Sizzling Oil Prices Burn A Hole In Your Pocket, But Refiners Are Killing

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New Delhi: Global crude prices have wreaked havoc on the budgets of Indian consumers, oil marketing companies and even the government.

While consumers are paying through the nose for petrol and diesel pump prices, the government has taken a hit on its revenue by cutting excise duties to relieve the population. Oil marketing companies are also taking huge losses by keeping retail prices down.

But amid all the gloom, refining activity appears to have benefited from high crude prices. Oil companies, both public and private, that refine crude into finished products such as gasoline, diesel and jet fuel have reaped record margins.

Even though crude prices have been on the rise since last December, the sharp price increase was seen after Russia’s invasion of Ukraine in late February, which led to a squeeze in global supply. Since then, global crude prices have held above $100 a barrel.

Although oil refiners find it difficult to pass on the full increase to companies in the retail sector when world prices for the raw material increase, various refineries have this time – because of the war – faces closures and sanctions on their refining capacity, which has led to soaring refining margins.

Shutdowns in China have also contributed to shortages of refined products, further driving up margins.

For private Indian refiners, this is a unique opportunity as they are able to source a significant share of their imports from Russia, which sells its crude at discounted rates. State-owned refiners, however, find it difficult to aggressively buy Russian crude as they source their crude requirements under annual forward supply agreements – meaning they are bound by fixed contracts. – although there is some flexibility.

While the price of India’s crude oil basket was $109.10 a barrel on June 23, it has fallen in recent days on fears of a likely recession as central banks broadly tightened interest rates to control inflation.

State-owned refiners like Indian Oil Corporation (IOC), Mangalore Refinery & Petrochemicals (MRPL), HPCL-Mittal Energy’s Bathinda Refinery (HMEL), Bharat Petroleum (BPCL) and Chennai Petroleum Corporation Limited (CPCL) recorded rates above -des normal margins in 2021-22 compared to the previous year.

Data from private refiners like Reliance Industries, Vedanta and Nayara Energy is not available as these companies do not share their margins publicly. But typically, private refiner margins are up to twice those of public sector refiners.

Gross Refining Margin (GRM) is the difference between the price of crude that companies buy and the price at which they sell refined products. All refiners buy crude at a low price and resell the refined products at the highest possible price to make a profit.

In 2020-2021, data from 23 refineries in India with the Ministry of Petroleum and Natural Gas shows that IOC holds the majority share at 28%, followed by Reliance at 27-28%, BPCL at 11%, HPCL close to 6.4 percent, and the rest around the same share.


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The oil sector and its margins

The petroleum sector can be divided into two main streams — upstream and downstream. Upstream companies are primarily those engaged in the exploration and production of oil and gas. They extract oil from wells and sell it to refiners. Downstream companies process raw crude into finished products.

With oilfields now experiencing declining production or reaching the end of their productive life in India, crude oil production has declined since 2014-15, falling to 29.69 million tonnes in 2021-22 – the lowest in 28 years – marking a decline of 7.8 percent from 32.2 million tonnes in 1994-95.

Oil and Natural Gas Corporation (ONGC) accounts for the bulk, 65%, of total national production. Currently, India imports nearly 85% of its oil demand.

Companies like ONGC and Oil India (OIL) rely heavily on their refining business to earn profits. For example, ONGC subsidiary MRPL, a major refiner, reported a net profit of Rs 2,958 crore in 2021-22, compared to a loss of Rs 765 crore in the previous year due to high refining margins.

On average, state refiners saw GRMs of $7-8 a barrel in 2021-22, similar to what they experienced in 2017-18, when margins were at all-time highs.

In 2020-21, average margins fell to $5.64 per barrel due to the pandemic and related issues. For IOC, the market leader, margins were close to $11.25 a barrel in 2021-22, down from $5.64 a year earlier. These margins change each month depending on the gross mix that these entities are able to obtain.

Stand-alone refineries such as CPCL and MRPL have been the main winners from the surge in crude prices. But those who do both refining and marketing – such as HPCL, IOC and BPCL – have suffered as their refining gains have mainly been used to offset losses on marketing margins, as they are forced to sell at lower prices that are not necessarily remunerative.

Graphics by Ramandeep Kaur | The footprint

Last week, the government said production of petroleum products by oil refineries in May 2022 was 23.25 million tonnes, 16.65% higher than production in May 2021.


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Private refiners have an advantage

Private refiners like Reliance Industries, Vedanta and Nayara Energy have an advantage over state refiners as most of their crude is used for export of refined products. Moreover, they were also the biggest beneficiaries of cheaper Russian crude, which allowed them to achieve record margins.

Although their GRMs are not in the public domain, experts estimate that private refiners’ margins are the same or up to twice those of public refiners. One reason is that state refiners source crude oil through annual supply agreements.

In order to meet export demands, private players have reportedly postponed their factory shutdowns, which usually take place at this time of year for maintenance.

For state refiners, while refining activity has boosted strongly due to high crude prices, marketing activity has weighed on their profitability. Not only do they buy rough at a higher cost, but they are also forced to sell the finished products at a lower price to consumers due to unofficial government price controls.

A PTI report earlier this month said private fuel retailers like Reliance-BP and Nayara Energy have sought intervention from the oil ministry as they are making losses by selling diesel at Rs 20-25 per liter below cost and petrol at Rs 14-18 per liter below cost, due to a price freeze despite soaring crude prices.


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Outlook for the refinery sector

Experts who follow the sector closely expect GRMs from state refiners to decline slightly in 2022-23 compared to the previous year.

“In 2021-2022, margins were hovering around $7-8 per barrel on average. There will be a slight slowdown in 2022-23, so they will be around $6-7 per barrel,” said Sourav Mitra, Director energy from CRISIL, to ThePrint,

He said the outlook for domestic growth looked very stable. “Therefore, if you look at demand for petroleum products, we believe it will see sustained growth of 5-7% in FY23. This would be led by continued growth in economic activity.

Private refiners tend to have better margins because their refineries are larger and can process a wider variety of fuels, Mitra said, adding that they also benefit from a more flexible crude sourcing process.

He said all major public sector oil companies will face potential losses in the quarter ending June 30. “First, although there are decent margins at the refinery level, there will be significant losses in the marketing sector. The other factor is LPG, because there will be a reduction in their margins. They are looking at a loss of Rs 100-114 per 14.2kg cylinder,” Mitra said.

“Crack propagations (another term for GRMs) are definitely very high,” said Prashant Vasisht, vice president and co-group leader, ICRA. While unofficial government price controls will hurt the profitability of state-owned refiners, Vasisht said, private refiners will make huge profits because their own retail network is quite small and most of their refining products are exported.

(Editing by Tony Rai)


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