Why are Indian state-owned explorers and refiners not complaining?

Why are Indian state-owned explorers and refiners not complaining?

Indian state-owned energy firms such as Oil and Natural Gas Corp. (ONGC) believe that given the crude oil price scenario and the National Democratic Alliance (NDA) government’s effort to exempt them from shouldering the subsidy on fuels such as domestic cooking gas, acche din (good days) are finally here. Interestingly, after a very long time even the state-owned refiners such as Indian Oil Corp. Ltd (IOC) are on the same page.

Herein lies the conundrum which has been the bane of Indian oil and gas sector. While worldwide explorers wish for a high crude oil price regime for higher returns, Indian government-owned upstream firms such as ONGC and Oil India Ltd (OIL) aren’t enthused by the same. Indeed, high prices don’t work well for them. This is because they share the subsidy on fuels such as petrol, diesel, cooking gas and kerosene.

There is a contradiction, admitted D.K. Sarraf, chairman and managing director, ONGC.

Crude oil prices in the Indian energy basket averaged at $84.16, $105.52, $107.97 and $111.89 in 2014-15, 2013-14, 2012-13 and 2011-12, respectively. The Indian energy basket represents the average of Oman, Dubai and Brent crude.

With petrol and diesel prices being deregulated and government trying to shield upstream explorers from fully shouldering the subsidy, the boardrooms are heaving a sigh of relief. With crude oil prices in the Indian energy basket averaging at around $62 per barrel for the quarter ended 30 June, ONGC posted a $58.92 per barrel net realization—the money earned on sales of each barrel of crude after discounting the subsidy extended to the oil marketing companies—for the June quarter, up 25% from $47.15 per barrel posted in the year-ago period.

With IOC registering one of its highest ever gross refining margins (GRM), or the revenue earned from processing a barrel of crude of $10.77 per barrel for the quarter ended 30 June as compared to $2.25 in the first quarter of the last fiscal, experts believe this is the precursor of things to come. To be sure, $3 of this GRM was due to the depressed oil prices of around $62 per barrel for the first quarter as compared to $100 per barrel in the corresponding period of the last fiscal. The highest GRM of $16.81 per barrel was registered by IOC in the June quarter of 2008-09.

“There has been a $38 per barrel reduction in crude oil prices in the first quarter,” said Arun Kumar Sharma, director, finance at IOC.

Crude oil prices for the current financial year averaged at $59.07, $63.82, $61.75 and $56.30 per barrel for April, May, June and July respectively with the price for the last fortnight averaging at $ 55.15.

Even as the prices of domestic cooking gas and kerosene continue to be set by the government, firms see a good time ahead due to expectation of lower crude oil prices and better targeting of subsidies by the government. Buoyed by the success of the Direct Benefit Transfer (DBT) scheme for delivery of subsidized cooking gas to the bank accounts of beneficiaries, the government is planning a similar mechanism for the kerosene. This is expected to reduce the subsidy burden in the backdrop of growing petroleum product consumption in India. According to India’s oil ministry, it grew 3.14% to around 163.17 million tonnes in 2014-15.

The 2015-16 budget has estimated the petroleum subsidy atRs.30,000 crore for 2015-16, 50% less than the revised estimate of Rs.60,270 crore. The difference between market prices and retail fuel rates—to be borne by oil marketing firms this fiscal year—is estimated at Rs.42,500 crore. The budget has earmarked Rs.22,000 crore for subsidy on domestic cooking gas and Rs.8,000 crore for kerosene.

“My gut feeling is crude oil prices will be depressed in short term period but they are bound to jump if not in the first year, definitely by the second or the third year. For the current quarter, it may be in the same range and hover around $50 per barrel,” said D.K. Sarraf of ONGC.

Sharing similar views, B. Ashok, chairman, IOC said that given the present environment, the oil supply glut is expected to continue in the backdrop of Iran emerging as an additional source of supplies and other economies of the world not doing well.

The glut is expected to continue with Organization of the Petroleum Exporting Countries (Opec) increasing production. India is one of the major consumers of Opec’s production, with the grouping accounting for 85% and 94% of India’s crude oil and gas imports.

“Oil production from the Organization of the Petroleum Exporting Countries (Opec) totaled 31.4 million barrels per day (b/d) in July, up 120,000 b/d from the June level of 31.28 million b/d,” Platts, a commodities research and analysis firm said in a 13 August statement.

The situation is expected to further improve with lifting of sanctions on Iran. India is heavily dependent on imports and sourced 189.43 million tonnes (mt) of crude oil last year. Of this, Iran supplied 10.95mt, making up 5.78% of Indian crude oil imports. According to the World Bank, Iran’s full return to the global market will eventually add about a million barrels of oil a day, lowering oil prices by US$10 per barrel next year.

“I think it is likely to be low. It is good for the country and the consumer,” Ashok said.

Indian refiners such as IOC may use this opportunity to recalibrate their crude sourcing strategy by sourcing heavy crude from Latin America, further reducing their input costs. India has been Asia’s largest refined product exporter since August 2009. India is a net exporter of petroleum products and imported 189.43 million tonnes (mt) of crude oil in 2014-15. It exported 16.05 mt of petrol, 2.55 mt of diesel and other products such as jet fuel, lubricants and naptha.

However, concerns are already being expressed with the rupee weakening against the dollar. This may not augur well for refiners as India imports 77% of its energy needs with an energy import bill of around $150 billion.


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