Indian Oil aims to improve refining margins this fiscal

The oil refiner had reported inventory losses of Rs9,731 crore in FY16 and Rs15,600 crore in FY15


Falling oil prices affected Indian Oil’s fortunes as gross refining margin, or the difference between the refined product and raw crude price, fell considerably. Photo: Abel Robinson
Falling oil prices affected Indian Oil’s fortunes as gross refining margin, or the difference between the refined product and raw crude price, fell considerably. Photo: Abel Robinson

Falling oil prices seems to have bottomed out, raising hopes of better margins for oil refiners in India.

Crude oil prices jumped to an eight-month high of over $50 a barrel on June 9, indicating an easing in supply glut and bringing cheers to state oil refiner Indian Oil Corp. Ltd (IOCL), which hopes to improve its margins by avoiding inventory losses for the fiscal 2016-17.

IOCL had reported inventory losses or fall in prices of crude oil below the price at which it was bought for the last two years—Rs.9,731 crore in 2015-16 and Rs.15,600 crore in 2014-15.

IOCL’s inventory loss is higher compared to its counterparts such as Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPLC) as its refineries are located away from the coast. Inventory losses for BPCL in 2015-16 stood at around Rs.2,400 crore and HPCL at Rs.1,800 crore.

“We wish there would not be any inventory loss during the current financial year. Crude oil prices have bottomed out and we don’t see a steep fall in oil prices which would impact our inventories significantly,” B. Ashok, chairman, IOCL, said.

Falling oil prices affected IOCL’s fortunes as gross refining margin (GRM), or the difference between the refined product and raw crude price, fell considerably.

Had there been no inventory loss, IOCL’s GRM for fiscal 2015-16 would have been $7.50 per barrel as against $5.06 per barrel. IOCL has a crude oil stockpile of 40 days, the highest among all oil refiners in India. “Because we have six inland refineries (away from the coast) where inventory holding is higher, we report a higher inventory loss as compared to the industry,” said an IOCL spokesperson in an email.

For fiscal 2016, BPCL reported GRM at $6.59 a barrel compared with $3.62 in 2014-15, while HPCL reported GRM of $6.68 per barrel in 2015-16 as against $2.84 a barrel in 2014-15. “Inventory losses are not a function of hedging strategy or operational inefficiency. It is purely a game of fluctuation in oil prices,” A.K. Sharma, director-finance, IOCL, said last month after the company posted its earnings for the quarter ended 31 March.

Sharma said IOCL’s inventory losses can’t be compared with BPCL or HPCL as the firm has six refineries that are away from the coast. IOCL owns and operates 11 of India’s 23 refineries. The group refining capacity is 80.7 million tonnes per annum (mtpa)—the largest share among refining companies in India.

It accounts for a 35% share of national refining capacity. “IOCL’s refining capacity and inventory holding capacity is much more than its peers, thus BPCL and HPCL’s inventory losses would be one-fourth of that reported by IOCL. Besides, refineries of BPCL and HPCL are located in coastal regions where as IOCL’s refineries are at Mathura, Gujarat, Panipat and Barauni are land-locked,” said Sharma.

For its land-locked refineries, IOCL has to move the crude oil from the coast via pipeline to the refineries, leading to higher stock of inventory both in pipeline and at the refinery. In case of coastal refineries, inventory stockpile can be lowered to 5-7 days as crude oil can be easily moved to refineries from oil-carrying vessels. In the case of private refiners such as Reliance Industries and Essar Oil, the refineries are located strategically located on the west coast of India, giving them the cost advantage of low transportation costs for feedstock and proximity to high-growth markets.

RIL owns and operates a 60 mtpa refinery in Jamnagar. Essar Oil owns and operates a 20 mtpa refinery at Vadinar in Gujarat.

India’s current refining capacity is 230 mtpa, including the just commissioned 15 mtpa IOCL refinery at Paradip, Odisha.

The public sector accounts for 66% or 150 million tonnes of the total capacity, while the private sector accounts for the remaining 34%, or 80 million tonnes.

Oil marketing firms in India are expected to post better numbers going forward as crude oil price stabilizes.

“First quarter of this fiscal has seen crude climb up so there may be significant improvement in the gross refining margins. Whenever the crude cycle reverses and there is gain, gains for IOCL would be higher than that of BPCL and HPCL,” said an analyst with a domestic brokerage who did not wish to get quoted as he is not allowed to talk to the media.

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