OMCs Face Crude Shocks

THE YEAR GONE BY was forgettable for India’s largest state-owned oil marketing companies (OMCs). Profits of Indian Oil Corporation (IOC) and Bharat Petroleum Corporation (BPCL) tumbled, while Hindustan Petroleum Corporation (HPCL) reported a loss as marketing margins shrank due to soaring crude oil prices.

The companies were unable to pass on high crude oil prices — which surged in first and second quarters — to retail customers. Crude oil averaged $93 a barrel during the year; it crossed $100 in the first half of 2022 on account of supply concerns amid Russia-Ukraine war. Prices, however, dropped in the second half of the year due to lower demand from China and concerns over global economic contraction.

In FY23, IOC’s profit fell 61%. BPCL saw 82% decline while HPCL reported an adjusted loss of ₹6,964.85 crore compared to a profit of ₹7,184.93 crore in FY22. Net sales, however, rose 26%. IOC reported a 40% jump in total income. BPCL’s income rose 34%.

The situation has improved this fiscal due to lower crude oil prices and rise in share of crude oil from Russia that is cheaper than from other countries. S. Bharathan, director of refineries, HPCL, says global crude oil prices have remained range-bound in last one year (around $85 a barrel with exception of May-June 2023 when they fell to $75 and in Sept-Oct 2023 when they were above $90). “Such volatility is much less than what we have witnessed in past two-three years due to the pandemic and the Russian-Ukraine conflict. HPCL is safe against fall in crude oil prices. High oil prices increase higher fuel cost for refineries. Due to higher global inflation and interest rates, cost of capital has increased in general,” he tells Fortune India, adding they have attempted to mitigate some of these risks by tapping cheaper crude grades.

“Indian national oil companies are unique due to backward integration. They weathered high crude oil prices well. They sourced from Russia by negotiating discounts over global prices. And cross-subsidised refining margins with oil marketing margins to keep consumer prices from firing up. Some exported refined products to generate revenue at global prices,” says Deepak Mahurkar, partner and leader, Oil & Gas, PwC India.

However, experts foresee a hit on margins as any price hike may be discouraged on account of general elections next year. Retail prices have remained frozen since May 2022. “We are heading into the year of general elections and oil companies will not have the flexibility of passing costs that they incur in case crude oil prices keep going up. OMCs will be impacted in next few quarters until the next government is formed,” says Deepak Chowdhury, partner at Indus Law who specialises in energy, infrastructure and natural resources.

Bharathan of HPCL expects crude oil prices to remain in the $80-90 per barrel range in 2024. “The upside is capped by a weak global macroeconomic sentiment, which is expected to dampen demand, and rapid rise in supplies from non-OPEC sources such as U.S., Brazil, Guyana and Argentina. At the same time, the downside is also limited due to production cuts by OPEC+ group and lower global inventories,” he says, adding that range-bound prices and robust refining margins will provide a stable environment.

Diversification Of Sources

IOC’s FY23 annual report says it diversified crude oil sources by incorporating 36 new grades from various regions, including Africa, Middle East, America and Russia. “This strategic move allows us to enhance our crude oil basket to deliver a wider range of feedstock and optimise refining processes to produce high-quality petroleum products efficiently,” it says. Supplies from Russia increased multifold compared to previous years, touching a record in April 2023, surpassing combined flows from Saudi Arabia and Iraq, says the report. “The diversification that has happened since 2022 where we are looking at other countries rather than just depending on OPEC will be comforting for oil companies,” says Chowdhury of Indus Law.

An S&P Global report says India is also exploring the possibility of importing discounted crude oil from Venezuela after U.S. eased oil, trade and financial sanctions on the South American country. It says India’s decisions will be guided by commitment to energy security and insulating itself from crude oil shocks.

Energy Security

India’s dependence on crude oil imports makes it vulnerable to price shocks that can compromise its energy security. Import dependence rose to 87.8% in April-August this year compared to 86.5% in same period a year ago, according to data from Petroleum Planning & Analysis Cell of Ministry of Petroleum and Natural Gas.

India wants to reduce dependence on imports for which it is focusing on domestic exploration and production as well as promoting renewable and alternative fuels like ethanol, compressed biogas and biodiesel. OMCs are playing a huge role in this endeavour. “HPCL is installing an electrolyser for producing green hydrogen at its Visakhapatnam refinery, a first-of-its-kind in any Indian refinery,” says Bharathan, adding the company plans to increase the share of biofuels and renewable energy in its portfolio; multiple projects are under way.

Vivek Dua, partner, energy and processes industries practice at Kearney, says world energy needs will grow 1% by 2040 whereas India’s will grow two-and-a-half times more. “India is anticipated to contribute 30-40% to incremental demand. What makes this growth noteworthy is the simultaneous emergence of a profound shift towards renewable energy. Interestingly, OMCs are set to undergo a transformative journey, evolving into integrated energy entities, a trend mirroring the global shift. Envisioning a diversified portfolio, these companies are expected to retain a significant reliance on fossil fuels by 2040, but the key distinction lies in their active pursuit of renewable energy ventures,” he says. Dua also expects oil and gas companies to expand their petrochemical portfolios. “This move, driven by imperative to reduce import dependence, extends beyond fuel considerations. Instead, it serves as a proactive hedge for the energy transition (EVs, other enablers of energy transition will need petrochemicals). By 2040, India will need 80-100 MTPA more refining capacity. With financial strength on their side, OMCs are positioning themselves to commit substantial investments towards these goals,” he says.

IOC board has given its approval in principle for a ₹61,077 crore petrochemical complex in Odisha’s Paradip. Similarly, BPCL is developing a petrochemical complex at Bina refinery in Madhya Pradesh at a cost of ₹49,000 crore. In FY23, HPCL installed 30 megawatt peak (MWp) captive solar power capacity, taking its total to 84 MWp as on March 31, 2023. IOC’s renewable energy portfolio stood at 239 MW in March 2023; the company is expanding its green portfolio through wind, solar, hydel and pumped hydro projects.

In March, IOC signed a memorandum of understanding with hydroelectric power generation company SJVN to form a joint venture for development of renewable energy projects in solar, wind, hydro and hybrid power, apart from energy storage systems, including battery storage and pumped storage projects for supply of renewable power to IOC’s refineries and other companies. It also issued letters of intent to 3,267 plants for production and supply of compressed biogas, the company said in its FY23 annual report. OMCs are hoping the green turn will insulate them from global volatility in crude oil prices.