Gujarat Gas: Double whammy of falling oil and rising gas prices
Gujarat Gas Ltd – India’s largest city gas distributor in terms of volumes – is facing a double whammy of falling crude prices and rising gas prices. According to Credit Suisse, the reducing spread between gas and crude prices makes alternate fuels like propane more attractive as compared to gas. Gas prices have reasons due to multiple factors – shutdown of FreePort LNG terminal in the US, Nord Stream pipeline is expected to go under week-long annual maintenance in mid-July 2022, Norway’s pipeline to the UK is under maintenance and given the fact that most of the US gas into Europe comes from the Gulf of Mexico coast which is at the brink of the Hurricane season, which may affect shipping lines, according to Credit Suisse. Asia Spot Gas prices jumped to $37/mmBtu as against last month’s average prices of around $23/mmBtu. This sudden rise in spot gas prices could impact Gujarat Gas’ volumes and/or margins. Gujarat Gas’ dependence on imported gas is the highest as it derives most of its revenue by selling gas to industries. Nearly 75% of its total sales volume is from industrials. At present, Gujarat Gas has a 30%-35% gas sourcing requirement that is dependent on the spot market, while the rest comes from domestic gas and long-term contracts. In the industrial region of Morbi – the main market of Gujarat Gas – industries are shifting to propane as gas has become expensive. With a further increase in prices, the shift towards propane could accelerate. On the other hand, if Gujarat Gas keeps the gas prices at current levels, then the same could impact margins. Recently, ETNOW and ETNOW Swadesh had interacted with Manoj Patel, Vice President, Morbi Ceramic Association, where he said that propane continues to remain cheaper by around 11%-12% as compared to gas prices. Currently, half of the fuel requirement is supplied through Gujarat Gas and the rest is propane, and if the gas price remains high, within the next 2-3 months, 60%-70% of gas volumes could go towards propane, he added. However, Motilal Oswal continues to remain bullish on Gujarat Gas ass it believes that over the long term, LNG would continue to remain cheaper than LPG, except during the summer season. Further, increased availability of domestic gas over the few months is likely to help the company to reduce its sourcing cost, thereby helping improve its margins.
Sharp drop in crude oil prices poses upside risks for OMCs: Report
The nascent rally in energy stocks have faded in recent past as continued slide in international crude prices and the lack of any increase in petrol and diesel prices dragged down oil marketing companies (OMCs). Energy companies including Oil and Natural Gas Corporation (ONGC), Reliance Industries, Oil India, BPCL, HPCL, Adani Total Gas are reeling under selling pressure these days as global benchmark Brent crude has witnessed significant fall recently amid growing fear that the global recession and fresh Covid-19 outbreak in China would impact demand for fuel. According to ICICI Securities report, a sharp drop in crude price and pricing decisions for petrol and diesel pose key upside risks for OMCs. Fuel prices have been kept unchanged for one month since May 21, after the government announced a cut in excise duty on petrol by ₹8 per litre, and by ₹6 per litre on diesel to ease inflationary pressure. However, the oil prices in the international market continued to fluctuate, hitting a high of $125 a barrel in intraday trade on June 14 to $108.05 per barrel during the session today. On Thursday, the Brent oil for August delivery was trading 2% lower at $109.5 per barrel, while the U.S. West Texas Intermediate (WTI) crude August futures were quoting at $103.8 a barrel, down 2.3%. In the previous session, Brent and WTI fell over 4% amid persistent fear that aggressive rate hikes by the U.S. Federal Reserve and other central banks would push the global economy into recession. The marketing segment for OMCs is continuously incurring losses, owing to strong international petrol and diesel prices and the lack of any price increase seen in either fuel in more than a month, says the report. However, this has been offset by a very strong refining margin environment, with calculated margins for OMCs trending at around $18-20 per bbl over the recent weeks. It is further boosted from the reported 20% crude sourcing from Russia at 20-25 per bbl discount to benchmark crude. The report noted that despite the strength seen in refining, overall earnings for OMCs will continue to remain under pressure, given the steady expansion in marketing losses over the last 3 months. “With international prices expanding sharply over the last 2-3 months and the continuing freeze on price increases in retail fuels, estimated losses on petrol and diesel have escalated to ₹10.5/ltr and ₹12.5/ltr for Q1FY23 (till week of 17th June 2022) vs loss of ₹1.5/ltr and ₹1.6/ltr, respectively, for Q4FY22,” it added. “However, factoring a record $20-22/bbl Gross refining margin (GRM) for the entire FY23E also cannot offset more than ₹3-4/ltr of net retail loss on petrol/diesel. We see a sharply lower EPS trajectory for FY24E as well if we factor lower marketing earnings trajectory to continue for longer-than-earlier estimates, owing to the Russia-Ukraine conflict,” it added. The brokerage has also cut earnings for FY23-24E by 15-60% to factor higher marketing losses, offset by sharply higher GRM estimates. The agency has downgraded state-owned oil retailer Hindustan Petroleum Corporation Ltd (HPCL) to “REDUCE” from “ADD”, Bharat Petroleum Corporation Ltd (BPCL) to “ADD” (from “BUY”). The agency has retained “BUY” call on Indian Oil Corporation Ltd (IOCL). “For BPCL & HPCL, a sharp turnaround in pricing decisions for petrol and diesel and a sharp drop in crude price are key upside risks. A sharp fall in refining and even higher marketing loss are key downside risks for IOCL,” the report noted. On Thursday, the S&P BSE energy index extended losses and declined 1.3%, led by Mangalore Refinery & Petrochemicals (MRPL) and Chennai Petroleum Corporation Limited (CPCL), which fell around 6%. Index heavyweights Oil and Natural Gas Corporation (ONGC), Reliance Industries and Adani Total Gas fell up to 1.5%.
Biden calls on Congress to suspend gas tax for 3 months amid soaring prices
US President Joe Biden on Wednesday called on Congress to suspend the federal gas tax for 90 days, as Americans need immediate relief amid the nation’s soaring gas prices. “By suspending the 18-cent gas tax — federal gas tax for the next 90 days, we can bring down the price of gas and give families just a little bit of relief,” Biden said in a speech at the Eisenhower Executive Office Building on Wednesday afternoon. “I call on the companies to pass this along — every penny of this 18-cents reduction — to the consumers. This is — there’s no time now for profiteering,” said Biden. The US federal government charges an 18-cent tax per gallon of gas that consumers purchase and a 24-cent tax per gallon of diesel they purchase. It’s a tax that’s been around for 90 years. “With the tax revenues up this year and our deficit down over USD 1.6 trillion this year alone, we’ll still be able to fix our highways and bring down prices of gas,” Biden added. Republicans, meanwhile, accused Democrats of playing “political games,” arguing that the proposed measure is aimed at boosting Democrats’ prospects and would soon expire after the midterm elections. “President Biden is calling for another ineffective stunt to mask the effects of Democrats’ inflation. The latest bad idea would barely put a dent in the soaring gas prices on his watch,” Senate Minority Leader Mitch McConnell said on Twitter. “Here is a better idea: What if Democrats stop waging war on affordable American energy?” McConnell said. In his speech, Biden also called on states to either suspend the state gas tax as well or find other ways to deliver some relief, noting that state gas taxes average another 30 cents per gallon. Biden also urged the industry to refine more oil into gasoline and to bring down gas prices, dismissing Republicans’ claim that he is blocking production on federal lands.Oil companies should use their profits to increase refining capacity rather than buy back their own stock, he added. US inflation reached the highest level in four decades as consumer prices jumped 7 per cent in 2021, the fastest pace since 1981. Inflation hit a fresh 39-year high in December 2021 as a drop in energy costs wasn’t enough to offset a steady march upward for staples such as food, rent, and cars amid stubborn supply-chain bottlenecks and worker shortage.
GAIL (India) plans foray into distributed LNG production biz
GAIL (India) plans to enter into distributed Liquefied Natural Gas (LNG) production with the vision to cater the demand from off-grid locations and transport sector. GAIL has placed order for two small-scale liquefaction skids capable of producing LNG on a pilot basis. Liquefaction will be achieved through proprietary technology-based mobile liquefaction skids. These plants will help in distribution of natural gas through liquefaction in new CGD areas, liquefaction of gas at isolated fields and will support setting-up of LNG fueling stations and in bunkering. It will be first of its kind in the country to introduce portable and scalable liquefaction units. Further, GAIL is also under discussions for manufacturing liquefaction skids in India.
India’s Russian imports up 3.5 times on oil buys despite Western pressure
On the back of rising crude oil purchases, India’s bill for imports from sanctions-hit Russia jumped 3.5 times in a year in April to $2.3 billion, showed data from the commerce ministry. In April, India’s crude oil imports from Russia were valued at $1.3 billion, 57 per cent of India’s total inbound shipments from Russia. Other major imported items during the month included coal, soybean and sunflower oil, fertilisers, and non-industrial diamonds. That month, Russia was also the fourth-largest crude petroleum supplier to India, after Iraq, Saudi Arabia, and the United Arab Emirates (UAE). As far as overall imports are concerned, Russia was the sixth largest import partner in April. During the same month last year, Russia was the 7th biggest source of crude oil for India and on an overall basis, it ranked 21st among India’s import partners. Russia was also India’s 9th largest trading partner in April (including both exports and imports), with the size of trade at $2.42 billion. This even as the value of outbound shipments to Russia nosedived to $96 million in April, down by 59 per cent year-on-year. Top items exported to Russia during the month included electrical machinery and equipment, iron and steel, pharmaceutical products, marine products, and automobile components. Crude oil imports to India from Russia are on the rise since Russia’s invasion of Ukraine on February 24. The invasion was followed by economic sanctions on Russia by the US and its allies, in an attempt to isolate the country from global trade and this led to spike in commodity prices. Despite pressure from Western nations, India did not pick a side and it chose to maintain a neutral stance considering its historical relationship with Russia. India was also criticised for continuing trade with Russia despite the imposition of economic sanctions. India on various global fora has been defending its stand holding that petroleum products do not fall under the ambit of sanctions by Western countries and New Delhi has always looked to diversify its energy sources. “If you’re looking at energy purchases from Russia, I’d suggest that your attention should be focused on Europe. We do buy some energy, which is necessary for our energy security. But I suspect, looking at figures, our total purchases for the month would be less than what Europe does in an afternoon,” External Affairs Minister S Jaishankar said in April during a press conference for the India-US 2+2 Ministerial Dialogue. Trade minister Piyush Goyal last month at the World Economic Forum said India is well within the current framework which has been designed by the countries which have imposed the sanctions. “Our interests or needs are no different from those of European nations. In the current situation, when inflation is at an all-time high, causing stress to people all over the world, the EU and European countries continue to buy larger quantities than India ever thought of buying,” Goyal said.
Why There Is A Worldwide Oil-Refining Crunch?
The refining industry estimates that the world has lost 3.3 million barrels of daily capacity since 2020. Drivers around the world are feeling pain at the pump with skyrocketing fuel prices, and the costs of heating buildings, power generation, and industrial production are rising. Prices were already high before Russia invaded Ukraine on February 24. But since mid-March, fuel costs have soared, while crude prices have risen only modestly. Much of the reason is a lack of adequate refining capacity to process crude into gasoline and diesel to meet high global demand. How much can the world’s refineries produce daily? In general, there is enough capacity to refine about 100 million barrels of oil per day, according to the International Energy Agency, but about 20% of that capacity is not usable. Much of that unusable capacity is in Latin America and other places where investment is lacking. That leaves about 82-83 million bpd in projected capacity. How many refineries have closed? The refining industry estimates that the world has lost a total of 3.3 million barrels of refining capacity daily since the beginning of 2020. About a third of these losses were in the United States, with the rest in Russia, China and Europe. . Fuel demand plummeted early in the pandemic when lockdowns and remote work were widespread. Before that, refining capacity had not decreased in any year for at least three decades. Will refining pick up? Global refining capacity will expand by 1 million bpd per day in 2022 and 1.6 million bpd in 2023. How much has refining decreased since before the pandemic? In April, 78 million barrels per day were processed, well below the pre-pandemic average of 82.1 million bpd. The IEA expects refining to recover over the summer to 81.9 million bpd as Chinese refineries come back online. Where is most of the refining capacity offline and why? The United States, China, Russia and Europe are operating refineries at lower capacity than before the pandemic. US refineries have shut down almost a million bpd of capacity since 2019 for various reasons. Nearly 30% of Russia’s refining capacity was idled in May, sources told Reuters. Many Western nations are rejecting Russian fuel. China has the most available refining capacity, exports of refined products are only allowed under official quotas, granted mainly to large state-owned refining companies and not to smaller independent companies that own much of China’s spare capacity. As of last week, run rates at China’s state-backed refineries averaged around 71.3% and independent refiners were around 65.5%. That was higher than at the beginning of the year, but low by historical standards. What else is contributing to high prices? The cost of transporting products on ships abroad has increased due to high global demand, as well as sanctions on Russian ships. In Europe, refiners are constrained by high natural gas prices, which drive their operations. Some refineries also rely on vacuum gas oil as an intermediate fuel. The loss of Russian vacuum diesel has prevented some from restarting certain gasoline-producing units. Who is benefiting from the current situation? Refineries, especially those that export a lot of fuel to other countries, such as US refineries. Global fuel shortages have pushed refining margins to record highs, with the key 3-2-1 crack spread approaching $60 a barrel. That has generated big profits for US-based Valero and India-based Reliance Industries. India, which refines more than 5 million bpd, according to the IEA, has been importing cheap Russian crude for domestic use and export. Production is expected to increase by 450,000 by the end of the year, the IEA said. More refining capacity is scheduled to come online in the Middle East and Asia to meet growing demand.
Europe’s Refineries Increase Russian Crude Purchases
Europe’s refineries took in an increasing amount of crude oil last week, tanker tracking data compiled by Bloomberg has shown. Europe’s refineries took in 1.84 million barrels per day of Russian crude oil last week—the third increase in the amount of Russian crude for the refineries in as many weeks. The oil flows from Russia to Europe, including to Turkey, are now the highest they’ve been in nearly two months. The increases mainly came from Russia’s Litasco SA—the trading arm of Lukoil—and Turkey. Lukoil boasts three refineries in Europe—in Italy, Romania, and Bulgaria—and they continue to step up their purchases of Russian crude oil. While the rest of Europe may not be increasing its imports of Russian crude oil—the decreases have definitely slowed, the Bloomberg analysis revealed. The EU agreed to embargo 90% of all of its oil imports from Russia by the end of the year—but perhaps the most damaging aspect of the European Union’s attempt to hit Russia where it hurts—through its oil revenues—comes in the form of an insurance ban. Under the ban—which the UK also signed onto–EU operators will not be allowed to insure or finance the marine transportation of Russian crude oil to other countries. This would cripple Russia’s ability to export crude oil anywhere in the world, according to analysts. Russia, however, said it would provide state assurance under Russia’s trade agreement with other countries, insulating itself from any ban that the EU and UK could cook up. However, most of the world’s ports do not allow tankers to dock unless they carry full-coverage insurance. Russia continues to ship large amounts of Russian crude to China and India as well, with overall Russian revenues from export duty rising 6% last week.
Adani-TotalEnergies deal: Why Big Oil is betting on green hydrogen
After years of dabbling, major oil companies are finally planning the kind of large-scale investments that would make green hydrogen a serious business. They’re chasing a very particular vision of a low-carbon future — multibillion dollar developments that generate vast concentrations of renewable electricity and convert it into chemicals or clean fuels that can be shipped around the world to power trucks, ships or even airplanes. ‘The oil majors have been building multibillion-dollar projects since forever,’ said Julien Rolland, head of power and renewables at commodities trader Trafigura Group Pte Ltd. ‘This green hydrogen, green ammonia stuff will be the new energy industry.’ The plan is well suited to the companies’ natural strengths in project management and their financial heft, but even with those advantages they’re still making a big bet on an unproven technology that could fall short of its potential. “I don’t think any company out there has developed anything to these kinds of scales,” said Gero Farruggio, head of Australia and global renewables at consultant Rystad A/S. Deep Pockets This month has seen a flurry of big news about hydrogen. BP Plc is taking the lead in the $36 billion Asian Renewable Energy Hub, a project that aims to install 26 gigawatts of solar and wind farms over a vast 6,500-square-kilometer (2,500 square-mile) stretch of Western Australia’s Pilbara region, and use the electricity generated to split water molecules into hydrogen and oxygen. Once fully developed, each year it would produce about 1.6 million tons of green hydrogen or 9 million tons of ammonia, which can be used to make fertilizer. TotalEnergies SE has joined Indian billionaire Gautam Adani’s conglomerate in a venture that has the ambition to invest as much as $50 billion over the next 10 years in green hydrogen. An initial investment of $5 billion will develop 4 gigawatts of wind and solar capacity, about half of which will feed electrolyzers producing hydrogen used to manufacture of ammonia. The venture could expand to 1 million tons of annual green hydrogen production by 2030, driven by 30 gigawatts of clean power. It’s only a matter of time before Shell Plc follows with a megaproject of its own, said Paul Bogers, vice president for hydrogen at the company. Shell is looking for a place where there are sufficient wind and solar resources for a large-scale project that would play to its strengths, he said in an interview on the sidelines of the Financial Times Hydrogen Summit in London. ‘The size of these projects isn’t something done by a small startup,’ Bogers said. ‘It requires deep pockets.’ US giant Chevron Corp. is ready to spend billions on a mixture of green and blue hydrogen, which uses a chemical reaction to split natural gas and capture and store the carbon dioxide. Smaller players in the oil market are also getting involved, with Trafigura looking at a number of mid-size green hydrogen projects, such as a 440-megawatt development near Adelaide, Australia.
Private fuel retailers like Jio-bp, Nayara Energy ask retailers to keep pumps open, sell less
Days after being brought under the universal service obligation (USO), private fuel marketing companies like Nayara Energy and Jio-bp have asked their retailers to keep their pumps open and also increased the fuel prices to discourage sales. Petrol pump operators have shared that Jio-bp and Nayara have increased fuel prices between Rs 2 and Rs 7 per litre. This follows the government mandate to bring all petrol pumps under the USO on Friday. This means that the pumps must maintain fuel supplies at reasonable prices during their specified working hours. Fuel marketers have been witnessing unsustainable losses on each litre of petrol and diesel they are selling as state-run firms have not hiked retail prices for about two months now, even as the crude prices in international markets are on the rise. According to the industry insider quoted by Economic Times, private players slash the supply to dealers so as to minimise their losses while keeping the prices higher. Universal service obligation “Now the authorised entities have been obligated to extend the USO to all the retail consumers at all the retail outlets. This has been done with an objective to ensure higher level of customer services in the market and to ensure that adherence to the USO forms a part of the market discipline,” the statement said. The government did so after there were reports of long queues outside several state-owned companies’ pumps in some states. However, petrol pump operators are of the view that this will only increase their costs while sales will not be much owing to higher prices. “This move by the government helps little. The company has increased diesel price by Rs 5 a litre and petrol price by Rs 7 a litre. Who will come to buy fuel from us at this price?” a Jio-bp retailer said on the condition of anonymity. Another retailer of a private fuel marketer said, “We have been asked not to barricade our outlets and that company officials will be visiting our outlets to keep a check.” Meanwhile, an industry body representing private and public oil refiners and retailers such as Jio-bp, Nayara Energy, Indian Oil, BPCL and HPCL has written to the government about unsustainable losses amid a price freeze announced by the government. The Federation of Indian Petroleum Industry (FIPI) in its letter to the oil ministry said selling petrol at a loss of Rs 14-18 per litre and diesel Rs 20-25 per litre below soaring crude oil market prices is unsustainable. The industry body has sought government intervention to create a viable investment environment, reported PTI.
Six European countries paid Russia $40 billion for fuel in the three months of the war, despite impending bans and sanctions on imports
Six European buyers accounted for almost half of the revenues Russia banked from its fossil fuel exports in the first 100 days of the war in Ukraine, even as the European Union was outlining a plan to ban imports from the country, according to recent analysis by a Finnish thinktank. France, Germany, Netherlands, Italy, Poland, and Belgium were the top European buyers of Russian fossil fuel exports, including coal, crude oil, natural gas and oil products on the spot market between March and May, according to according to the Centre for Research on Energy and Clean Air (CREA) The spot market is where traders buy and sell physical cargoes of oil, for example, for immediate delivery, as opposed to the futures market, where they seal a price for delivery at some point further ahead. “These purchases take place outside of pre-existing contracts, therefore always representing an active purchase decision,” CREA wrote in its analysis. European commodity traders have actively shunned Russian cargoes of crude oil and refined products, while most natural gas imports arrive via pipeline and are more difficult to avoid. In total, those countries shelled out a combined total of $40 billion of the roughly $97 billion Russia pocketed for its fossil fuel exports in that time, CREA said. Record discounts Russian oil is cheaper than other grades right now, as Western sanctions and traders avoiding those exports have cut the value of its flagship Urals crude. A barrel of Urals crude currently trades at a record $30 discount to the global Brent crude benchmark, which stood at about $120 a barrel on Friday, near its highest in a decade. To that end, sales of cheap Russian oil and gas are expected to hit $285 billion in 2022 — a 20% increase from its profits from oil and gas in 2021, according to Bloomberg Economics. It’s down to Chinese and Indian purchases of Russian oil, which now account for half of Russia’s seaborne oil exports. And while demand from China has remained consistent, India has ramped up its buying, to the tune of around 800,000 barrels a day, compared to next to nothing as recently as January.