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Sizzling oil prices burning a hole in your pocket, but refiners are making a killing

While state-run refiners have recorded higher-than-usual margins in 2021-22, the margins are more for private players as they are the biggest beneficiaries of cheap Russian crude.

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New Delhi: Global crude prices have wreaked havoc on budgets of Indian consumers, oil marketing companies and even the government.

While the consumers are paying through their nose for the sizzling pump prices of petrol and diesel, the government took a hit on its revenues by cutting excise duty to give some relief to the people. Oil marketing companies, too, are bearing huge losses by keeping the retail prices suppressed.

But in all this gloom, the refinery business seems to have profited from high crude prices. Oil companies, both public sector and private, that refine crude into finished products such as petrol, diesel and jet fuel have reaped record margins.

Even though crude prices have been on an upswing since last December, the steep increase in prices was witnessed after Russia’s invasion of Ukraine late February, which led to a squeeze in global supply. Since then, the global crude prices have sustained at over $100 a barrel.

Although oil refiners find it difficult to pass through the entire increase to the companies in the retailing business when global prices of the commodity rise, various refineries have this time — because of the war — faced shutdowns and sanctions on their refining capacity, which has led to soaring of the refining margins.

The lockdowns in China have also contributed to the shortages of refined products, further leading to a surge in margins.

For Indian private refiners, it is a one-time opportunity as they are able to procure a significant portion of their imports from Russia, which is selling its crude at discounted rates. Public refiners, however, find it hard to aggressively buy Russian crude as they procure their crude requirements under annual term supply deals — which means they are bound by fixed contracts — although there is some flexibility.

While the price of the Indian crude oil basket on 23 June was $109.10 per barrel, it has fallen in the last few days after concerns of a likely recession as central banks globally tightened interest rates to control inflation.

State-run refiners like Indian Oil Corporation (IOC), Mangalore Refinery & Petrochemicals (MRPL), HPCL-Mittal Energy’s Bathinda Refinery (HMEL), Bharat Petroleum (BPCL), and Chennai Petroleum Corporation Limited (CPCL), have recorded higher-than-normal margins in 2021-22 as compared to the previous year.

The data for private refiners like Reliance Industries, Vedanta and Nayara Energy, is not available as these companies do not share their margins publicly. But as a thumb rule, margins of private refiners are up to twice that of public sector refiners.

The Gross Refining Margin (GRM) is the difference between the price of the crude that the companies procure and the price at which they sell the refined products. All refiners buy crude cheap and sell the refined products for as much as possible to make profits.

In 2020-21, data of 23 refineries in India with the Ministry of Petroleum and Natural Gas shows that IOC holds the majority share at 28 per cent, followed by Reliance at 27-28 per cent, BPCL at 11 per cent, HPCL close to 6.4 per cent, and the rest around the same share.


Also Read: Lured by discounts, India in talks to double down on oil imports from Russia’s Rosneft 


Oil sector and its margins

The oil sector can be divided into two major streams — upstream and downstream. Upstream companies are primarily those into exploration and production of oil and gas. They extract oil from the wells and sell it to the refiners. Downstream companies convert raw crude into finished products.

With the oil fields now either seeing declining production or reaching the end of productive lives in India, crude oil production has declined since 2014-15, falling to 29.69 million tonnes in 2021-22 — the lowest in 28 years — marking a decline of 7.8 per cent from 32.2 million tonnes in 1994-95.

Oil and Natural Gas Corporation (ONGC) accounts for the bulk or 65 per cent of the total domestic production. Currently, India imports almost 85 per cent of its oil demand.

Companies like ONGC and Oil India (OIL) heavily depend on their refining business to make profits. For instance, ONGC subsidiary MRPL, a major refiner, reported a net profit of Rs 2,958 crore in 2021-22, compared to a loss of Rs 765 crore in the previous year on the back of high refining margins.

On an average, state-run refiners witnessed GRMs of $7-8 per barrel in 2021-22, which is similar to what they faced in 2017-18, when the margins were at their historical highs.

In 2020-21, the average margins fell to $5.64 per barrel because of the pandemic and related issues. For IOC, the market leader, the margins were close to $11.25 per barrel in 2021-22, compared to $5.64 in the previous year. These margins change each month depending on the crude mix that these entities are able to procure.

Standalone refineries such as CPCL and MRPL have been major gainers of the spike in crude prices. But the ones that do both refining and marketing — like HPCL, IOC, and BPCL — have suffered since their refining gains have mainly been used to offset losses on the marketing margins, as they are forced to sell at lower prices that may not necessarily be remunerative.

Graphic by Ramandeep Kaur | ThePrint
Graphic by Ramandeep Kaur | ThePrint

Last week, the government said that production of petroleum products by oil refineries during May 2022 was 23.25 million tonnes, which is 16.65 per cent higher than the production of May 2021.


Also Read: 2 options & a win-win — high crude prices can spell windfall gains of Rs 80,000 cr+ for govt


Private refiners have an edge

Private refiners like Reliance Industries, Vedanta and Nayara Energy are at an advantage over the state-run refiners as most of their crude is used for export of the refined products. Moreover, they have also been the biggest beneficiaries of the cheaper Russian crude, which has resulted in record margins for them.

While their GRMs are not in public domain, experts believe that margins of private refiners are the same or up to two times those of state-run refiners. One of the reasons for this is that state-run refiners do their crude oil procurement through annual term supply deals.

In order to cater to export demands, private players have reportedly deferred their plant shutdowns, which generally take place around this time of the year for maintenance.

For state-run refiners, while the refining business has given a big boost because of the high crude prices, the marketing business has been a drag on their profitability. Not only are they buying crude at a higher cost, but they are also forced to sell the finished products at a cheaper rate to consumers because of unofficial price controls by the government.

PTI report earlier this month said that private fuel retailers like Reliance-BP and Nayara Energy have sought an intervention from the oil ministry as they are making losses by selling diesel at Rs 20-25 a litre below cost and petrol at Rs 14-18 per litre below cost, as a result of a price freeze despite soaring crude rates.


Also Read: Heatwave sends Indians into air-conditioned cars for relief, petrol sales soar


Outlook for refinery sector 

Experts who track the sector closely expect the GRMs of state-run refiners to fall slightly in 2022-23 compared to the previous year.

“In 2021-22, the margins hovered around $7-8 per barrel on average. There will be a slight slowdown going in 2022-23, so they will be around $6-7 per barrel,” CRISIL director–energy Sourav Mitra told ThePrint,

He said that the domestic growth outlook looks very stable. “Therefore, if you look at the demand for petroleum products, we believe it will witness a sustained growth of 5-7 per cent in FY23. This would be led by continuous growth in economic activity.”

Private refiners tend to have better margins because their refineries are bigger and can process a greater variety of fuel, Mitra said, adding that they also benefit from a more flexible crude procurement process.

He said that all major public sector oil companies will face potential losses in the quarter ending 30 June. “One is, while there are decent margins at the refinery level, there will be some significant losses in the marketing business. The other factor is LPG, as there will be a cut in their margins. They are staring at a loss of Rs 100-114 per 14.2 kg cylinder,” Mitra said.

“The crack-spreads (another term for GRMs) are definitely very high,” said Prashant Vasisht, vice-president and co-group head, ICRA. While unofficial price controls by the government are going to be bad for the profitability of the state-run refiners, Vasisht said, private refiners will make huge profits because their own retail network is quite small and most of their refinery produce is exported.

(Edited by Tony Rai)


Also Read: Buying Russian gas not funding war? Jaishankar slams Europe criticism of Delhi-Moscow oil trade


 

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