Monthly Oil News Commentary: August – September 2017
The largest opposition party in the Indian parliament said that the Centre was targeting the poorest of the poor by not reducing the taxes of LPG, kerosene and other petroleum products. According to the opposition, party prices of essential commodities were mounting due to the Centre’s apathy towards the poor. It said that the Centre had been providing “absurd reasons” such as ‘Hurricane Harvey and Irma’ for the increase of petrol and diesel prices. It said the central excise duty was increased 11 times in last three-and-a-half years, resulting in a cumulative rise of 133.47 percent on the price of petrol and 400.86 percent on diesel. It added that while the Consumer Price Index recorded an increase of 3.36 percent in August from a year earlier, the Wholesale Price Index rose to a four-month high to 3.24 percent compared to the year-ago period. According to the party, the Centre earned a windfall of around ₹ 2.5 trillion from the reduced price of crude oil.
Petrol and diesel prices have risen to their highest in three years in some cities in the country. Petrol price in Mumbai rose to its highest since August 2014 while diesel prices reached their peak since August 2014 in Kolkata and Chennai. In Delhi, Kolkata and Chennai, petrol prices are at their peak since January this year. Since July 1, petrol has climbed ₹ 5.18/litre in Mumbai, and diesel by ₹ 5.75/litre in Kolkata, and ₹ 5.71/litre in Chennai. Indian fuel retailers such as IOC, BPCL and HPCL started daily revision of prices of petrol and diesel from the middle of June, replacing the previous practice of fortnightly revision. Companies align local fuel prices with international rates and account for currency fluctuations in daily revision. Daily price changes are small and rarely make it to the headlines and go largely unnoticed. The recent price spike is expected to result in enormous gains for oil companies who while charging higher fuel prices also benefitted from lower crude rates as refinery shutdown in US cut demand for crude oil.
The government said the dynamic pricing regime would continue despite petrol prices going up by over ₹ 7/litre since the scheme was introduced pan-India from mid-June. The government said that dynamic pricing ensured that the benefit of even the smallest change in international oil prices can be passed down the line to the dealers and the end-users. Daily revision allows any fall in international oil rates to be passed on to consumers immediately rather than having to wait for 15 days as in the old system. What this means is that the government is no longer the mediator of oil price risk. The consumer is now at the mercy of global oil price volatility. Earlier, the state-run oil marketing companies used to review and revise retail fuel prices every fortnight on the basis of global crude oil prices, while the revision took effect from midnight. Dynamic fuel pricing is followed in many developed countries and India opted for it as a response to the recent volatility in global crude oil prices.
Indian petrol and diesel prices are much higher than what prevailed on the same day in Southeast Asian nations such as Malaysia and Indonesia and neighbouring countries like Pakistan, Nepal, Sri Lanka, Bhutan. Petrol price of ₹ 32.19/litre in Malaysia was less than half what prevailed in India. The diesel price in the Southeast Asian country at ₹ 31.59/litre was 44% lower compared to India. On the same day, petrol and diesel were available in Indonesia at prices that were 41% and 24% lower compared to India. The difference in auto fuel prices in India and countries within the subcontinent is also no less surprising. For example, on the same day petrol was available at ₹ 42.14/litre at fuel retail outlets in Pakistan, a price that is nearly 40% lower compared to India. Similarly, diesel was cheaper by 17% there. Petrol and diesel were selling at ₹ 53.47 and ₹ 39.69/litre in Sri Lanka, nearly 23% and 30% lower compared to India. In Nepal, retail prices of petrol and diesel were 12% and 19% lower than prevailing rates of auto fuels in India on the same day. In Bhutan, the selling price of petrol was nearly 10% lower compared to India, though difference in diesel price was less pronounced at 1%. While the retail price of petrol in Bangladesh was nearly at the same level as in India on that day, diesel price was 10% lower. Crude oil prices are currently ruling at less than half their 2012-13 and 2013-14 levels. Petrol and diesel prices ruled at ₹ 68.31-73.16/litre and ₹ 48.63-55.48/litre respectively in 2013-14 when the price of Indian crude basket averaged at the staggeringly high level of $105.52/bbl. However, retail fuel prices still remain at the same level, though the price of Indian crude basket has fallen to below $47.86/bbl since then. However, the reason for India’s high fuel prices is quite clear. Taxes constitute 45%-52% of the retail price of auto fuels, far higher than what would be the incidence if petrol and diesel are brought under introduced GST and the highest tax rate of 28% is levied. The UPA government had decontrolled petrol prices in June 2010. Diesel pricing was deregulated by the NDA government in October 2014. The economic logic was that market forces should determine fuel prices and not the government. But the NDA government has taken away benefits of low oil prices from consumers, acting against the very logic propounded for the deregulation of the retail auto fuel market.
Maharashtra, Gujarat and UP top the list of states earning the most from VAT on petroleum products, fresh data from the PPAC, the statistical arm of oil ministry shows. Maharashtra earned ₹ 231.6 billion in 2016-2017 followed by Gujarat at ₹ 159.58 billion and UP at ₹ 158.5 billion in the same year. Collection of VAT on petroleum products contributed to over 8 percent of the state governments’ total revenue receipts last financial year and collection of excise duty on petroleum products by the centre contributed to over 24 percent of the centre’s total revenue receipts in the same period, PPAC data indicated. The central government earned over ₹ 3.3 trillion in 2016-2017 from levy of central excise on petroleum products, a growth of 30 percent over ₹ 2.5 trillion earned in the previous fiscal year 2015-2016. Andhra Pradesh and Madhya Pradesh charge the highest VAT on petrol and diesel but fall behind in total VAT collections as compared to states like UP, Tamil Nadu, Karnataka and Rajasthan due to the higher quantum of POL sold in the latter states. Andhra Pradesh registered 6,584 tmt of POL products sale in 2016-2017 as compared to 15,926 tmt of POL products sold in the same period in UP. UP earned more than Andhra Pradesh despite its significantly lower VAT on POL products. Similarly, 6,962 tmt of POL products were sold in MP in 2016-2017 as compared to 13,285 tmt of POL products sold in the same period in TN. TN earning more than MP despite its lower VAT rate on POL products. The central government wants to bring oil products within the ambit of the GST in the interest of consumers.
Petroleum imports including crude oil shipments accounted for 21 percent ($80 billion) of India’s total value of imports at around $380 billion last financial year. Petroleum products accounted for 10 percent of the country’s total outbound shipments in 2016-17. Petrol and diesel prices has seen an upward trend OMCs implemented daily fuel revisions from 16 June this year.
India’s trade growth for August is likely to record slight moderation while inflation could be higher, thanks to the high crude oil prices observed last month, global financial services firm Morgan Stanley has said. The Indian basket of imported crude oils gained nearly $3.50 a barrel even as petrol prices in the country touched their highest levels since the new government assumed office three years ago, data showed. The Indian basket, comprising 73 percent sour-grade Dubai and Oman crudes, and the balance in sweet-grade Brent, averaged $53.28 per barrel in August, 27 percent up as compared to $41.91 per barrel in the same month last year.
The effective tax rates for subsidised kerosene and cooking gas rose up to 5% but fell on average 10-12% for most other oil products such as fuel oil, naphtha and lubricants under the freshly rolled out GST, an analysis by the oil ministry showed. For subsidised cooking gas used by households, the effective tax rates went up by 4-5% in several states including Delhi, Rajasthan, Tamil Nadu, UP, Bihar, West Bengal, Karnataka, Jammu and Kashmir, Goa and Chhattisgarh. In many other states, tax rates remained unchanged or rose just a bit. The GST rate is 5% on domestic cooking gas, and 18% on non-domestic gas. In most states, the effective tax rates have fallen 3-6% on non-domestic cooking gas although in some states the rates have marginally risen too. The effective tax rate on subsidised kerosene, which attracts 5% rate under GST, has swelled 3-5% in several states including Rajasthan, West Bengal, Uttarakhand, Odisha, Jharkhand and Haryana. For kerosene used for industrial purpose, which attracts 18% GST, the effective tax rate has shrunk 10-12% in most states. The effective tax rate has substantially fallen in most states for fuel oil, naphtha, light diesel oil, bitumen and lubricants, all of which attract 18% GST. On average, the decline in effective tax rates under GST in most states is 12-13% for fuel oil, naphtha and lubes. The fall varies between 10-20% for light diesel oil. In case of bitumen, the decline is mostly limited to less than 2%.
Subsidised cooking gas or LPG price was raised by over ₹ 7/cylinder, in line with the government’s decision to hike prices every month so that all subsidises are eliminated by this fiscal-end. A subsidised 14.2 kg LPG cylinder now costs ₹ 487.18 in Delhi as against ₹ 479.77 previously, according to IOC. The government had asked state-owned oil companies to raise subsidised LPG prices by ₹ 4/cylinder every month to eliminate all the subsidies by March next year. Rates were, however, raised by ₹ 2.31/cylinder on the previous due date on August 1 and the oil companies have effected a larger hike to equalise that. Since the implementation of the policy of monthly increases of ₹ 2 from July last year, subsidised LPG rates have gone up by over ₹ 68/cylinder. A 14.2 kg LPG cylinder was priced at ₹ 419.18 in June 2016. The government had previously asked IOC, BPCL and HPCL to raise rates of subsidised domestic LPG by ₹ 2 per 14.2 kg cylinder per month (excluding VAT). The quantum has now been doubled so as to bring down the subsidy to nil. Every household is entitled to 12 cylinders of 14.2 kg each at subsidised rates in a year. Any requirement beyond that is to be purchased at market price. The price of non-subsidised LPG or market-priced cooking gas has also been hiked by ₹ 73.5 to ₹ 597.50/cylinder. Rates were at the last revision cut by ₹ 40/cylinder. Simultaneously, the oil companies also raised prices of ATF by 4 percent, in keeping with rising global rates. ATF, or jet fuel, now costs ₹ 50,020/kilolitre, ₹ 1,910 more than ₹ 48,110 previously. This hike comes on the back of a 2.3 percent increase effected from August 1. Also, price of kerosene sold through PDS was hiked by about ₹0.25/litre. The government is adopting the same policy as in LPG for eliminating subsidy on kerosene. Since July 1 last year, rates have been hiked by ₹ 0.25/litre each fortnight. While Delhi has been declared a kerosene-free state, the fuel now costs ₹ 22.27/litre in Mumbai compared to ₹ 22/litre previously. Kerosene was on July 1, 2016, priced at ₹ 15.02/litre in Mumbai.
India’s Oil Minister said that fuel prices may come down by Diwali, which falls next month. The comments come amid criticism by opposition parties of a sharp rise in oil prices after the daily rate revision mechanism was introduced by the government recently.
The oil ministry is considering withdrawing from management committees of O&G fields, crucial bodies comprising nominees of the ministry, upstream regulator and the contractor, which oversee field development plans, annual work programme and budgets. The government hopes the proposed move would enhance ease of doing upstream business, but industry executives say that the presence of bureaucrats in these committees also has some benefits. The O&G fields auctioned under the previous policy are guided by a production-sharing contract, which provides for a management committee to ensure that the spending proposed and incurred by the operator of the field did not adversely affect the government’s revenue interests. There are about 250 production-sharing contracts operational in the country. For each contract, there’s a management committee comprising one nominee each from the oil ministry, the DGH, and all companies with stake in the field. DGH is the technical arm of the oil ministry and also acts as the upstream regulator.
India will offer larger areas with higher oil and natural gas reserves in the next auction of discovered fields later this year to curtail rising crude oil imports. India last year offered 67 small oil and gas fields holding about 625 million barrels of reserves in its first auction in six years allowing new entrants such as drug-makers and engineering companies to try their hand at boosting local production. The government also relaxed rules by allowing pricing freedom for oil and gas and a uniform policy for extraction of all hydrocarbons under a single license to encourage investments. Cairn Oil & Gas is producing more than a quarter of India’s crude oil output through the six blocks it operates in India. A 10 percent cut in oil imports by 2022, involves a lot of work ahead. A burgeoning appetite for energy has increased India’s import dependence to 82 percent last year from 76 percent five years ago. The IEA estimates India will be the fastest-growing oil consumer through 2040. The South Asian nation’s oil imports are estimated to touch $85 billion in the year to March 2018, according to India’s oil ministry. The government approved spending more than $452 million for appraising new areas with limited data. The DGH has created a data bank of the nation’s sedimentary basins and has launched an open-acreage licensing program, that gives explorers the freedom to carve out areas for exploration.
In a step that could further promote collaboration in the O&G sector between India and Myanmar, IOC’s Assam based subsidiary NRL dispatched the first consignment of HSD by land route, the oil ministry said. NRL has entered into an agreement with Parami Energy Group of Companies of Myanmar for the supply of diesel and collaboration in the retail petroleum sector of Myanmar. Under which NRL dispatched 30 mt of HSD through NH 37 across the Moreh custom check point on the Indian side and Tamu custom check point on the Myanmar side. OVL, GAIL (India) Ltd and Oil India Ltd have assets in the upstream sector as well as pipelines in Myanmar. In their effort to strengthen the oil and gas engagement, more Indian companies are planning to set up their offices in Myanmar soon. OVL has an office in Yangon.
IOC expects its largest and newest east coast Paradip refinery to outperform benchmark Singapore GRMs in the third quarter ending December. GRM is the difference between price of crude oil price and total value of petroleum products produced by the refinery. GRM is one of the parameters which indicate the physical performance of a refinery. Normalised GRM accounts for the gross refinery margin excluding the inventory gain or loss. Paradip refinery posted a capacity utilization of 88 percent for the first quarter ended June 2017 and is expected to run at 100 percent capacity from the second quarter of the current fiscal which is expected to boost the bottom line of IOC and improve the overall GRM of the company. Also, with Paradip being a coastal refinery, its inventory is expected to account for lower inventory losses. Paradip refinery has been configured to have a nelson complexity index of 12.2, second highest in the country. The nelson complexity index indicates the ability of a refinery to process heavy crudes. With Paradip refinery reaching average capacity utilization of 100 percent from second quarter, coupled with a high nelson index configuration, the refinery will be able to source cheaper heavy crudes leading to increased profitability, improved crack spread and higher GRM. The company also informed it plans to invest ₹ 200 billion as capex in the current financial year of which ₹ 45 billion will go for the refinery segment, ₹ 19 billion for pipeline, ₹ 60 billion for marketing and ₹ 30 billion towards Exploration and Production activities.
Rest of the World
Global use of petroleum and other liquid fuels will grow by nearly a fifth by 2040, driven by the transportation and industrial sectors, the US government said. Consumption is set to grow from 95 million bpd in 2015 to 104 million bpd in 2030 and 113 million bpd in 2040, according to the US EIA’s international energy outlook for 2017. That reference case would mean a 19 percent increase between 2015 to 2040. Countries outside of the OECD account for most of the increase, with demand rising by 1.3 percent per year, compared with a slight decrease for those in the group. OPEC countries will maintain or increase their combined market share of crude and lease condensate production, the EIA said.
Oil prices are expected to hold between $50 and $60/bbl as bloated global stocks fall after a deal between OPEC and other producers to trim output, BP said. The OPEC and other producers, including Russia, are reducing crude output by about 1.8 million bpd until next March in an attempt to support prices by cutting a glut of crude oil on world markets. OPEC top producer Saudi Arabia and several other countries have held talks in recent days on a possible extension of the deal. Russia expected the 2018 price of Brent crude to be in the range of $45 to $55/bbl.
CNOOC Ltd is searching for partners to develop oil prospects deep into the Gulf of Mexico as the Chinese giant extends its global reach. After bidding alone for exploration rights in Mexico’s first-ever deep-water auction in 2016, CNOOC is seeking deals known as farm-outs, a common type of joint venture where a stake in an oil prospect is exchanged for help with drilling and production. The company has yet to choose partners. China has sought a foothold in crude production everywhere from Africa to Canada as it looks to ensure supplies to its fast-growing economy. Several Latin American countries like Venezuela and Brazil have taken advantage of China’s thirst for crude to secure investments or loans that haven’t always been easy to obtain elsewhere. CNOOC is the first foreign producer to seek a farm-out in Mexico since the opening of the country’s oil industry to competition, following decades of a monopoly in the hands of state-owned producer Petroleos Mexicanos.
Independent oil refiners in China’s Shandong province are planning to form a consortium to integrate their production of oil products and petrochemicals, according to a planning document. Since late 2015, China has allowed 31 mostly privately owned oil refineries to import crude oil, the majority of them based in Shandong province. With a combined capacity to import about 2 million bpd, their demand has upset oil trading flows in Asia and in the wider global crude market. Shandong Dongming Petrochemical Group and Shandong Qingyuan Group Co, both independent, or teapot, refineries in the province, will be among the key investors of the proposed group, according to the document that Shandong provincial authorities approved on September 1. The group will have the name Shandong Refining & Chemical Group Co, according to the document. Most of China’s independent refiners are based in the eastern province of Shandong.
Chinese refineries newly allowed to import crude oil will be penalized for reselling crude oil or expanding capacities without approvals, according to the NDRC. Qualifications will be stripped and trade permits revoked for the refineries that recently were allowed to use or import crude oil if they are caught in these violations, the NDRC said. Experts said the policy to crackdown on these violations is not new but the government was reaffirming the penalties amid growing concerns that abuses are getting more widespread. China has since late 2015 allowed about 31 companies, mostly privately-run refineries, to import crude oil in an unprecedented liberalization of China’s oil market, the world’s second-largest after the United States.
Venezuela published the price of its oil and fuel in Chinese currency in what it called an effort to free the socialist-run country from the “tyranny of the dollar,” echoing a plan recently announced by the President. The Venezuelan government would shun the dollar after the US announced sanctions that blocked certain financial dealings with Venezuela on accusations that the ruling Socialist Party is undermining democracy. The global oil industry overwhelmingly uses the dollar for pricing of products.
Royal Dutch Shell is set to end a century of oil production in Iraq by withdrawing from two of the Arab state’s flagship fields to focus on more profitable gas development. Shell’s retreat highlights the challenges foreign operators face with low-margin oil contracts in Iraq, an OPEC member that sits on some of the world’s biggest oil reserves and wants to boost production after years of conflict hindered development. The Anglo-Dutch firm said it had agreed with Iraq’s oil ministry to relinquish operations at Majnoon field to the government after unfavorable changes to fiscal terms. Shell is also selling its 20 percent stake in West Qurna 1 oil field in the south of the country. The field is operated by Exxon Mobil. Shell produced almost 20 million barrels of oil from Iraq during 2016, which accounted for about 3.5 percent of the firm’s total oil output last year, according to Shell’s annual report. Foreign firms in Iraq have long urged Baghdad to revise oil production contract terms to encourage development of reserves that Iraq estimates at about 153 billion barrels, the fourth biggest in the OPEC.
War-ravaged South Sudan is considering scrapping state subsidies on oil because it hasn’t been able to pay civil servants for four months and diplomatic staff abroad are being evicted over unpaid rent. Ending the subsidies would free up desperately needed cash. The government expects to receive $820 million from oil this year. Out of that, $453 million will go to neighbouring Sudan as payment for using its infrastructure for export; $183 million on the oil subsidy; and $166 million is allocated to the budget, which has a gaping deficit. State-subsidized oil sells at 22 SSP per liter, but severe shortages mean many people buy it on the black market for 300 SSP per liter. The SSP trades at about 17.5 to the dollar on the black market and 17.68 at the central bank.
Saudi Arabia will supply full contracted volumes of crude oil to at least five north Asian term buyers in October, while a sixth regional refiner was notified of cuts to its October Arab Extra Light supplies. Saudi Arabia is likely taking advantage of the lower refinery run rates and ample crude inventories in the United States in the wake of Hurricane Harvey, to redirect the allocation cuts from Asia to the US. Saudi Arabia plans to cut crude oil allocations to its customers worldwide in October by 350,000 bpd. In comparison, Saudi Arabia pledged last month to cut its September crude oil worldwide allocations by 520,000 bpd. Iran will reach an oil production rate of 4.5 million bpd within five years. Iran has been producing around 3.8 million bpd in recent months. Iranian gas production will reach 1.3 BCM/day and production of gas condensate will reach 864,000 bpd in the next five years. The boost in oil production will come from an increase of 420,000 bpd from the West Karoun oil field and an additional 280,000 bps from oil fields in central and southern Iran as well as the Falat Ghare oil company. Oil exports are expected to reach up to 2.5 million bpd within five years.
France will stop granting new exploration permits next year as it seeks to end all oil and gas production by 2040, according to a draft bill presented at a cabinet meeting. The move would allow the government to turn down more than 40 exploration requests already made, while some existing permits may be extended to respect contracts. France pumped 6 million barrels of oil in 2015, covering just 1 percent of its demand. Oil and gas exploration and production on French soil generates as much as €300 million ($358 million) in annual revenue, and accounts for as many as 5,000 jobs, directly and indirectly. Existing production licenses wouldn’t be extended beyond 2040 under the proposed law. France will end the sale of gasoline- and diesel-powered vehicles by 2040.
Iraq’s proposal to change the way it prices crude oil in Asia faces resistance from refiners who fear that longer lead times between pricing and deliveries will expose them to more risk. Iraq’s state oil marketer SOMO surprised traders by seeking feedback on plans to switch its Basra crude benchmark in Asia to pricing based off the Dubai Mercantile Exchange from January 2018, dropping quotes based on assessments by oil pricing agency S&P Global Platts. The move would affect the price of about 2 million bpd of crude oil supplies to Asia, mainly shipped to India, China and South Korea. Some buyers were concerned that almost 80 percent of the crude used to price DME Oman futures goes to China, reflecting the economics and fundamentals of just one Asian buyer.
US shale production is set to rise for the 10th month in a row in October, the US government said, spurred by US oil prices rising above the $50 a barrel threshold. Output across seven shale plays is forecasted to rise by nearly 79,000 bpd to 6.1 million bpd, according to the US EIA’s monthly drilling productivity report. North Dakota’s Bakken output is set to rise by 7,900 bpd to 1.06 million bpd, the highest since May 2016. In Texas, Eagle Ford oil output is set to fall by 9,000 bpd to 1.27 million bpd, the first monthly decline since April, the EIA said. Permian production is forecast to rise by nearly 55,000 bpd to 2.6 million bpd, the highest level in records dating back to 2007.
LPG: liquefied petroleum gas, BCM: billion cubic meters, Indian Oil Corp, BPCL: Bharat Petroleum Corp Ltd, HPCL: Hindustan Petroleum Corp Ltd, GST: Goods and Services Tax, NDA: National Democratic Alliance, UP: Uttar Pradesh, VAT: Value Added Tax, PPAC: Petroleum Planning and Analysis Cell, POL: Petroleum, Oil and Lubricants, tmt: thousand metric tonnes, MP: Madhya Pradesh, TN: Tamil Nadu, OMCs: Oil Marketing Companies, ATF: aviation turbine fuel, O&G: Oil and Gas, DGH: Directorate General of Hydrocarbons, IEA: International Energy Agency, HSD: High Speed Diesel, NRL: Numaligarh Refinery Ltd, OVL: ONGC Videsh, OPEC: Organization of the Petroleum Exporting Countries, ONGC: Oil and Natural Gas Corp, GRM: gross refining margin, EIA: Energy Information Administration, OECD: Organisation for Economic Co-operation and Development, bbl: barrel, SSP : South Sudanese pounds, bpd: barrels per day, NDRC: National Development and Reform Commission
Courtesy: Energy News Monitor | Volume XIV; Issue 16