State-owned oil stocks have more juice left in the barrel
Few stocks can claim to have juice left as markets hit staggering heights as 2023 bid goodbye. Public sector unit or PSU oil stocks like ONGC, OIL and GAIL are a rare few which still hold value. Thanks to production expansions, regulatory consistency and more the government owned companies are set to better days ahead. Most of the oil stocks have given over 60% returns in the last one year, with the exception of BPCL and ONGC. Yet, the upstream companies especially are trading at a discount, claim brokerages. Thus, going ahead, Antique Stock Broking believes that ONGC and Oil India remain among the cheapest upstream stocks globally despite a rally in the last six months. “We believe the current valuations do not fully reflect the jump in realization of both oil and gas over the last 6-18 months and the resultant cash flow,” it said. Both the companies are expected to see significant free cash flows starting FY24, after the gas prices increased via Administered Pricing Mechanism by the government. Not only will it improve margins, but improved price realization would lead to much more attractive returns on their annual capex. “We believe positive momentum in the upstream sector would be led by a shift towards companies with undemanding valuation, while we find fundamental support led by steady earnings and cash flows on the back of regulatory consistency, stable commodity prices, and margins and triggers in the core production outlook,” said a report by Emkay.
India raises C heavy molasses ethanol price by 14pc
The Indian government has increased prices of ethanol derived from C heavy molasses by 14pc on the year to 56.28 rupees/litre ($0.68/l) for the ethanol supply year between November 2023 and October 2024. This is up from the Rs49.41/l that state-controlled Indian oil marketing companies (OMCs) paid for ethanol derived from C heavy molasses in the previous year. This is also the highest price increase in more than five years since the government split ethanol purchase prices into those derived from C heavy molasses, B heavy molasses and sugarcane juice. The latest purchase price hike is to maximise ethanol production from C heavy molasses and boost overall ethanol availability for India’s national Ethanol Blended Petrol (EBP) programme, Delhi said on 29 December. The EBP programme has set a target of 20pc ethanol blending in gasoline by 2025, from 10pc currently. An earlier government directive in December eased restrictions on the use of sugarcane juice to produce ethanol and stated that all molasses-based distilleries should also endeavour to make ethanol from C heavy molasses. Of the total ethanol used for blending in gasoline, around 61pc comes from B heavy molasses, 20pc from sugar syrup, 11pc from surplus rice, 6pc from damaged foodgrains and maize and the remaining 2pc from C heavy molasses, government data show. Indian fuel retailers buy ethanol from ethanol producers like sugar mills and distilleries to blend with gasoline. Only domestically produced ethanol may be used for the EBP programme, with fuel ethanol imports restricted. Erratic rains, especially in key growing regions, are likely to cut India’s sugarcane production to 435mn t in the July 2023-June 2024 crop year from 491mn t the previous year, according to government estimates. OMCs issued tenders to buy around 8.25bn l of ethanol for November 2023-October 2024 and received offers for around 5.6bn l. Sugarcane-based ethanol comprised 2.7bn l of the offers and around 2.9bn l was grain-based ethanol, according to sources in the sugar industry.
Windfall tax on petroleum crude oil raised, cut to nil on diesel and ATF
India has hiked the windfall tax on crude oil while reducing the tax on diesel and aviation turbine fuel, according to a government notification. The government hiked the windfall tax on petroleum crude oil to 2,300 Indian rupees ($27.63) a ton from 1,300 rupees, it said. A tax on diesel of 0.5 rupee per litre was eliminated, it said as was a one rupee per litre windfall tax on aviation fuel. The tax rates are reviewed every fortnight based on average oil prices in the previous two weeks. A windfall tax is levied on domestic crude oil if rates of the global benchmark rise above $75 per barrel. Export of diesel, ATF and petrol attract the levy if product cracks (or margins) rise above $20 per barrel. Product cracks or margins are the difference between crude oil (raw material) and finished petroleum products. Concerns over demand due to a weaker global economy and rising crude inventories in the US have led to lower crude prices in November and December. Experts believe that only geopolitical tensions in the Middle East could drive up oil prices. Lower demand and higher oil output are expected to weigh on crude oil prices in early 2024. Demand from China, which is the largest energy consumer in the world, has not recovered amid the economic slowdown in the country.
Gujarat Gas – Softness In LNG Prices Obscures Murky Long-Term Prospects: ICICI Securities
We downgrade Gujarat Gas Ltd. to Reduce, from ‘Hold’, as we turn increasingly worried about the company’s growth trajectory beyond FY25. The recent weakness in liquefied natural gas prices is a positive (assuming it is not passed through) and drives a material 6/19.1/15.3% upgrade in FY24E/25E/26E earning per share, but does not detract from structural worried Growth from areas ex-Morbi remains murky, with limited traction observed from the ~Rs 43 billion capex over FY19-23 and a further Rs 36 billion estimated over FY24-26E. (volume/Ebitda compound annual growth rate over the same period at 8/14%); Margins remain volatile and dependent on propane price vagaries; Gujarat Gas guidance on margins is cautious, topped with limited visibility on volume growth; and The company’s valuation is still at >20 times FY26E EPS, leaving room for more downside risks. Key upside risks: Sharper recovery in liquified petroleum gas (propane) prices, Faster execution of expansion plans in new areas, Sharp drop in LNG prices. Key downside risks: Longer sustained weakness in propane prices, Slower ramp up of volumes from new areas,
Natural gas price slashed to $7.82 per mmBtu for January
The government has lowered the price of domestic natural gas for January to $7.82 per million British thermal units (mmBtu) from $8.47 per mmBtu last month. This marks the lowest domestic gas price since July 2023 and reflects a continued downward trend since August 2023. The price revision would be applicable on gas produced from difficult fields, operated by private players. However, the price of gas from the nomination fields of state-run ONGC and Oil India remained unchanged at the capped price of $6.5 per mmBtu. Nomination fields are areas the government granted to state-run ONGC and Oil India before 1999, when auctions became the basis for awarding oil and gas blocks. Considering that the city gas distribution (CGD) sector, the largest consumer of natural gas, including piped natural gas, and compressed natural gas), receives top priority in gas procurement from nominated legacy fields, this decline in the price of difficult fields may help sectors such as fertilizers and gas-based power plants. Since April last year, after the union cabinet approved the new gas pricing regime, domestic natural gas prices have been linked to the Indian crude oil basket. The new guidelines were recommended by the Kirit Parikh-led committee on natural gas pricing, paving the way for linking domestic natural gas prices in India to global crude prices. Following the change, the price of natural gas is calculated at 10% of the monthly average of the Indian crude basket, which is a weighted average of Dubai and Oman (sour) and Brent Crude (sweet) oil prices. The decline in gas prices comes amid the cooling down of global crude prices. The Indian basket of crude oil averaged at $77.42 per barrel in December, against $83.46 per barrel in November. The March contract of Brent on the Intercontinental Exchange closed at $71.65 per barrel on Friday lower by 0.17% from its previous close. The February contract of West Texas Intermediate (WTI) on the NYMEX fell 0.17% to $71.65 a barrel on Friday.
Gujarat emerges as India’s ‘petro capital’: Officials
With the world’s largest grassroot oil refinery in Jamnagar and OPaL petrochemical complex at Dahej in Bharuch district, Gujarat is now recognised as the ‘petro capital’ of India, officials said. Reliance Industries Ltd’s (RIL) Jamnagar refinery is the largest and most complex single-site refinery in the world with 1.4 million barrels per day (MMBPD) crude processing capacity, they said. As per the official website of RIL, the Jamnagar refinery complex houses some of the world’s largest units, such as the fluidised catalytic cracker, coker, alkylation, paraxylene, polypropylene, refinery off-gas cracker and petcoke gasification plant… Gujarat Chief Minister Bhupendra Patel recently threw light on the impact of the state’s petrochemical sector. “Industrial development is an important means to realise the resolve of Prime Minister Narendra Modi.
Petronet LNG to set up LNG terminal on east coast of India
Indian LNG importer Petronet LNG Limited (PLL) has signed binding transaction documents with Gopalpur Ports to set up its maiden LNG terminal on the east coast of India. According to Petronet LNG’s social media update, sub-concession agreement, sub-lease deed, and port service agreement with Gopalpur Ports were signed on December 27, 2023. Under these agreements, the Indian company seeks to set up a floating storage and regasification unit (FSRU) based LNG terminal with a capacity of approximately 4 million metric tons per annum (mmtpa) in Phase 1, with provision for converting to 5 mmtpa land-based terminal at Gopalpur Port in Odisha. “Petronet LNG is in the process of setting up its maiden LNG terminal on the east coast of India at Gopalpur, District- Ganjam, Odisha which would bring augmentation in overall regasification capacity in the country thereby contributing towards a gas-based economy,” the company said. The Indian company has also established and operates Dahej and Kochi LNG terminals. Dahej LNG terminal currently has a capacity of 17.5 mmtpa and is under expansion to 22.5 mmtpa in two phases. The terminal has six LNG storage tanks and other vaporization facilities and meets around 40% of the total gas demand of the country. Kochi LNG terminal is Petronet’s second terminal with 5 mmtpa nameplate capacity. It was established to cater to the gas requirement of Southern India. Earlier this year, Adani Total Private Limited (ATPL), a 50:50 joint venture between Adani and TotalEnergies, commissioned Dhamra LNG terminal, which is India’s seventh LNG import and regasification terminal and the first on the eastern seaboard.
India’s LNG imports set for 7%-8% boost in 2024 on hopes of softer prices
India’s LNG imports in 2024 are expected to get a boost if prices stay pressured, with year-on-year inflows likely to grow up to 7%-8%, driven by higher demand in the power, industrial and transportation sectors while infrastructure spending also strengthens in a year due for national elections. “India’s LNG imports will continue to increase, with an expected 8% year-on-year growth in 2024,” Ayush Agarwal, an LNG analyst at S&P Global Commodity Insights, said. “While the fertilizer sector will remain the largest consumer of LNG, the power and industrial sectors could contribute to an increase in imports if spot prices average close to 2023 levels,” Agarwal said. The Platts JKM, the benchmark price reflecting spot LNG delivered to Northeast Asia, averaged $13.801/mt from Jan. 3 to Dec. 22 this year while the Platts West India Marker averaged $13.167/MMBtu during the same period in 2023, according to data from S&P Global. India currently has about 25 GW of gas-based power capacity installed. This translates to about 30 million-35 million mt/year of LNG demand, an LNG industry source based in Singapore said. A few gas-based power units ran on domestic gas because of high LNG prices in recent years. That should change in 2024 because of the LNG price weakness, he added. Over January-October, regasified LNG consumption by the power sector jumped 128% on the year, hitting 7.4 MMcm/d, while India’s peak demand grew 12.5% on the year during the same period to reach 243 GW, said Akshay Modi, a senior analyst covering South Asian natural gas, LNG and hydrogen at S&P Global. “With the Platts JKM expected to fall below $10/MMBtu in 2024 summers, peak demand touching new highs and gas supporting renewables intermittency, we expect higher regasified LNG consumption for power sector to continue in 2024,” Modi said. Demand spurts on low prices India’s LNG consumption was set to jump if prices dropped below the $10/MMBtu mark, industry sources said. The recent fall in prices has already sparked increased spot buying although some Indian buyers were exhibiting an appetite to consume LNG when JKM prices were relatively elevated, in the range of $15-$16/MMBtu. Among recent market activity, Gujarat State Petroleum Corp. has bought a January-delivery cargo at $11.10-$11.20/MMBtu for delivery to Mundra. In December, Indian Oil purchased a cargo at $11.20-$11.30/MMBtu for delivery to Ennore and GAIL bought a cargo at $11.40-$11.50/MMBtu for delivery to Dabhol in January. Sources are also expecting higher utilization at the LNG terminals. “Next year, we expect Dabhol terminal to be operational through the monsoon period as well … Dhamra will also be more utilized because of obligations to bring cargoes for GAIL, IOC,” one of the sources said. After the commissioning of HPCL’s Chhara and GAIL’s Ratnagiri breakwater facility, the regasification capacity will likely rise to 52.5 million mt/year, S&P Global’s Modi said, adding that IOC’s Ennore-Tuticorin pipeline is also targeted for commission in 2024. The country’s northeast gas grid commissioning plan has been granted an extension by the Petroleum & Natural Gas Regulatory Board until 2025. However, its progress will be crucial for the development of a gas-based economy in the region, Modi added. Meanwhile, from mid-December 2023, Administered Pricing Mechanism, or APM, gas supplies to the transport and residential sector have been reduced to about 75% of demand compared to 88% earlier, Modi said, noting that the APM supply cut might see more city-gas entities tying up mid- to long-term offtake contracts. The additional APM deficit for transport and domestic sector is around 3 MMcm/d and some of the volumes will likely be tied up by CGD’s in the expected upcoming ONGC auction in 2024, while the remaining will be catered through regasified LNG supplies, Modi added.
What’s In Store for Energy Markets in 2024?
The year that is drawing to a close was a turbulent one, and not only for the oil industry. 2023 served up a reality check to the drivers of the energy transition, too—wind, solar, and electric vehicles. Next year will not be much different, it seems, judging by trends that we witnessed this year that are bound to accelerate in 2024. Among these are a balanced oil market, more gas supply, a slowdown in solar growth, and an increased focus on nuclear energy. #1 A balanced oil market It appears that many oil analysts expect the 2024 oil market to be well supplied because of ample non-OPEC production. Slowing demand will also contribute, notably in China, where post-pandemic economic recovery is, according to these analysts, beginning to lose steam. This year, the growth in non-OPEC supply was led by the United States, but for next year, the Energy Information Administration is predicting a significant slowdown in growth. Not all agree, however: some expect the latest shale boom to continue, essentially forcing OPEC to keep its output cuts in place. Because the above environment would mean lower prices for longer, some have predicted that Saudi Arabia may start a price war to regain market share and higher prices. The method: flooding the market with oil to tank prices and hurt higher-cost U.S. producers. #2 Lower gas investments The last two years saw a race to secure as much future LNG supply as possible as quickly as possible. Following this, it would only be natural that a slowdown in demand occurs, as noted by Wood Mackenzie’s head of gas and LNG consulting, Kristy Kramer. Kramer pointed out that 2022 and 2023 saw commitments for over 65 million tons of LNG signed by end consumers and suppliers as evidence of both robust demand and an indication of a slowdown in investments. Others see demand for gas continuing to grow globally and driving more favorable energy policies as a result. Gas is the obvious and most accessible alternative to coal, and this coal-to-gas transition will continue next year, although challenges will remain. These will be in the form of stricter emissions regulations and insufficient transport infrastructure, notably in the United States. #3 A nuclear renaissance Advocates of the energy transition are not big fans of nuclear power for the most part. They argue nuclear is non-renewable and dangerous, citing the only two major nuclear disasters in the history of the technology and the fact that nuclear waste is of the hazardous sort. Nuclear experts have countered these arguments with the fact that nuclear power is emission-free and that the industry actually has a pretty impressive track record when it comes to accidents and handling waste, especially in modern times as the technology continues to improve. The latest edition of the COP climate summit indicated that the tide is turning for nuclear as attendees admitted the transition would be much harder—if possible at all—without the baseload electricity supply that only nuclear can provide at an affordable cost among the emission-free generation sources. For wind and solar to be able to provide 24/7 supply, huge batteries would be necessary and battery costs are not in Affordable land yet. #4 A solar slowdown The solar slowdown already began this year in Europe and the United States. The reason for the decline in demand for new installations, in Europe specifically, appears to mostly have to do with market saturation, as observed by one of the biggest inverter suppliers to the EU. Higher raw material costs are also a problem for the industry, which has had trouble fattening its profit margins for a while now as it lives up to its own slogan that solar power is cheap. High costs are perhaps the biggest problem for U.S. solar developers due to tariffs on Asia imports aimed at Chinese PV tech. Globally, the slowdown, as forecast by Wood Mackenzie’s head of global solar, will be the result of natural trend developments, in this case an S curve. According to Michelle Davis, the annual average growth rate for the next four years in solar will be no growth at all: zero. Also, Davis has predicted a few years of declines in capacity additions. #5 The transition vs security debate Last year demonstrated the importance of energy security and temporarily replaced the transition as the number-one priority for a substantial part of the developed world, namely the European Union. Following this development, a sort of unofficial debate has emerged about the balance between transition and security, and how to strike a balance between them. Chances are the debate will continue next year as well, even though security appears to trump transition consideration where it matters. The clearest demonstration of this came recently, when China and India refused to sign a COP28 pledge to triple renewable energy capacity by 2030, opting instead for energy security from hydrocarbons. There was also Germany, which, after closing its last nuclear power plants, had to boost its coal consumption to produce enough electricity. In addition to all these trends, geopolitics will remain a strong factor in global energy, and not only oil and gas, as seen from the latest transport disruptions in the Red Sea that affected all sorts of goods moving from Asia to Europe, including, in all likelihood, solar power equipment. Geopolitics is losing its exclusive tie to oil and gas, and spreading as a critical supply security factor across transition technologies, too.
Russia, Iran Officially Ditch U.S. Dollar for Trade
Russia and Iran have finalized an agreement to trade in their local currencies instead of the U.S dollar, Iran’s state media has reported. Both countries are subject to U.S. sanctions. “Banks and economic actors can now use infrastructures including non-SWIFT interbank systems to deal in local currencies,” Iran’s state media has declared. Moscow has lately been cozying up to Tehran, with Iran revealing in November it will provide Russia with Su-35 fighter jets, Mi-28 attack helicopters and Yak-130 pilot training aircraft. The global de-dollarization drive has been going on for years with BRIC countries and the so-called pariah states trying to ditch the American dollar in favor of other currencies. Back in 2019, Putin declared that time was ripe to review the dollar’s role in trade. At that time, Russia and China considered switching to the euro, the world’s second most dominant currency, as an acceptable stalemate, with the ultimate goal being to use their own currencies. Earlier in the current year, Russia paid dividends from the Sakhalin 1 and 2 oil projects in Chinese yuan instead of the dollar. Last year, Russia was cut off from the US dollar-dominated global payments systems following sweeping sanctions off the Ukraine war. Russia has declared it will no longer accept the American currency as payment for its energy commodities but will instead switch to Chinese and Emirati currencies. However, global de-dollarization efforts have borne little fruit with the vast majority of cross-border transactions involving BRICS members continuing to be invoiced in dollars. Indeed, exchanging BRICS members’ local currencies with each other and with other emerging market currencies frequently requires using the dollar as an intermediary. Further, a large share of public and private debt in these economies is dollar denominated. The relative stability of the dollar compared to many local currencies makes it more attractive as a medium of payment in cross-border trade. The dollar’s widespread use in these cases has become self-reinforcing, thus preserving its dominant global role and impeding efforts to de-dollarize.