Year End Review 2016 – Ministry Of Petroleum And Natural Gas
As the year draws to a close, its time to check the promises versus delivery by the important economic ministries of the government. As one of the most important ministries, the Ministry of petroleum and natural gas under minister Dharmendra Pradhan, one of the most dynamic ministers in the Narendra Modi Cabinet, it is not a surprise when the yearly outcome exceeded expectations on most fronts. While a large number of important policies, activities, decisions and initiatives were undertaken by the Ministry of Petroleum & Natural Gas in last one year, what finally scored over every other initiative was empowerment of the rural women under the Pradhan Mantri Ujjwala Yojana program of the petroleum ministry where morethan 1.22 crore new LPG connections were released to BPL women. Lets take a closer look at the year round initiatives by the petroleum ministry Pradhan Mantri Ujjwala Yojana (PMUY) Government has approved Rs. 8000 crore under the Pradhan Mantri Ujjwala Yojana (PMUY) for release of 5 crore deposit free new LPG connections to Women of BPL families over three years, i.e. FY 2016-17, 2017-18 and 2018-19. The scheme will provide an initial cost of Rs. 1600/- for providing LPG connection to poor households in the name of women of the household. The Prime Minister launched the scheme on 01.05.2016 at Balia, Uttar Pradesh. LPG connection to BPL families is being provided to the BPL family access to clean cooking fuel. The provision of LPG as a cooking fuel helps in addressing health problems caused by use of traditional sources of cooking fuel such as fire wood, coal, cowdung, etc. This will in turn enhance productivity of woman, raise their quality of life by removing drudgery associated with collection of wood and ensure them against non-availability of cooking fuel, at times. Under the scheme, the Government of India provides deposit free LPG connection of BPL families identified through the Socio-Economic Caste Census 2011 data, which includes security of one cylinder, pressure regulator, hose pipe, installation charges and DGCC Book. The consumer has to purchase ISI standard gas stove, which is optional. Further, Oil Marketing Companies are also financing purchase of LPG stove and 1st refill to BPL customers on instalment basis, if they so desire. To ensure smooth supply chain of LPG cylinders to meet the demand, Government is in process of setting up of 10,000 new distributorships. Majority of these distributorships will come in rural areas to cater to unserved consumers. As on 09.12.2016, Oil Marketing Companies (OMCs) have released 12288517 new LPG connections under Pradhan Mantri Ujjwala Yojana (PMUY). A large number of important policies, activities, decisions and initiatives were undertaken by the Ministry of Petroleum & Natural Gas in last one year. The achievements were in downstream, midstream as well as upstream sectors. The year was declared as the year and saw launch of a number of people-oriented initiatives. Direct Benefit Transfer in PDS Kerosene Scheme (DBTK) Jharkhand has become first State in the country to implement DBTK and others have been requested to join the Scheme. Under the Scheme, the Kerosene is being sold at non-subsidised price and subsidy, as admissible, is being transferred to consumers directly into his/her bank account. The States would be given cash incentive of 75% of subsidy savings during the first two years, 50% in the third year and 25% in the fourth year. In case the States voluntarily agree to undertake cuts in kerosene allocation, beyond the savings due to DBT, a similar incentive would be given to those States/UTs. The initiative of the Government is aimed at rationalizing subsidies based on approach to cut subsidy leakages, but not subsidies themselves. The scheme will also stop diversion of Kerosene. State Government of Karnataka had volunteered to undertake cut in Kerosene allocation and the similar proposal has also been received from Government of Haryana and Government of Telangana. Further, Government of Haryana has requested to make the State Kerosene free by 31.03.2017. Kerosene Free Delhi and Chandigarh NCT of Delhi and UT of Chandigarh have been declared Kerosene Free cities effective 1st October, 2013 and 1st April, 2016 respectively and hence no PDS SKO allocation is made to them. PAHAL: World’s largest Direct Benefit Transfer Scheme PAHAL (Pratyaksh Hasthantarit Labh) is the world’s largest Direct Benefit Transfer Scheme. Through PAHAL, subsidy given to consumers is directly transferred to the registered account of the consumer without involving any intermediary. More than 16.99 crore consumers are registered to avail subsidy as on 28.11.2016. PAHAL Scheme has been acknowledged by the Guinness Book of World Records as the largest cash transfer programme (households). More than Rs. 38,276 crore of subsidy has been transferred to the LPG consumers through 204 crore transactions since inception of the Scheme. An intensive exercise was carried out for identifying duplicate / fake / ghost / inactive domestic LPG connections and, as of 01/04/2015, 3.34 crore such connections were identified. As a result of implementation of DBTL (PAHAL) mechanism, it became possible to block these 3.34 crore LPG connections as the subsidy was transferred in the accounts of only those consumers who had registered under PAHAL and who have been cleared after de-duplication exercise. For the financial year 2014-15, for 3.34 crore consumers outside the PAHAL net, the estimated savings would be 3.34 crore x 12 cylinders x Rs.369.72 (average subsidy per cylinder for FY 2014-15) equal to Rs.14,818.4 crore. Following a similar principle, the savings estimated for FY 2015-16 is Rs.6,443 crore and total savings for both the years works out to Rs.21,261 crore. Giveitup and Giveback Till date, around 105 lakh households have voluntarily given up their LPG subsidy, Nearly 63 lakh new LPG connections have been released to BPL families in Financial Year 2015-16 linked to Giveback campaign utilizing CSR funds of OMCs Production of Crude oil and Natural Gas Crude oil production during the year 2015-16 is at 36.950 Million Metric Tonnes (MMT) as against production of 37.461 MMT in 2014-15, showing a decline of 1.36%. Production of natural
LNG strategies for the EU and India
India’s gas consumption is lower than the EU’s, but it too, like the EU, relies heavily on imports. With LNG likely to remain a key part of India’s gas supplies in the future, and given recent changes in the global market, what is the future potential of LNG imports for the EU and India? What are the best energy policies for the two regions? India and the European Union (EU) share a common fate in terms of fossil fuels: both are poor in proved indigenous reserves and need substantial amounts of imports to fill the gap between domestic production and consumption. This is also true for natural gas. Given recent changes in the global market for liquefied natural gas (LNG)—including flexibility of trade and falling prices—what is the potential of LNG imports in the future for the EU and India? What are the LNG strategies that the two regions can consider? In the EU, the gap between domestic production in 2014 was around 255 billion cubic meters (bcm). [1] It is mainly covered by imports of piped gas, roughly two-thirds of which come from Russia and Norway. In recent years, LNG accounted for 10% of total gas imports, [2] far below the EU’s 2015 total regasification capacity of 195 billion cubic meters per year (bcma). [3]. Although the EU’s demand for gas peaked in 2010 and has decreased since, the need for additional imports is likely to rise in the future due to more rapidly decreasing domestic production. LNG could play an important role, not only in filling the supply gap, but also in reducing the dependence on imports from Russia. India’s gas consumption, at 50.6 bcm, is much lower than the EU’s, but with production only at 31.7 bcm, [4] it too relies to a large extent on imports. For natural gas, the supply gap in 2014 amounted to around 19 bcm. [5] In the absence of import pipelines, India exclusively relied on LNG imports to its four existing terminals with a total capacity of around 35 bcma. [6] Although India’s gas demand peaked in 2011, it is still projected to more than double until 2030 due to population and economic growth, and poverty reduction. [7] Without the development of substantial domestic gas fields, this means that the supply gap will increase in the future, raising the question where the gas for India will come from. Given the political difficulties associated with building import pipelines in the region to access Caspian or Iranian gas (through Afghanistan or Pakistan), LNG is likely to remain a key pillar of India’s gas supplies in the future. The new EU LNG strategy The EU’s energy policy is based on three pillars: security, competitiveness, and sustainability. Against this background, the European Commission proposed a strategy for LNG and gas storage in February 2016. [8] In terms of security, the strategy aims to diversify import sources and routes, with a particular focus on Eastern Europe. Given that some 95% of existing EU LNG import capacity is in Western Europe, the EU needs to explicitly aim at improving access to LNG particularly in Eastern European countries currently dependent on only one import source. In terms of competitiveness, the strategy proposes a three-pronged approach. First, it focuses on infrastructure, which is not only needed to complete the EU’s internal gas market but also to improve access to international LNG markets either directly or through other member states. Within this context, the Commission also highlights the role of gas storage in optimising gas infrastructure use and in balancing the system. Second, it urges the completion of the internal gas market in order to send the right price signals for both LNG imports and for required infrastructure investments. And third, the strategy calls for closer cooperation with international partners, both suppliers and major consumers of LNG (including India), in order to remove obstacles in the trading of LNG and to advance towards free, liquid, and transparent global LNG markets. Regarding sustainability, the EU LNG strategy highlights the potential of LNG in transport, in particular as a means to decarbonise shipping and heavy duty vehicles (such as trucks). It also points to the possibility of using small-scale LNG to replace more polluting fossil fuels in the heat and power sectors, for example in remote or off-grid locations. Elements of a successful LNG strategy [9] Current global market dynamics could support further diversification towards LNG. Increasing the flexibility of LNG trade, decreasing LNG prices and LNG charter rates, and a reduction in Asia-Pacific import prices could all reinforce the economic viability of a LNG strategy. This is true for the EU as well as for India, and these trends are expected to continue as more LNG enters the market, mainly from new suppliers such as Australia and the U.S. However, in order to be effective and to avoid mismatches between investments and market reality, a LNG strategy should be part of a broader natural gas and energy strategy. This latter strategy should not only consider issues related the security of gas supplies, but also take into account potential future developments of gas demand—also within the context of Paris Agreement on climate change. A LNG strategy should thus seek to define a space for LNG in the overall demand equation, taking into account the whole energy system and interactions between different energy sectors (for example, between gas and power markets, and gas and the transport sector). This will help avoid inefficient investments, as was the case in Europe in the recent past driving down utilisation rates of EU LNG terminals to 19% in 2015. [10] As important, the key to a successful LNG strategy is to develop sufficient infrastructure. Low utilisation rates of EU LNG terminals can be explained by decreasing gas demand, but partly also by the fact that there are not enough interconnections between EU countries (for example, between Spain and France). In order to fully exploit the benefits of LNG, a system of interconnectivity requires three essentials: (i)
LPG subsidy: Tax dept to share data on taxpayers earning over Rs 1 million with Oil Ministry
The Income-Tax department will soon begin sharing personal data—like PAN, residential address and mobile number—of a taxpayer earning over Rs 1 million per annum with the Oil Ministry as part of government’s initiative to effectively block subsidised cooking gas to higher income groups. As part of the official deal between the two government departments, the taxman will also share the date of birth, gender, email id, residential phone number and all available addresses of the taxpayer in its database so that the Petroleum and Oil Ministry could zero down on each LPG subscriber who is availing the subsidy beyond the stipulated rules and has not voluntarily given it up. The I-T department will soon sign a Memorandum of Understanding (MoU) with the Oil Ministry in order to begin this transfer of personal taxpayer data, in a “confidential and safe” manner. The department, till now, used to share such proprietary data with Law Enforcement Agencies (LEA) like police, CBI, ED and others with a rider that they should not share this information with anyone else and use it for their investigation purposes only. The latest move has also been approved by the policy—making body of the department, the Central Board of Direct Taxes (CBDT), in the backdrop of government’s decision which had said that tax payers with annual income of more than Rs 1 million will not get subsidised cooking gas (LPG). “This tax data with the Oil Ministry will ensure that all those who have income above Rs 1 million per year will automatically be barred from getting subsidised cooking gas cylinders. The data will be processed by the Oil Ministry and only names of those ineligible will be shared with the LPG distributor concerned on field. “While some individuals and households have already given up this subsidy voluntarily after the Government asked them to do so, there are many who have not done so. The government wants to check pilferage in this regard and hence the data is being shared between the two departments,” a senior official said. The official said the transfer of data will begin soon. At present, all households are entitled to 12 cylinders of 14.2—kg each at subsidised rates. The government has asked well—off people in the past to voluntarily give up using subsidised LPG and instead buy cooking fuel at market price. The government, while announcing this decision last year, had said it “has decided that the benefit of LPG subsidy will not be available for LPG consumers if the consumer or his/her spouse had taxable income of more than Rs 1 million during the previous financial year computed as per the Income Tax Act, 1961.” Bernie Parent Authentic Jersey
NGT asks West Bengal to decide on GAIL gas pipeline
The National Green Tribunal (NGT), eastern zone bench, has given the chief secretary (CS) 15 days to decide whether Gas Authority of India Ltd (GAIL) should be entrusted with natural gas distribution in the city through a pipeline by itself or a joint venture company should be set up for this. The gas major plans to complete its 2,539km long pipeline from Jagdishpur in Uttar Pradesh to Haldia by 2020. It proposes to distribute gas in seven cities, including Kolkata, enroute. Environment activist Subhas Datta had moved the NGT in September last year, to introduce natural gas in Kolkata. The green bench had passed several directions, after which the state government and GAIL have been at loggerheads with technical issues regarding the CNG distribution. In August, the NGT had directed the CS to take up the matter with the Ministry of Petroleum and Natural Gas and GAIL. When this didn’t happen, the bench directed senior officials including the CS to attend a meeting convened by it on December 7. Nearly 30 people attended the meeting while the CS chose to stay away. On Friday, the bench of justice SP Wangdi and professor PC Mishra expressed displeasure at this. “We didn’t convene the meeting to grace or glorify us. We are keen to introduce green and clean fuel in Kolkata,” the bench observed before going through an affidavit submitted by GAIL. Za’Darius Smith Jersey
Asia set for biggest refining capacity jump in three years
Asia will post its biggest net refining capacity addition in three years in 2017, further boosting demand for crude in the world’s biggest and fastest growing oil consuming region. New and expanded refineries from China to India will offset closures in Japan, adding a net 450,000 barrels per day (bpd) of crude processing capacity in 2017, the highest since 2014, energy consultancy Wood Mackenzie says. The increase amounts to about an additional 1.5 percent of refining capacity on top of Asia’s total installed capacity of nearly 29 million bpd, Thomson Reuters Eikon data shows. “Heavy crude demand in particular is expected to rise in 2017 as more Asian facilities undergo upgrading and new … refineries come online,” said Sushant Gupta, WoodMac’s Asia research director for refining. The rise in capacity will tighten Asia’s crude market as it coincides with planned output cuts by oil producers like the Organization of Petroleum Exporting Countries (OPEC) and Russia in a bid to end oversupply and prop up prices. China National Offshore Oil Corp (CNOOC) plans to start a new 200,000-bpd refinery in southern China, while PetroChina aims to start a 260,000-bpd refinery in Yunnan, pending talks with the Myanmar government. Chinese independent refiners are also expected to import an extra 200,000-400,000 bpd of crude, research consultancy Energy Aspects estimates, and an upgrade by Taiwan’s CPC at its Talin refinery will raise crude and condensate demand by 100,000 bpd. Vietnam is due to complete a new 200,000-bpd refinery, while India’s Bharat Petroleum Corp Ltd is trialling an expansion in Kochi that will include a new 210,000-bpd crude oil distillation unit. These additions will more than offset a 400,000 bpd decline in refining capacity in Japan by early April due to shrinking local demand, according to Wood Mackenzie. To meet Asian demand, Iraq has already inked new Basra Heavy deals, while Iran expects to complete a pipeline and terminal to export heavy crude West Kharoon next year. Kuwait said it is preparing to restart production from oilfields jointly operated with Saudi Arabia. “We expect a slow ramp up of production from mid-2017. Both Saudi Arabia and Kuwait will have to manage this growth within their agreed OPEC production cuts,” WoodMac’s Gupta said. Still, traders see no outright supply shortage for Asian refineries, as OPEC is shielding most of its Asian customers from the planned cuts. Alternative crude supplies are also available, including heavy crude from Latin America and Angola, as well as shale supplies from the United States. Aron Baynes Authentic Jersey
Auto LPG cleaner fuel, 50% cheaper than petrol: Study
New Delhi, Auto LPG is the most effective option for converting the existing pool of petrol-fuelled cars and bikes into more environment-friendly vehicles, an industry body said on Monday. Auto LPG is fast emerging worldwide as a cleaner and much cheaper alternative to petrol and diesel, even better than compressed natural gas (CNG) fuel, the Indian Auto LPG Coalition (IAC) said on Monday, citing a study it has commissioned. The study conducted by the Marketing and Development Research Associates (MDRA) said while auto LPG’s operating expenses are up to 50 per cent lower than petrol, LPG vehicles are cheaper than CNG ones, and the investment in auto LPG infrastructure and installation time are lower than for a CNG station. The study said the most significant advantage of auto LPG is its contribution to improving the air quality. “Auto LPG is the most effective option for converting the existing pool of petrol-fuelled cars and bikes into more environment-friendly vehicles. It also provides tremendous opportunity to avoid usage of highly polluting carcinogenic diesel-fuelled cars for personal and public transport,” the IAC said. “Auto LPG is currently available in more than 500 cities across India, including 19 outlets in Delhi. It is already the preferred fuel in south India, and fast catching up in other parts of the country,” it added. The auto LPG body cited the World Health Organiaation data that 13 out of 20 most polluted cities in the world are from India. “Delhi tops this list with 153 micrograms of PM2.5 per cubic meter, while PM2.5 should not exceed 10 micrograms per cubic meter. Health cost of air pollution in India has been assessed at 3 per cent of its GDP,” it said. “Among the cleaner fuels, auto LPG is the most suited as it can be fitted in two-wheelers as well,” IAC President and Executive Director of state-run Indian Oil Corp Y.K. Gupta said in the statement. “More than 26 million vehicles run on auto LPG globally in more than 70 countries, and therefore auto LPG has become the third-largest selling fuel in the world, after petrol and diesel,” he added. Joe Kelly Womens Jersey
Industry’s top choice of fuel cheap but deadly
The national capital region (NCR) may be one of the most polluted regions in the country but many industries located here are still running on an extremely polluting fuel-furnace oil. A substantially cheaper alternative to natural gas and diesel, FO, as it is called in industrial terminology , is marginally better than bitumen in quality .It emits substantially higher particulate matter (PM) and secondary sulphate particles, said scientists. The widespread use of FO came to light only recently after the Supreme Court-mandated Environment Pollution Control Authority (EPCA) investigated its use in NCR and submitted a report to SC. The report also highlighted the use of pet coke, another high sulphur fuel, in NCR. Industries in Ghaziabad’s Sahibabad and Loni Road industrial areas admit that they use FO despite knowing how harmful it is for environment. A large steel company TOI visited in Sahibabad, for instance, runs its generator on FO and natural gas. “It’s a 30:70 ratio, with FO making 70% of the fuel. It’s cheap and serves the purpose. I don’t think the Supreme Court can ban it because industries are a powerful lobby . Also, what will oil refineries do with the FO they generate?“ said its head of purchase. FO is priced around Rs 25 per litre, compared to Rs 56.76 for diesel, Rs 69.3 for petrol and Rs 24.5 per standard cubic meter for piped natural gas. About three months ago, the price of FO fell to Rs 15 per litre due to the dip in crude oil prices. “The prices fell seven times in the past year or so. It just makes economic sense for industries to opt for a cheaper fuel. Of course, it’s way more polluting and you can tell from the chimney smoke whether a factory is using FO. It’s usually black or blue smoke. That’s why we invested in piped gas supply ,“ said a senior representative from another steel company’s hot rolling and heat treatment division. TOI also found several dyeing, paper recycling and glass industries using FO. A representative from Indo Petro, a dealer, said, “Many industries in Delhi too use it illegally because it’s cheaper.“ Anant Bhargav, director of IFP Petro Products, said, “The government can have Bharat Standard (BS)-type norms for industrial fuel. Some industries even use very toxic tyre oil made from used rubber and ty res. Major dealers supply these fuels.“ Around 30 forging industries use FO in Ghaziabad, added an Industrial Area Manufacturer’s Association member. Mukesh Sharma, scientist at IIT Kanpur and author of Comprehensive Study on Air Pollution and Green House Gases (GHGs) in Delhi -the latest source apportionment study , said, “The PM emissions from FO are substantially higher than other liquid or gaseous fuels. Since the sulphur content in FO and pet coke is high, a large amount of sulphur dioxide (SO2) is released that converts into fine sulphate particles in the atmosphere.“ The sulphur content in FO is 15,000 to 20,000 ppm and about 70,000 ppm in pet coke compared to around 50 ppm in diesel. Scientists recommend that high sulphur fuel should only be used in cement industries because the calcium oxides generated in these factories can neutralise the sulphur emission. During a recent hearing in SC, a lawyer representing the Centre sought time to respond to EPCA ‘s submission. The apex court has given the Centre four weeks to examine whether pet coke and FO, if used as industrial fuel, is harmful. “In case the government comes to the conclusion that its use is indeed harmful, it may consider issuing appropriate directions in terms of Section 3(2)(v) of the Air Act,“ the order said. According to EPCA ‘s report, a big manufacturer of solar panels, a glass company and steel companies are using FO. Apart from PSUs, a private company also supplies FO. Cody Latimer Authentic Jersey
Mongolia pegs $1 billion from India for oil refinery, pipelines
Mongolia will seek approval from the Import-Export Bank of India to build an oil refinery and pipelines with $1 billion in infrastructure funding negotiated last year, a project that could boost the nation’s gross domestic product by 10%. The government intends to use $700 million of the loan for an oil refinery and $264 million for oil pipelines, according to a statement on its website last week. Mongolian prime minister Erdenebat Jargaltulga has instructed relevant ministries to negotiate with the Ex-Im Bank of India, according to the statement. Prime Minister Narendra Modi signed agreements last year to provide the $1 billion credit line to fund railroad and infrastructure projects in Mongolia. The Indian Ambassador in Ulaanbaatar Dr. T. Suresh Babu didn’t immediately respond to an email seeking comment. Mongolia is looking to India and other investment partners as its economy contracts and its debt burden grows. Last month, China backed off from talks with Ulaanbaatar over a loan package to help the economy after a dispute over the visit to Mongolia by the Dalai Lama. The refinery, to be sited in Sainshand county, will have a capacity to process 1.5 million metric tonnes of oil per year. It will produce 560,000 tonnes of gasoline, 670,000 tonnes of diesel fuel and 107,000 tonnes of liquefied gas annually. The refinery could boost Mongolia’s GDP by 10%, according to the statement. Sainshand, located on the Trans-Mongolia railway, is planned to be a transportation hub. Mongolia’s oil fields are primarily located in Dornod province in eastern Mongolia, about 545 kilometers northeast of Sainshand. PetroChina Daqing Tamsag Llc operates the oil fields and has produced 7.5 million barrels through the first 11 months of this year, according to the National Statistical Office. All of Mongolia’s crude is exported to China. The 20-year loan will have an interest rate of 1.75% and principle payments will be waived during the five years, according to the April statement. Mongolia imported 346,500 tonnes of gasoline worth $172 million and 479,800 tonnes of diesel worth $219 million in the first 11 months of this year, according to the NSO. More than 97% of the petrol and diesel was imported from Russia. Reggie Jackson Jersey
Total to give rivals storage space as Gapco buyout is approved
The Common Market for Eastern and Southern Africa (Comesa) Competition Commission has ordered French oil marketer Total to open up storage facilities of a regional dealer it has acquired to third parties, as a ¬condition for approving the takeover. The regional competition watchdog also wants Total to honour contracts Gulf Africa Petroleum Corp (Gapco) has with its employees. Total Outre Mer SA agreed to buy Gapco from India’s Reliance Industries for an undisclosed amount last May as it seeks to strengthen its presence in Africa. Reliance, which had 76 per cent stake in Gapco, and the minority shareholders agreed to sell their holdings for cash to Total. On Friday, the regional agency said the transaction did not raise any competition concerns in the rest of the common market. “The competition concern in the Kenyan market pertained to the provision of storage facilities to third parties post-merger and employment issues. We noted that Gapco is one of the significant players that provide storage for third parties, and expressed concerns that the post-merger entity may not provide storage to third parties,” it said. The watchdog added that following the concerns, both Total and Gapco have submitted undertakings to remedy the competition fears in Kenya. “The undertakings relate to maintaining the provision of storage facilities to third parties and ensuring that Gapco will honour the short-term and long-term employment contract currently in effect,” it said. Total sought the Comesa nod for a merger between it and Gapco in July. “The commission assessed whether the proposed transaction between the parties would have the effect of substantially preventing or lessening competition,” said the regional regulator in a press statement. With the acquisition, Total aims to raise its market share in Africa from 17 per cent in 2015 to more than 20 per cent. “This acquisition is in line with Total’s growth strategy for the distribution of petroleum products and services in Africa, which aims at expanding in fast-growing regions while maintaining high profitability,” Momar Nguer, president Total Marketing and Services said in May. Gapco’s assets in Tanzania, Kenya and Uganda include logistic terminals, 108 fuel stations, and 260,000 kilo-litres of storage capacity. Total currently operates a network of more than 4,000 fuel stations in Africa. Marcus Davenport Jersey
Worries around OMCs appear to be overdone?
Stocks of oil marketing companies (OMCs) namely Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) have lagged the S&P BSE Sensex since December 9 as the Opec and non-Opec nations agreed to cut crude oil production by 1.2 million barrels of oil equivalent per day from January 1, 2017. These stocks have fallen anywhere between 2-6 per cent in this period versus a per cent fall in the Sensex. While crude oil prices have come off by 0.6 per cent to $53.25 a barrel in this period, most analysts expect this metric to surge going forward and touch $60 a barrel levels. Rising crude oil prices are negative for OMCs as they may not always be in a position to pass on this hike and it is also likely to result in higher working capital requirements. But the fears around these stocks could have been overdone. Historical evidence suggests that the government has deployed excise duty as an efficient tool to reduce the burden of rising crude oil prices on both the OMCs as well as the end consumers. The trend is likely to continue this time around as well, estimate analysts. “We believe at $60 a barrel, excise duty rollbacks are likely, and possibly VAT cuts too. These cuts would be structurally positive for OMCs and reduce the risk of adverse marketing margins,” says Sabri Hazarika of PhillipCapital. Though the jury is out on whether the government would bear the entire burden of oil price increase, even a partial support on this front would aid OMCs. “If the government bears the entire brunt of the increase in oil price by cutting duties so as to leave the final retail selling price (RSP) unchanged, it could suffer a revenue loss of 0.5 to 0.7 per cent of GDP for oil between $60-65 a barrel,” estimates Suhas Harinarayanan of JM Financial. If the government shares half of this burden, he believes it could lead to a revenue loss of 0.32 to 0.45 per cent of GDP. In an unlikely scenario of the OMCs passing on the entire price increase to the end consumers, retail petrol and diesel prices could surge 16-19 per cent over December 1, 2016, estimate analysts. This scenario though seems highly unlikely as the government has asked the OMCs to raise prices in a protracted manner. An important change for OMCs is announcement of 0.75 per cent discount on sale of petrol and diesel via cards and e-wallets implying a hit of Rs 0.4 to 0.5 per litre on these fuels. “This move is not necessarily margin dilutive, as OMCs can offset the earnings hit through higher margins given the pricing freedom. It could introduce quarterly volatility in marketing earnings, as actual margin realisations would depend on the share of digital payments,” writes Sanjay Mookim of Bank of America Merrill Lynch in a recent report. For now, it seems that the recent stock price correction seems to ignore some of the positives for the OMCs. One, consumption demand continues to grow at a healthy clip in India with demonetisation adding fuel to the consumption fire. Second, de-regulation of kerosene and LPG prices since July have led to an increase of 18 per cent and 4 per cent respectively in their prices. Third, reduced under-recoveries burden on the OMCs will aid their profitability. “We see budgeted subsidy available for FY17 at Rs 170 billion; hence, about Rs 185 billion of projected under-recoveries would largely be managed,” adds Hazarika. Lastly, higher oil prices could lead to inventory gains (in the short term at least) and boost gross refining margins of the OMCs. In this backdrop, most analysts are positive on the three companies. HPCL is a direct play on crude oil prices, potential upsides from the exploration and production activities could further aid BPCL’s prospects. IOC too stands to benefit from ramped up capacities at its Paradip refinery kicking in. Austin Watson Jersey