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Feel Good . . . Why??? - Views on News from Equitymaster
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  • Jan 20, 2004

    Feel Good . . . Why???

    Too much has been written about the 'FEEL GOOD' factor over the past couple of months. However, the time now is to stress on another important factor, i.e., the 'WANT MORE' factor.

    Energy sources and petrochemicals together constitute 18.6% of the entire market capitalisation on the NSE. The sector thus has a tremendous impact on the bourses. Many of the companies in the sector have recently touched new highs. However, this seems to be just a tip of the iceberg, given the potential and scope in the coming years. But before going any further, we would like to mention that the potential and scope are likely to filter into actual numbers over the long-term and to that extent, the 'feel-good' factor has to be toned down.

    The fact that around 70% of the crude requirement is imported is enough reason for India to want more from within than feel good. Historically, the sector has grown at the rate of the economy.

    The country spent over Rs 840 bn on crude oil imports in FY03. Oil imports in US$ terms are higher by 12.4% (April Nov fig.) on the back of revival of domestic economy. So, as the country faces the prospects of strong growth rates in the foreseeable future, the oil and energy needs are expected to rise.

    The below mentioned table gives a comparative analysis of the Global oil production.

    (as per production fig)
    Country Production
    2 USA 8,054,000 19,650,000
    7 China 3,300,000 4,975,000
    15 Brazil 1,561,000 2,199,000
    25 India 732,400 2,130,000

    (Source: CIA World Fact Book 2003 as on 20th Sep, '03)

    The above table clearly indicates India's dependence on oil imports. Consumption is 3 times the production in India as compared to 1.5 times in China and 1.4 times in Brazil. Although US consumption figures are about 2.5 times the production, it should be borne in mind that the comparison will bear little fruit given that India is a developing economy whereas US is a developed economy. More importantly, India is not self-reliant. The dream of self-reliance seems to be unrealistic for the medium term.

    The recent developments in the domestic oil and gas sector show some promise. Exploration in deep waters of Krishna Godavari Basin, off the Andhra Coast, has resulted in seven gas discoveries with reserves of 10.5 trillion cubit feet (tcf). Reliance has already made a mark in the exploration segment by striking 9.5 tcf of gas in the Krishna Godavari Basin. Government backed oil major, ONGC, is set to start deep-sea exploration. Although risky, given the potential, the exercise, can contribute in a major way to reducing the import bill. The move to acquire equity stake in overseas projects by ONGC's overseas arm, ONGC Videsh (OVL), is another encouraging news. The 25% equity stake in the Sudanese oil fields by OVL is a realistic move to ensure that the country has access to physical crude supplies.

    It must be noticed that across the world, the major players are integrated, i.e. they straddle the entire spectrum viz. exploration, refining and marketing. Refining and marketing major, BPCL, is planning to invest about Rs 15 bn into exploration activities over the next 3-5 years and its peer HPCL too has plans to enter the upstream segment in the oil sector. Reliance has already made its presence felt in the exploration segment and is now set to venture into the retail segment. While such expansion plans are positive, one cannot ignore the risks associated with the same.

    The latest developments in the sector such as lifting the curbs on the FDI limit in the sector by allowing foreign investors to bring in 100% FDI through the automatic route are encouraging, which will enable investments in refineries, marketing, small and medium sized exploration blocks and petroleum product pipeline infrastructure. The marketing rights of transport fuel to foreign and private players would end the monopoly of the PSUs. If the Petroleum Ministry's estimates are to be believed, around 500 private retail outlets are to be in place by April 2004. This shall lead to greater competition in few areas and aggressive branding, thereby bringing about the benefits to the final consumer. But in terms of preparedness, the PSU marketing majors seem to be heading in the right direction.

    The latest move by the Government shall attract foreign investments into exploration and marketing given the country size and potential. All this augurs well for the sector and the economy in the long run.

    However, given the State's holdings across the oil majors, it is pertinent that there be a clear view of the Government's role. The scenario as of today has created too much of confusion relating to the stance on disinvestment of the Government's stake in HPCL and BPCL. The Government should gradually divest its stake into these companies and lay a platform for healthy competition. The prime focus should be on facilitating the growth across the sector and policy making aspects rather than managing the companies.

    Although a gradual process, this shall bring in more efficiency and competition in the sector leading to long term benefits which shall then reflect into the financial figures of the companies.

    A word of caution to the investors.... the gestation period for exploration and then starting commercial production (provided success in exploration) is high and therefore the investment strategy should be strictly based on a long term. Further, elections are round the corner and a change in the center could bring about changes in the policies.



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    Dec 3, 2016

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