State-owned oil refining and marketing firm Indian Oil Corp. Ltd (IOC) has said it will not be able to meet a 2012 target of sourcing 2 million tonnes per annum (mtpa) of crude oil from its own overseas blocks—a failure that has significant implications for the country’s energy security.
IOC is India’s largest oil refiner and while an executive at the firm attributed its failure to meet the 2012 target on rising costs of exploration blocks overseas, analysts say the problem has been exacerbated by IOC’s own cash flows being affected on account of bearing part of the burden of the government’s efforts to keep prices of petroleum products artificially low.
“We have failed in this target (of sourcing 2mtpa of oil from overseas blocks). With crude oil prices at the current levels, it looks impossible at this point of time. The value of exploration and production (E&P) blocks in the last three years has gone up manifold,” said a senior IOC executive, who did not wish to be named.
IOC is the largest oil importer in the country and its E&P initiative was driven by the desire to insulate itself against volatile crude prices and also ensure long-term supplies of the commodity to keep its refineries running.
India currently has a refining capacity of 149mtpa of crude, and the firm has a 40.4% share of the business.
“The only way out for us is to take a realistic view (of acquisition of overseas blocks) when crude oil prices cool down,” the executive added.
The oil refining company needs 60mt of crude oil a year. Of this, around 70%, or 42mt, is imported from countries such as Iraq, Kuwait, Saudi Arabia, Malaysia, Iran and Abu Dhabi. The balance is met from domestic production.
Stuck in the middle: An Indian Oil petrol pump in Tamil Nadu. IOC executives say the only way to better the situation is to take a realistic view of acquiring overseas blocks when crude prices cool down. ((Hemant Mishra / Mint)
India consumes around 112mt of petroleum products a year. It is also the world’s fifth largest oil importer and around 78% of its energy needs are met through imports.
Energy security, from local supplies and assured long-term import contracts, is critical if the country wants to sustain economic growth.
IOC currently has a total of 21 E&P blocks in India and elsewhere. The company’s overseas blocks are in Libya, Nigeria, Gabon, Yemen and Iraq, and commercial operations are yet to begin in any of these.
“All these blocks are under various stages of development,” the IOC executive said.
Analysts say cash-flow issues have also crimped the company’s overseas plans.The Indian government forces IOC and other state-ownedoil marketing firms to absorb part of the petroleum products subsidy.
“Indian Oil Corp. does not have strong cash flows to support its E&P business. Even if it gets a very good E&P block, it does not have the money to invest in it as this requires billion of dollars of investment. The company’s core business of oil marketing is not cash surplus and the uncertainties over the same will continue over the next year. Indian Oil is bleeding,” said Prayesh Jain, an analyst at stock market research firm India Infoline Ltd.
IOC has a total debt of Rs28,834 crore on its balance sheet and expects this number is expected to grow to Rs32,000 crore by March. It ended 2006-07 with Rs2,20,779 crore in revenues and Rs7,499 crore in net profit; in the first nine months of 2007-08 ended December, it returned a net profit of Rs7,377 crore on revenues of Rs1,77,223 crore.
With the international price of crude at around $90 (Rs3,573) per barrel, the total under-recoveries, or subsidy burden, of oil marketing companies such as IOC and Hindustan Petroleum Corp. Ltd for 2007-08 will be around Rs70,968 crore.