K. Ravichandran Prashant Vasisht

Transcription

1 Indian Oil & Gas Sector-Refining & Marketing Gross Under-recoveries to stay flat in FY2017 at current crude prices; any sharp spike in crude oil prices would be key risk factor K. Ravichandran Prashant Vasisht Anoop Bhatia Sai Krishna Abhishek Dafria Ankit Patel March 2016

2 What s inside? I. Executive Summary II. Trends & Outlook Global Refining Industry Domestic Refining Industry Export of Petroleum Products Under-recovery Petroleum Products Marketing III. IV. Industry Outlook Aggregate Financial Performance V. Company-wise Update on a. Indian Oil Corporation Limited b. Bharat Petroleum Corporation Limited c. Hindustan Petroleum Corporation Limited d. Reliance Industries Limited e. Essar Oil Limited f. Mangalore Refinery and Petrochemicals Limited g. Chennai Petroleum Corporation Limited Annexure Annexure-I: Trends in Crude Oil Prices, Light-Heavy Differentials and Crack Spreads ICRA Limited P a g e 2

3 INDIAN REFINING & MARKETING INDUSTRY Gross under-recoveries to stay flat in FY2017 at current crude prices; any sharp spike in crude oil prices would be key risk factor Industry Review March 2016 Executive Summary Following 60% (yoy) fall in FY2016, GURs may continue to be around Rs. 270 billion in FY2017. Right time for cessation of LPG subsidy due to low current subsidy levels (~Rs /cylinder) GURs in FY2016 to increase by Rs billion for every US$1/bbl rise in crude oil prices Following significant fall in FY2016, GURs may remain flat in FY2017 The gross under-recoveries (GURs) of public sector oil marketing companies (OMCs) are estimated to decline by 62% (yoy) to ~Rs. 274 billion in FY2016 from Rs. 723 billion in FY2015, following soft global crude oil prices. ICRA expects GURs of OMCs to remain flat at ~Rs. 270 billion for FY2017 (estimated at an average Indian basket of crude oil price of US$ 40/bbl and INR/US$ of 68.5 for FY2017). The Indian basket of crude oil prices has largely remained lower than US$ /bbl over the last few months. The soft level of crude oil prices is expected to lead to materially lower under-recoveries on sensitive petroleum products, including LPG and kerosene. The GURs may increase significantly from the current level of Rs. 270 billion, especially in the scenario of a sharp spike in crude oil prices, over our assumption of US$ 40 /bbl. However, there could be a downside to GURs if the Government of India (GoI) reduces the household income threshold for domestic LPG subsidy from the current level of Rs. 1 million per annum. Cessation of LPG subsidy for high income consumers is step in the right direction to derive advantages of Direct Benefit Transfer; reduction in income threshold may lead to material reduction in subsidies On December 28, 2015, the GoI had announced the discontinuation of the LPG subsidy benefit for consumers in case the consumer or his/her spouse had taxable income of more than Rs.1 million (income threshold) during the previous financial year. The move is intended to cease subsidy for high income consumers who can afford LPG at unsubsidised prices, while economically weaker consumers would continue to receive direct subsidy in their accounts. There could be material savings in LPG subsidies if the plan is implemented on a larger scale with a lower income threshold, as LPG is extensively used in urban areas that have a large population of consumers who can afford unsubsidised LPG prices. Based on the taxable income criteria of Rs. 1 million and above, a small population would not receive the subsidy as of now. As per ICRA estimates, the savings in LPG subsidies for the GoI could be upto Rs. 5 billion for the current income threshold households that may have recorded times the average consumption levels. Although the quantum of subsidy savings is minuscule compared to the overall LPG under-recovery in the recent past (Rs. 366 billion during FY2015 and estimated ~Rs. 160 billion for FY2016), this is a step in the right direction and the subsidy could decrease materially once the taxable income threshold for availing LPG subsidy is reduced progressively. Sensitivities of GURs to crude oil prices and foreign exchange rates Apart from an income threshold for LPG subsidy, crude oil prices and foreign exchange rates continue to be the key drivers of subsidies. The GURs for FY2017 are estimated to increase to the extent of Rs billion for every one Indian Rupee (INR) depreciation against the US Dollar (US$), while the GURs could increase by around ~Rs billion with every US$ 1 /bbl increase in crude oil prices. As per ICRA estimates, for every US$ 1 /bbl decline in the Indian basket of crude oil prices, the under-recovery on PDS kerosene is expected to increase by ~Rs /litre each; while domestic LPG subsidy would decrease ICRA Limited P a g e 3

4 Executive Summary by ~Rs. 7/cylinder. Furthermore, with every one Rupee depreciation against the US Dollar, the under-recovery on kerosene is projected to increase by ~Rs /litre, while the direct LPG subsidy could increase by ~Rs. 4-5 /cylinder. Demand of petroleum products reported growth of 9.6% (yoy) in 9M FY2016 on the back of high growth rates in consumption of petrol (14% yoy growth), naphtha (23%), ATF (10%), and pet coke (22%). Domestic demand growth continues to be high at 11.1% in Q3 FY2016 and 9.6% in 9M FY2016 on the back of improving economic activity and lower crude oil prices India s petroleum products demand growth continued to be high at 11.1% (yoy) in Q3 FY2016 as against 11.1% (yoy) in Q2 FY2016 and 3.3% (yoy) in Q3 FY2015. The high demand growth has been driven by economic recovery and acceleration in demand on the back of lower crude oil prices. The demand growth in 9M FY2016 at 9.6% is more than double the cumulative average growth (CAGR) level of 4% (achieved during FY ). This is in line with the high growth in consumption of petrol, naphtha and pet coke, along with material improvement in growth of diesel demand that increased to 6.2% (yoy) in 9M FY2016, as against 1.5% (yoy) in FY2015. The demand for petroleum products is expected to be materially higher than the long term average over the medium term, following prospects of increased economic activity along with low prices of crude oil and petroleum products incentivising consumers across different segments to switch over from alternative fuels. However, the recovery in crude oil prices may lead to certain moderation in growth rates from the current high levels. Light-sweet and heavy-sour crude differentials increased in Q3 FY2016 Light-Heavy differentials increased from US$ 2.9/bbl in Q2 FY2016 to US$ 3.2/bbl in Q3 FY2016 The light-sweet / heavy-sour differentials increased to US$ 3.2/bbl in Q3 FY2016 as against US$ 2.9/bbl in Q2 FY2016 due to strengthening of light (except gasoline) and middle cracks, even as fuel oil cracks also increased. The ability of complex refiners to leverage the price differential between light-sweet and heavy-sour crudes to earn higher GRMs vis-à-vis relatively simpler refiners increases with the widening in the differential. Crack spreads increased across the barrel (except gasoline) in Q3 FY2016 vis-à-vis Q2 FY2016 Crack spreads strengthen across the barrel in Q3 FY2016 Crack spreads increased across the barrel in Q3 FY2016 as compared to Q2 FY2016. Naphtha crack spreads increased in Q3 FY2016 as compared to Q2 FY2016 due to healthy petrochemical demand, substitution of LPG feedstock in crackers, and strong gasoline cracks and winter reid vapour pressure specifications in the US, leading to more naphtha blending and reforming of gasoline. Gasoline cracks declined in Q3 FY2016 vis-à-vis Q2 FY2016, but remained strong owing to healthy demand growth, especially from China and India, and delayed startup of secondary units in the Middle East. In the middle of the barrel, gasoil cracks strengthened in Q3 FY2016 vis-à-vis Q2 FY2016 owing to some demand recovery in China and robust demand from India amid unplanned outages and turnarounds. Jet/kero cracks also increased in Q3 FY2016 over Q2 FY2016 owing to improved passenger demand boosted by low fares and stock piling of kerosene for meeting winter heating demand. At the bottom of the barrel, fuel oil cracks increased owing to drop in inventories and stronger demand from China and South Korea. GRMs of refining companies were dampened by inventory losses in Q3 FY2016 as the international prices of crude oil declined by about 24% during this period from ~$ 47/barrel levels on September 30, 2015, to ~$ 36/barrel on December 31, ICRA Limited P a g e 4

5 Executive Summary Demand growth of petroleum products is expected to remain moderate, pulled down by slowdowns in China, Europe and the US. Global supply additions, net of closures, likely to match demand growth Globally, GRMs are expected to remain healthy in the medium term due to global refinery capacity additions, net of closures matching the demand growth. The demand growth of petroleum products is expected to remain moderate, pulled down by economic slowdowns in China, Europe and the US. Delays in commissioning of some of the proposed projects and closure of unviable refinery capacities would support GRM levels over the medium term. A higher than expected closure of unviable refinery capacities could provide additional uplift to the GRMs. However, the light-heavy differentials, which aid the GRMs of complex refineries, are expected to remain moderate in the medium term on account of the completion of complex refineries and conversion projects that are likely to result in increased demand for heavy and sour crudes. Following an outlook of healthy global refining margins, the GRMs of domestic refineries are also expected to remain healthy over the medium term. Their profit metrics will continue to be sensitive to the fluctuating value of the Indian Rupee (INR) against the US Dollar (USD), inventory gains/losses arising from volatility in crude prices, and import duty protection levels. Every one dollar decline in international crude oil prices reduces the import bill of the country by about Rs. 65 billion Lifting of sanctions on Iran further dampener for energy prices In July 2015, Iran had entered into an agreement with six world powers led by the US that paved the way for ending sanctions imposed by the US and Europe over the former s nuclear programme that governments of the latter feared was intended for developing nuclear weapons. The agreement limited Iran's nuclear capabilities for a decade and put in place a tighter inspection regime that allowed for lifting of financial and military sanctions in case Iran met with its commitments. Based on the report by the International Atomic Energy Agency confirming compliance by Iran with the July 2015 agreement, the sanctions were lifted on January 17, This included the lifting of the ban on any transactions with Iranian banks and financial institutions, the import, purchase or transport of Iranian crude oil and natural gas and insurance of Iranian oil shipments. Iran would now be able to freely trade in international markets once again. With the lifting of sanctions, 38 million barrels of oil, which were there in Iran s floating oil reserves at the Persian Gulf, were added to global markets besides an additional production of 500,000 barrels of oil per day (bpd) over and above its existing exports of 1 million barrels per day. Besides the aforementioned production, an additional 250, ,000 bpd could enter the market in the latter half of The additional production of Iranian oil assumes significance, because the already oversupplied market and weaker than expected demand would have a further dampening effect on crude oil prices. A decline in crude oil price is positive for the current account deficit, since India imports about 80% of its crude oil requirements; and for petroleum subsidies as well, since domestic fuels such as domestic LPG and kerosene remain subsidised. Every one dollar decline in global crude oil price reduces the import bill by about Rs. 65 billion and GURs by Rs. 8-9 billion. A lower crude oil price is also positive for Indian downstream companies due to lower working capital requirements and lower under-recoveries for oil marketing companies. Additionally, Iranian crude was also attractive for Indian refineries owing to the sops that Iran offered, such as concessional pricing and a three-month credit period as against a one-month credit period, which is the norm in the industry. These sops significantly buttressed the GRMs of Indian refineries and aided their liquidity positions. ICRA Limited P a g e 5

6 Executive Summary Healthy premium on higher spec fuels essential for achieving meaningful return on investment GoI advances date for implementation of higher level emission standards; skips BS-V fuel Vehicular exhaust is an important source of pollution for ambient air; and taking cognizance of the need to check the extent of vehicular pollution, in December 2012, the Ministry of Petroleum and Natural Gas (MoPNG) formed a committee under the chairmanship of Shri Saumitra Chaudhuri, Member, Planning Commission, to prepare a Draft Auto Fuel Vision and Policy The chief recommendations of the committee included, among others i) the roll out of BS-IV spec in a phased manner covering the entire country by April 1, 2017, followed by the roll out of BS-V specs in a phased manner covering the entire country by April 1, 2020; and ii) the application of an additional charge (termed as the high sulphur cess) on BS-III fuels and special fuel upgradation cess on both MS and HSD which would be utilised to fund capital investment for upgradation of refineries. However, due to the high levels of pollution in several Indian cities, the GoI issued a notification in February 2016 to implement BS-VI norms from April 1, 2020, thereby skipping the implementation of BS-V fuel specs altogether. ICRA Research believes that the implementation of higher fuel specifications are in keeping with the aim of reducing vehicular pollution, although they impose a huge burden on refining companies in terms of capex (Rs billion for implementing BS- VI) for upgrading refineries to meet more stringent specifications. The committee has recommended the imposition of a Special Fuel Upgradation Cess, which will accrue to Oil Industry Development Board (OIDB) to finance the modernisation of projects at the refineries, and the recovery of capex and opex with some return component. This will be executed through a suitable premium in the retail price of MS and HSD that could prove to be a challenge for the industry, and the proposal could weaken the RoCE of refineries. Hence a healthy premium is a pre-requisite for achieving meaningful returns from these investments. ICRA Limited P a g e 6

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