Russia’s Disrupted Oil Trade Crimps Margins for Indian Refiners
India’s state-run refiners are facing a shift in fortunes as once cheap Russian oil becomes more expensive and less accessible, squeezing profits for companies that had been benefiting from Moscow’s war in Ukraine Attacks in the Red Sea have driven up freight rates, while tougher US sanctions have stranded some Russian cargoes destined for India, adding to costs. That may force some processors to buy more pricey barrels from suppliers in the Middle East, eroding profit margins even more, say traders and analysts. India has to import 88% of its crude needs and the nation took advantage of cheaper Russian oil following the war in Ukraine as others shunned Moscow’s barrels. But the trade, which has helped put the state-owned refiners on track for a rebound in net income this year, is under pressure. Gross refining margins for processors including Indian Oil Corp. dropped in the previous quarter due to higher freight rates, said Hardik Shah, director at credit ratings and analytics firm CareEdge Group. The company estimates lower margins for refiners so far this financial year, but they are still higher than pre-war levels. The state-run processors primarily sell fuel domestically and don’t get the benefit of higher prices overseas, unlike the export-focused private processors including Reliance Industries Ltd. — which also have more flexibility on buying and payments for Russian crude. Indian Oil, Bharat Petroleum Corp. and Hindustan Petroleum Corp. didn’t immediately respond to emails seeking comment on margins. CareEdge predicts overall margins should hold around $10 a barrel, as long as crude prices stay below $90, a level that global benchmark Brent hasn’t been above since October. Futures traded near $83 on Thursday. The attacks on shipping in the Red Sea by Houthi rebels have also spilled into global fuel trade. Arrivals of fuel from India to Europe averaged just 18,000 barrels a day in the first two weeks of February, a plunge of more than 90% compared with January’s average, according to Vortexa Ltd. The disruptions will likely lead to some impact for Reliance and Nayara Energy Ltd., although they still have export options across Asia and Africa. Cheaper Russian oil has allowed India’s refiners to be more competitive than their peers in South Korea, Singapore and across the world. If India loses the Russian advantage on crude, whatever marginal refining edge it had will be gone, according to Mukesh Sahdev, the head of oil trading and downstream research at Rystad Energy.
India’s January crude imports hit 21-month high
India’s crude oil imports jumped to a 21-month high in January as the world’s third-biggest oil importer and consumer shipped in more fuel to meet surging demand led by strong industrial activity. Crude oil imports in January rose 9.5% month-on-month to 21.39 million metric tons, and were up 5.7% on a year-on-year basis, Petroleum Planning and Analysis Cell (PPAC) data showed on Thursday. India’s fuel consumption rose 8.2% year-on-year last month, government data showed earlier this month. India’s manufacturing industry improved substantially at the start of 2024, with factory activity expanding at its fastest pace in four months in January, while carmakers reported record sales last month. Imports of crude oil products rose 5% from a year earlier to 3.97 million tons in January, while product exports rose 7.5% to 4.84 million tons, data from the PPAC website showed.
LNG tankers may be converted to floating storage in India
A Japanese-Indian consortium is considering turning two LNG tankers into floating storage and regasification units to help meet growing demand in the South Asian economy, according to two people familiar with the matter. The units, with a capacity of 138,000 cubic meters each, are currently being leased by Petronet LNG Ltd. to import the super-chilled fuel from Qatar. Since the Indian company doesn’t plan to renew the lease past 2028, the consortium — called India LNG Transport Co. — may put the vessels to use on India’s east coast after retrofitting them in South Korea, said the people, who asked not to be named as they are not authorized to speak with the media A spokesperson for the Indian partner, state-owned Shipping Corp of India Ltd., didn’t reply to requests for comment. India is investing heavily in liquefied natural gas import infrastructure to help meet Prime Minister Narendra Modi’s target of gas reaching 15% of the energy mix by 2030, from less than 7% now. The South Asian nation, currently the world’s fourth-largest LNG buyer, could see its imports rise to 150 million tons by 2030, a seven-fold increase from 2023, Petronet’s Chief Executive Officer Akshay Kumar Singh said in February.
Upstream E&P companies shifting focus to longer contracts with lengthy lead times: Transocean
Oil and gas exploration and production (E&P) companies are increasingly directing their attention towards securing longer-term offshore deepwater contracts, accompanied by extended lead times until the commencement of these contracts, according to top executives at Transocean, a leading deepwater drilling company. According to S&P Global Commodity Insights, the executives made these remarks on February 20 during Transocean’s fourth-quarter earnings conference call, highlighting a shift in contracting dynamics within the industry. Despite experiencing a robust year of contracting activities in 2023, Transocean CEO Jeremy Thigpen acknowledged concerns among investors regarding a recent slowdown in the pace of contracting awards. Thigpen emphasized that the transition towards longer contract durations and lead times reflects the confidence of upstream operators in the longevity of the current upcycle and their commitment to the offshore market. He expressed optimism about the demand for Transocean’s assets and services, citing the encouraging trends in current and future rig demand. Thigpen said, “The extended duration [of contracts], with longer lead times to contract commencement… tends to result in prolonged contract negotiations. It also demonstrates our customers’ confidence in the longevity of this upcycle and their commitment to the offshore market. We remain extremely encouraged about the current and future demand for Transocean’s assets and services.” As an illustration of this trend, Thigpen provided insights into the average contract durations for Transocean’s drillships and semisubmersibles. In 2023, the average contract duration for drillships stood at 569 days, compared to 353 days in 2022 and 231 days in 2019. Similarly, semisubmersibles recorded an average contract duration of 404 days in 2023, up from 326 days in 2022 and 241 days in 2019. “Most of the negotiations taking place right now are for longer-term contracts, and thats where you can really start to… generate a lot of cash,” said Thigpen. This shift towards longer-term contracts signifies a strategic move by E&P companies to generate sustained cash flows and enhance operational stability. Moreover, the lead times between contract signings and start dates have also extended over the past couple of years, reflecting operators’ optimism about long-term commodity prices and the duration of the current upcycle. In 2023, drillship contracts were signed an average of 319 days ahead of their start dates, while semisubmersible contracts were signed 284 days in advance, compared to shorter lead times in previous years.
Cairn to double annual capital expenditure to $1 billion for 5 years
Cairn Oil & Gas will spend about $1 billion in capital expenditure (capex) annually for the next five years as it ramps up exploration activities across 12 key project areas. This will be double the $500 million worth of capex incurred annually by the company in the past couple of years, company officials told Business Standard during an interaction at the recently concluded India Energy Week. The announcement comes at a time when public-sector oil and gas producer ONGC and Oil India have outlined major exploration plans beginning 2024. “For the past three-four years, we have been spending at least $500 million .
Work on offshore breakwater at Dabhol LNG moves ahead
This 2.3 km long structure aims to reduce the action of the swell on the unloading vessels alongside. Concrete Layer Innovations (CLI) has been working with the contractor to assist with the manufacture, reuse and installation of the 9 and 12 m3 ACCROPODE™ I blocks that cover the armor of the structure. “The design of the structure implies a complete construction by maritime means on barges. The connection with the 500 m long existing breakwater is also one of the technical challenges,” Concrete Layer Innovations (CLI) said. The site is located at Anjanwel village, Dabhol port of Ratnagiri district of Maharashtra in India, about 340 km south of Mumbai.
India exported USD 6.65 billion oil products derived from Russian oil to sanctioning nations
Over one-third of India’s export of oil products to the G7-led coalition countries were derived from Russian crude, a European think-tank said, highlighting how the partners shunned buying Russian crude and imposed price caps but a loose policy on refined products allowed third countries to use Russian oil and legally export products to them. While there are no restrictions or sanctions on buying/using Russian crude oil and exporting fuels such as diesel derived from it, the Group of Seven (G7) rich nations, the European Union and Australia – called the price cap coalition countries – first set a crude price cap of USD 60 per barrel starting December 5, 2022, and later on products like diesel to keep the market supplied while limiting Moscow’s revenue. his was aimed at punishing Russia for its February 2022 invasion of Ukraine by depriving it of oil revenues while averting a surge in prices that could occur if Russian oil stopped flowing to global markets. “In the 13 months since the oil price cap took effect (in December 2022), over one-third of India’s exports of oil products to sanctioning countries was derived from Russian crude (EUR 6.16 billion or USD 6.65 billion),” the Finland-based Centre for Research on Energy and Clean Air (CREA) said in a report. “A huge proportion of these exports came from the Jamnagar refinery,” it said, alluding to the refinery operated by Reliance Industries Ltd in Gujarat. Jamnagar alone exported EUR 5.2 billion of oil products produced from Russian crude to the price cap coalition, it added. An email was sent to Reliance for comments to remain answered. “India imported Russian crude worth EUR 3.04 billion to create these products for sanctioning countries,” CREA said. The USA imported EUR 1.2 billion of oil products from India, which were estimated as being refined from Russian crude. “India imported EUR 733 million of Russian crude to create these products for the USA.” The price cap coalition countries imported a further EUR 469 million worth of oil products from the Vadinar refinery, it said, alluding to the refinery operated by Nayara Energy in Gujarat. “Russian energy giant Rosneft – who are on OFAC’s list of sanctioned entities – is its single largest shareholder with a 49.1 per cent share in the company.” The USA imported EUR 59 million of oil products from Vadinar starting from the introduction of the crude oil price cap until the end of December 2023. According to CREA’s estimate, 42 per cent of the refinery’s feedstock is Russian crude. While some Western nations have since February 2022 shunned buying Russian oil directly, they however import petroleum products from China, India and Turkey that have emerged as major buyers of Russian crude oil. Turkey’s port of Aliaga (the location of the STAR refinery and Tupras Aliaga Izmir refinery), was the second-highest exporting location of oil products made from Russian crude to the price cap coalition, it said. “EUR 8.5 billion (USD 9.18 billion) of price cap coalition countries’ imports of oil products between December 1, 2022 and December 2023 were made from Russian crude. These imports in 13 months are equivalent to 68 per cent of the EU’s annual commitment to aid Ukraine between 2024 and the end of 2027,” CREA said.
Russia’s disrupted oil trade crimps margins for Indian refiners
India’s state-run refiners are facing a shift in fortunes as once cheap Russian oil becomes more expensive and less accessible, squeezing profits for companies that had been benefiting from Moscow’s war in Ukraine. Attacks in the Red Sea have driven up freight rates, while tougher US sanctions have stranded some Russian cargoes destined for India, adding to costs. That may force some processors to buy more pricey barrels from suppliers in the Middle East, eroding profit margins even more, say traders and analysts. India has to import 88% of its crude needs and the nation took advantage of cheaper Russian oil following the war in Ukraine as others shunned Moscow’s barrels. But the trade, which has helped put the state-owned refiners on track for a rebound in net income this year, is under pressure. India has to import 88% of its crude needs and the nation took advantage of cheaper Russian oil following the war in Ukraine as others shunned Moscow’s barrels. But the trade, which has helped put the state-owned refiners on track for a rebound in net income this year, is under pressure. Gross refining margins for processors including Indian Oil Corp. dropped in the previous quarter due to higher freight rates, said Hardik Shah, director at credit ratings and analytics firm CareEdge Group. The company estimates lower margins for refiners so far this financial year, but they are still higher than pre-war levels. The state-run processors primarily sell fuel domestically and don’t get the benefit of higher prices overseas, unlike the export-focused private processors including Reliance Industries Ltd. — which also have more flexibility on buying and payments for Russian crude. Indian Oil, Bharat Petroleum Corp. and Hindustan Petroleum Corp. didn’t immediately respond to emails seeking comment on margins. CareEdge predicts overall margins should hold around $10 a barrel, as long as crude prices stay below $90, a level that global benchmark Brent hasn’t been above since October. Futures traded near $83 on Thursday. The attacks on shipping in the Red Sea by Houthi rebels have also spilled into global fuel trade. Arrivals of fuel from India to Europe averaged just 18,000 barrels a day in the first two weeks of February, a plunge of more than 90% compared with January’s average, according to Vortexa Ltd. The disruptions will likely lead to some impact for Reliance and and Nayara Energy Ltd., although they still have export options across Asia and Africa. Cheaper Russian oil has allowed India’s refiners to be more competitive than their peers in South Korea, Singapore and across the world. If India loses the Russian advantage on crude, whatever marginal refining edge it had will be gone, according to Mukesh Sahdev, the head of oil trading and downstream research at Rystad Energy.
India’s LNG Terminal Plans In Iraq Face Visa Hurdles
Plans to set up a liquified natural gas terminal in Iraq are yet to take off, as Iraq is yet to issue visas to officials from Indian oil and gas and EPC (engineering, procurement and construction) companies amid persistent security concerns in the country. A team of officials from state-run companies, including Indian Oil Corp (IOCL) and Engineers India Ltd (EIL), were to visit Iraq and weigh the prospects of an LNG terminal which would also operate as a gas liquefaction plant. “They are yet to issue visas. No significant movement has taken place from the Iraqi side as of now. Things will only move forward when our team visits the country,” said a person aware of the development, adding that there is no certainty on the timeline for the proposed visit sent to the union ministry of petroleum and natural gas, Iraq’s embassy in India, IOCL and EIL remained unanswered till press time has been about eight months since the project was proposed by Iraq in the last joint commission meeting (JCM) in New Delhi held during the visit of Iraq’s deputy prime minister for energy affairs and oil minister Hayan Abdul Ghani Abdul Zahra Al Sawad in June 2023. On 11 July 2023, Mint reported that a team from India would shortly visit the Gulf nation idea of the terminal was conceived to liquify some of the 50 million metric standard cubic metres per day (mmscmd) of gas currently flared by Iraq and transport it to India, where it would be converted back to LNG for use in city gas distribution (CGD) as well as power, fertilizer, and steel sectors. When natural gas is brought to the surface but cannot be processed soon enough, it is burned away, commonly called flaring. Flaring is done primarily when gas turns up as a by-product of crude oil extraction. “The project would be a win-win situation for both the countries. Iraq would be able to optimally utilize the gas it generally flares up and earn revenue and India has also been looking at newer sources of gas at cheaper prices,” said a second person looking at diversifying its LNG import sources to curb market volatility a gap of almost 10 years, the 18th India-Iraq joint commission meeting was held in New Delhi on 20 June, 2023. India had also reached out to Iraq at a government-to-government level as part of an outreach including the US, UAE, and Saudi Arabia for additional LNG cargoes at affordable prices Marketing and Trading Singapore, a former subsidiary of Russian gas giant Gazprom, had agreed to supply GAIL (India) Ltd 2.5 million tonnes of LNG every year for 20 years starting 2018-19. The supply began in June 2018 but remained disrupted for a year after the Russian invasion of Ukraine. This forced the Indian state-run company to buy expensive spot cargoes, prompting the government to look for newer LNG sources.
Shale Patch M&A Might Be Booming, But Refineries Are Left Behind
After a two-year hiatus, deal-making in the U.S. shale patch has hit high gear with the U.S. energy sector leveraging high stock prices to go on a $250 billion buying spree in 2023. Last quarter alone, U.S. oil majors Exxon Mobil Corp. (NYSE:XOM), Chevron Corp. (NYSE:CVX) and Occidental Petroleum (NYSE:OXY) struck deals worth a combined $125 billion to acquire low-cost oilfields with low breakeven oil price. And, activity is not slowing down in the current year. A couple of weeks ago, Midland, Tex.-based Diamondback Energy, Inc. (NASDAQ:FANG) agreed to buy Permian producer Endeavor Energy Resources in a cash and stock deal valued at $26 billion, an ambitious move for a company with a market cap of $32 billion. Unfortunately, a pivotal energy industry has been conspicuously missing in the M&A boom: U.S. refining. Virtually no refinery deals have closed ever since independent refiner Par Pacific completed its $310 million acquisition of Exxon Mobil’s Billings, Montana, plant in June last year. That price came in at the lower end of expectations with industry insiders estimating the oil major might get twice as much for the 63,000 barrels per day (bpd) plant. The refining sector is missing out despite the presence of plenty of willing sellers mainly due to widespread fears that the energy transition away from fossil fuels will leave many aging refineries as stranded assets. Distressed Industry Things are getting quite dire for the beleaguered industry. Shell Plc. (NYSE:SHEL) has been forced to close its 240,000-bpd Convent, Louisiana, refinery, after failing to find a buyer. Delta Airlines has so far had no takers for its 100-year old, 190,000-bpd Trainer, Pennsylvania, refinery despite placing it in the market six years ago. LyondellBasell Industries’ (NYSE:LYB) 260,000-bpd Houston refinery is scheduled to close in 2025 after two failed attempts to sell. To aggravate matters, these companies are really struggling with high costs of maintenance for their aging plants leading to increasing breakdowns. Last year, giant refiners Valero Energy Corp. (NYSE:VLO), Marathon Petroleum (NYSE:MPC), and Phillips 66 (NYSE:PSX) together had the equivalent of 280,000 bpd of capacity offline due to planned and unplanned outages, a more than 20% jump from 2019. According to company filings, Phillips 66 spent $786 million on maintenance in 2023 alone. Meanwhile, LyondellBasell estimates its plant requires at least $1 billion in upgrades to continue operations. Overall, the U.S. refining industry is in bad shape. The U.S. refines nearly one-fifth of global crude oil, accounting for 18.1 million barrels per day (bdp). The country’s refining capacity surged during the shale boom, peaking at 18.97 million bpd in early 2020. Unfortunately, over the last three years, the U.S. has lost six operable petroleum refineries, with refining capacity falling to 18.27 million bpd as of August 2023. A lot of the damage came during the pandemic with low fuel demand leading to multiple plant closures. Unfortunately, high maintenance costs as well as a government that is not too keen on fossil fuels have hampered recovery in the post-pandemic period. But the Biden administration is not solely to blame. After a brief surge of its fossil fuel sector following Russia’s invasion of Ukraine, the energy transition in Europe is back on track with falling demand posing a long-term risk to U.S. refineries. McKinsey estimates that as much as 41% of refining capacity in North America faces negative profit margins in 2040 thus discouraging new investments. But not everybody believes the refining industry is on its deathbed. The U.S. Energy Information Administration (EIA) has predicted that global demand for liquid fuels is set to increase by nearly 20 million bpd by 2050, from 101 million to more than 120 million bpd. The investing world appears to share that bullishness, with the refining sector’s favorite benchmark VanEck Oil Refiners ETF (NYSEARCA:CRAK) outperforming the broader fossil fuel market with a 12.4% return over the past 12 months compared with -2.6% return by the Energy Select Sector SPDR Fund (NYSEARCA:XLE). CRAK’s top 5 holdings are: Reliance Industries Ltd DR, Phillips 66, Marathon Petroleum, Valero Energy and ENEOS Holdings.