|
Global oil markets and implications for
Indian refineries
|
|
The
development of tight oil and shale gas in the US is reshaping markets and
trade flows not just for oil and gas, but also refined products and
petrochemicals. The availability of cheap ethane, in particular, has laid the
platform for a competitive ethylene-based petrochemical industry there and a
round of investments unsurpassed in the history of the industry.
The fall & feeble recovery
Oil
and gas markets have stayed soft for much of the period since 2014 when OPEC,
led by Saudi Arabia, opted to lift crude output in a desperate bid not to
further loose market share to rising shale oil production in the US. The
opening of the spigots, at a time of weakening demand, had a not surprising
impact on oil prices, which plummeted to below $40 a barrel by the end of
2015 – a far cry from the record high of $145 per barrel set a few months
ago. Besides the 1.5-mbpd (million barrels per day) increase in output from
Saudi Arabia and Iraq, another factor that contributed to the softness in oil
markets was the nuclear deal with Iran, which raised the possibility of
increased exports from the hitherto isolated country.
The
low oil prices persisted through much of 2016, till Saudi Arabia and OPEC
reversed course and concluded an historic agreement (that included Russia) to
slash oil output by close to 1.5-mbpd. Though prices corrected upward in an
expected reaction as 2017 rolled in, the uptick has been difficult to sustain
for several reasons, and prices have hovered around the $50 mark. The
transient upward movement in prices, it seemed, flattered only to deceive.
There
are several reasons for this state of affairs. For one, markets have
recognised that there is clearly more oil available now than needed and that
the situation is unlikely to change significantly – save for dramatic
geo-political developments. More significantly, signals from the demand side
are not encouraging. In several advanced countries, economic growth today has
decoupled from oil, as economies have transitioned to services and
low-carbon-intensive manufacturing. Several developing economies – China in
particular – are now laying great emphasis on lowering the energy &
carbon footprints of manufacturing industries, both through the deployment of
alternative energy sources (including renewables) and improved energy
management practices. The emergence of alternate transportation options,
including electro-mobility (hybrid and electric vehicles), and shared
services (Uber, Ola etc.) have the potential to significantly alter demand
for personal vehicles and hence transportation fuels – a big and profitable
outlet for refineries.
While
in the past the concerns were about peak oil and the world running out of the
resource in a few decades, the argument has now been turned on its head.
Terms like “peak demand” are increasingly being heard. However, it must be
reiterated that most forecasts still see oil demand rising, though at a
slower pace vis-à-vis its historical trend.
Ample supply & weak demand
The
two scenarios of ample supply and weak demand growth imply that oil prices
will stay weak for the medium term – in the absence of any jarring political
developments.
This
will guarantee the fossil fuel a continuing and significant place in the
energy mix of most economies. It will also polarise centres of demand and
supply. Developing economies of Asia, Latin America and Africa will account
for nearly all of the incremental growth in oil demand, while exploration and
production (E&P) efforts will be focussed on regions with the least cost
of production, such as the Middle East, Northern Africa and North America.
Expensive E&P forays into offshore deep-waters, Arctic regions where
harsh conditions raise the cost of production significantly, or politically
troubled parts of the world, will be hard to justify in the new realities of
the oil markets. This polarisation will mean that oil will still be shipped
around the world from producers to markets even as the latter try to shore up
self-reliance.
Positive implications for India – mostly
Much
of the above have positive implications India, which is severely dependent on
imports of oil & gas to fuel its energy needs. There is a stated policy
to reduce the national oil dependence by 10% by 2020, but the path to this is
unclear, and given the near certainty that domestic production is unlikely to
rise significantly, seems unlikely to be achieved. But given the weakness in
oil prices, there is distinct possibility that the value of imports could be
slashed by 10% (or more) from the record highs set four years ago. But this
is sleight of hand!
There
is an ambitious – some would say unrealistic – roadmap to electrification of
vehicles, but implementation has been remarkably poor so far. There are
virtually no significant efforts in creation of the extensive infrastructure
needed for a large-scale migration to electric vehicles. Furthermore,
research in areas such as battery technologies – heavily protected by walls
of patents by international firms – is almost non-existent, in sharp contrast
to China.
Refinery margins under pressure
The
weakness in oil prices will spill over to the markets for refined products as
well. Margins will be under pressure and only the most efficient refiners
will survive. Some of India’s refineries – particularly the new ones set up
in the private sector and a few in the public sector – are well positioned to
capitalise on the flexibility and the complexity of their investments, but
several others will be challenged on the margins front.
The
likely market conditions will require refineries to address every possibility
to add value to every drop of oil processed. Till now, most have been
fuel-centric – partly due the realities of the marketplace that prioritised
fuel needs over anything else, but also due inertia and lack of risk-taking.
That has changed somewhat and several refiners have outlined value-addition
aimed at shoring up margins. This will require them to invest significant
capital at a time when there are several other demands on their resources.
Investments in upgrading fuel quality
The
specifications of automobile fuels Indian refiners produce have been
tightened and India will in a sense leapfrog a generation of clean fuel
technologies to make fuels with much lower specifications of sulphur,
aromatics, nitrogen compounds etc. Refiners are likely to spend around Rs.
90,000-crore – a staggering sum of money – by 2020 to meet these mandates,
and engineering companies are salivating at the prospects of increased
business coming from technology licensing, engineering services etc.
The
best opportunities to shore up margins in refining is through integration to
petrochemicals and the experience in India so far has been poor. While a few
refineries do produce propylene and process it captively or make it available
for third-party investors, most do not. Valorisation of heavier streams –
starting from C4 onwards – is poorer. Most butanes, for example, are consigned
to the LPG stream, which fetches refineries nothing more than fuel value for
a molecule that is precious (in the sense of the diverse products that can be
made from it). The situation is worse for the heavier fractions.
Valorising
these streams will require refineries to have a critical size – about 15-mtpa
– and several fall short on this score. But the good news is that at least
some are now eyeing expansions to reach such a size.
Rationalising the upstream & downstream companies ….
There
is now talk of rationalising the structure of India’s oil & refining
industries to create integrated champions that can count amongst the giants
that stride this world. There are merits and demerits to the exercise and it
will be interesting to see whether these moves will actually come to
fruition. There is clearly scope to rationalise jobs, streamline
efficiencies, and share marketing & infrastructure networks through
integration, but whether the government will have the stomach to do this,
without upsetting labour unions, is debatable.
The
other big idea mooted for the sector is the creation of a ‘mega-refinery’ in
the west coast of India, possibly in the Ratnagiri district of Maharashtra.
As of now this is to have a crude oil processing capacity of about 40-mtpa –
and will likely be built in two phases. The national oil companies are to
come together for this ambitious project, though there have been reports that
an international oil major – possibly from one of the oil-rich countries of
the Middle East – will be roped in to provide some assurance of oil supply.
Such
a refinery can be well positioned to be an anchor around which a significant
petrochemical industry can also develop. The planning for this needs to be
dovetailed into the planning for the refinery, and needs to be done keeping
in mind the country’s needs for chemicals and polymers. Importantly, there
should be firm allocations of key raw materials – particularly olefins and
aromatics – to potential investors. Only this will ensure that a downstream chemical
industry that is broad in scope will emerge. A cluster approach – wherein
anchor and downstream units are juxtaposed in close geographical vicinity,
and share basic and specialised infrastructure – is the best way to ensure
competitiveness of all participants.
… and the government
On
its part, the government must merge the Department of Chemicals and
Petrochemicals, under the Ministry of Chemicals and Fertilisers, with the
Ministry of Petroleum and Natural Gas. This makes eminent sense as the latter
has control over the units producing petroleum-derived feedstock, and the
former the ones that can convert these into the many products indispensible
to modern living.
The
fate of the petroleum and the petrochemicals industries are intertwined. No
need to keep their administrations apart!
|
- Ravi
Raghavan
CHWKLY 18APR17
No comments:
Post a Comment