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Oil And Gas Sector Review 2009

SUMMARY OPINION
The domestic crude oil refinery sector has entered a period of weak refining margins, which is likely to intensify in the medium term, after having enjoyed an extended period of robust refining margins during the past four years. The key factors that could have a sobering influence on refining margins include weakening demand for petroleum products in major markets; commissioning of new refineries and conversion projects; and decline in the price differentials between “light-sweet” and “heavy-sour” crudes. Besides, inventory losses and foreign currency translation losses are also expected to pull down refinery profits. Among other potential risk factors for refineries focused on the domestic market are further decline in the import duty differential and change in the product pricing philosophy from trade/import parity to export parity. Given the weak outlook on refining margins, the profitability and debt protection metrics of the new refinery projects to be commissioned in India in the next five years are likely to be subdued. Besides, some of these projects have high capital costs, which leave them with a high cost structure and a high break-even gross refining margin (GRM). As for the existing older refineries, their return on capital employed (RoCE) is likely to be muted by large investments in environmental compliance that are unlikely to yield material incremental returns. Despite the sharp reduction in gross under-recoveries (GUR) from the estimates made at the beginning of fiscal 2008-09, the outlook for the marketing sector is negative for 2008-09, given the losses already suffered in the first half (H1) of 2008-09 and the possible losses in the third quarter (Q3) of the same fiscal. Revival of competition from the private sector and a further rollback of automotive and cooking fuel prices by the Government of India (GoI) could prevent the public sector oil marketing companies (OMCs) from enjoying an extended period of high marketing...