'Falling crude prices not conducive to oil companies’

Priya sundarajan | | Updated on: Aug 13, 2015
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Indian Oil Corpn’s finance chief says inventory losses will increase as a result

Oil companies no longer need to go through the nightmare of high crude prices, particularly in 2008 when they touched $150 per barrel.

However, things can be equally sticky with falling prices as is the case right now at $50/bbl.

Alarm bells are not ringing yet, but any further decline can pose problems, cautions AK Sharma, Director (Finance), Indian Oil Corporation.

“Such a scenario of rapidly falling crude prices is not conducive and could adversely affect oil companies in terms of inventory losses,” he said during a recent visit to Mumbai.

For companies like IOC, the cycle begins when crude is first loaded on to ships which head out to India.

Further time goes into storage and transport which means over a month will have elapsed from the time crude is loaded till it reaches the refineries. If prices fall steeply during this period, it results in huge inventory losses.

In the case of IOC, this is compounded by the fact that its refineries are all located inland unlike Bharat Petroleum Corporation and Hindustan Petroleum Corporation, which have their share of coastal refineries. As a result, adds Sharma, the company’s inventory losses could end up being four times more.

Crude has been on a downward slide for some months before climbing in June and falling all over again.

Sharma believes a 10-day up/down cycle is not much of a concern but something longer is unwelcome even though the country benefits from a lower import bill.

“In my view, $60-70/bbl is ideal and comfortable for both the supplier and buyer,” he says.

However, if crude starts inching beyond this desired level, there is a strong possibility of the US resuming shale oil production to offset this price hike. Unlike crude, which once discovered has to be drawn from an oilfield at any cost, shale output can be stopped and started at the drop of a hat.

IOC will begin full commissioning of its first coastal refinery in Paradip, Odisha, by December. It has been a long wait for this project which went though its share of hiccups before emerging a reality.

The original business plan factored in incentives from the state government which were withdrawn and made the project unviable. These were then put in place some years later. “By that time, we also realised that the original plan of six million tonnes was not viable and 15 mt made sense,” recalls Sharma.

IOC has earmarked ₹3,000 crore for a polypropylene facility in Paradip, while exploring the option of increasing the petrochemical product basket at this location. Sharma says the refinery will go a long way in meeting the domestic needs of the market.

Interestingly, the recent Iran nuclear deal with a clutch of global powers is not expected to translate into too much of an opportunity for IOC as crude sourced from the country is not entirely suitable for its refineries. An exception will perhaps be made if it is sold below the official selling price as it is otherwise not worth the company’s while.

Thanks to deregulation of auto fuels, IOC is also realising money a lot faster compared to the subsidy regime when Government compensation would take forever in coming.

The company has generated ₹20,000 crore from sale of petrol and diesel, while another ₹10,000 crore has come in thanks to falling crude prices. Borrowings, as a result, have fallen by ₹30,000 crore to ₹55,000 crore.

Sharma says gas is the next big play and this is where the recent acquisition of a field in British Columbia, Canada will play an important role.

IOC’s portion of the gas will be brought to its LNG facility at Ennore near Chennai.

According to him, nearly 75 per cent of the gas can be consumed in the Ennore zone of 70-km radius which will do away with the need to lay pipelines.

Published on January 23, 2018

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