Why inventory gains are helping oil companies
Both Indian Oil Corporation Ltd. (IOCL) and Bharat Petroleum Corporation Ltd. (BPCL) have reported strong financial results in the second quarter of this fiscal despite lower operating revenues. The key item driving profits for both companies in the quarter were “inventory gains”. We examine what causes inventory gains and how they impact the financial performance of oil marketing companies. HPCL, the third major state owned oil refiner, has not yet reported financial results for the second quarter. What are inventory gains? Inventory gains are registered from an appreciation in the value of inventory held by a company. In the case of oil marketing companies, inventory gains can be caused by an appreciation in the price of crude classified as refining inventory gains or an appreciation in the price of products such as petrol and diesel classified as marketing inventory gains. Refining inventory gains are a result of an appreciation in the price of crude oil in the company’s inventory. OMCs purchased crude oil in April when the price of Brent crude hit a low of $19.33 per barrel. The price of Brent crude oil recovered to around $40- 45 $ per barrel in mid-June though a recent fall has pushed it to $38 per barrel in late October. OMC, can also get inventory gains from an upward change in the price of end products including petrol and diesel that they have in stock. The price of petrol and diesel are calculated based on benchmark prices of petrol and diesel in the international market. Notably, OMCs were likely insulated from some possible declines in the international price of petrol and diesel as they stopped revising prices on a daily basis from March 16 to June 6 when international prices of petrol and diesel fell sharply as a result of low international crude prices. How did these changes in inventory value affect the performance of OMCs? The rise in prices of brent crude allowed IOC to register a gain of Rs 58.29 billion on crude alone and a total inventory gain of Rs 74 billion including marketing inventory gain on end products such as petrol and diesel when net profit for the quarter was Rs 62.27 billion. BPCL similarly saw a refining inventory gain of Rs 13.03 billion and marketing inventory gain of Rs 12 billion in the quarter ending September 30. Notably, All three state-owned OMCs registered major inventory losses in the previous financial year due to a sharp fall in the international price of crude oil. Indian oil corporation recorded a Rs 113.05 billion reduction in the value of its crude oil inventories as an exceptional item while BPCL recorded a reduction of Rs 10.81 billion leading to both companies posting large losses. Indian Oil posted a loss of Rs 77.83 billion in the Q4FY20 while BPCL posted a loss of Rs 13.61 billion. Hindustan Petroleum Corporation also suffered an inventory loss of Rs 41.13 billion in the January-March quarter. What quantifies operational performance of OMCs when inventory gains and losses play such a major role in earnings? While analysts do take into account the ability of a company to claw back inventory losses incurred, they asess operational performance by comparing gross profits with EBITDA or operating profit to assess the underlying operating performance of the company.
Diesel sales top pre-Covid level by 6 per cent in Oct; petrol, power demand head north on festive demand
India’s diesel consumption in October shot past the pre-pandemic level for the first time since the lockdown, while petrol and power demand continued to grow at a healthy trot, clearly indicating that economic recovery is gathering steam on the back of festival season demand. Latest market data shows state-run fuel retailers, who dominate 90 per cent of the market, selling six per cent more diesel in October than they did a year ago and petrol consumption rising four per cent year-on-year. Simultaneously, government data for October shows power consumption rising more than 13 per cent to 110.94 BUs (billion units), driven mainly by buoyancy in industrial and commercial activities, from 97.84 BUs a year ago. The sharp uptick in fuel and power consumption reinforces the recent projection by the International Energy Agency that India will lead the recovery in global energy demand, as reported by TOI on October 14. Prime Minister Narendra, too, echoed the view on October 26, when he told top guns of the global oil industry that, “India is set to nearly double its energy consumption over the long term.” On a month-on-month basis, October diesel sales spiked 19 per cent from September level but petrol demand tapered off to less than one per cent as the preference for personal vehicle appeared to be flattening. September diesel sales had jumped nearly 22 per cent over August, while petrol consumption had risen 10.5 per cent month-on-month. October jet fuel sales too rose more than 9.11 per cent from September as the number of flights increased, but it is still about half of the year-ago period. Predictably, consumption of LPG, or common household cooking gas, continued to rise and was 3.5 per cent higher than the year-ago period, indicating a lot more cooking as families get into the Diwali groove. Rising fuel sales will help refiners to ramp up operations of their units. Shrikant Madhav Vaidya, chairman of India’s largest oil refiner and fuel retailer Indian Oil, said he expected to run the company’s refineries at full steam in the next two months. Fuel sales have also been boosted by rising car and two-wheeler sales and exports of iron ore, garments and drugs, which increased movement of goods. Car sales rose 26 per cent and two-wheelers 12 per cent in September from a year ago. India’s exports too rose 6 per cent, contributing to the uptick in economic activity.
Bharat Petroleum Corp puts Bina refinery expansion plan on hold pending privatisation
India’s Bharat Petroleum Corp has put on hold its plans to expand its Bina refinery and install a secondary unit at its Mumbai refinery to boost efficiency pending privatisation of the company, its head of finance N. Vijayagopal said. The federal government wants to sell its 53.29 per cent stake in BPCL, the country’s second-largest state-run refiner, to raise funds to rein in a ballooning fiscal deficit. “It is for the new owner to decide whether they want and have the flexibility to add refining capacity,” Vijaagopal told an analyst conference. BPCL wanted to install a residue fluid catalytic cracker at the Mumbai refinery and connect the plant with a new site where it wanted to build an ethylene cracker. It wanted to expand the Bina refinery in central India to 300,000 barrels per day from 156,000 bpd along with a petrochemical plant. Vijayagopal said BPCL privatisation by March 2021 looks “challenging” as the initial bid submission deadline has been extended to mid-November and any spurt in coronavirus infections could prevent foreign players from traveling to do due diligence of the assets. The company, which has a robust retail presence in key Indian cities, aims to set up 6,000 retail outlets in three years with a focus on rural areas to raise its market share in diesel and gasoline sales to about 32 per cent from 29 per cent, he said.
Mitsui OSK signs 30-year charter contract for Russia’s Arctic LNG 2 project
Japan’s Mitsui OSK Lines Ltd (MOL) said on Monday it has signed a 30-year charter contract with the operator of the Arctic liquefied natural gas (LNG) 2 project, led by Novatek, for three ice-breaking carriers for the Russian project. The three vessels will be built by South Korea’s Daewoo Shipbuilding & Marine Engineering Co Ltd, costing about 90 billion yen ($859 million) in total, and are scheduled for delivery in 2023, MOL said. The carriers will mainly transport LNG from a loading terminal on the Gydan Peninsula in the Russian Arctic to the floating LNG storage unit (FSU) to be installed at the transhipment terminals in Kamchatka and Murmansk via the Northern Sea route. Unlike MOL’s existing ice-breaking LNG carriers, which can only sail eastbound in the Northern Sea route during mostly summer and autumn when the ice is thin, the new vessels will have a narrower width, higher ice breaking capability and increased propulsion engine output, which enable them to sail east via the Northern Sea route all year round. The eastbound transportation route will reduce the voyage’s distance by about 65% compared to the westbound route via the Suez Canal for Asian destinations, helping to cut greenhouse gas emissions by vessels, it said in a statement. MOL is in talks with another company to form a partnership for the charter deal to split the construction cost by half, a company spokesman said. If agreed, MOL expects the 30-year contract will contribute about 80 billion yen ($764 million) to its recurring profit in total, he said. The equity partners of the Arctic LNG 2 project include France’s Total, China National Petroleum Corp , China’s CNOOC and the Japan Arctic LNG consortium made up of Mitsui & Co and state-owned Japan Oil, Gas and Metals National Corp (JOGMEC).
SIAC arbitration order against Rs 24,713 cr deal with RIL not ‘enforceable, binding’: Future Retail
Future Retail on Sunday said the emergency order passed by the Singapore International Arbitration Centre (SIAC) putting its Rs 24,713-crore deal with Mukesh Ambani-led RIL on hold is not “enforceable and binding”, and any move to enforce it would be “resisted” by the company. The interim award passed by the Emergency Arbitrator (EA) of SIAC last week over the plea of Amazon.com NV Investment Holdings LLC are “void and coram non-judice”, said Future Retail Ltd (FRL) in a regulatory update. According to FRL, the EA order was passed in arbitration proceedings initiated by Amazon by invoking an arbitration clause in a contract to which FRL is not a party, it added. “FRL is advised that an Emergency Arbitrator has no legal status under Part I of the Indian Arbitration and Conciliation Act, 1996 and therefore, the proceedings before an Emergency Arbitrator are void and coram non-judice,” the Kishore Biyani-led company said. The EA order having been passed by an authority without jurisdiction is a nullity under Indian law, it added. Last Sunday, the SIAC passing an interim award in favour of Amazon had asked the Future group to put the deal on hold and said that the deal cannot go through until it finally decides the matter. In the interim arbitration award, a single-judge bench of V K Rajah barred Future Retail from taking any step to dispose of or encumber its assets or issuing any securities to secure any funding from a restricted party. “The EA order is not enforceable under the provisions of the Arbitration and Conciliation Act, 1996 and is not binding on FRL. Any attempt on the part of Amazon to enforce the EA order shall be resisted by FRL to the fullest extent available under Indian law. FRL is also in the process of taking appropriate legal action to protect its rights,” the Future group firm said. It has also said “the bourses BSE and NSE ought not to take cognizance of Amazon’s letter or the EA order” as FRL has complied with all the requirements of obtaining the requisite approval from its step-down firm Future Coupons Private Ltd (FCPL) as was required in the shareholders agreement executed by FRL with its promoters. “FRL is undergoing serious financial difficulties, particularly in light of the unprecedented impact of the COVID pandemic” and “the proposed scheme is the only way, it can come out of the situation”. The scheme is in the best interest of all stakeholders that includes shareholders, financial institutions, vendors and suppliers, and its employees and delay in the implementation “will cause irreparable losses” to all, FRL said. Earlier Amazon.com Inc complained to India’s market regulator SEBI that FRL misled shareholders by incorrectly saying it was complying with its contractual obligations to the US e-commerce giant. Over the process, the Future group firm said that consent for scheme was accorded by the Board of Directors of FRL at a properly constituted meeting held on August 29, 2020. “The said board resolution, as well as actions taken in pursuance of the same are consistent with the Articles of Association of FRL and remain valid and subsisting,” it said. Online retail giant Amazon had last year acquired a 49 per cent stake in Future Coupons Private Ltd, the promoter entity which owns a 7.3 per cent interest in Future Retail, the operator of more than 1,500 stores in India including grocery chain Big Bazaar. Amazon’s investment in Future Group came with contractual rights that include a right of first refusal and a non-compete-like pact. Also, the deal came with the right to buy into their flagship, Future Retail, after a period of between 3 and 10 years. On August 29, 2020, the Future group announced sale of its retail, wholesale and logistic etc to Reliance Retail Ventures Limited, the retail arm of the Reliance Industries (RIL). Amazon, Reliance and Walmart Inc’s Flipkart are in a battle to gain market share in India, where millions of middle-class customers are newly adopting online purchases of food and groceries due to the COVID-19 pandemic. The booming e-commerce market in the country will be worth USD 86 billion by 2024, according to research firm Forrester. The stakes are particularly high for Amazon, which believes India is a big growth market after shutting its online store in China last year. The oil-to-telecom conglomerate Reliance has since September 9 sold an 8.48 per cent stake in its retail unit to investors such as Silver Lake, KKR and Mubadala for Rs 37,710 crore to expand its so-called new commerce venture, which uses neighbourhood stores for online deliveries of groceries, apparel and electronics. The firm, whose retail operations already runs close to 12,000 stores, is looking to dislodge Amazon and Flipkart, which together control about 70 per cent of the online market in India.
India’s gasoline, gasoil consumption exceed pre-coronavirus levels
India’s gasoil consumption in October rose 6.6 per cent from a year earlier, the first such increase since Covid-19 restrictions were imposed in late March, preliminary data showed on Sunday, signalling a pick-up in industrial activity. Diesel sales by the country’s three state fuel retailers totalled 6.17 million tonnes in October, according to provisional data compiled by Indian Oil Corp (IOC), the country’s biggest refiner and fuel retailer. Sales of gasoil, which account for about two-fifths of India’s fuel demand, rose 27.5 per cent from September. Rising diesel sales in the world’s third-biggest oil consumer and importer should help refiners, who had to cut crude-processing runs during the coronavirus crisis. IOC hopes to operate refineries at full capacity in a couple of months, up from 95 per centnow, as local fuel demand is rising, company chairman S.M. Vaidya said on Friday. Rising gasoline and gasoil demand in India should also aid other markets hit by slow demand recovery. Local gasoline sales in October rose above pre-pandemic levels for a second month in a row. Gasoline sales rose 4 per cent from a year earlier to about 2.4 million tonnes, about 8.6 per cent higher than September, the data showed. State companies IOC, Hindustan Petroleum Corp and Bharat Petroleum own about 90 per cent of India’s retail fuel outlets. State retailers sold 3.8 per cent more cooking gas in October than a year ago, at about 2.44 million tonnes, while jet fuel sales halved to 328,000 tonnes.
‘Hydrogen Wars’ pit Europe vs China for $700 billion business
Niels-Arne Baden has a problem. The factory he’s building for Green Hydrogen Systems is too small. Plans for the Denmark site to be one of the largest for assembling the machines that make hydrogen from electricity were finalized about a year ago. But demand for those electrolyzers is growing so fast that Baden’s now planning to double its size. “When I joined this company in 2014, there was no market,” Baden said. “Then last year, it was ‘Kaboom!’, and we were up to our ears in opportunities.” The Danish company isn’t alone. Governments, energy giants, automobile companies and lobbying groups say hydrogen use is pivotal for cutting greenhouse gas emissions quickly enough to prevent the worst effects of climate change. That’s triggered a global race to stake claims in what could be a $700 billion business by 2050, according to Bloomberg NEF. The European Union aims to push as much as 470 billion euros ($550 billion) toward hydrogen infrastructure; China, Japan and South Korea will all likely use hydrogen to achieve recent pledges to slash emissions; and Saudi Arabia plans a $5 billion hydrogen-based ammonia plant powered by renewable energy. “It’s countries going against countries to lock in market share,” said Gero Farruggio, head of renewables at research firm Rystad Energy. “We call it ‘the hydrogen wars’ because of the way governments are racing to subsidize these projects to be a leader.” Global Game Farruggio and his colleagues tallied up over 60 gigawatts of hydrogen projects globally that would be powered by renewable energy, with the majority of them announced this year. The major players don’t include the US, where President Donald Trump has championed fossil fuels and moved to withdraw the country from the Paris climate accord. The outcome of Tuesday’s presidential election could determine whether the US stays on the sidelines. Using hydrogen as an energy source is a century-old idea. An electric machine to produce the gas was installed in 1927 in Norway to help fertilizer production. Since then, it’s been used in zeppelins, rocket engines and nuclear weapons. Yet it does have drawbacks. Hydrogen is expensive to make without expelling greenhouse gases, difficult to store and, not least, highly combustible. Despite the inconsistent interest over the years, this era seems different, said David Hart, director at the consultancy E4tech in Switzerland. He started studying hydrogen as a graduate student at Imperial College London in the mid-1990s after seeing fuel cells on display at an environmental-technology exhibition in Yokohama, Japan. During the ensuing decades, he watched public interest in hydrogen rise to match his own, only to fall back again into obscurity. The US once touted hydrogen as a “freedom fuel” to break its dependence on imported oil, but that strategy stalled. Hart considers hydrogen the “elegant ultimate solution” — one fuel source with myriad applications. “There were periods when nobody cared about climate change, so there weren’t the right drivers for CO2 and fossil fuel to be pushed out,” Hart said. “But I had a stubborn belief that at some point the conditions would be right. I had no idea if it would be five years or 50 years, but there was a feeling.” That time may be now. Hart’s expertise is in demand by Royal Dutch Shell Plc, BP Plc, Exxon Mobil Corp., the UK government and automakers Toyota Motor Corp. and Hyundai Motor Co. He’s telling clients to be nimble and grab market share quickly. “A lot of the important steps and important positioning will happen before the end of the decade,” Hart said. “It puts you in a much more difficult position and a more expensive position if you’re not moving now.” So far, Europe is moving aggressively. European Commission President Ursula von der Leyen put the bloc’s Green Deal at the center of a 750 billion-euro spending plan to help the economy recover from the pandemic. At its heart is a goal to build 40 gigawatts of capacity to produce hydrogen from renewable sources this decade. Member states are also writing their own blueprints, and the UK plans to release a hydrogen strategy in coming months. When Baden, the Danish executive, joined Green Hydrogen Systems in 2014 as chief executive officer, the company was still testing its machines. For years, its only orders were for small demonstration projects, mostly in Denmark. The company would deliver the electrolyzers, do trial runs and then disassemble them. “There was no market,” Baden said. “There were just plans and a lot of ideas.” That changed last year. At an industry fair in Hanover, Germany, executives from automotive companies and wind turbine manufacturers wanted to learn how electrolyzers could help them store some of their cheap, renewable electricity. Suddenly, orders were flooding in. “There was no chance we could deliver the volumes we were seeing coming,” Baden said. The company raised new capital last year from Danish venture fund Nordic Alpha Partners ApS to help scale up production. “I’ve wondered if all these big projects are for real,” Baden said about his order sheet. “And if we didn’t know who was asking, we wouldn’t believe they would pull through.” There are industries, mainly oil refining and chemicals production, that rely on hydrogen already. But they typically use fossil fuels to make it, producing as much CO2 every year as the economies of the U.K. and Indonesia combined, according to the International Energy Agency. Hydrogen can be made without producing carbon emissions, either by using machines powered by renewable energy or by capturing the pollution. Those methods minimize the carbon footprint because hydrogen mainly produces water vapor when burned. That’s getting attention in boardrooms as shareholders apply pressure on companies to clean up their businesses. Shell plans to produce hydrogen in the Netherlands for its refineries. Airbus SE wants to propel planes with the gas. Steelmaker giant, ArcelorMittal SA, is working on a pilot project to replace fossil fuels in Hamburg. Climate-friendly production methods are costly, however, so their viability likely depends on government policies penalizing emissions.
Russian oil and gas condensate output up in October: Interfax
Russian oil and gas condensate output rose to 9.98 million barrels per day (bpd) in October from 9.93 million bpd in September, according to Reuters calculations based on an Interfax report, which cited Energy Ministry’s data on Monday. In tonnage for the month, oil and gas condensate production stood at 42.19 million tonnes for October, in comparison with 40.65 million tonnes in September, the news agency reported. Interfax also said natural gas production at Russian gas giant Gazprom rose for the first time this year in October, to 42.7 billion cubic metres (bcm), from 41.9 bcm a year earlier. According to a Reuters survey, OPEC oil output has also risen, for a fourth month in October, as a restart of more Libyan installations and higher Iraqi exports offset full adherence by other members to a supply cut deal. OPEC+ made a record cut of 9.7 million bpd, or 10% of global output, from May as the pandemic destroyed demand. Since August, the group has been pumping more as the cut tapered down to 7.7 million bpd, of which OPEC’s share is 4.868 million bpd. The OPEC+ producer group’s global deal excludes condensate, a type of light oil, which Russia, on average, pumps around 700,000-800,000 bpd. Moscow’s quota is now around 9 million bpd of oil. Another 2 million bpd increase is scheduled in January, although Saudi Arabia and Russia are in favour of continuing with the current cuts amid a second wave of the coronavirus, which has dampened demand, OPEC sources said.