Fortunes of India's oil & gas and petrochemicals sector

Oil & Gas: Fortunes turning around
Business Standard, New Delhi, April 9, 2010

With global economic growth on the recovery path and crude oil prices
rising, the
##fortunes of India's oil & gas and petrochemicals sector are hanging.
To begin with, the global demand for crude oil is seen rising by 9,
00,000 barrels per day (bpd) to 85.12 million bpd in CY2010, compared
with the 1.5 per cent decline in CY2009. This should support crude oil
prices, which have risen 20 per cent in the last two months to around
$85 a barrel, and benefit companies like Cairn India.

Gross refining margins (GRMs) and petrochemical cracks have also begun
to improve, benefiting companies like Reliance Industries, standalone
refineries like MRPL, and petchem producer GAIL The significant
decline in demand, coupled with new capacities, had earlier led to a
sharp decline in GRMs. "However, from here on, utilisation (refinery)
will improve gradually, as new capacities will be lower than the
demand growth of about 1.8 million bpd per year," said Edelweiss
Securities' analysts in a report. They expect GRMs to rise from $6.1
per barrel in CY09 to $10.6 per barrel in CY11 and say that these have
already picked up in CY10.

Overall, analysts are bullish on private players like Reliance
Industries and Cairn India. Additionally, higher crude oil prices will
aid demand for oil exploration and production services provided by
companies like Aban Offshore, Dolphin Offshore and Shiv-Vani. These
will gain from the higher demand (improved utilisation of equipment)
and improved rentals (on equipment). A case in point is Aban. The
company, which saw the number of idle rigs decline in recent past,
signed a rig-deployment contract on Thursday that would earn the
company $159 million (Rs.700 crore) in revenues over four years
starting end-2010.

Contrarily, higher crude oil prices, coupled with a cap on retail fuel
prices, will affect profits of government-owned oil marketing
companies (OMCs), while ONGC and Oil India could end up sharing a
higher subsidy burden. Given the current situation, Centrum's analysts
estimate under recoveries to rise to Rs.80, 000 crore by the end of
2010-11 from an estimated Rs.46, 000 crore in 2009-10. An appreciating
rupee and improving GRMs are positives for OMCs, but not enough to
offset the pressure from under recoveries. Not surprisingly, stocks of
ONGC and Oil India have fallen as against a rise of Sensex since
end-February 2010.