The Bull Run that private Indian petroleum companies noticed in their Gross Refining Margins (GRMs) while in latest quarter’s could not last long, thanks to capacities being included in West Asia & China, beside the US flooding the South American & European markets with refined products.
With China predicted to add about 1.5 million barrels a day capacity over 2015-18, & Saudi Arabia alone including a complete of 1.2 million barrels a day capacity over 3 new refineries between 2013 & 2019, they will have feedstock benefits and produce ultra-clean fuels destined for the European market.
“Though, the main risk to the export-oriented Indian refiners like Reliance & Essar currently comes from the US, which is sending improving amounts of product into South America & Europe. And, in a few years, will come from the new and extended refineries in West Asia,” said Vandana Hari, the Singapore-based Asia editorial director of Platts, the premier watchdog on energy issues.
Adding: “It does not bode well for the Gross Refining Margins in India. The US refiners have a significant cost advantage from the increasing flood of domestic tight oil production, currently affording them the best margins in the world currently. Cracking margins towards Light Louisiana Sweet on the US Gulf Coast has been up to 20 times higher than Dubai breaking margins in Singapore at times in previous months.”
RIL and Essar Oil have, over the past 2 to 3 quarters, seen their GRMs perform better (see chart). GRMs are the earnings from producing every barrel of crude oil. Essar Oil posted a 5-fold jump in net profit at Rs 1,008 cr, for the Q4 of 2013-2014.
“GRMs are subject to many factors. Opening of new capacities is predicted to put pressure on them. But the huge of this will depend on factors like demand growth in other markets like Europe, Southeast Asia, India, West Asia, etc, and how quickly these markets will absorb this additional capacity. However, closure of capacities in some markets such as Europe & Australia will help in consumption of incremental capacity,” said an Essar Oil spokesperson in an emailed response.
Experts said the refining margins could see a decrease of $1-2 a barrel. “India’s status as the refining hub could be challenged & crude finding strategies will have to be very agile, as even a $1-2 per barrel difference in crude cost effects the GRMs,” said a senior official from a professional services firm, who did not wish to be named.
“Yes, new refining capacities are a fact & our GRMs could be under pressure. We will have to look at getting cheaper crude & explore new trade markets,” said an official from RIL.
Reliance & Essar export to countries in Africa (Tanzania, Kenya, Mozambique, South Africa), to Fujairah & Saudi Arabia in West Asia, and to Singapore.
“Competition for the export markets is absolutely heating up, as the US continues to export increasing amounts of refined product & as the next tidal wave from the Middle East also begins aiming for the European and African markets in the coming years,” said Hari.
Reliance & Essar Oil currently export a little over a million barrels a day of refined products to markets overseas, based on Platts’ research of shipping data. Around 40-50 % of this is generally gas oil (normally used as a fuel oil). The 2nd biggest export is petrol, at 20-30 % of the total, observed by naphtha and aviation turbine fuel (jet fuel).
Essar exports some vacuum gas oil, and the occasional fuel oil cargo. Public sector refiners together export around 250,000 barrels a day. Naphtha and fuel oil account for the bulk of their exports, with gas oil, gasoline and jet fuel holding small shares.
Essar said it was continuously discovering new crude markets & crude varieties. It has prepared about 75 unique varieties of crude. “Expanding our crude basket to optimize returns is a continuous exercise,” it said.
To meet their fast-growing domestic need, China and India have for the past decade or so been increasing their refining capacity. A important difference among the two, however, is while Indian refiners are free to export surplus product, the Chinese government exercises strict control on any sales abroad, through a system of export licenses & quotas. This is one cause why the Indian refining sector has much more than 100 % capacity utilization; in China, the combined average refining rates for the 2 state-owned giants, Sinopec and Petro China, slipped to 83 % in 2013 from 86-87 % in 2007-2008.
Experts have informed that by 2015, China could be sitting on around 4 million barrels a day of excess refining capacity. This March, Sinopec Chairman Fu Chengyu warned if the country did not rein in like addition, utilization rates could slip to 67 % by 2020.
“In our estimate, some 2.5 million barrels a day of capacity will be added in the Middle East region by the turn of the century, with a complete of nearly 3.6 million barrels a day of the currently prepared projects seen likely coming to fruition in the coming years. This new wave of capacity is characterized by high-complexity mega-refineries,” said Hari.
Moreover, with a reducing premium of light sweet grades through heavy sour ones, US crude imports from Angola, Nigeria and Algeria are down 90 % in the past 4 years. The US brought in an average of 170,000 barrels a day from these 3 producers in January-April, in contrast with two million barrels a day in 2010, as per to Administration. “So, the Indian refiners can’t really bank upon a competitive edge from their cracking/coking capacities by maximizing heavy sour grades in their crude record to the level they could until about five years ago,” said Hari.
As for public sector refiners, as these largely cater to the domestic market, expected to continue growing, they would not be impacted by the transforming international scene unless India moves towards total market deregulation and Reliance & Essar make retail push within the country.
EPC World News Bureau
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