India’s state-run oil sector units may be heading for stormy waters this year, with domestic product flagging and gross refining margins expected to fare poorer than levels seen over the past few years. The government’s increasing appetite for more lucrative shareholder returns from its commercial units may also put a dampener on oil sector PSUs profitability this fiscal year.
Analysts at Moody’s Investor Services note that while India’s rising domestic consumption will support ongoing investments in upstream systems and refining capacity, several other headwinds exist. In a note this week, the agency said: “India’s oil and gas consumption will support its investments in refining capacity and upstream production, but crude imports will keep growing amid stagnant production, and government pressure for shareholder returns will temper national oil companies’ credit quality”.
The first challenge oil sector PSUs will have to face is rising import dependence in the face of falling domestic production and rising demand. Over the past four financial years, domestic crude oil and condensate production by oil companies have steadily declined, going from 36.9 million tonnes in financial year 2016-17 (FY17) to 34.2 million tonnes (provisional) in 2018-19. This fall comes even as India’s consumption of petroleum products has increased from 184.7 million tonnes in FY16 to 211.6 million tonnes in FY19. India’s import dependency has consequently increased from 80.6 per cent in FY16 to 83.7 per cent in FY19.
With international crude oil rates expected to trend higher this fiscal year with supply disruptions in several oil producers, full Iran sanctions and geopolitical uncertainty, India’s higher import dependence could see refining margins being squeezed. “Refining margins in the region in 2019 and 2020 are likely to be lower than 2017 and 2018, which will result in lower earnings, particularly for refiners and integrated oil companies,” Moody’s noted.
Exports of petroleum products could mitigate these effects. The country’s predominantly state-run refiners produced 262.4 million tonnes of petroleum products in FY19, against total consumption of 211.6 million tonnes. However, a global economic slowdown could suppress demand on the international markets, and economists point to worrying signs that the global growth engine might be spluttering. Oil PSUs may also have to deal with a hungry government, which has pressured state-run firms into doling out larger dividends and making share buybacks to meet its fiscal deficit and disinvestment targets.