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| India Infoline Sector Reports | Wed, 18-Feb-2004 16:16:30 IST (GMT+5:30) | |
| Refining | ||
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Summary Till Q1 FY99, the Indian oil & gasindustry has been under state control vide the Administered Pricing Mechanism (APM). Theproduction pattern, capital expenditure and pricing of petroleum products were determinedby the state. The pricing system assured all players a normative post-tax return of 12% onnet worth. Decontrol measures were initiated andretention pricing for refineries has been abolished wef Apr '98. However, controls on 5products (MS, HSD, ATF, SKO and LPG) that contribute 70% of the volumes, continue toremain. Subsidies on LPG and SKO will be limited to 15% and 33% of import parity pricesand tariff on crude and petroleum products will be reduced to 0-5% and 15% respectively. The major gainers of deregulation processwill be old players with old and depreciated units like - MRL, CRL, BPCL, HPCL, IOCL etc.New refineries like MRPL, Essar Oil and Reliance Petroleum will be hard hit, as theirrefining margins under the market determined pricing mechanism would be lower than thatunder the APM. In addition, net profit will be affected by high interest and depreciationoutgo. It is important to note that a six mtpa refinery (current minimum economic size)will cost Rs36bn. Global oil & gas production is skewedwith most of the reserves concentrated in the Middle East, which supplies to deficitcountries in the Americas and the Asia-Pacific. As at end 1998, the world had proven oilreserves of a little over 1 bbl and proven gas reserves of a little less than 140 trillioncubic meters. Declining crude oil prices has resulted inreduction of the oil pool account deficit owing to over production and falling demand inthe developing world (mainly South East Asia). Crude prices have risen to US$13/ bl afterproducing countries agreed on cuts. Amongst players, ONGC has a virtualmonopoly in upstream crude oil and gas production, while GAIL has a monopoly in marketingand distribution of gas. The refining and marketing sector is again dominated by PSUs,which account for nearly 95% of the total refining capacity and 100% of products marketed.IOCL is the market leader in both refining and marketing followed by BPCL and HPCL. MRPLwas the first non-PSU in the sector, followed by Reliance and Essar by 1999-2000. Stock valuations continue to remaindepressed. The two negative factors for the sector are dim outlook on global refiningmargins and supply of stock in the form of government disinvestment. Investors should useall disinvestment programs as a buying opportunity because the long-term fundamental storyis still intact.
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