Monthly Oil News Commentary: December 2017
The price of the Indian basket of crude oil crashed from $113 per barrel in 2014 to $50 by January 2015. That was a bonanza for a government struggling to manage fiscal deficit and planning large social-sector spends. Oil prices tumbled to $29 by January 2016. Tightened by OPEC-led production cuts, oil is sensitive to all kinds of shocks. Prices have already touched the above-$65 mark. India’s import bill has gone up and so has the current account deficit. India is heavily dependent on imports for a large chunk of the crude oil that it consumes. In 2016-17, around 82.1 percent of the oil consumed in India, was imported. The rising oil prices in the global markets have caused the oil import bill to grow 15% in the second quarter ending September 2017 to $23.7 billion from $20.5 billion in the same period. A bigger oil import bill contributed to India’s current account deficit doubling to 1.2% of GDP or $7.2 billion in the September quarter from 0.6% of GDP or $3.5 billion in the same period in 2016. The current account deficit is expected to widen and end the fiscal year at 1.7-2.0% of GDP. The higher the imports, the bigger negative impact it has on the net rate. So with oil prices on the decline since 2014, it meant that the export metric in GDP calculation did not have as severe a negative hit. A 2014 report from Macquarie Capital Securities India said a $10 per barrel fall in oil prices would reduce India’s import bill and the current account deficit by $9.2 billion (0.43% of the then GDP). Due to falling oil prices India’s macro-economic indicators such as inflation, CAD, and trade balance improved. On the back of contraction in the trade deficit, the CAD came down to $22.1 billion, or 1.1 percent of GDP from $26.8 billion, or 1.3 percent of GDP, in 2014-15. In the last three years, despite the fall in global crude oil prices, the average Indian consumer of petroleum products has not been a beneficiary of it. Instead, increased excise duty and VAT on petrol and diesel has meant that despite the 56 percent fall in oil prices, the prices of petrol and diesel are at most 5 percent less than what they were in May 2014. Since June 2014, when international oil prices started declining, India has increased its excise duties from ₹ 15.5 per litre to ₹ 22.7 per litre as of December 2016 for branded petrol and from ₹ 5.8 per litre to ₹ 19.7 per litre for branded diesel. In contrast, the governments of most advanced countries simply passed on the benefits to consumers. With oil prices increasing, an unchanged excise duty would mean that the end consumer would have to pay even more, while a cut in excise duty would mean that petroleum companies will not be able to reap the benefits of the revival in the industry. The government thinks the oil prices are within the range where they cannot upset the fiscal math. India is one of the major OPEC consumers. 85 percent and 94 percent of India’s crude oil and gas imports respectively come from the OPEC countries.
ONGC’s partners in six pre-NELP blocks will have to share royalty, cess and other government charges with the state firm in proportion to their stakes, ending the current practice of ONGC alone bearing state levies for entire production, according to an oil ministry proposal that would soon be sent to the Cabinet. Once the proposal gets the Cabinet’s nod, Vedanta, Essar Oil, GSPC, Focus Energy, Hindustan Oil, and UK’s Hardy Oil would have to bear the burden of government charges in their respective fields where they partner with ONGC. The DGH had recently recommended ONGC exit the contract and let other partners share the government charges in proportion to their stakes in these six blocks. But the government didn’t accept the DGH proposal of removing ONGC from the blocks while taking its recommendation of allowing shared liability. These six blocks—CB/OS-2, CBON/2, CB-ON/3, CB-ON/7, CYOS90/1 (PY3), RJ-ON/6—are located mainly in Gujarat and Rajasthan. The prolific Barmer block (RJON-90/1) too had the same royalty and cess sharing rule earlier, but about six years back Vedanta, while purchasing the field from Cairn Energy, agreed to share with ONGC the liability of paying government charges. Vedanta is the operator of the field with 70% participating interest in the Barmer block. In other six pre-NELP blocks too, partners operate fields with ONGC owning only minority interest. These are called pre-NELP blocks because they were auctioned before the NELP, was launched, which mandated proportionate sharing of government charges by all contractors of a block. The oil ministry is now planning to extend the model adopted in Barmer to other six blocks.
IOC has said that the impact of the GST would be nearly ₹ 42 billion as it would not be able to claim ITC for automotive fuels that fall outside GST. ITC allows an entity to reduce the tax on outputs by the same amount already paid as tax on inputs.
State oil companies are aiming to augment their cooking gas distribution network by nearly a third in a little more than a year to cater to the rapidly expanding consumer base, mainly in rural areas. The past three years have witnessed a spectacular rise in access to cooking gas, putting strain on the current distribution network that hasn’t grown as fast. Between April 1, 2015, and September 30 this year, the number of active domestic cooking gas consumers has risen 44% to 214 million while the number of LPG distributors has expanded just a fifth to 19,200. The government is now pushing oil companies to accelerate the process of appointing new distributors and ensure they quickly become operational, the oil ministry said. The government has already issued 2,000 new licences. In addition, nearly 600 applicants have been selected through draw of lots in recent months while another 3,400 are slated to be picked for licences by March. After obtaining licence from an oil company, it usually takes about a year for an applicant to set up a cooking gas distribution agency, which involves obtaining many local regulatory clearances as well as readying an office and warehouse. New distributors are mainly coming up in regions that have been short on distributors or places which have seen a surge in new cooking gas consumers. States like Uttar Pradesh, Bihar, Bengal, Odisha and Maharashtra are set to have a big share of new distributors. The new LPG consumers are mostly located in remote and rural areas and from underprivileged background. Big distance to gas agencies become a deterrent for consumers to seek a refill when they run out of gas. In these regions, services by distributors are relatively weak and home delivery of cylinders mostly absent, making it difficult and expensive for consumers to use cooking gas. By staying close to consumers, state oil companies can hope to overcome these consumption hurdles and increase their sales volume.
After hiking cooking gas or LPG price by ₹ 76.5 in 19 installments in 17 months, national oil companies skipped the monthly revision in rates this month ahead of elections in Gujarat. State-owned IOC, BPCL and HPCL have been since July last year raising price of LPG on 1st of every month with a view to eliminating government subsidies on the fuel by 2018. The oil companies however skipped the hike this month. The price of subsidised LPG was last raised by ₹ 4.50 per cylinder on November 1 to ₹ 495.69, according to a price notification issued by state-owned firms. The government last year had asked state-run oil firms to raise prices every month to eliminate all the subsidies by March 2018. Since the implementation of the policy of monthly increases from July last year, subsidised LPG rates have gone up by ₹ 76.51 per cylinder. A 14.2 kg LPG cylinder was priced at ₹ 419.18 in June 2016. 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. Initially, the hike in LPG rate was ₹ 2 per month which was raised to ₹ 3 from May this year. The November 1 hike in the LPG price was the sixth since the May 30 order of the oil ministry to raise rates by ₹ 4 per cylinder every month. According to the PPAC of the oil ministry, there is a subsidy of ₹ 251.31 on every 14.2 kg subsidised LPG cylinder. Incidentally, the non-subsidised or market priced LPG rates were raised by ₹ 5 per cylinder to ₹ 747 a bottle on December 1. Non-subsidised LPG rates have moved in tandem with their cost since December 2013.
The Centre has sanctioned ₹ 75 billion for setting up a LPG bottling plant in Meghalaya which will help increase the clean fuel’s penetration, especially in the rural areas of the state. A Memorandum of Understanding (MoU) was inked between the oil ministry and the state government. Only 27 percent of the households in the state are linked with LPG connectivity which is much below the national average. Another 20 LPG distributors have now been added for Meghalaya. Meghalaya is the only state in the region which has no bottling plant. The new bottling plant will be constructed at an existing site located in Shillong itself.
India is set to surpass China as the biggest importer of LPG this month as a drive to replace wood and animal dung fires for cooking boosts consumption. Shipping data shows LPG shipments to India will reach 2.4 million tonnes in December, pushing it ahead of top importer China, on 2.3 million tonnes, for the first time. India’s LPG purchases have surged from just 1 million tonnes a month in early 2015 on the back of a government program to bring energy to millions of poor households relying on open fires. China, India and Japan together make up about 45 percent of global LPG purchases.
The government is planning to curb the imports of petroleum coke, which is believed to be a major polluter. Policy is being framed by various stakeholder ministries to put curbs on its imports. Petroleum coke does not cause pollution if it is used as fuel in certain industries such as cement production.
The government will be soon announcing a policy which calls for 15 percent blending of methanol in petrol to make it cheaper and also reduce pollution. Union Roads Minister Nitin Gadkari said methanol gets made from coal and costs only ₹ 22 per litre as against the prevailing price of about ₹ 80 per litre for petrol and added that China is making the coal byproduct for ₹ 17 per litre itself. Volvo has got a special engine to the financial capital which runs on methanol and using the locally available methanol. Total investment opportunity on ethanol alone if ₹ 1500 billion.
India’s refiners imported nearly half as much crude oil from Iran in November as the month before, ship tracking data showed, cutting purchases to a 21-month low in protest at Tehran’s decision to award a giant gas field to a Russian company. India, the world’s No. 3 crude oil consumer, received about 266,000 bpd of oil from Iran last month, a decline of 43 percent from October and 55 percent from a year ago. For the fiscal year to March 2018, Indian refiners have opted to order about a quarter less Iranian crude as Tehran decided to award development rights for its huge Farzad B gas field to Russian rivals instead of an Indian consortium that discovered the field. For April-November, the first eight months of this fiscal year, India shipped in 19 percent less Iranian oil at about 427,200 bpd, according to the data. But India’s oil imports from Iran will likely rise in December, as vessels holding about 4 million barrels of oil sailed from the Iranian ports in end-November and discharged cargoes in early December, the data showed.
All powerful GST Council will consider bringing electricity, petroleum products and some other items under the ambit of GST in future. If petroleum products are brought under the GST regime, Bihar Finance Minister Sushil Modi said, it will attract the highest tax slab prevalent at that time and states would be at liberty to levy cess on it in order to protect their revenues. Both states and the Centre earn 40 percent of their revenue from petroleum products at present. The subsidy on kerosene is likely to be phased out by 2020. While there could be an increase in the subsidy on LPG, analysts said there would not be much net increase. For the first six months of FY18, the cumulative subsidy claims on LPG and kerosene to the petroleum ministry stood at ₹ 90.79 billion. The kerosene subsidy is expected to decline by 40 percent from ₹ 7,595 billion in 2016-17 to ₹ 45 billion this financial year. According to the PPAC, kerosene consumption fell 33.7 percent for the period April to October from the same period last year. The annual fall in kerosene consumption over the past five years has been 8.1 percent. During 2016-17, it was 5.3 million tonnes, down from 6.8 mt in 2015-16. Over the years, LPG has been replacing kerosene as a fuel in rural India. During 2016-17, its consumption rose almost 10 percent from the year before, to 21.5 mt. Under PMUY, the government has so far added 31.9 million consumers, taking the India total to 251.1 mn as of November.
ONGC has torn into regulator DGH’s proposal for auctioning its discovered oil and gas fields, saying national oil companies can raise production if they are offered the same fiscal concessions as being extended to private companies. In para-wise comments on the DGH’s proposal to auction 60 percent stake in some producing oil and gas fields of ONGC and OIL, ONGC said national oil companies (NOCs) should also be allowed to participate in the auction. DGH has identified 15 discovered and producing fields – 11 of ONGC and four of OIL – with a cumulative in-place reserve of 791.2 million tonnes of crude oil and 333.46 billion cubic metres of gas, for auctioning on the plea that private involvement will raise output. DGH has in the policy proposed to auction the fields to the bidder who commits the maximum investment and pledges the largest share of its net revenue to the government.
HPCL has written to Airtel and sought a reversal of subsidy amounts that have been wrongfully credited to the Airtel Payment bank accounts. ₹ 1.67 billion have been wrongfully credited to the Airtel Payment Bank interface through 310000 transactions. The OMCs and the oil ministry have been getting a large number of complaints from consumers regarding non-credit of the LPG subsidy amounts into their earlier bank accounts for the past few weeks, HPCL said. In order to link LPG subsidy to earlier bank account, HPCL has written to Airtel Bank and requested that the subsidy amounts of these consumers be immediately either transferred back to the customer’s earlier bank account or to the respective OMC’s, HPCL said.
The National Green Tribunal dismissed the application of the LPG Virudha Samara Samithi against IOC’s LPG import terminal at Puthuvypeen. In the application, the leaders of the Samara Samithi, wanted the tribunal to direct IOC not to implement the project. However, the tribunal refused to countenance the demand. The tribunal found no substance in the allegation that the project posed safety threats to the residents of the area. The tribunal upheld Indian Oil’s contention that storage of LPG is a permitted activity at the seashore under the CRZ norms and hence the project does not in any way offend those norms. However, the tribunal has observed that the company may undertake sea protection measures to arrest erosion at the project site. With this, IOC has overcome all the legal hurdles to the project. Earlier, the tribunal had also dismissed the Samara Samithi’s appeal against the extension of environmental clearance to the project. Samara Samithi preferred an appeal before the apex court against this. The Supreme Court, however, dismissed the appeal even without admitting the same. Though there was no stay against developing the project, the Samara Samithi had been obstructing the development of the project for more than 10 months now. IOC is stated to have suffered a loss of ₹ 1 billion per day on account of the delay. The project was conceived to meet the increasing demand for LPG in the country. For now, the oil major is transporting LPG by road in bulk LPG carrier trucks from a similar facility at Mangaluru.
The plan by state-run OMCs to expand its liquefied petroleum gas dealership has gathered momentum with the addition of 2,156 dealers in the past two months across 23 states. The road map is to appoint 6,149 distributors across the country through an online selection process, which might see an investment of ₹ 20 billion in the industry. However some opposition-ruled states such as West Bengal were not co-operating with the online bidding process despite several letters from the ministry of petroleum and natural gas and the OMCs —IOC, HPCL and BPCL. Kolkata-based MSTC is conducting the online draw for the OMCs. This is for the first time that OMCs have changed the selection process from physical to the digital mode, with the introduction of online receipts of application, processing and online draw. This initiative of the ministry is part of promoting Digital India and to bring more transparency and accountability in the selection process. The goal is to increase LPG penetration to 95 percent by 2020 from 74 percent. There are around 19,000 agencies and the government wants to increase that to 27,000 by 2019. Among the new distributors, 3,000 would be for IOC, while BPCL and HPCL would have 1,500 each. Meanwhile, the Cabinet is likely to take a call next month on a proposal to increase the reach of PMUY schemes by adding 30 million connections. In the past two years, the BJP-led government was also successful in increasing LPG reach by more than 18 percent. To achieve this target, the Centre had launched the PMUY to provide 50 million LPG connections in three years to below-poverty-line families, with a government support of ₹ 1,600 a connection. So far, 32-million LPG users have been added under the scheme. Of the 6,149 distributors to be appointed, 1,028 would be in Uttar Pradesh, 986 in Bihar, 631 in West Bengal, 400 in Odisha, 300 in Jharkhand, 300 in Gujarat, 455 in Maharashtra, 355 in Madhya Pradesh and 298 in Tamil Nadu.
The government has withdrawn its decision to raise LPG prices by ₹ 4 per cylinder every month as the move was seen contrary to its Ujjwala scheme of providing free cooking gas connections to the poor. The government had previously ordered public sector oil marketing companies to raise domestic cooking gas or LPG prices by ₹ 4 per cylinder every month beginning June 2016 with a view to eliminating subsidies. The order was, however, withdrawn in October. IOC, BPCL and HPCL have not raised LPG prices from October.
India’s MRPL has made its first purchase of US crude oil, buying high-sulphur grade Southern Green Canyon through a buy tender for an early February delivery. MRPL bought a 1 million-barrel cargo for a February 1-10 delivery. Other Indian refiners – IOC, HPCL, BPCL and RIL – have also bought US oil in recent months. He declined to elaborate on the award of a separate MRPL buy tender for a million barrels of sour grades for January loading. MRPL bought Oman crude in the January tender. Both cargoes were sold by Royal Dutch Shell.
The oil ministry has set up a high-level committee to help frame fuel economy rules for tractors to moderate their diesel consumption that constitutes nearly 7.7 percent of India’s annual diesel use. The nine-member Steering Committee, headed by an additional secretary in the oil ministry, will submit an interim report in six months and a final one on the road map for development of the norms in 15 months. Tractors are used for different applications and the average fuel consumed for each application varies. On a rotavator, they may consume 7-8 litres per house while on a trailer, they may give an efficiency of 5-7 kilometre per litre with the load. On static application like alternator or straw reaper, it could be 6-7 litres per house. Diesel is the most consumed fuel in India, accounting for over 56 percent of 82 million tonnes of petroleum products used in April-October. As much as 57 percent of diesel is used by automobiles, with trucks guzzling 28.25 percent. Tractors, agri equipment and agri pumpsets use 13 percent diesel while cars and SUVs use 13.15 percent of the fuel.
India’s crude oil production in October remained flat at 3,038 tmt as compared to the corresponding month a year ago while natural gas output grew 1.95 percent to 2,755 mmscm in the same month. The country’s gross petroleum imports in value terms increased a whopping 27.5 percent to $8.8 billion in October as compared to the corresponding month a year ago. Cumulatively, gross petroleum import bill increased 19 percent to $52.3 billion in the first seven months of 2017-18 as compared to the corresponding period last year on the back of increased international crude oil prices. Oil production dipped marginally by 0.4 percent due to poor performance of fields under Production Sharing Contracts (PSC), data shows. The growth in natural gas production is attributed to healthy performance of acreages under government-owned ONGC, data released by PPAC indicated. On a cumulative basis, the country’s crude oil production in the first seven months of 2017-2018 remained almost flat at 21,063 tmt decreasing 0.24 percent as compared to the corresponding period a year ago. Cumulative natural gas production during the period grew 4 percent to 19,222 mmscm as compared to the corresponding period a year ago. Government-owned ONGC, responsible for 62 percent of country’s crude oil production in October, witnessed a crude output growth of 0.93 percent to 1,890 tmt for the month. Cumulatively, the oil and gas behemoth witnessed a 2.25 percent increase in production to 13,192 tmt in the first seven months.
Rest of the World
US oil prices closed above $60 a barrel on the final trading day of the year, the first time since mid-2015, as the commodity ended 2017 with a 12 percent gain spurred by strong demand and declining global inventories. International benchmark Brent crude futures ended the year with a 17 percent rise, supported by ongoing supply cuts by top producers OPEC and Russia as well as strong demand from China. The spread between the benchmarks widened throughout the year, as Brent responded to the drawdown in supply from major world producers while US output continued to grow. The gains indicate that the global glut that has dogged the market since 2014 is shrinking. Earlier this year, oil prices slumped on concerns that rising crude production from Nigeria, Libya and elsewhere would undermine output cuts led by the OPEC and Russia. But prices have rallied nearly 50 percent since the middle of the year on robust demand and strong compliance with the production limits.
Saudi Arabia’s King Salman and Russian President Vladimir Putin held a telephone conversation during which they agreed to continue close cooperation to ensure stability on global hydrocarbon markets, the Kremlin said. During the call, the Saudi leader voiced his concern about a missile attack on Riyadh by a Yemen-based rebel group on December 19. The Kremlin said that Putin had condemned the attack and spoken of the need for a thorough investigation into it.
Ministers from OPEC and their allies have agreed to extend their production pact all the way to the end of 2018 but with a review in June that will take into account market conditions and progress toward rebalancing. The outcome represents a successful compromise between de facto OPEC leader Saudi Arabia (which wanted to announce an extension throughout 2018) and non-OPEC heavyweight Russia (which wanted to avoid giving such a long commitment). Saudi Arabia’s Oil Minister Khalid Al-Falih said the excess of OECD oil stocks over the five-year average had already shrunk from 280 million barrels in May to just 140 million in October. If OECD stocks were to decline to the five-year average, the market would almost certainly feel uncomfortably tight, given the enormous growth in oil consumption since 2012.
The US EIA cut its 2018 world oil demand growth forecast by 40,000 bpd to 1.62 million bpd. The EIA raised its oil demand growth estimate for 2017 by 80,000 bpd to 1.39 million bpd.
Brazil will likely limit planned cuts in local content requirements for future oil exploration and production contracts in a move aimed at appeasing local suppliers and to pave the way for an extension of customs breaks for oil companies. The measures would be a concession to some opponents of “Repetro,” a preferential customs regime for oil and gas companies, who were angered by steep cuts in local content requirements for oil contracts, according to Abimaq, a group which represents local suppliers. Famously tough requirements in Brazil have stymied investment by oil firms which had complained that complying made oil development in the country unprofitable. OPEC has started working on plans for an exit strategy from its deal to cut supplies with non-member producers. OPEC, Russia and other non-OPEC producers on November 30 extended an oil output-cutting deal until the end of 2018 to finish clearing a glut. But the market is increasingly interested in how producers will exit the deal once the excess is cleared. Oil prices have rallied this year and are trading near $64 a barrel, close to the highest since 2015, supported by the OPEC-led effort. This is above the $60 floor that sources say OPEC would like to see in 2018. Publicly, OPEC Ministers said it is too early to talk of an exit strategy. But OPEC has said producers want to continue working together beyond the end of 2018, including on supply management. While oil prices have risen to levels seen as favorable by OPEC, the stated goal of the supply cut is to reduce inventories in developed economies, which built up after a supply glut emerged in 2014, to the level of the five-year average. Non-OPEC Russia, which has been the biggest contributor to cuts from outside the group, has been suggesting a review of the deal as early as June. However, its biggest producer Rosneft said the cuts could last into 2019. Russia held on as China’s largest crude oil supplier for the ninth month in a row in November, also topping Saudi Arabia for the year so far, China’s General Administration of Customs data showed. Shipments from Russia in November reached 5.12 million tonnes, or 1.26 million bpd, up 11 percent from a year ago, according to detailed commodity trade data for last month from China’s General Administration of Customs. That compared to October’s 1.095 million bpd in Russian oil imports, and a record set in September at 1.545 million bpd. Saudi Arabia came in second, with November imports from there dropping 7.8 percent from a year ago to 1.056 million bpd. For the first 11 months of the year, Russian supplies expanded 15.5 percent on the year to 54.77 million tonnes, or 1.2 million bpd, overtaking Saudi Arabia by 159,000 bpd. The boost in Russian supplies was supported in part by robust demand from China’s independent refineries, and also by increases in supplies via a trans-Siberia pipeline. Iraq supplies ranked third in November with shipments at 4.21 million tonnes, or 1.023 million bpd. Year-to-date Iraq supplied 5.5 percent more oil than a year earlier at 762,900 bpd, the data showed. China’s total crude oil imports rebounded to the second highest on record last month to 9.01 million bpd, with imports partially driven by a new additional batch of import quotas released to independent refiners.
Swiss-based trading and mining giant Glencore Plc has partly completed the sale of a 51 percent stake in its storage and logistics businesses to a unit of China’s HNA Group, although transfer of some assets is pending US clearance. Glencore in March agreed to sell the stake in HG Storage International Ltd, a vehicle that carries its petroleum products storage and logistics portfolio, to HNA Innovation Finance Group Co for $775 million. HNA said that the companies had completed the deal and would operate HG Storage International Ltd’s portfolio in Europe, Africa and the Americas as a joint venture. Glencore had been looking to sell a bundle of its global oil storage stakes, following similar moves by rivals as a boom period for storage showed signs of ending. Demand for storage exploded following the oil price plunge in 2014 because the abundance of crude for immediate delivery meant traders could make millions by buying oil cheaply and storing it to resell later at higher prices.
ONGC: Oil and Natural Gas Corp, OPEC: Organization of the Petroleum Exporting Countries, GDP: Gross Domestic Product, CAD: Current Account Deficit, VAT: Value Added Tax, NELP: New Exploration Licensing Policy, UK: United Kingdom, DGH: Directorate General of Hydrocarbons, IOC: Indian Oil Corp, BPCL: Bharat Petroleum Corp Ltd, HPCL: Hindustan Petroleum Corp Ltd, ITC: Input Tax Credit, LPG: Liquefied Petroleum Gas, PMUY: Pradhan Mantri Ujjwala Yojana, PPAC: Petroleum Planning and Analysis Cell, FY: Financial Year, OIL: Oil India Ltd, OMCs: Oil Marketing Companies, MRPL: Mangalore Refinery and Petrochemicals Ltd, US: United States, bpd: barrels per day, tmt: thousand metric tonne, RIL: Reliance Industries Ltd, mmscm: million metric standard cubic meter, OECD: Organization for Economic Cooperation and Development, EIA: Energy Information Administration