Monday, June 18, 2012

PETROLEUM INDUSTRY: More Pain Ahead for Petro Cos as Under-recoveries Soar


Indian petroleum industry's woes are likely to worsen in FY13 as the total under-recoveries zoom to a record high of 1,70,000 crore, up 22.7% from 1,38,541 crore in FY12. This is notwithstanding the recent fall in international oil prices, benefits of which have been blunted due to the weakness in the rupee.
India continues to keep retail fuel prices under control disregarding high crude oil prices and even though we import 84% of our crude requirements. Out of the 204.8 million tonne crude oil processed by Indian refiners during FY12, 172.11 million tonne was imported while the domestic production stood at around 38.4 million tonne. This high import dependency means high prices lead to a widening trade deficit for the country. Nevertheless, the government continues to offer these fuels at heavy discount to consumers. For the first fortnight of June 2012, the petroleum ministry estimates pegged losses of 12.53 per litre on diesel, 30.53 per litre on kerosene and 396 per cylinder of LPG. These may be marginally lower to comparable figures from March 2012 when oil prices were trading above $125 in the international market. However, they mean a 
combined loss of 457 crore per day — a large chunk of which will become the burden of the national exchequer ultimately. Thanks to the subsidised sales the public sector oil industry has lost control over its profitability and hence become unattractive for investment. Public sector petroleum companies like IndianOil, HPCL and Gail India have heavily under-performed the market, while ONGC and Oil India have barely maintained the overall pace. BPCL has been the only outperformer of the league, which is mainly due to its attractive exploration portfolio.
The situation in India's natural gas sector is not looking rosy either. Mukesh Ambani made it clear in RIL's annual general meeting recently that the ongoing problems at KG-D6 block are unlikely to be over within the next 3-4 years.
This means the country's natural gas volumes — growth in which is necessary for growth of transmission companies like Gail — will increase only at a slow pace in the near future. Although some additions can be expected to domestic production, the main growth will come from incremental LNG imports in FY13. Dabhol and Kochi LNG import facilities are expected to commence operations this year and should add 10 million tonne or around 40 mmscmd of additional capacity on a whole-year basis. The actual benefit in FY13 will depend on how soon they commence operations and how fast they can scale up capacity utilisation.



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