Energy News Monitor | Volume XIII; Issue 13
Oil News Commentary: August 2016
India
The overseas media reported that India was planning a 13-way merger for state-owned oil and gas companies that include Oil and Natural Gas Corp (ONGC) and Oil India. This is not the first attempt at unifying various energy entities owned by the state but if all goes as planned it will be the first successful one. By some accounts if the merger succeeds, it will create a huge company on par with Russia’s Rosneft. The Indian Minister denied that there was any such efforts being made. This is the right decision as monopolies do not have a history of creating value.
Staying with upstream the Oil Minister has said that he favoured a reduction in cess on crude prices from the current 20%. India earlier charged a cess of ₹4500/tonne amounting to $9/bbl. This was increased to 20% in the budget for FY17. Energy cess has become a source of revenue for the government but it will become a burden for consumers who ultimately pick up the tab.
A big relief to upstream companies came in the form of government announcement that it will bear the entire fuel subsidy burden, rather than passing a part of it to upstream oil companies. The move, enabled by the steep decline in under-recoveries since FY15 due to the global oil price decline, the decontrol of petrol and diesel and cut in LPG subsidy, would boost the bottom lines of ONGC, Oil India and GAIL (India) Ltd, and make them more attractive to investors. As per media reports, upstream subsidy burden has declined from 56% to seven percent.
There was some bad news for ONGC. The CAG issued a report criticising ONGC for over-reporting crude production by 12% that increased subsidy payment and interestingly also increased performance related pay to executives. Consultants who came up with performance incentives probably need to rethink their approach! As they say what is measured will get ‘managed’!
Moving to the downstream, IOCs oil imports from Iran have reportedly increased fourfold to 5 MT from 1.2 MT in FY11 on lifting of sanctions on Iran. Saudi Arabia with over 40 MT imports remains India’s top oil supplier. Overall the Middle East with over 65% of oil imports into India remains on the top of the list of oil suppliers to India. IOC also reported that it will invest in expanding its storage and bottling capacity in Tripura over the next three years. The interesting part of this news is that its convoy of 20 trucks would move through Bangladesh rather than through NH 44 whose roads are in need of maintenance. Petroleum products from IOC’s Betkuchi depot in Guwahati will move to Dharmanagar depot in Tripura via Bangladesh covering atotal of 366 km, including 126 km in Bangladesh, against 386 km long-route through the Barak Valley. The convoy will enter Bangladesh through Dawki point in Maghalaya and re-enter India at Kailashahar in Tripura. As per the agreement, India will pay about ₹1300 per truck and limit the number of trucks to 160 at any point in time. Obviously markets do not like borders!
There was plenty of news on new refinery projects and refinery expansions. HPCL’s plan for expansion of its Visakh Refinery has reportedly received board approval. When current capacity of 8.33 MTPA is increased to 15 MTPA it will fill the gap between the refining and marketing volumes of HPCL. Among refineries planning expansions is NRL that is looking at a $3 billion expansion of its 60,000 b/d refinery in Assam and awaiting a response from the oil ministry on the plan to treble the refinery capacity to 180,000 b/d.
Chennai Petroleum Corp a unit of IOC in which Iran has a stake also plans to spend about $3 billion for a nine-fold capacity increase at its Nagapattinam plant in the southern state of Tamil Nadu to as much as 180,000 b/d from the current 20,000 b/d. The race to expand refining capacity is driven by forecasts of a dramatic increase in demand for lighter products such as petrol for which there is insufficient capacity. India’s 23 refineries have a capacity of 230 MT while demand was 183.5 MT in FY16.
Among private refiners, Essar Oil Ltd’s 20 MTPA Vadinar refinery is reportedly looking upgrades to improve its margins. Essar Oil Ltd expects to lower purchases from Iran after shipments from Rosneft begin once the Russian state producer completes a deal to buy a stake in the Indian company. Essar bought more than 148,000 b/d from Iran in the first six months of this year, accounting for more than 40% of India’s purchases from Iran.
Lower oil prices are now impacting even the holy grail of subsidies. IOC, HPCL and BPCL have been given the freedom (if you can call it that) to increase the retail price of kerosene sold through the PDS by ₹0.25/litre/month for 10 months. Hopefully this will restrict diversion as it will reduce the price difference between PDS and open market kerosene. The government is also reportedly taking steps to implement the scheme of transferring subsidy directly to the bank accounts of beneficiaries (direct benefits transfer, or DBT) on kerosene.
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