Energy: Looking towards 2002 - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Energy: Looking towards 2002

Jul 27, 2001

The genesis of current volatility in the oil markets could be traced to the Asian crisis followed by the global financial crisis. Over fiscal year '98 and '99, commodity prices, including crude dropped to two year lows of $10 / barrel.

With a lull in oil markets, the oil production dependent economies came in for a rough time with the price of economic life giving crude crashing. Falling back on solidarity to better protect the interest of the major oil producers, the Organisation of Petroleum Exporting Countries (OPEC) re-solemnised their ties. Ever since, the cartel has been attempting to moderate market prices within the preferred band of $22 - $28 / barrel ($25 is the target). With this objective in mind the cartel cut production thrice over FY00 by an aggregate 4.6 m barrels per day (mbd) to bring equilibrium in the market.

However, with Asia recovering swiftly from the dip and the Organisation for Economic Co-operation & Development (OECD) nations experiencing a new economy led boom, the global economy witnessed a sharp run up. The ensuing nervousness in the oil markets with increased demand and lower supply (classical economic problem) led to oil prices running through the roof. Crude oil prices formed new ten year peaks of $35 / barrel (Brent blend) despite the OPEC opening the taps, pumping an additional 3.2 mbd over FY01.

The sharp slowdown in the global economy, in calendar year '01, following the bubble, once again impacted market equilibrium with prices needing to adjust according. Fearing a repeat of $10 / barrels the OPEC cut production in the first quarter of 2001 by an aggregate 2.5 mbd to sustain prices at preferred levels. Recently, the OPEC has again decided to cut production by 1 mbd from September '01, as brakes on global economic growth continue to be pressed. With the effort to monitor oil prices at $25 / barrel the global economy might need to get accustomed to higher energy prices and the volatility accompanying the same.

Besides higher feedstock costs the Indian refining sector is facing a glut of refined products mainly, petrol and naphtha. The demand-supply situation has shifted from a deficit 5 years back to 10% surplus supply. The total refining capacity, at the end of FY01, in the country was 112 m metric tonnes per annum (MMTPA) while the total consumption of petroleum products was 102.5 MMTPA over the same period. Over the next 4 - 5 years additional capacity of 43.5 MMTPA is planned. Consequently, for demand to equate with supply, consumption will have to grow approximately by 9% - 11% on compounded (CAGR) basis. With the shackles on the economy seeming difficult to break, it is likely that the industry will reel under a surplus scenario. Alternatively, we could see some of the projects being delayed or shelved.

Another concern plaguing the industry is the slowdown in petroleum consumption. After growing at a CAGR of 5.6% over the past five years, in FY01, consumption registered a growth of only 1.4%. The start of FY02 also has not been encouraging, as the slowdown malaise, which intensified in 4QFY01, has spread into the current fiscal. In fact, core sector (six key infrastructure industries) growth slipped to 1% in 1QFY02 compared to 9.3% in 1QFY01. Although the refining sector -- throughput -- grew by 6.4% over the same period, the growth was much lower compared to 34.5% in 1QFY01. With a revival in the economy expected only in the latter part of the second half, fiscal '02 could be a challenging year for refiners', especially in achieving volume led growth.

Despite the negatives, petroleum stocks continue to be on the radar of the markets. The dismantling of administered pricing mechanism (APM), marketing deregulation and proposed disinvestment has kept investors anxious on the start blocks, ready to lap up scrips on the slightest hint of any of the above materializing. But investors, on several occasions, due to the anxiety have jumped the gun. As per the original dismantling schedule, pricing of the four controlled products will shift to a market determined mechanism (MDM) from the present APM on April 1, 2002. Till FY01, five products, namely, petrol, diesel, ATF, kerosene & LPG were under Government control. However, at the start of FY02 the Government deregulated pricing & marketing of ATF (aviation turbine fuel). Also, at the start of FY03, the Government will open up the marketing of petroleum products to private competition. The Government has laid down certain eligibility criteria. Prospective players will need to invest either a minimum of Rs 20 bn in crude refining, invest in crude production of 3 MMTPA or invest in setting up hydrocarbon infrastructure including pipelines and LNG terminals.

Cost of Consolidation
No. of shares m 137.8 147.2 199.8
Government holding55.0%52.5%74.5%
Shares acquiredm 75.8 77.3 148.8
Purchase price Rs 86.0 65.9 10.0
Acquisition costRs m 6,522.7 5,095.3 1,487.9
MP*Rs 56.6 36.1 8.3
Premium to MP51.9%82.6%21.2%
Book ValueRs 95.8 78.3 30.9
* At time of announcement

Most industry insiders believe that, in line with the upside enjoyed on deregulation of the refining sector in FY98, similar benefits will accrue to marketing companies on dismantling of the APM. Consequently, markets await the transition to the deregulated environment.

The Union Minister of Petroleum & Natural Gas, Mr. Ram Naik, recently indicated no intentions of divesting the refining & marketing (R&M) majors, Bharat Petroleum (BPCL) & Hindustan Petroleum (HPCL), in the near future. Nevertheless, acquisition of public assets is seen as an attractive entry vehicle into the petroleum sector, especially with marketing deregulation around the corner. Therefore, several domestic and international majors are considered to be in the fray for acquiring the pure marketing company, Indo-Burmah Petroleum (IBP).

These developments have kept market interest alive in petroleum stocks. However, the Government has played this tune earlier, which has led to investors burning their finger. Although the sector offers scope with the structural changes some uncertainty remains on the Government's actions.

Equitymaster requests your view! Post a comment on "Energy: Looking towards 2002". Click here!


More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

My Recent Recommendation Will Profit from the Global Supply Chain Crisis (Profit Hunter)

Mar 31, 2021

A tiny chemical company, started in the Licence Raj era, is a great example of a new wealth creating opportunity.

My Stock Trading Strategy (Fast Profits Daily)

Mar 31, 2021

In this video I'll show you exactly how I go about picking stocks for trading.

4 Stocks to Make Your Portfolio Immune to the Second Covid Wave (Profit Hunter)

Apr 6, 2021

Rather than predicting the market, successful investing is more about preparing well and placing your bets accordingly.

If the Market Falls, I Will Do This... (Fast Profits Daily)

Apr 1, 2021

What should you do if the market falls? In this video, I'll tell you what I will do.

India: Recovery Stalled by Vaccine Games? (The Honest Truth)

Apr 13, 2021

Ajit Dayal on how India's vaccine strategy will impact the markets.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Apr 13, 2021 (Close)