June-July 2012

CRISIL CRBCustomised Research Bulletin

Oil & Gas

CRISIL CRBCustomised Research Bulletin

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Foreword
In this edition of Customised Research Bulletin, we present our views
RQ2LODQG*DVVHFWRU
The sector insights in this report are based on various research
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production from many countries has increased significantly over the last
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CRISIL Research

CRISIL CRB Customised Research Bulletin

Contents

Opinion
Hike in diesel SULFHVFULWLFDOIRU20&VOLTXLGLW\

01

Economic Overview June 2012

05

Industry Overview
Crude Oil
Refining & Marketing
Natural Gas

06
08
09

Customised Research Services

Oil & Gas

11

Media Coverage

12

+LNHLQGLHVHOSULFHVFULWLFDOIRU20&V
liquidity

(Rs/kl)

prices (under-recoveries) reaching alarming levels,

40,000

urgent corrective action like hiking the price of diesel

35,000

has become imperative. Diesel prices were last revised

30,000

in June 2011, when kerosene and LPG prices were also

25,000

revised upwards. Non-revision of the administered

20,000

Domestic prices (before taxes)

Under-recoveries at record-high levels

Diesel prices
(Rs/kl)
40,000

(Rs bn)
1,600

1,385

1,400

35,000
30,000

1,042

20,000

461

Domestic prices (before taxes)

2011-12

2010-11

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

200

2009-10

15,000
2008-09

494

2007-08

400

25,000

782

771

800

2005-06

1,000

2006-07

1,200

400

International prices

Source: CRISIL Research

Trend in under-recoveries

600

2011-12

WKHJRYHUQPHQWVVXEVLG\EXUGHQ

2010-11

liquidity and profitability of OMCs and massively inflated

2009-10

15,000

2005-06

prices of these fuels, since then, has severely impacted

2008-09

(OMCs) on selling regulated fuels below their market

Petrol prices

2007-08

With the losses incurred by oil marketing companies

2006-07

Opinion

International prices

Source: CRISIL Research

Source: Industry

LPG prices

record-high losses of ~Rs 10 per litre on diesel, ~Rs 27

(Rs/cylinder)
700

per litre on kerosene, and ~Rs 270 per cylinder on LPG.

600

This was largely on account of inadequate revision of

500

domestic

in

400

international prices. As a result, under-recoveries have

300

from Rs 782 billion in 2010-11.

200

Domestic prices (before taxes)

2011-12

increased by 77 per cent in 2011-12 to Rs 1,385 billion

2010-11

increase

2009-10

sharp

2008-09

2007-08

despite

2005-06

prices,

2006-07

In 2011-12, oil marketing companies (OMCs) incurred

International prices

Source: CRISIL Research

CRISIL CRB Customised Research Bulletin

Comparison of running cost

Diesel prices
(Rs/kl)

(Rs/km)
5.0

41,000
36,000
31,000
26,000
21,000
16,000
11,000
6,000

4.0

2.4

3.0
1.3

2.0

Diesel car

Source: CRISIL Research

Source: Industry, CRISIL Research

The increase in under-recoveries was also due to

Product-wise trend of under-recoveries

40%

7-8 years , which is lucrative enough for buyers to opt

20%

IRU D GLHVHO FDU WKHUHE\ LQFUHDVLQJ WKH IXHOV

0%

consumption. Consequently, proportion of diesel cars in

total car sales has increased to 38 per cent in 2011-12
vis--vis 20 per cent in 2005-06. Hence, a hike in prices
of regulated fuels, especially diesel, which accounts for
40

per

cent

of

the

overall

petroleum

product

consumption and ~60 per cent of under-recoveries, is

essential and inevitable given the crippling underrecoveries of OMCs and a fast deteriorating fiscal
situation.

44%

51%
38%

36%

36%

26%

Petrol

20%
46%

22%

25%
20%

Domestic LPG

27%

28%
31%
25%

17%

PDS Kerosene

59%

20%
22%

2011-12

-vis diesel car has gone up by ~85 per cent in the last

38%

2005-06

The difference between running cost for a petrol car vis-

60%

32%

2009-10

80%

2008-09

prices as compared to other alternate fuels like petrol.

100%

2007-08

by private car owners due to significant difference in

2006-07

increased consumption of regulated fuels (like diesel)

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2010-11

2011-12

Petrol car

International prices

2010-11

Domestic prices (before taxes)

2009-10

2008-09

2007-08

2006-07

2005-06

1.0

Diesel

Source: Industry

Increase in under-recoveries severely straining

profitability, liquidity of OMCs
Losses arising from under-recoveries are typically
shared by the government, upstream oil companies
(ONGC, OIL India and GAIL) and OMCs (IOCL, BPCL
and HPCL) according to a proportion determined by the
government at the end of every year. Until 2010-11,
OMCs were able to bear some part of the underrecoveries as they were earning adequate profits from
the refining business. However, in 2011-12, when the
under-UHFRYHULHV VKRW XS VLJQLILFDQWO\ 20&V GLGQW
share the burden. All of it was shared between the
government and the upstream companies. This was

because the weak refining profits coupled with rising

Trend in consolidated gearing of OMCs

interest costs on account of higher working capital

(times)

borrowings led to a situation where OMCs were not

1.90

able to share any burden.

1.70

1.50
1.30

Subsidy sharing formula

20%

49%

56%

52%

40%

0.70

0.50

60%

Mar-12

39%

Mar-11

68%
46%

31%

0.90

Mar-10

40%

9%

Mar-09

33%

12%

Mar-08

60%

42%

32%

Mar-07

80%

21%

Mar-06

10%

1.10

Mar-05

100%

Source: Industry

Government

Upstream

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

0%

Downstream

Note: Figures on the top of the bar indicate total under recoveries in Rs billion
Source: MOPNG

(YHQWKRXJKWKH20&VGLGQWVKDUHDQ\XQGHU-recovery
burden in 2011-12, the absence of a fixed annual
sharing mechanism for under-recoveries and the
uncertain timing of cash payouts by the government,
have adversely affected their profitability and liquidity.
7KH 20&V OLTXLGLW\ SRVLWLRQ KDV ZRUVHQHG RYHU WKH
years as clearly indicated by their rising gearing levels.
The debt-equity ratio of these companies has almost
tripled from 0.6 times in March 2005 to 1.7 times in
March 2012.

As a result, their interest costs have also gone up. Over

the last one year itself, the interest costs have more
than doubled to Rs 105 billion in 2011-12 from Rs 51
billion in 2010-11. Consequently, their profits dropped to
Rs 62 billion in 2011-12 from Rs 105 billion in 2010-11.

Rising
under-recoveries
JRYHUQPHQWVILVFal position

worsens

Rising under-recoveries is not only hurting the OMCs

EXW DOVR DGYHUVHO\ LPSDFWLQJ WKH JRYHUQPHQWV
finances. In 2011-12, oil subsidies constituted 32 per
FHQW RI WKH JRYHUQPHQWV WRWDO VXEVLG\ EXUGHQ
amounting to Rs 835 billion. Out of the total
JRYHUQPHQWVVKDUHLWKDVDOUHDG\SURYLGHGIRU5V
billion in 2011-12 and the balance Rs 385 billion was to
be paid in 2012-13. However, for 2012-13, the
government has made an overall provision of merely Rs
436 billion towards oil subsidies. Of this, more than 80
per cent will be exhausted towards payment of the
balance subsidy of 2011-12. If the prices of regulated
fuels are not revised upwards, the under-recoveries will
continue to remain high in 2012-13. Consequently, the
share of oil subsidies in the fiscal deficit, which has
already increased to 27 per cent in 2011-12 from 11 per
cent in 2009-10, will remain high in 2012-13 as well.
The government will be left with no option but to borrow
additional funds to compensate OMCs during the year,

CRISIL CRB Customised Research Bulletin

thereE\ DGYHUVHO\ LPSDFWLQJ WKH JRYHUQPHQWV ILVFDO

international prices. The alignment of regulated fuel

position, assuming other factors remain constant. This,

prices with international prices may affect domestic fuel

in turn, could exert further upward pressure on interest

inflation in the short term, but in the long term, the move

UDWHVDQGZLOODOVROLPLWWKHJRYHUQPHQWVDELOLW\WRIXQG

ZRXOGKHOSHDVHWKHJRYHUQPHQWVVXEVLG\ EXUGHQDQG

critical social and infrastructure projects.

reduce wasteful consumption of regulated fuels like

diesel.

Alignment
of
domestic
prices
with
international prices critical for reigning in
VXEVLGLHV DQG VWUHQJWKHQLQJ ,QGLDV HQHUJ\
security
Given the seriousness of the problem, it is absolutely
crucial that prices of regulated fuels be raised by at
least 10-15 per cent immediately and gradually linked to

In addition, it will also help the OMCs by

reducing their dependence on the government for

reimbursement of under-recoveries and give them
enough flexibility to undertake capital expenditure and
make acquisitions. This, in turn, would help strengthen
,QGLDVHQHUJ\VHFXULW\

Indian Economy

Economic Overview June 2012

High Threat
IIndustrial production grow th

Feb-12

Jun-12
Jun-12

Oct-11

Jun-11

Oct-10

Feb-11

Jun-10

Jun-12

Oct-11

Feb-12

Jun-11

Oct-10

WPI

Primay
Fuel
Manufacturing

CPI-IW

Interest rates

Credit grow th
25
20

FDI+ECBs

Imports

Net FII flows

15

10 Yr

Oct-11

Jun-11

Feb-11

Oct-10

Jun-12

Feb-12

Oct-11

Jun-11

Oct-10

Feb-11
1 Yr

Jun-10

10

Jun-10

Jun-12

Feb-12

Oct-11

Jun-11

Feb-11

Oct-10

-5

Feb-11

-15

Jun-10

-2

May-12

Jan-12

10

Jun-10

-40

May-12

Jan-12

0
Sep-11

May-11

10

Jan-11

80

Sep-10

Foreign inflow (US$ bn)

40

May-10

25

Mfg

Trade grow th

Exports

Sectoral inflation

Feb-12

Avg Rs per US$

Sep-11

Jun-12

Feb-12

Oct-11

Jun-11

Feb-11

Jun-10

40

Oct-10

45

Inflation
18

May-11

50

18
14
10
6
2
-2
-6

Jan-11

55

Sep-10

60

May-10

Currency

Medium Threat

Non Food Credit

Macroeconomic Indicators - Forecasts

2011-12 2012-13
Grow th

Rationale
GDP in 2012-13 is expected to grow by 6.5 per cent. An increased Euro zone
uncertainity, continued domestic policy logjam and low er investment demand
w ill impact grow th adversely. Moderation in export demand w ill low er grow th in
IT/ITES services and low private consumption w ill impact grow th of hotels,
trade and transport services, keeping the overall services sector grow th
muted. Industrial grow th w ill also remain w eak due to w eak investment demand
and limited scope for reduction in interest rates. Going forw ard, sub-normal
monsoons and a further w orsening of the Eurozone situation may pose
dow nside risks to our grow th forecast.

Agriculture

2.5*

3.0

Industry

3.9*

5.0

Services

9.4*

8.1

Total

6.9*

6.5

Inflation

WPI - Average

9.2

7.0

WPI inflation forecast stands at 7.0 per cent . This takes into account a higherthan-anticipated increase in food inflation, and the impact of a w eak currency
on the imported content of inflation. The w eak rupee is offsetting the gains from
low er global crude oil and commodity prices and is keeping the cost of imported
items high. Though low er GDP grow th w ill reduce demand-side pressures on
inflation, other pressure points like decisions on revision of electricity prices
and revision in prices of diesel, kerosene, and LPG is likely to keep inflation
high.

Interest rate

10- year G-Sec

(year end)

8.5

8.0-8.2

Yield on benchmark 10 year G-sec is expected to settle around 8.0-8.2 per cent
by March-end 2013. We expect the Reserve Bank of India (RBI) to cut repo rate
by upto 50 basis points (bps) in the rest of the fiscal year in order to support
private consumption and invetsment grow th. Despite this easing, dow nside to
10-year G-sec yield is limited due to the large size of government borrow ings.

Exchange rate

Re/US $
(year end)

48

50.0

The rupee is projected to settle around 50 per US$ by March-end 2013 in the
base case scenario. In this scenario, w e have assumed (1) an easing of the
current account deficit due to moderation in global crude oil prices and (2)
higher foreign capital inflow s in 4QFY13. Both of these factors w ill help
currency appreciation from current levels. How ever, a further w orsening of
Eurozone crisis is not accounted for in this scneario.

Fiscal deficit

as a % of GDP

5.5

5.8

Slow er GDP grow th is expected to translate into low er grow th of government

revenue w hile subsidy burden w ill remain high. This w ill raise the fiscal deficit
to 5.8 per cent of GDP.

CRISIL CRB Customised Research Bulletin

Industry Overview

Crude oil

CRUDE OIL

Global oil production increased by 1.3 per cent in 2011

After a strong rebound in 2010, oil demand

growth slows down in 2011

In 2011, annual global oil production increased by 1.1

In 2011, global crude oil demand increased to 88 million

supply came from OPEC, with large increases in Saudi

barrel per day (mbpd) from 87.4 mbpd in 2010. The

Arabia (1.2 million barrels per day), the UAE, Kuwait

demand growth slowed down to a meager 0.7 per cent

and Iraq more than offsetting a loss of Libyan supply (-

after registering a growth of 3.3 per cent in 2010. This

1.2 million barrels per day). Output reached record

was mainly due to slowdown in global GDP growth rate

levels in Saudi Arabia, the UAE and Qatar. Non-OPEC

to 3.9 per cent in 2011 from 5.3 per cent in 2010.

output was broadly flat, with increases in the US,

mbpd or 1.3 per cent. Virtually , the entire incremental

Canada, Russia and Colombia offsetting continued

The consumption in Organisation for Economic Co-

declines in mature provinces such as the UK and

operation and Development (OECD) countries declined

Norway, as well as unexpected outages in a number of

by 1.2 per cent (600,000 barrels/day), the fifth decrease

other countries. The US (+285,000 barrels per day) had

in the past six years, reaching the lowest level since

the largest increase among non-OPEC producers for

1995. The major decline was witnessed in the US and

the third consecutive year. Driven by continued strong

Europe, where the consumption went down by more

growth in onshore production of shale liquids, US output

than 300,000 barrels per day each. In non-OECD

reached the highest level since 1998.

countries, consumption grew by 1.2 million barrels per

day, or 2.8 per cent. China again recorded the largest
increment to global consumption growth (505,000
barrels per day) followed by Russia (156,000 barrels

Dependence on OPEC for supply of crude oil

to remain stable at ~36 per cent over the next
few years

per day), India (140,000 barrel per day) and Saudi

Crude oil supply from OPEC increased to 35.8 mbpd in

Arabia (108,000 barrels per day)

2011 from 35 mbpd in 2006. Global dependence on

OPEC crude oil, which is currently at ~36 per cent, is
expected to remain stable over the next few years. This

Review of world oil demand

is due to incremental supply from new fields in non5.2%

5.4%

5.3%

4.5%
34

3.9%

35

37

38

41

39

42

2.8%
50

50

50

48

46

46

46

-0.6%
2005

2006
OECD

2007

2008

Non-OECD

2009

2010

OPEC countries to counter structural decline in their

5.0%

existing matured fields. In addition, many small and

4.0%

marginal fields in non-OPEC which were earlier

3.0%

considered unviable have now become viable at higher

2.0%

oil prices. Also, production of OPEC NGLs is expected

1.0%

to increase over the next five years.

0.0%
-1.0%

2011

World GDP growth (RHS)

Source: IMF, BP Statistics, CRISIL Research

6.0%

Crude oil demand and dependence on OPEC

2009

2011

World Oil demand (LHS)

Dependence on OPEC (RHS)

Mar-12

2007

Oct-11

2005

Geopolitical tensions in
MENA region

May-11

0%

Jul-10

5%

82

Dec-10

10%

84.7

Feb-10

85.0

15%

Apr-09

84.1

86.0

20%

Sep-09

83

88.0

Jun-08

86.4

84

87.4

Economic downturn

Nov-08

85

High
growth
period

Jan-08

25%

86

Renewed Euro debt crisis &

increase in production

Aug-07

87

30%

Oct-06

35%

140
130
120
110
100
90
80
70
60
50
40

Mar-07

88

($ per barrel)

May-06

40%

89
(million barrels per day)

Movement in crude oil prices

Source: CRISIL Research

Source: Industry, CRISIL Research

Crude oil prices declined sharply in May 2012

after remaining high for almost two years

The increase in crude oil production from OPEC

Since May 2012, crude oil prices have declined sharply

demand is expected to result pressure on oil prices

below $100 per barrel from $120.5 per barrel in April

going forward.

countries and North America coupled weak global

2012 mainly because of increased concerns over the

recovery of stressed European economies as well as
fears of slowdown in global crude oil demand. Also,
production from many countries, including the US, Iraq,
Libya, Saudi Arabia, etc, has increased significantly
since the last one year.
Prices have declined after remaining persistently high
for almost two years. Crude oil prices had increased to
$120 per barrel in April 2012 from $85 per barrel in April
2010. Prices surged mainly because crude oil demand
rebounded by 3.3 per cent in 2010 post the economic
downturn, and also due to intensifying of geo-political
tensions in various Middle Eastern & North African
(MENA) countries like Egypt, Libya, Syria and Sudan.
Additionally, in January 2012, the US and European
Union enforced sanctions against importing of crude oil
from Iran. In response, Iran threatened to block the Gulf
of Hormuz. This added a significant risk premium to
crude oil prices, which traded at around $120 per barrel
since February 2012.

CRISIL CRB Customised Research Bulletin

Industry Overview

Refining Marketing

Weak global refining capacity utilisation rates

led to decline in GRMs

Indian petroleum product demand increased

by 4.9 per cent in 2011-12 led by diesel

Global refinery capacity utilisation rates fell to 81.2 per

Despite high prices in 2011-12, the overall petroleum

cent in 2011 as global refining capacity increased by

product demand in India increased by 4.9 per cent to

1.5 per cent (1.4 mbpd) to 93 mbpd, whereas global

148 million tonnes. The increase was mainly led by

refinery throughput increased by a meager 0.5 per cent

increased consumption of regulated fuels like diesel

(375,000 barrels per day) to 75.6 mbpd. Throughput in

which grew by 7.6 per cent as it was at a significant

non-OECD countries accounted for the entire net

discount to alternate fuels like petrol. In contrast

increase, rising by 685,000 barrels per day. While

demand for petrol declined to 5.6 per cent as compared

OECD throughput declined by 310,000 b/d, US

to an average growth rate of 9.3 per cent between

throughput increased by 110,000 barrel per day and the

2006-07 and 2010-11. Going forward, we expect

US became a net exporter of refined products for the

demand to continue to grow at ~4 per cent

first time on record.

Domestic demand for petroleum products

2011

2010

2009

2008

2007

2006

2005

2004

2003

16
14
12
10
8
6
4
2
0

2002

2001

(per cent)
87
86
85
84
83
82
81
80
79
78
77

Refinery utilisation rates [LHS]

USGC Heavy Sour Coking GRMs [RHS]
Source: BP Statistics, CRISIL Research

138

141

4.9
121

3.2

129

3.6
2.3

1.4

Consumption of petroleum product

Source: PPAC, CRISIL Research

7
6
5
4
3
2
1
0

2011-12

GRMs vs Global refining capacity utilisation rates

134

2010-11

under pressure.

6.8

2009-10

cent over the next 3-4 years which will keep GRMs

6.7

(per cent)
148
8

113

2008-09

global refining utilization rates to remain at 81-82 per

160
140
120
100
80
60
40
20
0

2007-08

to decadal low levels. Going forward too, we expect

(mn tonnes)

2006-07

(GRMs) also declined in 2011 and have reached close

2005-06

With the fall in utilization rates, gross refining margins

Growth rate

Industry Overview

Natural Gas

Natural gas accounts for around 24 per cent of

primary energy consumption globally

share of LNG overall gas consumption has more than

Natural gas has a share of nearly 24 per cent of the

overall global primary energy consumption. Global
consumption rose from 2,454 bcm in 2001 to 3,223 bcm
in 2011 increasing at a compounded growth rate of 2.8
per cent. The US, Russia, Iran, Japan, Canada and the
UK are the key consumers, accounting for around 48
per cent of global consumption in 2011.
Composition of global natural gas consumption in
2011 (3,223 bcm)

doubled to 25 per cent over the same period.

Natural gas consumption in India
(mcm)
60,000

50,000
40,000

30,000
20,000
10,000

Others
52%

Japan
3%
Iran
5%

Russian
Federation
13%

2011-12

2010-11

2009-10

2008-09

2006-07

2005-06

2007-08

Canada
3%

2004-05

UK
3%

2003-04

2002-03

Source: PPAC

Price sensitive - Power and Fertiliser sectors,

contribute to the lion share of gas demand
US
21%

Domestic natural gas consumption is driven by the

fertilisers and power (including captive power) sectors,
which together accounted for around 77 per cent of
,QGLDV GRPHVWLF QDWXUDO JDV FRQVXPSWLRQ LQ -12.

Source: BP Statistics

Fertiliser sector is estimated to have accounted for 24

per cent

while power

(including captive power)

Limited domestic gas availability resulting in

increasing of share of LNG

accounted for around 53 per cent of total gas

Domestic gas production has remained stagnant at

pass on higher prices to end users, which constrains

around 90 mmscmd over 2005-09 due to no major

their ability to absorb high cost LNG.

consumption. Both these sectors have limited ability to

discoveries baring Reliance Industries discovery in the

discount to international prices, but due to limited

Limited domestic gas supply to constrain

demand growth

domestic gas availability reliance on LNG is increasing.

CRISIL Research expects demand for natural gas to

Further, during the second half of 2010-2011, following

grow at modest pace of 6-7 per cent CAGR over the

technical issues in the KG-D6 field, production has

near term. The production growth for low cost domestic

been on a downward trend. With declining production,

gas will be slower, particularly till 2014-15, on account

consumption of gas in 2011-12 remained at the

of limited ramp-up in domestic gas supplies. The

SUHYLRXV \HDUV OHYHO RI DURXQG  EFP UHVXOWLQJ LQ

consumers will have to increasingly rely on high cost

increased demand for high priced LNG. As a result, the

LNG for their incremental gas requirements. Hence,

KG-D6 basin. Domestic gas is priced at a significant

CRISIL CRB Customised Research Bulletin

demand growth for price sensitive sectors will be

constrained.

10

Customised Research Services

Oil and Gas

Coverage
Refining and
Marketing
Oil
Crude Oil

Motor spirit/ gasoline/ petrol

(MS)
Special boiling point spirits
(SBP)
Aviation turbine fuel (ATF)
Superior kerosene oil (SKO)

Oil and Gas

Sector

High speed diesel oil (HSD)

Light diesel oil (LDO)
Mineral turpentine oil (MTO)
Domestic Gas

Low sulphur heavy stock

(LSHS)

Gas
LNG

Carbon black feedstock

(CBFS)
Fuel Oil (FO)
LPG

Source: CRISIL Research

Oil and Gas

Assessment opportunity for LNG, CNG, PNG, LPG, etc.

Project feasibilities for bottling and distribution projects for LPG
Domestic supply forecasting and gas pricing
Investment trends and potential within the sector
Assessment of current pipeline infrastructure and future development
Domestic demand forecasting (end user segment-wise) (Power, Fertiliser, City Gas Distribution, Petrochemicals, Refinery,
Steel, etc.) and scenario analysis
Demand forecasting across regions/states
Assessments of Regulatory scenario and impact analysis
Player profitability analysis of players in mid-stream and down-stream segments

Refining & Marketing

Domestic demand forecasting (product-wise, end use segment-wise)

Domestic supply forecasting (refinery-wise, product-wise)
Impact of natural gas availability on different end use segments of petroleum products
Second-hand refinery economics
Regionwise marketing infrastructure of players and impact on marketing profitability

11

CRISIL CRB Customised Research Bulletin

Media Coverage

Wednesday , February 29, 2012

Tuesday, January 25, 2011

12

Friday , January 13, 2012

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