IOC, HPCL and BPCL free to set their own fuel prices, says India’s oil minister
Oil marketing companies such as Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) are free to set their own fuel prices, said Hardeep Singh Puri, Minister of Petroleum and Natural Gas. The minister’s comment came after the Centre announced a cut in excise duty on petrol by Rs 8 per litre and on diesel by Rs 6 per litre on Saturday. “They (OMCs) are very strong stakeholders in our system and clearly, they do their own decision making,” said Puri in an exclusive interview with CNBC-TV18, on the sidelines of the World Economic Forum Annual Meeting 2022. “Now, obviously, if they have under-recovery in one area — and this is for them to answer — maybe because they make up in petrochemicals or in refining and other areas, they are able to do it. But you know, it is not for me, as the Minister for petroleum and natural gas, to have to tell them what they can do and what they can’t do,” Puri said. OMCs fell on Monday after the government’s decision of reducing excise duty on fuel and giving subsidy of Rs 200 on gas cylinders. “At this stage it will be incorrect on my part to comment whether the OMCs will raise or not raise. I can only say that probably the excise duty rate card may help in or give some flexibility in the day-to-day management of the prices and it may also help a little bit on the working capital management. But how it needs to be handled, which way prices should be directed… that probably the OMCs have to decide,” said MK Surana, CMD, HPCL. Harshvardhan Dole, VP-Institutional Equities, IIFL, said the OMCs have incurred significant inventory losses and added the excise duty cut will incur a loss of almost Rs 50 billion for the companies collectively. “Big question marks as to how the government will let these OMCs recoup these losses and essentially take price increases and compensate on the LPG losses,” he said. Puri added that the excise duty cut on petrol and diesel is, in a sense, a sequel to the November reductions. “On the decision, which was taken yesterday, I would like to remind you that this is in a sense, a sequel. Earlier, a decision was taken on November 4 last year because of the Prime Minister’s considered and very well thought through assessment that the burden on the common man, the Aam Aadmi needed to be addressed,” Puri said. He said that Prime Minister Narendra Modi took the decision of petrol and diesel excise duty cut based on inputs he received from various stakeholders within the system. Samir Arora, Founder and Fund Manager, Helios Capital said that the excise duty cut cannot change much from a macro point of view. “We are talking only about the month of May. Oil prices are up more than 5 percent, which means if you were to give 5 percent back in terms of price cut effectively through excise cut or any duty cut, basically just takes you back to April 30. Separately, we know that the oil marketing companies themselves are sitting on a huge shortfall. So in theory, maybe one reason for doing this is to make sure that the oil companies at least are able to get some slight increase, and effectively instead of government getting the money, the OMCs get it,” he said.
Five Major Challenges Facing The Energy Industry
Record-high prices at the pump, a looming diesel shortage right when the summer season is starting, and an uncooperative OPEC are probably reasons for many headaches among government officials around the world. Yet these are, in fact, manifestations of deeper problems in the energy industry. Underinvestment In the past decade or so, Europe and, to a lesser but no less significant extent, North America, have made it their mission to reduce their reliance on fossil fuels and increase their reliance on renewable energy. This has spurred an investor exodus from oil and gas and the emergence of the so-called ESG investing trend. Money for new oil and gas developments has become more difficult to tap as banks join the ESG movement, and companies have had to cut back on spending. Saudi Arabia’s oil minister warned that underinvestment in oil and gas would have a boomerang effect on consumers earlier this year, and he is not the only one. Many OPEC officials have made the same warning but, apparently, to no avail. After all, none other than the International Energy Agency said last year the world does not need new oil and gas exploration because we won’t be needing any more new oil or gas supply. Of course, it was only a few months later that the IEA changed its tune, calling on OPEC to boost production, and it demonstrated one of the harsh realities of the energy industry: you cannot reverse a process that has been going on for years in a matter of months. Low discovery rates A topic that doesn’t get much talked about, the average rate of new oil and gas discoveries is, in a way, comparable to the average conversion rate of solar panels: it is well below 30 percent. Bloomberg recently reported that three wells that Shell had drilled offshore Brazil had come up dry. The supermajor had paid $1 billion for drilling rights in the area and had spent three years drilling to come up empty-handed. Exxon had also failed to tap any significant oil reserves in its Brazilian blocks, which cost it $1.6 billion. The news highlights the risky nature of oil and gas exploration even in places like Brazil, which has been touted as the next hot spot in the industry, probably alongside Guyana. Brazil has become a magnet for supermajors because of its prolific presalt zone, but, as one local energy consultant told Bloomberg, the big discoveries have already been made—back when the discovery rate was close to 100 percent. The average successful discovery rate for the oil and gas industry is much lower than that, however, at 24.8 percent, according to Bloomberg. And there are fewer and fewer big discoveries to be made. Production cost inflation Broader inflation trends, in large part driven by soaring energy costs, have not passed the energy industry itself. In the U.S. shale patch, production costs have risen by some 20 percent. Two companies recently warned they would be reporting higher costs for their second quarters, Continental Resources and Hess Corp, and they are far from the only ones experiencing these higher costs. Shortages of raw materials such as frac sand and, earlier this year, steel piping for wells, are one reason for the production cost inflation, not just in the shale patch but everywhere where these raw materials are used in oil fields. A shortage of labor is a special problem for the U.S. shale patch, too, helping to drive production costs higher. Lingering supply chain problems from the pandemic are also in the mix. The bigger problem is that the industry is not expecting any respite in the coming months, either, as Argus recently reported, citing oil and gas executives. The production cost squeeze comes at a time when the federal government really needs more oil and gas, which is probably the worst possible time as it has discouraged drillers further from spending more on new drilling. Cyberattacks Cybersecurity has become a cause for concern in the energy industry in the past few years as cyberattacks have multiplied significantly. The Colonial Pipeline hacking really helped out things in perspective on the cybersecurity front, but little action followed, it seems. A brand new survey by DNV, the Norwegian risk assessment and quality assurance consultancy, revealed this week that the industry is quite uneasy about cyberthreats and, what’s worse, not really prepared to handle them. According to the study, 84 percent of executives expect cyberattacks will lead to physical damage to energy assets, while more than half—54 percent—expect cyberattacks to result in the loss of human life. Some 74 percent of the respondents expect environmental damage as a result of a cyberattack. And only 30 percent know what to do if their company becomes a target of such an attack. Geopolitics The most chronic risk in the energy industry, geopolitics is never far away when prices start swinging wildly or, as is the case right now, remain stubbornly high. The prospect of an EU oil embargo on Russia, although dimming in the past few days, is one big bullish factor for oil prices. The lack of progress on Iran nuclear talks is another. And then there is, of course, OPEC’s evident unwillingness to respond to calls from the West for more oil. Russia itself does not seem bothered by the embargo prospects at all. “The same oil that they [the EU countries] bought from us will have to be purchased elsewhere, and they will pay more, because the prices will definitely rise; and once the cost of delivery and freight increase, it will be necessary to invest in building the corresponding infrastructure,” Deputy Prime Minister Alexander Novak said this week. Iran is meanwhile boosting its oil exports, which go almost exclusively to China. The country has signaled it will not agree to a deal with the U.S. unless the U.S. meets its demands, and it appears that the ball is now in Washington’s court. In the meantime, China will have Iranian oil, but no
Rising fuel costs, expensive EVs making CNG a welcome relief, alternate fuel for mobility: Report
Rising fuel costs and prohibitively expensive electric vehicles are making compressed natural gas (CNG) “a welcome relief and alternate fuel” for mobility for Indian consumers, according to a report by NRI (Nomura Research Institute) Consulting & Solutions. CNG vehicle sales continued to grow in FY22, rising by 55 per cent to 2,65,383 units in FY22 compared to 1,71,288 units in FY21, as per NRI’s report titled ‘Path to clean mobility: Increasing penetration of NGVs in India’. In the last five years, the penetration of CNG vehicles has also increased, and its parc has grown at a CAGR of 5.3 per cent to 37.97 lakh units as of March 2022 from 30.90 lakh units in March 2018, the report said. “With increased differential TCO (total cost of ownership) benefits compared to other fuels, CNG is gaining more prominence among consumer preference post-BS-VI. The technology is now well established in India with major OEMs concentrating to bring in a range of cost-efficient and fuel-efficient CNG variants,” NRI said in a statement. The report pointed out that favourable factors, such as improvement in CNG fuelling infrastructure and supporting regulatory environment, are helping the growth of CNG vehicles. “With fuel prices soaring and electric vehicles becoming prohibitively expensive for most Indians, vehicles that run on compressed natural gas could be considered as a welcome relief and an alternative for mobility,” NRI said. The expansion of the CGD (city gas distribution) network and an increasing number of CNG stations is expected to encourage the proliferation of NGVs (natural gas vehicles), it added. “The immense volume and favourable conditions of the Indian automobile market give an opportunity to promote widespread adoption of NGVs in India,” NRI Consulting & Solutions Senior Partner & Group Head Ashim Sharma said. However, he pointed out that “higher gas prices will exacerbate the CGD industries’ already unfavourable economics, limiting network expansion and negatively impacting consumer experience. The government, industry and CGD companies must all work together for India’s NGV market to thrive in the future”. According to the report, bio-CNG provides an effective solution to environmental issues like stubble burning. However, the uncertainty of biomass availability poses a challenge. Yet, India’s bio-CNG generation potential, once fully realised, can meet the current natural gas demand of the country and can power 54 lakh additional vehicles, it added.
How China Could Spark A Major Reversal For Oil Prices
The huge discrepancy between China’s massive economic growth and its minimal oil and gas reserves made it the big global backstop bid for crude oil and many other commodities over the past 20 years or so. According to figures from the Energy Information Administration (EIA), China surpassed the U.S. as the largest annual gross crude oil importer in the world in 2017, having become the world’s largest net importer of total petroleum and other liquid fuels in 2013. Since the full breakout of the COVID-19 virus across the world in 2020, China’s strictly-enforced ‘zero-COVID’ policy has damaged its economic growth engine and its appetite for the oil and gas used to fuel it. There have been murmurings that this policy may be relaxed but these have not proven correct and are unlikely to be in the near future, leaving the big bid sidelined in the oil markets, and a plethora of other bearish factors set to dramatically push oil prices down. At the outset of March, China saw the largest wave of COVID infections since those across Wuhan in early 2020, with the new cases focused across its northeast and coastal regions, mostly in the Jilin and Shandong provinces. At that point, although official rhetoric did not signal any softening in the zero-COVID containment strategy in the near term, the previous December had seen a refinement of the strategy to one incorporating the idea of ‘dynamic clearing’. “This provided local governments more flexibility in imposing restrictions, allowing daily increases in symptomatic cases to be capped at around 200 on a national basis,” Eugenia Fabon Victorino, head of Asia Strategy for SEB, in Singapore, told Oilprice.com. Even back then, though, she added, there were clear limits to this flexibility, with China’s still-aggressive approach to tracing possible exposures to the virus putting more than 184,000 individuals under medical observation in isolation within two weeks or so of that new March outbreak. Soft though oil prices looked at that stage, they looked considerably softer still with news at the end of March that the economic powerhouse city of Shanghai, population 26 million, had been placed in a two-stage lockdown. This was then followed in early April by news that the authorities in other cities, including Ningbo (population 4.2 million) and the capital Beijing (22 million) had begun implementing limited restrictions to curb the spread of the virus. Again, at that point, there had been hopes of a softening in the zero-COVID approach, stoked by the publication in the second week of April by the Chinese Center for Disease Control and Prevention (CCDC) of a guide that outlined measures for quarantining at home. These measures seemed to indicate the possibility that people suffering from very mild symptoms or none at all, but having tested positive for COVID, might be able to quarantine at home rather than having to go to centralized state-run facilities to do so. Hopes that such measures might be introduced, however, were also dashed when the CCDC in a later clarification simply reiterated the previous set of strict policies. At that point, the bearish effect on global crude oil prices of the ‘China COVID’ factor was highlighted by OPEC in its report wherein it cut its global oil demand forecast for 2022 by 480,000 barrels per day (bpd). At almost the same time, the same reasoning was given by the International Energy Agency (IEA) in the lowering of its global demand outlook for 2022 by 260,000 bpd. Even then, with Brent crude around the US$110.00 per barrel (pb) level, and pervasive talk of a potentially bullish-for-prices ban on Russian oil in Europe whistling through the markets, the IEA further warned that even though crude oil prices had come back down from recent highs they still: “Remain troublingly high and are a serious threat to the global economic outlook.” These actions and comments were made even before China stepped up its counter-COVID programs, with the end of April seeing announcements of mass testing for the virus being rolled out across Beijing, and other cities, including Hangzhou (population 12.2 million). By the onset of May, some analysts had calculated that the effect of ongoing lockdowns in China was reducing crude oil demand from the country by around one million barrels per day, with no indication of when or how this decline would end. Even before the transmission of COVID surged in mid-March, several major banks had regarded China’s 2022 economic growth target of ‘about 5.5 percent’ as too ambitious and the big data releases in April showed they were right. April’s official Purchasing Managers’ Index (PMI) – the key indicator that shows the state of the country’s manufacturing activity (with a reading above 50 showing an expansion and below 50 marking a contraction) came in at just 47.4 for the month, the lowest level since February 2020. China’s own National Bureau of Statistics (NBS) senior statistician, Zhao Qinghe, stated that: “The production and operation of… enterprises have been greatly affected [by COVID-related actions].” Late last week, leading independent global economic and investment strategy research house TS Lombard (TSL), told Oilprice.com that it believes that China’s economy will likely contract this quarter and slashed its full-year 2022 China economic growth forecast to just 3.3 percent (although it thinks that for political reasons the official report from Beijing will be of 2022 economic growth close to 5.0 percent). Although the current Omicron wave of COVID appears to have peaked and the number of areas classified as high/medium risk has fallen in recent days from their recent highs, it remains the case that mobility remains low and stimulus measures are less effective under zero-COVID conditions and structural headwinds, according to TSL. “Beijing is firmly committed to ‘zero-COVID’, making further lockdowns almost inevitable during the remainder of 2022,” Rory Green, head of China and Asia research at TS Lombard, in London, told Oilprice.com last week. “Healthcare limitations, including the low vaccination rate and insufficient numbers of hospitals and staff, combined with politics ahead of the Q4/22
Global oil firms report huge profits but Indian marketers are left high and dry
Indian oil refiners are staring at huge losses as they have failed to pass on the higher costs of crude to fuel consumers, even as global energy producers report outsized profits in the March quarter. A Mint compilation of earnings data reported by global oil giants shows some have recorded their best profit figures in years, even decades, as crude oil prices soared after the Russia-Ukraine war broke out. Saudi Aramco, the world’s largest oil company, is now neck-and-neck with Apple as the most valuable company globally and is ranked on top as of Friday’s closing. The company also reported more than 80% growth in its profit in the March quarter. Oil majors ExxonMobil, Chevron, Shell, TotalEnergies, and ConocoPhillips have also reported a year-on-year (y-o-y) earnings growth of 80-255%. National producers from China and Russia are not behind. Brent crude prices crossed $100 per barrel in late February and remained above that mark for almost throughout March. The prices have further surged in May after the EU’s proposed tightening of sanctions on Russia. On Friday, Brent crude was trading around $113 per barrel. Indian oil producers Oil and Natural Gas Corp. (ONGC) and Oil India are also likely to report strong quarterly earnings this week, reaping the benefits of high oil prices. However, the companies down the value chain, which engage in midstream and downstream operations, are staring at sharp losses. This is because fuel prices during the election season, from November 2021 to March 2022, remained unchanged. Fuel retailers such as Indian Oil Corp. Ltd (IOCL), Hindustan Petroleum Corp. Ltd (HPCL), and Bharat Petroleum Corp. Ltd who were unable to pass on the high cost to consumers, they are taking a hit. IOCL and HPCL reported a 31.4% and 40.5% decline, respectively, in their March quarter earnings. Fuel retailers are allowed to set rates, but they have so far shied away from increasing prices commensurate with the rise in crude oil prices. Bringing some relief, the Union government, on Saturday, reduced central excise duty on petrol by ₹8 per litre and on diesel by ₹6 a litre. This would give fuel retailers some leeway to cope up with the volatility in crude oil prices and could lead to a reduction in their under-recoveries. If the government allows the upstream companies to reap the benefits of the high crude oil prices, it will definitely be very positive for ONGC and Oil India, said Swarnendu Bhushan, senior group vice-president and oil and gas analyst at Motilal Oswal Financial Services However, fuel retailers are losing ₹8.8 per litre on petrol and ₹12.9 on diesel. This could mean that profitability of Indian oil marketing companies will not be in sync with similar companies in the free-market regime abroad, Bhushan said. “So will the government allow these OMCs to take this whole burden of under-recovery or ask ONGC and Oil India or maybe GAIL to participate in this sharing of under-recovery? That is the big question,” Bhushan said.
ONGC starts trading on Indian Gas Exchange
Oil and Natural Gas Corporation (ONGC) on Monday started trading on the Indian Gas Exchange. With this, ONGC has become the first Exploration and Production (E&P) company in India to trade domestic gas on the Indian Gas Exchange. The first online trade was made on 23 May 2022 by ONGC Director (Onshore) In-charge Marketing Anurag Sharma on India’s first automated national level Gas Exchange, IGX. The gas traded is from ONGC Krishna Godavari 98/2 block, the Ministry of Petroleum & Natural Gas said in a statement. After the deregulation of the gas pricing ecosystem in 2000-21, ONGC has prepared itself to reap the benefits. The quantity sold by ONGC through the Gas Exchange will be enhanced slowly, it added.
Petrol under-recovery at Rs 13, diesel Rs 24; Reliance-BP says operations unsustainable
The joint venture of Reliance Industries Ltd and supermajor BP – has told the government that fuel retailing for the private sector in India has become unsustainable after market-controlling public sector firms frequently froze petrol and diesel prices at rates way below the cost, sources said. Despite a surge in oil prices, state-owned Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) first froze petrol and diesel rates for a record 137 days beginning early November 2021 when five states including Uttar Pradesh went to the polls, and last month again went into a hiatus that is now 47 days old. “They (Reliance BP Mobility Ltd) has written to the petroleum ministry over the fuel pricing issue,” a highly placed source in the government, who didn’t want to be quoted, told reporters here. While RBML is scaling down its retail operations to cut some of the Rs 7 billion loss it is incurring every month, Russia’s Rosneft-backed Nayara Energy has raised prices of petrol and diesel by up to Rs 3 a litre over and above the PSU rates, to cover for some losses. The government over the weekend cut excise duty on petrol by Rs 8 per litre and by Rs 6 a litre on diesel. This reduction was passed on to the consumers and not adjusted against the under-recovery or losses oil firms make on selling petrol and diesel. Two sources aware of the matter said RBML contends that PSU oil marketing companies control over 90 per cent of the market and are the price-setters, leaving no room for private fuel retailers in fixation of the retail selling price of petrol and diesel. PSUs have not increased fuel prices in line with escalating international crude prices eventually leading to huge under-recoveries (losses) for all fuel retailers since February 2022. As of May 16, 2022, net under-recoveries in the industry were Rs 13.08 per litre for petrol and Rs 24.09 per litre for diesel. The top source, quoted in the first instance, said the ministry is going to reply to RBML, but refused to say what it is going to say. A top ministry official said petrol and diesel prices are decided by the PSU oil companies after considering not just the international oil prices but also gains from other businesses such as petrochemicals and oil refining. “Reliance is exporting diesel to Europe and other countries at highly lucrative prices but rationing supplies for its petrol pumps,” the official said. An industry official however said the inference ministry is drawing is incorrect. Reliance owns and operates two refineries, including one only meant for exports, at Jamnagar in Gujarat. BP has no equity shareholding in them. RBML is an equal joint venture of Reliance and BP with separate legal identity and separate financial books. RBML buys fuel at market price from Reliance as well as other oil companies to supply to its 1,459 petrol pumps. “It is like saying that windfall profits that oil producer ONGC is making on spurt in oil and gas prices should be used to help its subsidiary HPCL sell petrol and diesel at highly subsidised rates,” he said. The petroleum ministry spokesperson did not reply to an e-mail sent for comments even after three days. An e-mail sent to RBML too remained unanswered. A spokesperson of Nayara Energy, which has 6,568 petrol pumps in the country, acknowledged having raised fuel prices. “In recent times, several factors beyond our control have led to an unprecedented increase in crude oil and product prices. The domestic price situation caused an additional shift of volume from institutional business to retail, aggravating the impact of the currently unfavourable retail business environment. “Nayara Energy, since the beginning of the year has been absorbing a significant part of the substantial drop in margins,” the spokesperson said. To reduce the impact in the long run and provide a sustainable solution, “there is a nominal price increase across our retail fuel stations,” the spokesperson added. IOC, BPCL and HPCL own 74,647 out of 83,027 petrol pumps in the country. Industry sources said the market practices of PSU OMCs are contrary to the objective of promoting healthy competition and creating the right climate for investments in the fuel retailing sector when petrol pricing was deregulated in 2010 and diesel in 2014. Private fuel retailers including Jio-bp — the brand under which RBML retails fuel — that are making investments in the fuel retailing sector are staring at a difficult investment environment. Under-recoveries will not only limit their ability to make further investments but also continue to cause severe hardship and financial duress, they said. Seven new private retailers have taken marketing authorization for fuel retailing after a relaxed fuel retailing policy was announced in 2019. They are facing severe hardship and financial duress due to the impact of unprecedented under-recoveries on sales of petrol and diesel, they said. Private retailers want PSU oil marketing companies to adopt the free market-determined pricing principles, facilitating daily revision until under-recoveries are nullified. Alongside the reduction in central excise, the state government should also cut VAT and shift from ad valorem taxation to specific taxation, they said adding without these steps the private sector will be driven out of the fuel retailing business just like in 2008 when they shut shop after being unable to match highly subsidised petrol and diesel of PSU oil firms.
India set to be leader in green hydrogen: Petroleum Minister Puri at Davos
India is more conscious of going for green energy than any other country in the world, Union Petroleum and Natural Gas Minister Hardeep Singh Puri said on Monday. He said special emphasis is being given on green hydrogen, biofuel blending and exploration and production of biofuel from alternative sources. Puri asserted that India would eventually become a leader in the green hydrogen space. The target of 20 per cent of ethanol blending has been brought forward from 2030 to 2025 and it would be definitely achieved, he said. Puri, also Union Minister for Housing and Urban Affairs, said India responded quickly and effectively when the Covid-19 pandemic hit the world and one of the most important decisions was to fast-track vaccine development and manufacturing on a war footing. “Whatever vaccine manufacturing capacity India had earlier, had almost got dismantled during the 2004-2014 period,” Puri said, while emphasising that one of the most important decisions taken by the Modi government after the pandemic hit the world was to ramp up the vaccine manufacturing at an unprecedented speed. The minister said he doesn’t want to sound political on this. “While we have seen pandemics before, when this Covid-19 pandemic hit us, it was more reminiscent of Spanish Flu due to the amount of destruction it caused across the world,” he said. Speaking at a session on the sidelines of the World Economic Forum Annual Meeting 2022 here, Puri also talked about various transformational changes that have happened after 2014 during the Narendra Modi government.