Explained: Why fuel prices are rising sharply in India
A litre of petrol now costs upwards of Rs 90 in some Indian cities like Mumbai and Jaipur. Across most other cities and towns in the country, petrol costs remain in the upper band of Rs 80. Diesel prices have also increased sharply, well-above Rs 80 in cities like Jaipur. The fresh hike in petrol and diesel prices could pose a major challenge as India’s economy looks to recover from the damage inflicted by the coronavirus-induced economic slowdown. But why are fuel prices rising in the country? There are two possible explanations — Increase in global crude oil prices and higher fuel taxes levied by the central and state governments. Mapping the fresh rise Just over two weeks ago, fuel prices started rising in India. And five days ago, Brent crude oil price rose to its highest level since March. This happened after an OPEC+ output cut deal. After increasing initially, crude oil prices have fallen again as many countries are mulling restrictions due to rising Covid-19 infections. Though petrol and diesel prices have been kept unchanged today, the latest round of hikes — Over Rs 2.3 per litre for petrol and over Rs 3 per litre for diesel — over the past 17 days can impact improving fuel consumption demand in the country.
Qatar Set To Significantly Boost Energy Investments In India
Major energy importer India and one of the world’s top liquefied natural gas (LNG) exporters, Qatar, agreed on Tuesday to create a special task force to explore and facilitate Qatari investments in India, including in the energy sector. In a telephone conversation today, India’s Prime Minister Narendra Modi and the Emir of Qatar, Sheikh Tamim Bin Hamad Al-Thani, agreed to deepen cooperation in the energy sector, the Indian government said in a statement. “The two leaders discussed the robust cooperation between both countries in the fields of investment flows and energy security, and reviewed recent positive developments in this regard. They decided to create a special Task-Force to further facilitate investments by Qatar Investment Authority into India, and also resolved to explore Qatari investments in the entire energy value-chain in India,” the government of India said. India, the world’s third-largest oil importer, is also a major importer of LNG, of which Qatar delivers around 80 percent. At the beginning of this year, India asked Qatar for renegotiation of its long-term supply contract, but Qatar was not inclined to renegotiate the prices. “Qatar is our largest source of LNG. India’s appetite for energy, particularly gas is increasing considerably. We see an enormous potential to further expand India-Qatar energy ties and also expect to increase our bilateral engagements beyond buyer-seller relationship,” India’s Oil Minister Dharmendra Pradhan said at the end of January. India wants to significantly boost its gas consumption and expand its gas infrastructure. “An estimated investment of 60 billion US dollars is lined up in developing gas infrastructure which includes pipelines, city gas distribution and LNG re-gasification terminals,” Pradhan said in September. Qatar, for its part, sees LNG as an important part of India’s plans to increase its gas-based economy. “We believe that natural gas is a critical component of India’s energy mix as the country seeks to boost its use across all sectors, while at the same time playing an important global role in curbing global warming,” Qatar’s Minister of State for Energy Affairs and President and CEO of Qatar Petroleum, Saad Sherida Al Kaabi, said at a virtual Indian energy forum in October.
Oil rises on vaccine rollout, concern on Iraq oilfield attack
Oil prices rose in early trade on Thursday, buoyed by a COVID-19 vaccine rollout in Britain and the imminent approval of a vaccine in the United States, which could spur a rebound in fuel demand, despite a large build in U.S. crude stocks last week. U.S. West Texas Intermediate (WTI) crude futures rose 23 cents, or 0.5%, to $45.75 a barrel at 0200 GMT, while Brent crude futures climbed 21 cents, or 0.4%, to $49.07 a barrel. Prices were little changed overnight. “Optimism over the vaccine prevails and continues to limit any serious downside action,” Axi chief market strategist Stephen Innes said in a note. Vaccinations could start as soon as this weekend in the United States, with a panel of advisers to meet on Thursday to discuss whether to recommend to the Food and Drug Administration emergency use authorization of the Pfizer/BioNTech vaccine. Canada approved its first COVID-19 vaccine on Wednesday and said inoculations would start next week. Oil prices were also supported by some nervousness after two wells at a small oilfield in northern Iraq were set ablaze in what the government called a “terrorist attack”, though production was not affected. “While the wells were small, it has raised concerns of further disruptions,” ANZ Research said in a note. Analysts were surprised that the market had shrugged off an unexpectedly large build in U.S. crude stocks in government data released on Wednesday, largely due to a plunge in U.S. crude exports to their lowest since 2018. Crude inventories rose by 15.2 million barrels in the week to Dec. 4, the Energy Information Administration said, compared with analysts’ expectations in a Reuters poll for a 1.4 million -barrel drop.
Quarter of forecast LNG supply needed by 2040 to meet 2C global warming limit – Wood Mac
Only a quarter of forecast new liquefied natural gas (LNG) supply will be needed to meet demand by 2040 under measures aimed at curbing global warming below 2 degrees Celsius, a report by consultancy Wood Mackenzie showed on Wednesday. Under a climate pact to cut global warming, nations have committed to a long-term goal of limiting the average temperature rise to below 2C above pre-industrial levels and to pursue efforts to limit it even further to 1.5C. Wood Mackenzie said tougher government measures to curb warming will increase renewables investments and energy efficiency, putting gas demand under pressure. Green hydrogen fuel, extracted from water with electrolysis powered by renewable electricity, will become a major competitor to gas towards the end of 2040 and achieve a 10% share of total primary energy demand by 2050. This will be a challenge for companies considering final investment decisions (FID) on new LNG projects. “In a 2 degree world, only about 145 billion cubic metres (bcm) per annum of additional LNG supply is needed in 2040 compared to 450 bcm/yr in our base case outlook,” said Wood Mackenzie principal analyst Kateryna Filippenko. The consultancy’s “base case” scenario implies 3C warming. “If we consider the imminent FID for the Qatar North Field East expansion, the space for new projects shrinks down by 77% to 104 bcm/yr by 2040 compared to our base case,” she added. In stark contrast to last year’s record level of approvals for LNG production plants, this year’s oil and gas price drops have forced companies to delay decisions on new projects and write down investments in existing plants. However, industry executives in September said they expected LNG demand to increase steadily for several decades, helped by economic growth in Asia. Wood Mackenzie said only a few Australian backfill projects – those which commit new gas to existing projects to allow them to continue operating beyond their expected life – will go ahead, pushing the country down the list of top LNG exporters. The expansion of Canadian and Mozambique LNG capacities is unlikely to materialise, it added. Backfill projects do not add new capacity but prevent volumes from leaving the market. Low LNG prices could wipe out any new investment in more economically challenging projects, and only the most cost-efficient and flexible ones will survive. Around 12 trillion cubic metres of undiscovered gas resources could be stranded – more than three times the amount of gas produced worldwide this year.
How oil majors shift billions in profits to island tax havens
Bermuda and the Bahamas aren’t exactly big players in the oil-and-gas world. They don’t produce any of the fuels at all. Yet the islands are deep wells of profit for European oil giant Royal Dutch Shell Plc. In 2018 and 2019, Shell earned more than $2.7 billion – about 7 per cent of its total income in those years – tax-free by reporting profits in companies located in Bermuda and the Bahamas that employed just 39 people and generated the bulk of their revenue from other Shell entities, company filings show. If the oil-and-gas major had booked the profits through its headquarters in the Netherlands, it could have faced a tax bill of about $700 million based on the Dutch corporate tax rate of 25 per cent. The bill would have been much steeper if the income were reported in oil-producing countries – some of which levy rates exceeding 80 per cent. Shell and other oil majors are avoiding hundreds of millions of dollars in taxes in countries where they drill by shifting profits to thinly staffed insurance and finance affiliates based in tax havens, according to a Reuters review of corporate filings and rating agency reports. Shell, BP Plc, Chevron and Total use subsidiaries in the Bahamas, Switzerland, Bermuda, the UK Channel Islands and Ireland to provide their global operations with banking, insurance and oil-trading services, the documents show. These subsidiaries, in turn, book profits that go lightly taxed or entirely tax-free. Such arrangements are not illegal. But they highlight the ability of international oil corporations to game global tax systems and avoid handing over revenue to nations where they conduct their core business, according to academics who study corporate taxation. The profits generated by those offshore units are enormous, despite their tiny operations. BP’s so-called captive insurer – meaning it serves only other BP entities – had $6.5 billion in cash on hand at the end of 2018 after years of robust annual profits, according to insurance rating agency AM Best Co. The insurer, Jupiter Insurance Ltd, has accounted for as much as 14 per cent of BP’s global annual profits in recent years, according to AM Best figures and BP’s financial statements. Jupiter has six directors but no employees; BP outsources insurance administration to a brokerage located in Guernsey, a tax haven in the UK Channel Islands. The big oil firms’ captive insurers are far more profitable than a typical insurance company. That’s because the amount they pay in claims accounts for a far lower proportion of the money collected in premiums – all from other affiliates of the oil giants – than is the case at other insurers, Industry data shows. That means the captive insurance units absorb part of the revenue made by the oil majors’ subsidiaries elsewhere – often in high-tax countries where they extract oil and gas – and shift it to operations located in low-tax or no-tax jurisdictions. The oil companies have also transferred capital to tax havens to establish banking units that lend money to sister companies. Shell established an oil trader in the Bahamas that generates revenue primarily by buying and selling oil among other Shell affiliates. The companies named in this story all said they followed tax rules of the nations where they do business. Their subsidiaries in tax havens, the companies said, were located there for commercial or operational reasons rather than to avoid taxation. Shell denied that its arrangements constituted tax avoidance and said the location of its subsidiaries were driven by business rather than tax reasons. BP declined to answer questions about its insurance subsidiary but a spokesman directed Reuters to a 2018 tax policy statement – published to meet a regulatory requirement – which said the company does not engage in profit-shifting. Profit-shifting has long been a concern among the Group of 20 nations, which have asked the Organization for Economic Cooperation and Development (OECD), which helps coordinate international taxation rule-making, to find ways to rein in corporate tax avoidance. The organization in February issued new guidance on the treatment of intra-group financial transactions, advising nations to limit deductions on such payments. Critics of corporate tax planning say oil firms’ profit-shifting undermines their claims to responsible corporate governance and exacerbates the deep budgetary problems that many oil-producing countries face amid the coronavirus pandemic and a related drop in oil prices. “These companies are deliberately exploiting gaps in tax law and weak enforcement, and they are doing so in order to make enormous profits,” said Raymond Baker, president of Global Financial Integrity, a Washington D.C.-based not-for-profit organization that has lobbied for stricter international action against corporate tax avoidance. “The victims are the countries and their budgets and their people.” Nations such as Angola, Brazil and Trinidad, who rely heavily on oil tax revenues, have had to moderate spending and increase borrowing to respond to the health crisis. Nigeria is another country that relies heavily on oil tax revenues. Waziri Adio – executive secretary of the Nigeria Extractive Industries Transparency Initiative, which advocates for stronger governance of oil revenues – said the practices of oil companies may be legal but aren’t fair. “This is something that robs Nigeria of legitimate revenues and will affect the ability of the government to deliver badly needed services to its citizens,” Adio said. The governments of Nigeria, Angola, Brazil and Trinidad did not respond to requests for comment. Tax advisors said companies owe it to their shareholders to pay the lowest-possible tax bill. “Tax planning is a legitimate part of business,” said Bryan Kelly, a partner with law firm Withers in Los Angeles. “The board of directors has a fiduciary duty to maximize profits.” ‘THE NUMBERS DON’T MAKE SENSE’ Shell booked $1.3 billion in 2018 and 2019 profits through Bermuda-based banking and insurance subsidiaries that together employed three people, according to the company’s ‘Tax Contribution Reports’ published in November this year and December 2019 which detail tax payments. The tiny firms provide insurance and loans to Shell oil-producing facilities worldwide,
TAP pipeline explores feasibility of blending hydrogen
Developers of the Trans Adriatic Pipeline (TAP) have started feasibility studies on blending hydrogen with the natural gas the pipeline will bring in from Azerbaijan, the TAP head said. “The company has kicked off a technical study and we hope to be in a position to make a first assessment by the end of June next year,” TAP managing director Luca Schieppati told Reuters on Wednesday. TAP is the final leg of a $40 billion project named the Southern Gas Corridor, which will carry 10 billion cubic metres of gas per year from the giant Shah Deniz field into Europe. The pipeline, already commercially operative, is set to start pumping its first gas into Italy at the end of this year. Schieppati said any commitment on hydrogen blending could come in tandem with a decision, expected in July 2021, on the possible doubling of the infrastructure’s gas capacity. Hydrogen is seen as an energy source that could partly replace natural gas in future, helping to cut emissions provided it is produced using renewable power and is therefore carbon-free. TAP shareholders include BP, Azerbaijan’s SOCAR, Snam , Fluxys, Enagas and Axpo. Many gas grid companies around the world are committing to a wider use of hydrogen as a way to extend the long-term life of their infrastructure because of increasing requirements to move away from fossil fuel, such as gas. Snam, Europe’s biggest gas pipeline operator, has been experimenting with a 10% mix of hydrogen in part of its gas network and has said 70% of its grid is “hydrogen ready”. Earlier this year it reached a deal with SOCAR to study the possible use of renewable gases for delivery through the Southern Gas Corridor.
OPINION: Where are the oil prices headed in 2021?
Since the Oil Crisis of 70’s and early 80’s, the price of crude oil has remained, mostly, in a $10-$30 band before breaking out of it in 2004. This breakout was primarily due to China-led oil demand growth and its impact on OPEC’s surplus oil production resulting in concerns about the tighter supply-demand situation. The 2008 financial crisis led to global recession which resulted in an unprecedented fall in oil prices by over $100, from its all-time highs in $140s before resuming an uptrend due to economic recovery. For the next 5 years, the prices hovered around the $100 mark whilst the shale boom in the US continued. The 2014-15 plunge in the oil prices was, primarily, driven by years of increase in oil supply from unconventional sources and the missing price support by OPEC as the oil producing nations continued to flood the market with their produce at highest rates, ever. OPINION: Where are the oil prices headed in 2021? This time around the price drop was a first-time visit of the negative territory when the WTI futures contract for May 2020 delivery dipped to a low of -$37 in April this year. The onset of pandemic, earlier this year, led to travel curbs and a sharp drop in the economic activity causing an oversupply situation in the market. This coupled with a lack of availability of storage, at exchange designated location in Cushing, Oklahoma, effectively made the price of the commodity worthless. Where do we go from here? There’s a renewed optimism for a global economic recovery in 2021 on the news of distribution of vaccines in major economies across the world starting in few weeks’ time. A high confidence in global economic recovery is, typically, considered to bring weakness in the US dollar, which has fallen by around 12% against a basket of top currencies since March of this year when it topped due to ‘flight to safety’. It’s also anticipated to buoy the demand for US exports. The US Federal Reserve has announced that it will keep interest rates low and continue to provide the stimulus required to support the US economy. President-elect Joe Biden’s nomination of former Fed Chairwoman Janet Yellen for Treasury Secretary is reassuring of stimulus spending, promoting faster economic growth in the US. A falling US Dollar on the back of global economic recovery & continued stimulus spending in the US, as well as other major economies, are bullish for oil prices. In addition, vaccines would allow people to resume life in a normal way supporting more consumption-led spending that would drive up the oil prices. In their latest Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration or EIA indicates an average of $49/b for Brent in 2021 which is around 14% higher than the expected average for the fourth quarter of 2020. EIA expects that while inventories will remain high, its anticipated that they will decline because of the rising global oil demand and lower than expected increase in OPEC+ oil supply. EIA forecasts Brent prices will average $47/b in the first quarter of 2021 and rise to an average of $50/b by the fourth quarter. OPINION: Where are the oil prices headed in 2021? Other key driver for the recent increase in oil prices has been the deal to slowly cut the OPEC production cap in the first quarter instead of a hard 2 million barrels a day. OPEC+ agreed to raise oil supply by 500,000 barrels a day in the next month, well below the 2 million barrels mark. A positive outlook for the next year doesn’t necessarily support a low volatility environment for crude oil prices as over the medium to long term period the uncertainties remain, mainly, in terms of impact of (a) consumption patterns due to changes in behaviors caused due to multiple lockdowns across the globe, (b) a slower than expected economic recovery, (c) changes in global production of crude oil – OPEC & non-OPEC, (d) shape & structure of US-China Trade related alignment and (d) the pace of Energy transition, primarily led by leading global economies, towards green energy. Crude oil prices will continue to demonstrate volatility. Companies that can adapt, deploy and harness the benefits of data and modern risk management processes, tools & technologies will thrive and be best placed to respond to challenges posed by the evolving global economic & political situations.
At over Rs 80 per litre, diesel at two-decade high in Mumbai
The price of diesel, which stood at Rs80.51 on Monday, is the highest in Mumbai in two decades, leaving transporters and motorists fuming. Between April and December, the rates of fuel —both diesel and petrol —have increased by around Rs 14, making it one of the biggest hikes in recent years. While petrol price zoomed from Rs 76.31 on April 2 to Rs 90.34 on December 7, diesel prices saw a gradual hike from Rs 66.21 in April to Rs 80.51 per litre on Monday. At over Rs 80 per litre, diesel at two-decade high in Mumbai The record high price of diesel is likely to increase freight charges on transportation by 7-8% and drive up prices of essentials. Transporters from All India Motor Transport Congress (AIMTC) have threatened a repeat of their 2018 nationwide agitation if the hikes are not curtailed. Sources said diesel was at its lowest in two decades on June 4, 2002 when the rate was Rs 22.84 a litre at the pumps. The increase has been over 250% since then. “Also, the 21% hike in diesel rates during Covid months between April and December and 18% hike for petrol during the same period are uncalled for. We strongly protest the hikes and want the government to give relief on taxes, VAT and excise — the rates for which are highest in our state,” said a leading transporter from Masjid Bunder, requesting anonymity. According to statistics obtained by TOI, diesel cost around Rs 23 a litre in June 2002, and had increased to Rs 33 in December 2004 after which it was hiked to Rs 40 in June 2006. In a subsequent dip, diesel was around Rs36 in January 2008. The prices went up again — from Rs 44 a litre in March 2011 to Rs 66 in May 2014, followed by a slide to Rs 57 in July 2017. After this, fuel prices witnessed a record hike. By October 2018, it had peaked to Rs 80.10 a litre. Exactly a year later, prices were brought down and it was retailing at Rs 70.76 in October 2019. By April 2, 2020, the prices were further reduced to Rs 66.21. During the initial two Covid months, prices remained steady. “Prices have been fluctuating since June, and the present rate is unwarranted,” said Bal Malkit Singh, core committee member of AIMTC. “When international crude prices are considerably down, diesel has soared above Rs 80 per litre in Mumbai. The mathematics of decontrol regime is not understandable. It is adversely impacting the common man, farmers and the transport sector,” he said in a statement released on Monday. Transporters have warned that if pushed to the wall, they may agitate again. In 2018, they had protested with a nationwide chakka jam, which crippled transportation of manufacturing and industrial goods and affected operations at the ports.
Post-stake sale, BPCL’s LPG business to be in new SBU; new owner to take call after 3 yrs
Privatisation-bound Bharat Petroleum Corporation Ltd’s (BPCL) new owner will after three years of takeover get a right to decide on retaining the business of selling subsidised LPG, which in the intervening period will be transferred into a new unit to continue the flow of government subsidy, a top official said. Government subsidy will continue to be given to BPCL customers if the new owner chooses to retain the business after three years, the official said. The firm’s cooking gas LPG customers will be transferred to other state-owned firms, Indian Oil Corporation (IOC) and Hindustan Petroleum Corporation Ltd (HPCL), in case the new owner does not want to continue with such a business, the official added. The government is keen to continue providing subsidy to 7.3 crore domestic cooking gas (LPG) consumers of BPCL even after the firm’s privatisation. To resolve the conflict of paying the dole to a private company, it has been decided to transfer the LPG business of the firm into a new strategic business unit (SBU). The SBU will maintain separate accounts, with records of subsidy received and digitally transferred to user accounts, the official said. The accounts will be audited to ensure no pilferage, he said. Subsidy to privatised BPCL will not result in similar payout to other private LPG retailers. “BPCL is a legacy company and overnight subsidy flow to users cannot be stopped,” he said. There will be a three-year lock post-government exit from BPCL, the official said. “The new owner cannot sell any asset or the SBU for three years. Post three years, the new owner will have a right to decide on retailing the LPG business.” The government gives 12 cooking gas (LPG) cylinders of 14.2-kg each to households in a year at a subsidised rate. The subsidy this month is about Rs 50 per cylinder, which is directly paid into the bank accounts of the users. The subsidy is paid in advance and consumers use this to buy LPG refills that are available only at market price from dealers of oil marketing companies — IOC, BPCL and HPCL. The moment a refill is bought using the subsidy, another instalment is transferred into the user bank accounts. On November 27, Oil Minister Dharmendra Pradhan had told that government subsidy to BPCL customers will continue after the privatisation of the nation’s second-biggest fuel retailers. “Subsidy on LPG is paid to consumers directly and not to any company. So the ownership of the company that sells LPG is not of any material consequence,” he had told . Pradhan had said the LPG subsidy payment is done digitally to all verified customers. “Since it is paid directly to consumers, it does not matter if the servicing company is public sector or private sector,” he said. “LPG subsidy will continue as before to BPCL consumers even after disinvestment.” The government is selling its entire 53 per cent stake along with management control in BPCL. The new owner will get 15.33 per cent of India’s oil refining capacity and 22 per cent of the fuel marketing share. It also owns 17,355 petrol pumps, 6,159 LPG distributor agencies and 61 out of 256 aviation fuel stations in the country. BPCL services 7.3 crore out of 28.5 crore LPG consumers in the country. Privatisation of BPCL is part of plans to raise a record Rs 2.1 lakh crore from disinvestment proceeds in 2020-21 (April 2020 to March 2021). BPCL operates four refineries in Mumbai (Maharashtra), Kochi (Kerala), Bina (Madhya Pradesh), and Numaligarh (Assam) with a combined capacity of 38.3 million tonnes per annum, which is 15.3 per cent of India’s total refining capacity of 249.8 million tonnes. While the Numaligarh refinery will be carved out of BPCL and sold to a PSU, the new buyer of the company will get 35.3 million tonnes of refining capacity — 12 million tonnes Mumbai unit, 15.5 million tonnes Kochi refinery and 7.8 million tonnes Bina unit.
2021 Oil prices would hover in the $40-45 per barrel range: Moody’s
Global oil prices will hover in the $40-$45 per barrel range in 2021, remaining in the lower end of the $45-$65 Brent medium-term price range, with implications for capital spending by producers, according to Moody’s Investors Service. “Oil prices are set for only modest gains and will remain at lower end of our $45-$65 per barrel medium-term range, with uneven demand recovery and market rebalancing,” the top rating agency said in a report on the 2021 outlook for the oil and gas sector. The modest improvement in 2021 oil prices will lead producers to limit capital investment, with negative knock-on effects for drilling, oilfield services and midstream companies, while fuel demand will rise, but not to pre-downturn levels. The report said the spending in new drilling will remain limited as producers will keep capital spending low , focusing on balance sheets, maintaining volumes and shareholder returns. Also, the downturn will promote strategic reviews as consolidation will continue among companies with higher credit quality and lower leverage. Natural gas prices in 2021 – at benchmark Henry Hub – will stay largely within $2.00-$3.00 per million British thermal units (MMBtu) medium-term range. However, final decisions on LNG expansion projects face delays from oversupply, changing pricing models in Asia and rising competition from renewables.