Mumbai: Reliance Industries Ltd (RIL), which operates the world’s single largest oil refinery, likely earned less out of each barrel of crude oil it processed in the September quarter due to costlier oil and a weak rupee, said analysts.

RIL has traditionally enjoyed higher gross refining margins, or GRM—what a refiner earns by turning crude oil into final products—than the benchmark Singapore GRMs thanks to its technical prowess.

“We expect Reliance’s refining margin premium to soften with realized margins 50¢ lower at $10.0/bbl," Jefferies India Pvt. Ltd said in a 7 October note.

RIL’s GRM, which was $12 per barrel in the September quarter of 2017-18, fell to $10.5 per barrel in the first quarter of this fiscal. In the September quarter, the benchmark Singapore Complex GRM rose from $6.0 to $6.2, led mainly by higher fuel oil cracks. RIL however does not produce fuel oil. RIL is currently in the silent period ahead of announcing its September quarter results on 17 October, when it is also expected to disclose the September quarter GRM.

RIL’s Jamnagar refinery which can process 1.24 million barrels of oil per day has for years enjoyed over $4-5 premium to benchmark Singapore refining margins. This was helped by RIL’s superior technology that can process heavier and cheaper varieties of crude oil to yield the same quality of products that other refiners can make only with light and more expensive crude.

Most of the products at Jamnagar are exported, except for some such as cooking gas.

“Over the past few quarters, refining GRMs have relatively moderated from $12/bbl in Q1/Q2FY18 to $10.5/bb in 1QFY19. Also, with higher oil prices, the fuel and losses and operating costs have likely increased, impacting realised earnings. However, there will be a partial-offset from the weak rupee," Nomura Research said in a 27 September note.

In the September quarter, the rupee fell 5.55% while crude oil prices rose 1.58%. On Thursday, rupee ended at 74.13 to a dollar, up 0.12%. Crude oil fell 1.53% and was trading at 81.80 per barrel.

However, with the International Maritime Organization regulations taking effect by 2020 and RIL’s own expansion of its core projects, its GRMs are expected to rise.

“Assuming even a $5/bbl improvement in diesel oil cracks, with 40% diesel production, we think RIL’s GRM could easily increase by $2/bbl," according to Nomura. “As the IMO regulations are to be applied from Jan-2020, the full benefit of these will be seen in FY21."

Under regulations issued in October 2016 by the IMO, ships must shift to fuel oil with sulphur content below 0.5% January 2020, against the present 3.5%. RIL has already upgraded to these standards as part of its massive refinery expansion.

Fuel oil or furnace oil is a by-product of crude oil distillation. It is used in ships, and for steam boilers in power plants and in industrial plants. With the impending shift to low-sulphur fuel oil, demand for the same is expected to rise.

RIL’s Jamnagar refinery’s profitability would also improve as it completes its petcoke gasification project which will help it meet its entire fuel requirement at the refineries and eliminate its petcoke production of 6.5 million tonnes a year, generated from two of its cokers.

The technology for petcoke gasification will help RIL produce 23 mscmd (million standard cubic metres a day) of syngas (synthetic gas) substituting its LNG (liquefied natural gas) imports.

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