Oil & Gas Industry: On Slippery Ground

The Global Scenario

The fiscal year 2011-12 has been an eventful year for the oil & gas sector. Crude oil, also famously know as ‘black gold’, witnessed heavy action amidst rising political instability in the Middle East and North Africa (MENA) region as well as a slowdown in the developed economies of the US and Europe. After flagging off the year at USD 94 per barrel, Brent crude oil (spot prices) shot up sharply in May 2011 to USD 123 per barrel on the back of rising political tensions in the Arab nations of Libya, Syria, Bahrain, Egypt, etc.


Source: MarketWatch.com

Soon after, the prices cooled off to USD 96 per barrel in October 2011, as the downgrade of the US economy by S&P and the never-abating euro zone crisis took centre-stage. However, fresh concerns flagged off from the Middle East with Iran at the helm of it managed to spike up the crude prices yet again, with Brent rallying by almost 12 per cent in CY2012 to USD 125 per barrel. The NYMEX (futures) crude oil also followed the same pattern as it found interest in the eyes of investors who wanted to play this volatility.


Source: MarketWatch.com

On Home Turf

The crippling effect of this sharp volatility seen in global crude prices has taken a heavy toll on the Indian economy which depends on imports to meet around 70 per cent of its requirements. Though the Brent crude prices at present are far away from its all-time high of USD 148 per barrel seen in July 2008, the sharp rupee depreciation over the past 6-8 months has accentuated the pressure over domestic refiners in rupee terms.

Coupled with this were our very own domestic macro-economic problems like stubbornly high inflation and rising borrowing costs. Blame it on soaring crude oil prices, the sharp rupee depreciation or the high inflation high interest cost scenario, the Indian oil & gas has had a roller-coaster fiscal 2011-12.

While the first half of fiscal 2011-12 saw upstream companies like ONGC and Oil India emerge winners, the recently ended December quarter belonged to the domestic refiners – IOC, BPCL and HPCL. After posting a cumulative loss of around Rs 14,000 crore during the April-September 2011 period, the three oil marketers sprung right back into action as they witnessed a significant jump in budgetary support and increased upstream discounts.

However, the domestic refiners continue to post losses on sale of fuel at subsidized rates. As per the latest figures from the oil ministry, the combined daily loss incurred by them on sale of diesel, kerosene and LPG at subsidized rates amount to Rs 471 crore. At this rate they are expected to report an annual under-recovery in excess of Rs 1 lakh crore.

Budget 2011-12: A Quick Rewind

The promises made by the government in the budget of 2011-12 have massively backfired. Right from its fiscal deficit targets to the flamboyant disinvestment target and finally a modest subsidy bill of Rs 23,700 crore, on all counts the government today finds itself in a sorry state. Even as the year went on, the government went on committing mistakes one after the other rather than setting things right.

For instance, one may look at the roll-back in excise and customs duty on petrol and diesel, which though populist in nature, seriously led to a shortfall in its tax receipts and eventually impacted the government’s overall revenue receipts. Other proposals like allowing the beleaguered airline sector to directly import jet fuel or a move to impose a cap on marketing margins charged by gas companies were all severely criticized by not only the oil & gas industry players, but also by many market experts.

The only move that would have seriously helped the oil & gas industry and also would have pleased the vote bank at large was the proposal to set up a mechanism to transfer direct cash subsidies on fuels like kerosene and LPG to people living below the poverty line. However, this proposal, like many others, has so far failed to see the light of the day.

Budget 2012-13: Fast Forward

With its back against the wall and very few options left to explore, the government under normal circumstances would have undertook some reformist measures in the upcoming budget on March 16, 2012 to reduce its subsidy burden and spur up the revenue receipts. This would mean that one may see the government push forward a proposal to de-regulate diesel and/or roll-back its generous excise and customs duty cuts that it had introduced in June 2011. However, owing to the disdainful defeat it faced in the recently concluded assembly election in the states of Uttar Pradesh, Punjab and Goa, the government would be compelled to adopt a more populist approach which would be aimed at salvaging its image in the build-up to the 2014 Lok Sabha elections.

In conclusion, we at DSIJ believe that despite the need of the hour, the government may refrain from taking any bold steps such as de-regulating the subsidized fuels or rolling back the excise and customs duty cuts, fearing a backlash from the common man who is already dithering under the burden of high prices and slow growth. The only likely outcome from the budget is that the government may re-work the modalities for introducing the direct transfer of cash subsidies on kerosene and LPG for people living below the poverty line.

However, this move is a very old move and may fail to bring about any positives for the oil & gas sector unless the prices of subsidized fuels are de-regulated. Finally, the government may work towards extension of the commissioning date of new refineries to avail the seven-year tax holiday. This will benefit IOCL which is setting up a greenfield 15 MMTPA refinery in Paradip, Orissa.