Transcript RIL Petrofed Presentation

Impact of rising oil prices and
possible solutions
Industry Perspective
What is behind rising oil prices ?
Crude
•
•
•
•
Increase in finding and development cost
Increased marginal cost of production esp. Non-OPEC
Market uncertainty affecting fresh investments by oil producers
Rising producer taxes, transportation and quality premiums
Products
•
Inadequate refining and upgrading capacity
•
Better and environmental friendly fuels needing high investment in
technology upgradation
Current price rise due to structural changes in fundamentals
and business drivers
2
What is the Outlook for Crude ?
Long term crude price forecast (WTI)
70
60
Price ($/bbl)
50
40
Based on Saudi Arabia’s
Oil minister, Mr. Naimi’s
statement
30
20
10
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Year
PIRA
PEL
ESAI
Source:PEL, PIRA, ESAI
World adjusting to new OPEC unofficial price band of $ 40 - $ 50
3
What is the Outlook for Products ?
• Demand for transportation fuels expected to grow faster than other fuels
in line with growth in GDP
• Refining / upgrading capacity is currently constrained leading to high
crack margins and subsequent high prices
• Changes in product quality driven by environmental considerations are
further constraining the upgrading capacity
• Most incremental crude in future likely to be heavy and sour there by
necessitating higher investments in cracking / upgrading capacities
• Refining business is highly capital intensive and cyclical in nature with
prolonged periods of zero / negative margins following periods of high
margins
Structural changes stable enough to keep product prices high
4
Refining - a hedge to achieve Energy Security
• Investments in upstream essential to achieve Energy security
• They are high risk in nature due to huge earnings variability / uncertainty
• Investments in downstream especially refining can provide stable
earnings during good times like at present
• This can mitigate the risk involved in upstream and help achieve product
sufficiency in the country
• Fresh investments possible only if refineries are allowed to generate
profits during good times
• Any attempt to prevent refineries from generating profits by way of
subsidy burden would be detrimental to Energy security in the long run
Investments in refining can hedge risky investments in E&P
5
Need for stable long term policy
• To minimise the impact of high oil prices there is a need for adopting a
stable / consistent policy -
•
Eliminate / Reduce subsidies and move towards completely market
determined pricing
•
Encourage investment in upstream and downstream assets and
allow them to realise full legitimate margins
•
Rationalise / reduce taxes, duties and other levies and implement
VAT on a speedy basis to moderate prices
•
State governments should help by reducing the sales tax rates
•
Promote energy conservation among consumers by true pricing of
products
•
Integrated model of energy, economy and environment using
country specific data necessary for stable long term policy
development to meet growth objectives.
Opportunity to become a global player through higher
6
Responses of other countries to high oil prices
•
Developed nations (eg. OECD nations)
Oil price rise passed to the final consumer
Gasoil
Country
France
Germany
Italy
Spain
UK
Japan
Canada
USA
($/bbl)
Crude Cost
42.73
40.73
42.04
40.82
41.8
41.89
46.74
40.89
Taxes
86.09
97.03
83.20
60.70
138.66
56.98
31.00
19.08
R&M
margins
36.96
44.33
46.32
45.68
36.21
55.25
35.13
30.49
RSP
165.78
182.09
171.56
147.20
216.67
154.12
112.87
90.45
Source: IEA
Passing of oil price rise to final consumer only long term
7
Responses of other countries to high oil prices
•
Developed nations (eg. OECD nations)
Oil price rise passed to the final consumer
Gasoline
Country
France
Germany
Italy
Spain
UK
Japan
Canada
USA
($/bbl)
Crude Cost
42.73
40.73
42.04
40.82
41.8
41.89
46.74
40.89
Taxes
158.35
168.05
155.67
107.36
175.46
92.35
40.54
16.37
R&M
margins
23.13
29.67
43.64
37.84
30.62
60.34
21.75
26.20
RSP
224.21
238.46
241.35
186.02
247.88
194.58
109.03
83.46
Source: IEA
Passing of oil price rise to final consumer only long term
8
Responses of other countries to high oil prices
•
Oil importing nations (eg. India, Pakistan)
Oil price rise partially passed to the final consumer
Gasoline
Crude Cost
R&M
Taxes
(estimated)
margins
Pakistan
36.32
44.26
17.71
Thailand
40.79
22.08
18.71
Australia
56.46
59.08
13.25
Singapore
39.54
49.16
53.41
17
India Nov-04
44.80
71.90
5.8
India Current
52.5
98.1
Source:PSOCL, EPPO, Fuelwatch,
Shell Singapore
Country
($/bbl)
RSP
98.29
81.58
128.79
142.11
Source:PSOCL, EPPO, Fuelwatch, Shell Singapore
Passing of oil price rise to final consumer only long term
9
Responses of other countries to high oil prices
•
Oil importing nations (eg. India, Pakistan)
Oil price rise partially passed to the final consumer
Gasoil
Country
Pakistan
Thailand
Australia
Singapore
India Nov 2004
India Current
($/bbl)
Crude Cost
(estimated)
36.32
40.79
56.46
39.54
44.80
52.5
Taxes
44.26
22.08
59.08
49.16
37.10
52.5
R&M
margins
17.71
18.71
13.25
53.41
10.9
14.7
RSP
98.29
81.58
128.79
142.11
92.82
119.7
Source:PSOCL, EPPO, Fuelwatch, Shell Singapore
Passing of oil price rise to final consumer only long term
10
Responses of other countries to high oil prices
•
Oil exporting nations (eg. Malaysia, Indonesia)
Oil price rise borne by the government through subsidy
Gasoil
Country
Malaysia
Indonesia
($/bbl)
Marker @
Crude Cost
54.46
49.04
RSP
34.76
29.14
@ Tapis for Malaysia, Minas for Indonesia
Gasoline
Country
Malaysia
Indonesia
($/bbl)
Marker @
Crude Cost
54.46
49.04
RSP
57.31
31.97
@ Tapis for Malaysia, Minas for Indonesia
Passing of oil price rise to final consumer only long term
11
Response of China to high oil prices
Gasoline and Diesel Prices in China v/s Dubai
70
RSP (incl taxes) ($/bbl)
60
50
40
30
20
10
0
Jan- Feb- Mar04
04
04
Apr- May- Jun04
04
04
Jul04
Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar04
04
04
04
04
05
05
05
Month
Gasoline
Gasoil
Dubai
Source: ESAI
Passing of oil price rise to final consumer only long term
12
Options for India
• Current oil price rise is long term fundamental increase due to structural
changes and not a speculative increase
• The only viable option for India is to pass this price increase to the final
consumer
• RBI governor Sh. Y V Reddy has also acknowledged in a recent interview
“As the policy itself has indicated, the headroom is less. If the supply
shock persists for long, the relative burden sharing will have to change.
For instance, if we assumed that the oil shock is temporary, the entire
burden cannot be shifted to the consumers.
If it is seen to be less temporary, then we will have to start shifting the
relative sharing of the burden.”
Completely deregulated market need of the hour
13
Conclusion
• Indian oil industry is highly matured matching best global standards.
• Indian refining company (RIL) became the 1st Asian company to be
recognised as “International Refiner of the Year 2005” by World refining
magazine
• Golden opportunity for India to become a global player and hence need to
encourage investment in upstream and downstream sector
• Reduced product prices in domestic market will lead to inefficient
utilisation of petroleum and affect cashflows of oil industry preventing
them from making fresh investments in India and abroad.
• Elimination / reduction of subsidies / taxes / duties and move to a market
determined pricing regime in the long term interest of consumer, oil
industry and the government
Pragmatic solution required to deregulate the pricing process
14
Thank You
Increase in Finding and Development Cost
Costs of tubing and well casings v/s US steel prices
8000
6000
4000
2000
Day rates
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0
150
100
Index
10000
200
50
0
19
97
19
9
1Q 8
19
9
1Q 9
20
0
1Q 0
20
0
1Q 1
20
0
1Q 2
20
0
1Q 3
20
0
1Q 4
20
05
Day Rates ($)
12000
800
700
600
500
400
300
200
100
0
1Q
US Steel Price
($/MT)
14000
1Q
Average Day Rates for Rotary Rigs
Year
US Steel Prices
OCTG Index
Source: Goldman Sachs Commodities Research
•
Average day rates have increased more than 50% over 2002 levels
•
The prices for tubings and well casings have more than doubled over 2002
levels in line with increase in international steel prices
Increase in F & D costs predicts increase in price of oil
16
Increase in marginal cost of production
Marginal cost of Production
45
40
35
Cost ($/bbl)
30
25
20
15
10
5
A
fr
ic
a
Q
A
1
fr
ic
a
Q
2
Sy
ria
A
si
a
Q
2
O
m
an
U
SA
Q
1
A
si
a
Q
La
tA 1
m
Q
2
U
SA
Eu
Q
2
ro
pe
L a Q1
tA
m
Q
3
A
si
a
Q
La
tA 3
m
Q
O
4
th
er
C
a n Q3
ad
a
Q
2
A
si
Eu a Q
4
ro
pe
Q
A
4
fr
ic
a
Q
4
Pe
m
ex
0
Source: Goldman Sachs Commodities Research
•
Nearly 14% of current non OPEC production needs a WTI breakeven price
above $30/bbl to generate 8 % return on capital
Higher marginal cost predicts increase in price of oil
17
Investments required by OPEC
Expected Demand (MMBPD)
2010
2020
OECD
50.7
53.0
Developing Countries
33.8
45.1
Transition economies
5.3
5.9
Total
89.9
104.0
Expected Supply (MMBPD)
2010
2020
OECD
21.7
20.6
Developing Countries
17.6
18.8
Russia
13.3
15.2
Non OPEC
54.8
57.2
Call on OPEC
35.0
46.8
(excl OPEC)
OPEC’s capital requirement $ 70 - 95 billion
•
$ 185 - 269 billion
Source: OPEC Research division
If growth slows - $ 25 billion can become dead investment by 2010
Uncertainty may hold back investments and drive up prices
18
Cumulative OPEC investment required
Cumulative OPEC Investment
$ (2003) Billion
500
Impact of lower
economic growth
400
300
200
100
0
2010
2015
2020
2025
Year
Source: OPEC Research division
•
Huge uncertainties in future oil demand translate into high
uncertainties and risks for future OPEC investment
Uncertainty may hold back investments and drive up prices
19
Rising producer taxes, transportation and quality
premium
40
35
Cost ($/bbl)
30
25
20
15
10
5
0
1990s
Upstream cost
2000s
Producer tax
Transportation & Quality Premiums
Source: Goldman Sachs Commodities Research
•
•
Rising producer taxes have increased the price by $6/bbl
Transportation and quality premium have risen by $5/bbl
Higher producer taxes predicts increase in price of oil
20
Inadequate refining and upgrading capacity
Capacity (MMBPD)
Annual Incremental Oil demand, CDU and Cracking
capacity (1996 - 2004)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1996 1997 1998 1999 2000 2001 2002 2003 2004
Year
CDU capacity
Cracking capacity
Oil Demand
Source: PEL
•
Investment in refining assets dropped after late 1990s due to glut in the
oil products market
Investments in refining dropped after late 1990s due to low
21
Refining a cyclical business
Singapore Refining Margins (1995 - 2005)
8
6
4
Source: IEA
2
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
-2
Jan-96
0
Jan-95
Gross Margin ($/bbl)
10
-4
Month
Dubai Hydrocracking
Dubai Hydroskimming
• Asian refining margins below break even levels since late 1990s
• No new investment planned during this period leading to capacity
constraints
• Tremendous opportunity for India to become a Global Player in refining
by investing in world class assets
Refineries should be allowed to make legitimate margins for
22
Responses by OECD countries
RSP (incl taxes) ($/bbl)
Diesel Prices v/s Marker Crude Prices
250
200
150
100
50
0
Jan04
Feb04
Mar04
Apr04
May04
Jun04
Jul04
Aug- Sep04
04
Oct04
Nov04
Dec04
Jan05
Feb05
Mar05
Month
France
Germany
Italy
Spain
United Kingdom
Japan
Canada
United States
Dubai
Brent
WTI
Source: IEA
Consumer prices raised in line with crude prices
23
Responses by OECD countries
RSP (incl taxes) ($/bbl)
Gasoline Prices v/s Marker Crude Prices
300
250
200
150
100
50
0
Jan- Feb- Mar04
04
04
Apr- May- Jun04
04
04
Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar04
04
04
04
04
04
05
05
05
Month
France
Germany
Italy
Spain
United Kingdom
Japan
Canada
United States
Dubai
Brent
WTI
Source: IEA
Consumer prices raised in line with crude prices
24
Responses by Other oil importing countries
Diesel Prices v/s Dubai
160
RSP (incl taxes)($/bbl)
140
120
100
80
60
40
20
0
Jan04
Feb04
Mar04
Apr04
May04
Jun04
Jul04
Aug04
Sep04
Oct04
Nov04
Dec04
Jan05
Feb05
Mar05
Month
Pakistan
Thailand
Australia
Singapore
India
Dubai
Source:PSOCL, EPPO, Fuelwatch, Shell Singapore
Developing nations responding differently than developed
25
Responses by Other oil importing countries
Gasoline Prices v/s Dubai
RSP (incl taxes) ($/bbl)
160
140
120
100
80
60
40
20
0
Jan- Feb- Mar04
04
04
Apr- May- Jun04
04
04
Jul04
Aug- Sep04
04
Oct- Nov- Dec- Jan- Feb- Mar04
04
04
05
05
05
Month
Pakistan
Thailand
Australia
Singapore
India
Dubai
Source:PSOCL, EPPO, Fuelwatch, Shell Singapore
Developing nations responding differently than developed
26
Responses by oil exporting countries
Diesel Prices v/s Marker Crudes
RSP (incl taxes) ($/bbl)
70
60
50
40
30
20
10
0
Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar04
04
04
04
04
04
04
04
04
04
04
04
05
05
05
Month
Indonesia
Malaysia
Tapis
Minas
Source:ESAI
Consumer prices subsidies by government
27
Responses by oil exporting countries
Gasoline Prices v/s Marker crudes
RSP (incl taxes) ($/bbl)
70
60
50
40
30
20
10
0
Jan- Feb- Mar04
04
04
Apr- May- Jun04
04
04
Jul04
Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar04
04
04
04
04
05
05
05
Month
Indonesia
Malaysia
Tapis
Minas
Source:ESAI
Consumer prices subsidised by government
28