While oil marketing companies are back to selling fuel at a loss due to high crude prices, private oil companies appear to be better bets compared to their statecontrolled counterparts
WITH the recession pulling down oil demand, the petroleum refining industry globally has entered a cyclical downturn and is expected to remain depressed over next couple of years. Also, the oil marketing companies in India are once again selling fuel at a loss as crude prices have crossed $70 mark.
It is only the petroleum producers, who are making money. There again, Cairn’s oil production from Rajasthan fields is held up in uncertainty over pricing and taxation, while Reliance Industries’ gas continues to remain embroiled in court cases. The fate of the industry, which is investing heavily for its future growth, clearly depends on several policy decisions.
WITH the recession pulling down oil demand, the petroleum refining industry globally has entered a cyclical downturn and is expected to remain depressed over next couple of years. Also, the oil marketing companies in India are once again selling fuel at a loss as crude prices have crossed $70 mark.
It is only the petroleum producers, who are making money. There again, Cairn’s oil production from Rajasthan fields is held up in uncertainty over pricing and taxation, while Reliance Industries’ gas continues to remain embroiled in court cases. The fate of the industry, which is investing heavily for its future growth, clearly depends on several policy decisions.
OIL MARKETING COMPANIES
State-controlled oil marketing companies Indian Oil, BPCL and HPCL, which were in a soup with over Rs 11,000 crore of accumulated losses in the first nine months of FY09, turned around in the fourth quarter.
Weak oil prices helped them not only wipe out the accumulated losses but also end the year in profit. A talk of the government allowing these firms some freedom in determining the retail prices of petroleum products has boosted their stock prices too.
But the companies are stressed. Lack of liquidity forced the three firms to borrow heavily last year and their annual interest cost jumped almost three times to more than Rs 8,700 crore.
One reason for this was delayed arrival of the special oil bonds from the government. In fact, the government is still to issue Rs 10,000 crore of bonds, out of the Rs 71,300 crore promised for FY09.
Despite the pressure on cash flows, the companies increased their dividend payouts over the last year by an average of 47%, further straining their cash position.
STANDALONE REFINERS
The standalone refiners witnessed huge jump in profits in the first quarter of FY09 due to a spurt in petroleum prices, only to see steep losses in the second and third quarters as the prices plummeted. The price stability in the fourth quarter returned the players to profits.
However, the accumulated losses of the previous quarters made Chennai Petroleum and Essar Oil close the year in red. India’s largest corporate Reliance Industries and ONGC’s subsidiary Mangalore Refinery (MRPL) reported profits for the year, which were lower on y-o-y
The boom phase for the refining industry, from FY04 to FY08, came to an end as industry entered a cyclical downturn. The refining margins in FY09 were lower for all the players.
With a number of new projects being
commissioned around the world and the demand remaining depressed due to the economic slowdown, the refinery margins are expected to be under pressure till a global recovery.
According to the latest estimates by International Energy Agency, the refinery utilisation in the member countries of the Organization for Economic Cooperation and Development (OECD) stood around 80% in March 2009 compared to 84% a year earlier.
India too, meanwhile, is adding to its refining capacity. Reliance commissioned its 580,000 barrels-per-day refinery in March. Other prominent projects include HPCL’s 180,000 bpd Bhatinda Refinery by 2011, BPCL’s 120,000 bpd refinery in Bina by 2010, Essar Oil’s plan to add 110,000 bpd capacity by end 2010, Indian Oil’s 300,000 bpd Paradip refinery by 2012 and ongoing expansions at other Indian Oil refineries and MRPL.
PETROLEUM UPSTREAM
ONGC, India’s largest petroleum producing company, is yet to publish its fourth quarter results. The discounts it had to extend on sale of crude oil to oil marketing companies have forced a drop in its profitability in the first nine months of the FY09.
The recovery in the crude oil prices since
April this year bodes well for the company, which has lined up big investments for the next five years in developing new fields and maintaining production from its ageing fields.
At the same time, the proposed petroleum sector reforms may make the subsidy sharing process transparent and may also raise the price at which ONGC sells natural gas. Both these developments would be positive for the petroleum behemoth.
Cairn India’s development work in its Rajasthan fields progressed well during the FY09 with the company readying the first train to begin production at 30,000 barrels per day (bpd). Another 50,000 bpd capacity will be added by end of 2009 to be augmented by a further 50,000 bpd by June 2010. With the construction of the fourth train in 2011, the company plans to achieve the plateau rate of 175,000 bpd. However, the company has so far not commissioned the production despite the facilities being in place. Although the customers for its crude have been identified, there are differences over pricing. Similarly, the payment of royalty and cess remains a point of contention between Cairn and ONGC, which owns 30% in the project. At the same time, since the pipeline to evacuate the crude oil is not in place, Cairn will have to spend $7-10 per barrel extra on trucking it to the Gujarat coast. In comparison, the other major exploration and production (E&P) project - Reliance’s D6 block in the KG basin - has done much better by starting production from April 2009, despite being embroiled in legal hassles. With the evacuation infrastructure in place, the natural gas from the east coast is now being shipped to various fertiliser and power producers. The production, which started at 15 million metric standard cubic meters per day (mmscmd), has been scaled up to around 26 mmscmd and will reach 40 mmscmd by end of June 2009, to be further raised to 80 mmscmd by end of the year.
ONGC, India’s largest petroleum producing company, is yet to publish its fourth quarter results. The discounts it had to extend on sale of crude oil to oil marketing companies have forced a drop in its profitability in the first nine months of the FY09.
The recovery in the crude oil prices since
April this year bodes well for the company, which has lined up big investments for the next five years in developing new fields and maintaining production from its ageing fields.
At the same time, the proposed petroleum sector reforms may make the subsidy sharing process transparent and may also raise the price at which ONGC sells natural gas. Both these developments would be positive for the petroleum behemoth.
Cairn India’s development work in its Rajasthan fields progressed well during the FY09 with the company readying the first train to begin production at 30,000 barrels per day (bpd). Another 50,000 bpd capacity will be added by end of 2009 to be augmented by a further 50,000 bpd by June 2010. With the construction of the fourth train in 2011, the company plans to achieve the plateau rate of 175,000 bpd. However, the company has so far not commissioned the production despite the facilities being in place. Although the customers for its crude have been identified, there are differences over pricing. Similarly, the payment of royalty and cess remains a point of contention between Cairn and ONGC, which owns 30% in the project. At the same time, since the pipeline to evacuate the crude oil is not in place, Cairn will have to spend $7-10 per barrel extra on trucking it to the Gujarat coast. In comparison, the other major exploration and production (E&P) project - Reliance’s D6 block in the KG basin - has done much better by starting production from April 2009, despite being embroiled in legal hassles. With the evacuation infrastructure in place, the natural gas from the east coast is now being shipped to various fertiliser and power producers. The production, which started at 15 million metric standard cubic meters per day (mmscmd), has been scaled up to around 26 mmscmd and will reach 40 mmscmd by end of June 2009, to be further raised to 80 mmscmd by end of the year.
CONCLUSION
The current valuations of most Indian petroleum companies appear expensive considering that the fate of the government-owned players remains strongly linked to policy changes. Amongst the lot, ONGC’s chances of obtaining a higher price for its gas appear bright. The long-term investors may, however, consider private companies in the sector, preferably on dips. The sale of natural gas and doubling of refining capacity are expected to improve Reliance’s profits substantially. Cairn and Essar Oil too will see their profits improving once their capitalintensive projects start paying off.
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