Energy News Monitor

Wind Fall Gain from Low Oil Prices

Oil News Commentary: February 2017

India

Middle class owners of personal vehicles in India, with four or two wheels, have been asking why they are paying roughly the same price for a litre of petrol even though the price of crude oil has fallen by more than half in the last few years. It appears that the question has now reached the level of policy makers. In a response to the question in the Parliament the concerned Minister has stated that the current price of petrol at Rs 73.60/litre (in Delhi) was lower than the price in FY 14 at Rs 71/litre and that the money collected through taxes on petroleum products was being used to develop infrastructure and creating educational facilities. The explanation for the insignificant reduction in retail price was that excise duty had been increased to Rs 12/litre and that the rupee had depreciated against the dollar, the currency in which crude oil is purchased. VAT and other local levies by the state governments were also included among reasons why the price of petrol in India had not fallen to the extent the price of crude oil had fallen.

Yet another gain from the oil sector to the government was the reduction in the subsidy burden. The government reported that with the termination of over 33 million illegal LPG connections, the government had saved Rs 210 billion (or roughly $3 billion) in subsidies. The government also said that the Direct Benefit Transfer scheme for LPG benefitted over 176 million consumers and over Rs 400 billion (or about $ 6 billion) of subsidy was transferred directly to the beneficiaries’ bank accounts in the last two years.

One of the ambitious initiatives announced in the budget was that of the merger of state-run energy companies to create a single company with market value of over $ 400 billion supposedly provide India the muscle to acquire assets abroad and negotiate better. According to the government this would bring the entity on par with BP, which has a market value of $115 billion. This is probably the right step if India wants to project power in the international arena but the wrong step if India wants to unleash the power of the market in the domestic arena.  A single company will become monopoly producer and supplier of oil and oil derived products much in the same way Coal India Ltd is the dominant producer of coal in the country. This will distort competition and reduce efficiency as it has in the case of coal. The comparison with BP is inaccurate as BP is not a state owned company nor does it have a monopoly in Britain which is home territory.  There is also the question whether the idea of acquiring oil assets outside the country is strategically that important for India so as to modify the entire structure of the industry to pursue this single goal.

There was more news on government moves in the oil sector in the budget. The government announced that it will build two more underground crude oil storages at Chandikhol in Odisha and Bikaner in Rajasthan in addition to underground storages in rock caverns at Visakhapatnam, Mangalore and Padur. The storage at Chandikhol is expected to be an underground rock cavern while the one at Bikaner is expected to be an underground salt caverns. Phase-II storage will have a total capacity of 10 MT which includes 4.4 MT storage capacity at Chandikhol and 5.6 MT at Bikaner. Abu Dhabi National Oil Company has reportedly signed an agreement to hire half of the capacity of India’s maiden strategic oil storage at Mangalore. India is 81 percent dependent on imports to meet its crude oil needs.

Now that Iran has been freed from sanctions, India’s annual oil imports from Iran have reportedly surged to a record high in 2016. According to Reuters, Iran is now the fourth largest supplier to India. In 2016 India bought about 473,000 bpd of oil from Iran to feed expanding refining capacity, up from 208,300 bpd in 2015. Indian refiners RIL, HPCL, BPCL and HPCL-Mittal Energy Ltd were said to have resumed imports from Tehran, attracted by the discount offered by Iran. Overall, India imported 4.3 million bpd oil in 2016, up 7.4 percent from the previous year. Rising imports from Iran and Iraq lifted the Middle Eastern share in India’s crude diet to 64 percent in 2016, reversing a declines in recent years, partly due to rising prices for Atlantic Basin oil tied to Brent. Saudi Arabia remained the top supplier to India last year followed by Iraq and Venezuela.

Rest of the World

A survey by Reuters reportedly revealed that Saudi Arabia wanted oil prices to rise to $60/bbl this year. As OPEC compliance with supply constraints is reported to have improved with Iraq and UAE pledging more cuts $60/bbl does not appear to be unrealistic. OPEC already achieved close to a 90 percent compliance rate with its oil production cut, and compliance could increase as Iraq and UAE promise to accelerate their reductions. The two OPEC members were the main laggards in what was an otherwise impressive rate of compliance. Supply from the 11 OPEC members with production targets under the deal in had fallen to 29.921 million bpd. This amounts to 92 percent compliance, according to an OPEC calculation. Compliance of 92 percent comfortably exceeds the initial 60 percent achieved when OPEC’s previous deal to cut was implemented in 2009, and the OPEC figures add to indications that adherence so far has been high. The IEA said that oil production fell by around 1.5 bpd including by 1 million bpd for OPEC, leading to record initial compliance by OPEC with a six-month output-cut deal reached in December by big producers to boost prices. The IEA said if the January level of compliance were maintained, the output reductions combined with strong demand growth should help ease the record stocks overhang in the next six months by around 600,000 bpd.

Staying with the oil states of the Persian Gulf, Saudi Arabia’s King Salman and a large entourage were reported to be taking a month-long tour through Asia, hoping to bolster partnerships and increase investments in the region as they do not see USA as a dependable market. One of the first outcomes was the decision by Saudi Arabia to invest $7 billion in a petrochemical complex in Malaysia. New investment flowing into the region is increasing oil reserves at a fast pace.  Iraq’s oil reserves were reportedly increased to 153 billion barrels from 143 billion barrels bringing it closer to reserves of Iran out at 158 billion barrels. Iraq is now OPEC’s second largest producer after Saudi Arabia.

Low oil prices continue to take their toll.  Major oil companies are actively finding ways to deal with the problem of abundance. Shell was reportedly the third oil major to scale back ambitions in Canada’s oil sands. Last week, ExxonMobil and ConocoPhillips de-booked billions of barrels of oil reserves in Canada, admitting that they were not viable in today’s market.  As for Venezuela, the geopolitical deals that it struck with China and Russia with an estimated value of $55 billion were reportedly going bad with the fall in oil prices.

NATIONAL: OIL

Govt bails out ONGC, OIL of Rs 220 bn royalty liability

February 28, 2017. The government has bailed out Oil and Natural Gas Corp (ONGC) and Oil India Ltd (OIL) from a potential liability of about Rs 22,000 crore in royalty dues to states like Gujarat and Assam. The central government will pay two state-owned firms’ outstanding liabilities of Rs 14,698 crore directly to the state governments, who will not insist on levy of Rs 7,223 crore interest on payments that were due from April 2008. ONGC had to pay Gujarat Rs 8,392 crore and Assam Rs 1,404 crore in royalties for the period between April 1, 2008 and January 2014. On this amount, it faced an interest liability of Rs 2,868 crore. Similarly, OIL had to pay the Assam government Rs 4,902 crore in royalty dues and another Rs 4,355 crore in interest. ONGC sold crude oil to public sector undertaking (PSU) refiners at a discount since 2003-04 on government directive so as to help partly subsidise petrol, diesel, liquefied petroleum gas (LPG) and kerosene price. Royalty payable to the state, in which oil is produced, was paid on pre-discount sale price till March 31, 2008. Subsequently, royalty was paid to states on post discount sale price with effect from April 1, 2008 in line with an oil ministry order.

Source: The Economic Times

RIL buys naphtha to feed growing domestic demand

February 28, 2017. Reliance Industries Ltd (RIL) has bought between 60,000 and 90,000 tonnes of heavy full-range naphtha for March arrival to plug a supply gap due to its growing petrochemical capacity. The purchase came at a time when Asian naphtha supplies are relatively tight due to firm demand and low volumes of Western cargoes arriving in the East. Details on price, sellers and origin of the cargoes were not clear. RIL is continuing to export lighter naphtha that typically is consumed in steam crackers for petrochemical manufacturing. It has already sold at least 160,000 tonnes of naphtha with a minimum 70 percent paraffin content for March loading from Sikka. It offered another 55,000 tonnes for late March loading. This brought its total exports of paraffinic naphtha next month to over 210,000 tonnes, making it the dominant seller among other refiners such as Indian Oil Corp, Bharat Petroleum Corp Ltd.

Source: Reuters

PM Modi to inaugurate Rs 300 bn OPaL petrochemical project in March

February 28, 2017. Prime Minister (PM) Narendra Modi will inaugurate ONGC Petro Additions Ltd (OPaL)’s mega petrochemical project at Dahej on 7 March, Oil Minister Dharmendra Pradhan said. Spread over 508 hectares with an investment of over Rs 30,000 crore, OPaL is the single-largest petrochemical complex in India producing 1.9 million metric tonnes (MMT), Pradhan said. The complex consists of a dual feed cracker unit with a capacity to produce 1,100 kilo tonnes per annum (KTPA) Ethylene, 400 KTPA Propylene along with Polymerisation Units and various Associated Units consisting of Pyrolysis Gasoline Hydrogenation Unit, Butadiene and Benzene Extraction Units. OPaL is a joint venture company incorporated in 2006 promoted by ONGC and co-promoted by GAIL (India) Ltd and Gujarat State Petroleum Corp. OPaL has set-up the mega petrochemical project in the port city of Dahej, Gujarat as part of the Petroleum, Chemicals and Petrochemical Investment Region.

Source: The Economic Times

Adani Enterprises plans ship-fuelling business expansion

February 28, 2017. Adani Group plans to expand its share in the ship-fuelling market by leveraging the ports it has on India’s east and west coast. The idea is to use its ports to fuel the ships passing through the country, taking away business from ports at Fujairah, Dubai and Singapore, and expanding the 1 million tonne (MT) Indian bunkering market valued at Rs 4,000 crore to 3.5 MT by 2020. Bunker or ship fuel accounts for the majority of a ship’s operating costs. Adani Group’s plan comes in the backdrop of India’s ambitious Sagarmala programme which envisages construction of new ports to harness the country’s 7,517 km coastline and set up of as many as 142 cargo terminals at major ports at an estimated cost of Rs 93,000 crore. India has 12 major ports. Adani Ports and Special Economic Zone Ltd, India’s biggest private port operator has a cargo handling capacity of 151.51 MT. APSEZ owns and operates eight ports and terminals in India at Mundra, Dahej, Kandla and Hazira in Gujarat, Dhamra in Orissa, Mormugao in Goa, Visakhapatnam in Andhra Pradesh and Kattupalli in Chennai. The company is developing terminals at Ennore in Tamil Nadu and Vizhinjam in Kerala. The global bunkering market is estimated at around 35mt, with vessels coming to India requiring around 10mt of ship fuel. According to the government, the total overseas traffic registered by the Indian ports in 2013-14 was 811.11 MT, of which 91.5% was carried by foreign flag vessels.

Source: Livemint

India’s crude oil import bill expected to rise by 12.5 percent to $72 bn current fiscal

February 27, 2017. India’s crude oil import bill is expected to increase by 12.5 percent to $72 billion in the current financial year (2016-17), according to Petroleum Planning and Analysis Cell (PPAC), the oil ministry’s technical wing. In the first ten months of the current fiscal (April-January), the Indian basket of crude oil averaged $47 per barrel as compared to $49 per barrel in the corresponding period last fiscal. During April-January 2016-17, the country’s import bill increased a mere 1.59 percent to $ 57.2 billion as compared to the corresponding period last fiscal year. PPAC said any upward change in the exchange rate or increase in crude oil prices during the last quarter of 2016-17 will push the country’s crude import bill above the $72 billion mark. India’s crude oil import bill fell 21 percent to $112.7 billion in 2014-15 and 43 percent to $64 billion in 2015-16.

Source: The Economic Times

ONGC to take control of HPCL to create larger oil sector entity

February 27, 2017. Oil and Natural Gas Corp (ONGC) will take control of Hindustan Petroleum Corp Ltd (HPCL) as part of the government’s plan to create an integrated public sector oil entity. India plans to create a giant oil company by combining state-owned firms, Finance Minister Arun Jaitley said in the budget speech as the world’s third largest oil consumer looks to better compete with global majors in acquiring foreign assets.

Source: Reuters

Banks still levying card fee on fuel purchases

February 27, 2017. Several banks are still imposing the transaction fee on consumers paying by debit card for fuel despite a clear instruction from the government not to do so. Several inconvenienced customers have written to the oil ministry in the past few weeks regarding this illegal deduction, the oil ministry said. The ministry is engaged in persuading banks with the help of the finance ministry to reverse these charges. In order to boost digital payments after demonetisation, the government had said that no bank can levy fuel surcharge or transaction fee on customers paying by debit cards. An RBI order also bars banks from levying the fee on consumers; it directs them to recover it from merchants. But the petrol pump dealers have argued that their margin was too thin to pay for fuel surcharge, which is about 2.5% plus service tax. Therefore, the government clarified that petrol pumps too would not pay the fuel surcharge and left it to oil companies to sort this out with the banks. The current arrangement allows for the card issuing banks to submit information on daily fuel purchase transactions to oil retailers such as Indian Oil Corp (IOC), Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) and get compensated. But according to consumers and oil ministry, many banks including those from the public and the private sector are still levying fuel surcharge. Customers said it was a mammoth task to get banks to reverse these charges. Consumers paid Rs 14,000 crore digitally to petrol pumps between November 9 and December 31, according to the oil ministry data. By December end, digital transactions made up nearly 30% of total sales from 10% before the demonetisation.

Source: The Times of India

Odisha govt withdraws tax sops to IOC’s Paradip refinery

February 26, 2017. In a big jolt to Indian Oil Corp (IOC), the Odisha government has withdrawn tax incentives given to the ₹34,555 crore Paradip refinery, making the company reconsider its plans to invest another ₹52,000 crore in the State. The withdrawal will cost ₹2,000 crore to IOC this year and will progressively increase every year as more petrol and diesel as also petrochemicals are sold within the State. Besides leading to levy of sales tax on 2 million tonnes of petrol and diesel sold in the State annually, the withdrawal is threatening viability of investments in downstream petrochemical plants as products from it will be consumed by an array of synthetic fibre and plastic industries and now tax will also be levied on them.