Economic Overview:
- According to the most recent IMF projections, the world economy would expand by 3.6%
in 2022 and 2023. The Indian economy expanded by a robust 8.7% in the
financial year 2021–2022, as opposed to a decrease of 6.6% in the
financial year 2020–2021, according to the Central Statistical Office
(CSO), indicating that pre-pandemic levels of economic activity have been
surpassed in India.
- However,
in the latter half of the FY 2021-2022, India’s growth prediction for
2022–23 (FY23) was reduced by 140 basis points to 6.8% by the
International Monetary Fund (IMF), which cited less favourable external
conditions and the central bank’s quickening of policy tightening. 2022
Projected Consumer Prices remained at 6.9%.
- The
Repo rate was hiked in a phased manner to 6.25% (December 2022) by the RBI
adapting to the hawkish needs of the market and to counter rising
inflation which cooled off to 5.88% (retail CPI) by November. An impending
revival in demand, positive consumption pattern and rising disposable income
makes India the most sought-after investment destination.
- In
FY22, OECD commercial oil stocks stood at 389 million barrels (mb) lower
than the same period in FY21 and also below the FY19 average. The oil
market's rebalancing was supported by the coordinated supply management
strategy of OPEC+ and the revival of petroleum consumption faster than
production. Currently, OPEC+ contributes more than 57% of world crude
production and recently (November 2022) it announced a production cut of 2
million barrels.
- Production
of petroleum products increased by 5.7% during April-November 2022
as compared to the corresponding period of the previous
year. Crude oil imports increased by 11.6% during April-November 2022
and 3.1% during November 2022 as compared to the corresponding
period of the previous year. Crude oil processing increased by 6.8 %
during April-November 2022 as compared to the same period, FY21.
Industry Overview:
- Petroleum
production means the production of crude oil or other forms of crude oil,
as well as the production of petroleum products from purchased/mined
items. Refining means the cracking, distillation,
separation, conversion, upgrading and finishing of refined petroleum or
petroleum products. Marketing means the distribution,
transfer or sale of petroleum and petroleum products for wholesale or
retail purposes.
- The
oil and gas industry is usually divided into three major sectors:
upstream, midstream, and downstream. The downstream sector is the refining
of petroleum crude oil and the processing and purifying of raw natural as
well as the marketing and distribution of products derived from crude oil
and natural gas. The downstream sector reaches consumers through products
such as gasoline or petrol, kerosene, jet fuel, diesel oil, heating oil,
fuel oils, lubricants, waxes, asphalt, natural gas, and liquefied
petroleum gas (LPG) as well as naphtha and hundreds of petrochemicals.
- Nayara
Energy is engaged in refining imported crude from CIS (Commonwealth of
Independent States) countries and selling a varied range of products
including a crude basket to 125+ crude grades and crude distillates like
MFO (Marine Fuel Oil) and Reformate, naphtha, Motor Spirit (MS), Gasoil,
Ultra Low Sulfur Diesel (ULSD), MS, High-Density Diesel (HDD) and Light
Diesel Oil (LDO) through the retail channel (6500+ pumps) and export of
the same to Asia, Middle-east, Africa and others. In FY22, the company
Safely handled 5,000 vessels and 390 MMT of crude at the port. It further
supplies natural gas at its pumps procured through PMS (Parallel Marketing
System).
Classification:
- Crude
oil is the primary input cost for a refinery (90% to 95% of the total cost
of refining). Refineries process the crude oil purchased into various
value-added products, which in turn are classified as light, middle and
heavy distillates. A refinery tries to optimize its capacity to
produce more remunerative distillates to boost margins (petrol and
diesel).
- During
the FY2022, the Refinery processed 20.16 million metric tonnes (MMT) of
crude, achieving approx. 101% capacity utilisation. It processed 84% of
Heavy and Ultra Heavy Crudes and produced 87% of high-margin
distillates. Institutional Business continued to contribute
significantly to the company's performance driving the growth objective
for high-margin products, i.e. HSD, LDO and MTO. Despite the pandemic
affecting industrial activities, Institutional Business registered its
highest-ever sale of HSD and better than planned delivery for Bitumen. The
company was able to scale up both HSD & LDO business with strong
growth of 9% and 61%, respectively, viz-a-viz industry growth of 10% and
20%, respectively, by entering into new segments and geographies. NPIs
like MTO was successfully launched in June 2021 and we could establish
our product with major paint companies achieving a market share of 8%
Market Dynamics:
- India
is the world's third largest oil importing and consuming nation
behind the USA and China. For 2023, the Organisation of Petroleum
Exporting Countries (OPEC) projected growth of 4.67% in India's
demand to 5.38%. GOI-controlled PSUs (Public Service Union) produce 77% of
national production with 65.1% by ONGC (FY22). The rest of the 22.6% of
production is credited to PSCs (Public Sharing Contracts).
- Due
to low volumes of production compared to high demand, the Indian Oil &
petroleum products industry is heavily dependent on imports and thus
exposed to global price volatility. Further the artificial price control
by GOI by implementing policy changes to establish price stability in
domestic markets often squeezes margins from private retail marketers.
Thus private refineries like Reliance and Nayara prefer to sell the bulk
of their output through exports before catering to domestic retail.
- Imports
made due to deficit in production viz. LPG and Lubes/LOBS accounted
for 48.5% share of total POL products import during April-November
2022 as compared to 50.8% during April-November 2021. Imports of
petcoke accounted for 13.3% of the total POL imports during April-November
2022. The entire quantity was imported by private importers.
Catalyst: Oil prices rose significantly as the
Russia-Ukraine conflict dragged on, after Russia's invasion of
Ukraine began in the last week of February 2022 and supply concerns
weighing on the global oil market. The monthly average price of the Indian
basket of crude oil rose to $112.87/ bbl at the end of the financial year
2021-22 in March 2022 from $63.40/bbl at the beginning of April 2021 and
finally averaging $87.55/bbl November 2022. European Union and G7
countries have imposed a price cap of $60/bbl on crude originating hence
from Russia from 05, December 2022. Europe's energy system faces an
unprecedented crisis. Supplies of Russian gas—critical for heating, industrial
processes, and power—have been cut by more than 80% this year. Wholesale prices
of electricity and gas have surged as much as 15-fold since early 2021, with
severe effects on households and businesses. India has ramped up its oil
imports from Russia, amid fears of a sharp price increase from December.
Trickle-Down Effect: Reliance Industries and
Nayara Energy are among the Asian refiners that produce winter-specification
diesel for the European Union, therefore the ongoing energy crisis in Europe is
anticipated to be advantageous for them. Since state-owned oil businesses do
not export, private refineries, which are the nation's top exporters of diesel,
have an edge. According to oil analysts at Refinitiv, since the start of
the Ukrainian conflict, Reliance and Nayara have purchased 2.82 million tonnes
of Russian oil per month between March and September, which is almost ten times
as much as they did before the invasion. In response to the invasion, Indian
refiners (RIL & Nayara) increased their exports to Europe, averaging
7,30,000 tonnes per month, or 21% of their total exports of 2.64 million tonnes
per month, which peaked at 1.1 million tonnes in March, according to the
analysts. This is a significant increase from the pre-invasion period average
of 5,70,000 tonnes per month. Diesel supplies from Asia to Europe have been
consistent since the Ukraine crisis broke out in February, averaging 9,50,000 tonnes per month, a significant
increase from the pre-invasion peak of 1 million tonnes per month. In
August this hit an 11-month high of 1.64 million tonnes.
Reaping on Windfall gains? Russia became the 7th
largest trade partner of India and its top crude exporter in December. Private
Indian refineries (RIL & Nayara) accounted for 69% of the imports. As of
January 2023, India has been buying more Russian crude and condensate.
Between late April and the end of December 2022, Russian crude imports were
equivalent to around 64,000 b/d over the period. Arctic Varandey Blend is
expected to account for 13% of total Russian imports in January, up from zero
in November. India is also buying other Arctic grades from Russia, including
Arco and Novy Port Light. Top supplier Russia ships record 1.17
million b/d of crude to India in December 2022. While the export of crude
and energy to the US has increased, there has been a considerable decrease in
Britain, Spain and Romania. Meanwhile, countries including
Portugal, Belgium, and Italy have increased their imports by 1600,
535, and 17 times respectively. Exports to the Netherlands also saw a 45% increase
compared to October.
Hindrance: GOI adhocism:
- The
fuel retailing business in India has seen cyclical changes that have more
to do with politics-driven policy over the past two decades than the
balance of supply and demand. These include introducing market-linked fuel
pricing twice and reverting to an administered mechanism twice. In the
early quarters of FY23, the country faced fuel shortages in various parts
induced by rising global crude prices. Private refineries reduced
supplies to dealers and maintained prices higher to deter customers in
order to minimize their losses amidst margin squeeze. The action
was taken when the government placed all gas stations under the Universal
Service Obligation (USO), which required that they keep supplies at fair
prices during their designated operating hours. Estimated GOI losses
arising out of the price freeze on petrol and diesel are pegged at ₹
45,000 Cr.
- To
deal with the fuel crisis, the GOI deregulated sale of
domestically-produced crude oil; and imposed a cess, or windfall tax, of
₹23,250/tonne on crude oil and a special additional excise duty (SAED) of
₹ 6 per litre and ₹ 13 per litre on exports of petrol and diesel
respectively. On July 20, the SAED (Special Added Excise Duty) on petrol
was removed and on diesel was cut to Rs 11 per litre. On one hand, it
expects exploration and production (E&P) companies to increase the
domestic production of crude oil and reduce the import of costly oil from
global suppliers, while on the other, expects the companies to curb fuel
shortages in the domestic market. According to market estimates on a
net-net basis, actual revenue gain from windfall tax could be limited to ₹
25,000 Cr. This is because the government is likely to lose out on
corporate tax collections from oil companies, the largest contributor to
corporate taxes.
Key Drivers
- Cheap
sourcing of raw materials: Procurement of Russian crude at well below
the price cap of $60 and significantly below the global price of $80
allows for good margins.
- Reduction
in windfall tax: On July 1, 2022, the GOI imposed windfall gain
taxes on the production and export of crude and its distillates (petrol, diesel
and aviation turbine fuel (ATF)) worth ₹ 23,250/tonne. But cooling off of global prices and changing geo-political scenario enabled stepwise reduction of tax as the year rolled. By December 2022, the
government estimate of fiscal earnings was only ₹ 35,000 Cr against the
predicted ₹ 94,800 Cr. Windfall tax on crude was further cut to ₹ 1700/tonne from the prevalent ₹ 4900/tonne by
GOI notification on December 15, 2022.
- Growth
in the Plastics market: The company laid the foundation stone for
the petrochemical expansion project for the 450 KTPA Polypropylene
Plant as a part of its backward diversification to alternate sustainable
revenue streams. The polymer is derived from propylene gas and other by-products of crude distillation like naphtha. Optimization of the sales mix with the inclusion of high-demand 'On-Purpose Product' (OPP) from common throughput is expected to benefit the Company's profit margins and provide a hedge against fortuitous economic extremes. Polypropylene (PP) contributed to the largest share
of Indian plastic demand during FY22 at 24% or 6.1 million tons.
