Supply glut, low demand erode refining margins for Essar, RIL
Oct 27 2013
Companies scout for alternative means to raise bottomlines
Essar Oil, the subsidiary of UK-listed Essar Energy, and Reliance Industries (RIL) both reported a drop in refining margins as the benchmark International Energy Agency margin (IEA) and Singapore gross refining margin (GRM) dropped in the past six months. Industry experts believe that there is little prospect for a rebound in the coming few quarters.
Essar Oil’s refining margin fell to $6.93 per barrel during the second quarter from $7.83 per barrel in the same quarter last year. RIL’s refining margin was lower at $7.7 per barrel against $9.05 per barrel last year. Even their operating margins dropped due to weak domestic demand.
The Singapore GRM for the three months ending September 30 came in at $5.4 per barrel.
Experts opine that pure refiners like Essar Oil are going to find it extremely difficult in the coming years, as gas and other alternative fuels gain wider acceptance as fuel in the US and certain European countries, where several refineries are closing down, as operations become unviable.
Refining margins for RIL and Essar are expected to stabilise around their current levels, as global economic conditions are expected to improve once Iran mends ties with the US and European Union. However, both these companies would suffer once Iran and Syria patch up with the west.
Indian companies have the disadvantage of double transportation — first for importing crude oil and then for exporting refined products — which would not be the case with Iran, said AK Prabhakar, an independent broker and RIL-watcher.
Another Mumbai-based broker who did not want to be named, said companies like Essar would have to play the volumes game and take advantage of 35 per cent depreciation in Indian currency. Even China cannot take that advantage since their currency is pegged to dollar.
Although India imports around $100 billion worth of crude oil every year, it exports more than $50 billion worth of refined products. He believed that India could export over $100 billion of products provided local companies derived the advantage of lower labour cost controlled overheads.
Essar Oil has already launched its ‘optima plus’ programme by optimising vacuum gas oil (VGO) into valuable distillates and starting a new hydrogen plant to treat the cracks into more valuable products.
“These activities would help the company increase the GRM by $1.5 per barrel,” said C Manoharan, director refinery at Essar Oil. Besides, the company has also planned to increase focus on retail outlets, as diesel deregulation looks a reality in the short term. Essar plans to open around 3,000 retail outlets in the next four years. At present, it operates 1,400 retail outlets with another 200 under various phases of construction.
Meanwhile, RIL has increased focus on shale gas that offers a higher margin of around 35 to 40 per cent. At peak, RIL’s gas business posted margins as high as 58 per cent, said Prabhakar. Besides, RIL’s petrochemical margins are also high at 8-9 per cent. That would help the company remain profitable till refinery margins improve.