The third quarter of 2011-12 (FY12) was a shocking period for India's largest oil refiner, Reliance Industries (RIL). For the first time in its history, the gross refining margin (GRM) — the difference between value of petroleum products and cost of crude — of RIL fell below the Singapore complex refining margin. All efforts to protect the margins through hedging failed. The narrowing of the price difference between heavy and light crude hit its bottomline. In the fourth quarter (Q4), RIL did better, and managed a marginal recovery in GRMs, to $7.6 a barrel, compared to $6.8 a barrel in Q3. That's a premium of $0.40 a barrel over the Asian benchmark, the Singapore complex GRM, much better than the $1.1 a barrel discount in Q3 FY11. But even then, RIL managed an average GRM of just $8.60 in FY12, compared to $8.40 in FY11. But the business environment for refining companies continues to be tough the world over; blame weakness in demand and capacity additions globally. Even if some of Europe's mature refineries close, the spread between light and heavy crude remains under pressure. The increase in light crude supply from Libya and the North Sea, the reduction in Iranian exports thanks to sanctions on that country and the strength in fuel crack prices are driving the demand for heavy crude.Essar Oil, too, is struggling to protect its margins, which came down to $6.07 per barrel during Q3 of FY12 from $7.31 a barrel in the same period of FY11. Industry experts expect Essar's margin will also improve in the fourth quarter, but it won't be stellar (the fourth quarter financial results are due next month).Analysts predict that the complete recovery of GRMs would take six to nine months. But L.K. Gupta, managing director and chief executive officer of Essar Oil says a correction has already started. "This is an abnormal condition that will not last long," he adds.There are many reasons for a subdued second half of FY12 for refiners. The tsunami in Japan led to shutdown of its nuclear power plants, forcing the country to use fuel oil (the residue from petroleum distillation) for power production, creating unprecedented demand for fuel oil. But complex refineries like RIL produce less fuel oil, and more petrol and diesel. The price of heavy crude rose seemingly due to surge in the demand for fuel oil. Complex refiners like RIL and Essar Oil added auxiliary units to increase complexity for producing more high value petroleum products by refining cheaper heavy crudes like Arab Heavy and Mexican Maya, and reducing production of low-value, low-demand fuel oil for better yield.The increasing isolation of Iran on the global scene is also jacking up crude oil prices. FY12 began and ended with crude prices above $120 a barrel, but they were highly volatile in between. In October the price of Brent crude (light) went below $100. Average crude prices also increased by 31 per cent in the last financial year. Analysts at Macquarie Bank estimate that the festering tension in West Asia triggered by Iran's nuclear policy leads to a daily shortfall of 2.5 million barrels of crude.In Search Of Greater ComplexityThe complexity of RIL's two refineries at 11.3 in its first refinery and 14 in the new refinery — measured by the Nelson Index (the higher the number, the more complex the refinery) — in Jamnagar allows it to process heavy and sour crudes, which are cheaper compared to lighter crudes, and produce the same value products as from lighter crudes. Essar has almost doubled its complexity to 11.8 at its refinery in Vadinar in Gujarat. Now, the situation is not helpful for the complex refineries, says an analyst with a foreign bank. The issue wasn't that serious for public sector refiners. "Historically, the public sector refineries were less concerned about complexity and refining margins," says a senior executive with one of the PSU refineries. "But that is changing. Indian Oil Corporation's new refineries are coming up with higher complexities. Bharat Petroleum and Hindustan Petroleum are thinking of increasing the complexity of their existing units for processing heavier crude." The complexities of old PSU refineries are below 8.In the longer run, no refiner can survive without investing in complexity, says an official with RIL. "So everybody is running to add units for extracting maximum value products," he adds. IDFC analysts say that the configurations of refinery capacities being added globally means demand for heavy oil has grown disproportionately, reducing Arab heavy-light spreads and, therefore, impacting the premium players such as RIL and Essar, which enjoy premiums over Singapore complexity.break-page-breakRIL's GRM improved in the sequential quarters as petrol prices bounced back, while LPG and naphtha spreads improved. At the same time, however, IDFC analysts believe that while demand for diesel will remain strong across Asia, the rate of growth in demand will moderate in both India and China over the next 6-9 months as GDP growth rates moderate across the region.According to Goldman Sachs analysts, "While RIL's Q4 results were impacted by improving but still relatively low refining margins, we believe the cycle should improve in the second half of this calendar year, driven by benefits from the closures in US and Europe, delays in new projects and recovering oil demand."RIL refining earnings before interest and tax (EBIT) were marginally higher due to improved GRM and lower segment depreciation, at Rs 1,700 crore, despite lower throughput due to a maintenance shutdown at its SEZ refinery. Macquarie Capital evaluates that the efficiency initiatives during planned shutdown will add $0.25 a barrel to GRM.RIL's improved margins were led by a strong revival in gasoline and naphtha cracks. They were up $4.2 and $6.6 a barrel, respectively. However, diesel cracks, which have a higher share in RIL's slate vis-a-vis Singapore GRMs, declined $1.5 a barrel on the back of weak industrial demand, write Edelweiss analysts in their report.Way ForwardRIL is taking a balanced refining outlook, with capacity additions in Asia being offset by shutdowns of high-cost refineries. The company has implemented several initiatives during the planned shutdowns taken last year (will improve GRMs by $0.25 a barrel), including debottlenecking of secondary units, increased ability to process more crudes, and some work on the Crude Distillation Unit (CDU) which will improve the yields of high-value products. GRMs were impacted by higher LNG cost as well. So RIL has decided to implement the petcoke gasification plant with a capex of $4 billion. RIL estimates this plant will add about $3 a barrel to its refining margin by replacing the high-cost LNG with synthetic gas produced from petcoke.Petcoke, which costs less, will produce syn-gas that would be used to meet refining energy needs, and lead to savings on high-cost imported LNG and higher-value fuels currently used. The off-gas cracker project is still in the planning stage, and would be taken up once work commences on petcoke gasification. The project is expected to be completed in the first quarter of FY15. Credit Suisse thinks that the gasifiers will produce the equivalent of 20 mmscmd of natural gas; a little under half of which may be used to substitute LNG currently used at the refineries. The rest is likely to be used as (part) feedstock for and to power the proposed off-gas cracker.Similarly, Essar Oil is setting up a coal-based power plant for feeding its Vadinar refinery. According to Gupta, the captive power capacitywill increase the GRM by $1, which means Rs 750 crore to the bottom line.Kotak Institutional Equities Research estimates that refining margins of FY13, FY14 and FY15 for RIL would be $8.4 a barrel, $8.7 and $8.9, respectively. The reasons are: limited supply additions globally, announced and expected shutdowns of refineries and incremental oil demand of 2 million barrels per day in two years.Citibank has marginally lowered their FY13 estimation on GRM of RIL to $7.8 compared to $8 earlier. "We expect Asian refining demand-supply balance to be relatively stable in 2012-13 following large refinery closures. New supply from India in 2012 (~300 kbpd) will keep the Asian market well supplied," analysts with Citi say in a report.According to Bank of America Merrill Lynch Global Research, the factors in favour of GRM are: a healthy rise in demand for global oil in Q2-Q4 2012; recently closed refining capacity in US and Europe, with more closures likely. Also, incrementally, over 2 mbpd of OECD refining capacity is under review, and this should support refining margins against upcoming new capacity.There's another hope. Light-heavy spreads that fell to an average $2.6 a barrel have started recovering. Light-heavy crude differential has weakened further during the quarter and is likely to remain subdued in the medium-term, predict Deutsche Bank analysts.However, UBS's outlook on RIL's GRM remains weak for the next two quarters. This is primarily on the back of: narrowing spreads between the Arab heavy and light; Brent prices likely to sustain amidst ongoing Iran issue; ongoing weak spreads for RIL's product slate — especially diesel; and regional forecast factoring complex refining margin to decline from $8.2 a barrel in 2011 to $6.5 in 2012 and $6.0 in 2013. "We have lowered RIL's GRMs marginally by 2-3 per cent to $8 per barrel and $7.75 per barrel for FY13-14E respectively," according to UBS.It's a tightrope walk for the refiners for the next six months at least.nevin(dot)john(at)abp(dot)in(This story was published in Businessworld Issue Dated 07-05-2012)
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The deadlock over fuel supply pacts between Coal India and power companies is expected to end by the month-end as the issue is being considered at the highest levels of government, the Coal Ministry said on Wednesday."Coal India Ltd (CIL) has some apprehensions whether it can meet the stipulated requirements or not. It is but natural. Coal India is deliberating on the issue and its Board will meet soon," Coal Minister Sriprakash Jaiswal told reporters in New Delhi at a mining conference, organised by the Indian Chamber of Commerce."Yes, it should...," he said, when asked whether the long pending issue of signing fuel supply agreements will get resolved by month-end.Many power firms, including NTPC — the largest consumer of Coal India — have refused to sign the supply pacts as they are opposed to certain clauses like minimum assured supply and the penalty to be paid by the state-owned coal producer, in case it fails to meet the commitment.The issue has been lying unresolved for many months now and even the intervention of the Prime Minister's Office has not been able to break the logjam so far."One should take time in deciding important issues like this. We are considering it at the highest level, we need to know whether the requirements can be met or not," Jaiswal said.A few days ago, the state-owned coal producer had postponed its board meeting as it has not received the written communication from the PMO on the decisions taken in a meeting held last Friday to resolve the deadlock. The company Board is now likely to meet on July 17.The PMO meeting of last week is believed to have discussed the contentious clauses of the supply pact, including issue of minimum assured quantity and the penalty to be paid by the state-owned coal producer.It is also believed to have discussed the possibilities of supplying between 65 and 80% of the coal requirement of power companies as minimum assured quantity.While Coal India says that it can not guarantee more than 65 per cent of required coal as minimum assured supply, power producers have been pitching for keeping it at 80 per cent levels.The power firms are also opposed to the minimum penalty clause, which says that Coal India will not be liable to pay penalty for the first three years of the pact even if there is a shortfall in supply.According to the official data, only 27 power plants, of 48 in all, have so far signed the supply agreements with the state-owned coal giant. These include Adani's Mundra Power plant, Lanco's Anpara Power, Reliance Power's Rosa Power Project and CESC.(PTI)
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Turkmenistan hopes to conclude a long-awaited gas price deal with Pakistan and India during imminent talks on construction of an ambitious project to build a pipeline through Afghanistan, a government official said on Thursday.Turkmenistan, which holds more than 4 per cent of the world's natural gas reserves, expects within the next few months to host a new round of talks with participants in the U.S.-backed TAPI project to link Turkmen gas fields with India, the source said.The official's comments followed a letter from Indian Prime Minister Manmohan Singh, published by several state-run national newspapers on Thursday, hailing "great progress" since the signing of a preliminary agreement in December 2010.Singh's letter, published in Russian, was sent to mark the 20th anniversary of diplomatic relations between India and Turkmenistan, a former Soviet republic bordering Iran and the Caspian Sea which gained independence in 1991.The idea of the TAPI pipeline, an acronym formed from the initials of the four countries through which it would pass, was first raised in the mid-1990s but construction has yet to begin.The proposed 1,700-km (1,056-mile) pipeline could carry 1 trillion cubic metres of gas over a 30-year period, or 33 billion cubic metres a year.But the route, particularly the 735-km (450-mile) Afghan leg, presents significant security challenges and will require Pakistan and India to agree on volumes and price. Participants must also secure funding for the project.The preliminary agreement signed by the TAPI countries contained no specific provisions for security, finance, volumes or price. Turkmenistan's unflinching policy of selling gas at its own borders means Pakistan and India would need to settle transit fees with each other and Afghanistan."According to the preliminary agreement, discussions between the participating countries should take place before summer," the government source told Reuters, on condition of anonymity."Possibly, this could include the signing of a gas sales purchase agreement."BP data show Turkmenistan's natural gas reserves equal to those of Saudi Arabia and behind only Russia, Iran and Qatar. The Central Asian state supports the pipeline as part of its plans to diversify sales from Soviet-era master Russia.It aims to supply natural gas from its Galkynysh field, better known by its previous name, South Iolotan, to Pakistan and India. British auditor Gaffney, Cline & Associates has said the gas field is the world's second-largest.(Reuters)
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Standard & Poor's downgraded the outlook for India's Tata Power to 'negative' from 'stable' on 9 July, citing the company's limited ability to arrange funds for a 4000 megawatt project in Gujarat, after it breached a debt pact.The company's cash flow and financial risk profile could deteriorate over the next six to nine months and availability of funds to the company will be limited, the ratings agency said in a statement.Tata Power is losing money on the project, as a change in Indonesia's mineral export rules has pushed up the cost of coal for Indian buyers, who source 70 percent of their coal imports from the southeast Asian nation.Several projects, including the Mundra project in Gujarat, were originally bid for at a fixed tariff. Now Tata Power, Reliance Power and other power producers are lobbying the government to raise the prices at which they sell power to state-run distribution utilities."The factors which have led S&P to lower the outlook are already known. Still, a negative rating can make fresh funds expensive for Tata Power," said an analyst with a Mumbai-based brokerage, who asked not to be named.Tata Power's Chief Financial Officer told Reuters last month that it has put on hold all new projects based on imported coal and warned that it would be a challenge for the company to meet its target of a five-fold increase in generating capacity by 2017.Tata Power shares, valued at about $4.35 billion, closed 2.2 per cent down at Rs 101.35 on the National Stock Exchange.(Reuters)
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India has embarked on a low-carbon-inclusive growth trajectory through a slew of policy, institutional market creation measures. These include the National Action Plan on Climate Change, solar missions - national and states, energy efficiency mission, green SEZs, green transportation and renewable energy certificates. It has also set up expert groups on low carbon inclusive growth strategies. All these initiatives would require a humongous amount of financing and a number of estimates have been made for that, such as the one by Mckinsey which talks of an order of magnitude of $1 trillion in incremental capital required by 2030. Just for renewable /clean energy, investment requirement at a mandatory 10 per cent level will be $20 billion in the next five years (2012-2017).The estimates are staggering, but there is less clarity on how such green investment needs would be met. India is fast emerging as preferred destination for clean energy/low carbon investments in terms of industry-attractiveness driven favorable natural endowments for solar, wind, biomass and small hydro projects and there is a huge potential for energy efficiency. The E&Y Renewable Energy Country Attractiveness index places India among the top 5 destinations for renewable energy investments. There are some questions around how this investment potential could be realized. How can we generate funds — both domestic and international — to finance such investments? More specifically, there is need for complementing investor interest with adequate availability of debt financing. How can we use the existing financial intermediation systems to address these new kinds of investments? How could public finance be possibly directed to leverage increased commercial financing?Indian commercial banks do not have a good track record of commercially financing projects/ventures which are understood to be "new" and therefore,unproven and capital markets is also out of access for heightened risk perception of rating agencies that prefer to play safe, thereby constraining credit to desirable sectors rather than enabling credit. Generically applicable to most infrastructure project finance, there is a pronounced credit market failure for ‘cleantech' projects. These projects rarely get financing from commercial banks without additional outside collateral. It is important to understand that India's growth story would not be driven by the top few hundred business groups (which is where most of the institutional credit flows) but by thousands of small and medium business enterprises which are emerging on the horizon every year and most of clean energy/technology enterprises usually start off small to medium scale. Cleantech industry is emerging as one of the most promising emerging businesses in India. But these businesses have a serious problem with "access to finance" given the small to medium scale of operations, decentralized nature of business models, relatively lower asset intensity and cash flows which are often partly driven by monetization of savings and carbon offsets such as Renewable Energy Certificates (REC) and Perform Achieve and Trade(PAT) mechanisms. These cleantech enterprises which are emerging on the horizon have a wide range of business models ranging from grid connected renewable energy power projects and off-grid distributed generations to energy service and energy saving companies which do not lend themselves to conventional collateral based bank financing.In order to realize India's cleantech potential, it is imperative that we create private and public financial institutions /banks focused on "Cleantech" and "Low Carbon" projects and enterprises and also garner additional public finance for the same with focused financial intermediation interventions. We need to focus on generating additional resources for low carbon/cleantech financing and create/allow focused financial intermediaries to develop capabilities for financing cleantech investments. Some possible initiatives could include creating a well-capitalized clean/green financing apex institution or restructuring an existing one, providing an enabling regulatory framework for private sector clean tech NBFCs (as sub set of the existing infra-NBFCs), evolving risk sharing instruments/mechanisms to support commercial bank financing and developing domestic carbon offsets market. (The author is President & CEO, Financial Advisory Division, Feedback Infrastructure Services. The views expressed here are personal)
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In a bid to simplify the process of tariff collection, the Uttar Pradesh Power Corporation Limited (UPPCL) has introduced a system of online payment of electricity bills in the state.Consumers will be able to pay their bills through debit and credit cards and online banking by logging into the website www.uppclonline.com specially designed for the purpose."The corporation has developed website www.uppclonline.com on which consumers could register themselves by entering their account number and bill number to pay their bills," Corporation Chairman Avnish Awasthi said.He however, said that at present only Punjab National Bank is linked for the internet banking option and process is on to add other banks too.In first phase, this facility will be available in the cities of Lucknow, Varanasi, Aligarh and Meerut and then will be extended later, he said.(PTI)
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The government on Tuesday said it has agreed in-principle to deregulate diesel prices, but is not considering similar proposal for the cooking gas."Government has, in principle, agreed to make the prices of diesel market determined," Minister of State for Finance Namo Narain Meena said in a written reply to the Rajya Sabha.Opposition Bharatiya Janata Party (BJP) attacked the government for its in-principle decision to decontrol diesel prices even as Finance Minister Pranab Mukherjee said the move was decided in June last year but refused to specify whether it is being implemented."They (government) are saying that they are doing it in-principle and they will modulate it to the needs of the people. But this means that they are going to increase diesel prices and the diesel shock is coming in few days from now," BJP spokesman Prakash Javadekar told reporters."What Kaushik Basu (PM's Economic Adviser) was saying and has indicated is now confirmed by government in its written reply also."...And we oppose such a move because diesel is a basic fuel for all types of transport and that will have a cascading effect on price rise," he said outside Parliament House.When asked about the move, Mukherjee said the decision was taken in June last year. "That decision was taken in June, 2011," he told reporters outside Parliament House.While petrol prices are market-linked, the government fixes the rates of LPG, kerosene and diesel, which results in a large budgetary expenditure on subsidies."There is no proposal at present to fully deregulate cooking gas price," Meena said.He said the government continues to fix the price of diesel in order to shield the common man from the impact of rising crude oil prices and the resultant inflation."In order to insulate the common man from the impact of rise in international oil prices and the domestic inflationary conditions, the government continues to modulate the retail selling price of diesel," Meena added.Finance Minister Pranab Mukherjee had vowed to raise fuel prices as soon as possible to tackle a rising subsidy burden and large deficits, but the move is politically fraught for the weak coalition government, already under fire over high inflation.Diesel prices were last raised in July and the government has still not fulfilled a promise to fully liberalize the market. It was expected to raise prices earlier this year.India imports about 80 per cent of its crude oil needs. Rising global prices increases its import bill and widens the trade and current account deficits.Crude Price RisingGlobal crude oil prices have surged since the beginning of 2012 on account of geo-political concerns in the Middle East and abundant global liquidity. The price of Brent crude rose to $120 a barrel in mid-April from $111 in January.For the current fiscal, the government has made a provision of Rs 43,580 crore for oil subsidies, of which Rs 40,000 crore has been earmarked as compensation to oil marketing companies (OMCs) for selling petroleum products at lower than market rates.During the 2011-12 fiscal, the government has paid Rs 65,000 crore to OMCs on account of under-recoveries, of which Rs 20,000 crore alone was for the January-March quarter.High subsidies are putting pressure on the country's fiscal deficit, which touched 5.9 per cent of GDP last fiscal and is pegged at 5.1 per cent in 2012-13. India imports about 80 per cent of its crude oil requirement.The government targets to bring down the subsidy bill to below 2 per cent of GDP this fiscal and 1.75 per cent in the subsequent years.Refiners Threatened To Hike PricesIt may be remembered State-run fuel retailers have threatened to raise petrol prices sharply if the government does not compensate them for revenue losses on retail sales, Indian Oil Corp said on Tuesday in a statement.It said the government should 'temporarily' consider petrol as a regulated commodity on a par with other subsidised fuels -- diesel, cooking gas and kerosene -- and provide cash compensation for retail sales or reduce factory gate tax on the fuel to the extent of revenue losses.IOC said state-run refiners cannot sustain the current scenario where they import crude oil at $121.29 per barrel and sell at $109.03 per barrel."Continuation of such pricing will only impede the ability of the Company to import crude oil and may affect product supply-demand balance," IOC said in the statement. It added the alternative was to "increase the price of petrol by Rs.8.04 per litre (excluding State levies) with immediate effect."The companies previously raised petrol prices on December 1.Earlier, a senior government source had told Reuters that retail prices of subsidised fuels, including diesel, will be raised once Parliament approves the finance bill for the current fiscal year.Parliament is expected to consider the finance bill on May 7 and approve it a couple of days after that."The government's credibility on fiscal consolidation is at stake. After crude prices remaining over $120 a barrel, hike in oil (fuel) prices is certain," the source, who did not wish to be named because of the sensitivity of the issue, told Reuters."We cannot do without it. Once the finance bill is approved, oil prices including diesel would be raised," he said.In theory, India allows state fuel retailers to fix petrol prices to market rates but continues to cap prices of other fuels at a lower rate to rein in inflation and protect the poor.However, the state fuel retailers - Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp - have not raised prices of petrol since December in line with global trends due to an unofficial dictat from the government.Any price rise will help curb rampant diesel use, which has increased as the market-driven price of alternatives like fuel oil have jumped. Diesel now accounts for a third of local fuel use.The source indicated petrol prices could be raised around the same time as diesel.Softening inflation, currently at about 7 percent, also strengthens a case for a hike in fuel prices.
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The Asian Development Bank said on Tuesday it will lend Rs 542.81 crore to Reliance Power Ltd, which is controlled by billionaire Anil Ambani, to fund a solar power project in Rajasthan.The 100 megawatt plant will be located near the village of Dhursar in the Jaisalmer district of the northwest Indian state.(Reuters)
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