Notwithstanding the huge subsidy burden and uncertain global economic environment, the outlook for the Indian

oil and gas sector remains stable in 2012, according to global ratings agency Fitch. The agency also added that slow policy reforms along with high international prices were leading to burgeoning under-recoveries of oil and gas firms. "The 2012 outlook for both public and private sector Indian oil and gas companies is stable despite various challenges, including the increasing fuel subsidy burden on public sector companies (PSCs) and an uncertain global macroeconomic environment," Fitch said in its report '2012 Outlook: Indian Oil and Gas'. It said the ratings of oil and gas PSCs have been linked with India's sovereign rating of BBB/Stable, which denotes a moderate default risk, because of strategic importance of the sector and evidence of tangible financial support from the government to firms in the segment. According to Fitch, there is no likelihood of weakening of these ties. "The agency continues to have a Stable Outlook on private sector companies based on its current expectation of their earnings and capital expenditure," the report said. The report blamed slow policy reform for under-recoveries of oil and gas firms. Besides, it also cited high global crude prices and a depreciating rupee for compounding the problem. India imports around three-quarters of its oil and gas needs. The weakening rupee, which has fallen by over 15 per cent so far this fiscal, has made imports expensive. While the government has freed prices of petrol, other essential fuels like diesel and cooking gas continue to be in the controlled list. "High net under-recoveries caused all three public sector oil marketing companies (OMCs) to report EBITDA losses in the first half of 2011-12. "As Fitch does not expect much fuel pricing policy reforms in 2012, gross under-recoveries will remain high unless crude oil prices reduce significantly or the rupee appreciates," the report said. It, however, added that as ratings on public sector OMCs are based on expectation of continued government support, they are not likely to be affected. "There is a lack of policy reform to improve timeliness of subsidy transfer to public sector OMCs, leading to borrowing spikes. OMCs' borrowings increased in first half of FY'12 partly due to the time gap between the announcement of subsidies and actual release of funds by the Indian government," Fitch said. The first tranche amounting to Rs 80,000 crore of the budgetary support was released in December 2011.

The ratings agency also said refining margins are likely to soften in 2012 from the 2011 levels as global demand growth slows and further refining capacity is added.