Gas price takes a toll on refining margins

  • In FY22, IOC reported an average GRM of $11.25 per barrel of crude oil, BPCL $9.09 per barrel & HPCL $7.19

Rituraj Baruah
Updated20 Oct 2022
Gas plays a significant role in the oil refining process, in all three stages—separation, conversion and treating of oil. bloomberg
Gas plays a significant role in the oil refining process, in all three stages—separation, conversion and treating of oil. bloomberg

The rise in prices of liquefied natural gas and a global supply crunch has impacted the gross refining margins (GRM) of oil marketing companies, said people in the know of the developments.

Two officials aware of the developments said this has prompted OMCs, as the three state-run companies are called, to move to alternatives like naphtha and diesel in their crude refinery processes instead LNG.

But refining margins have been impacted despite the shift because the alternatives too are priced high under long-term agreements.

“We have had to shift from gas to other alternatives like diesel, naptha and even grid power. This has hit our GRMs,” said an official with one of the OMCs.

Another official said several refineries have more or less stopped using gas in the refining process.

Gas plays a significant role in the oil refining process, in all three stages—separation, conversion and treating of oil. Refining margin refers to the difference between the price of the refined product and crude.

In the last financial year (FY22), Indian Oil Corporation reported an average GRM of $11.25 per barrel of crude oil, Bharat Petroleum Corporation Ltd (BPCL) $9.09 per barrel and Hindustan Petroleum Corporation (HPCL) $7.19.

The impact on GRM due to high gas prices and low supplies comes at a time when the three public sector are already reeling under heavy losses due to high global crude prices.

Queries sent to IOCL, BPCL, HPCL and the ministry of petroleum and natural gas remained unanswered.

 “Given the check on domestic sales prices, primarily of high speed diesel, the integrated refinery and marketing companies are understandably suffering under-recovery. Refining fuel costs have gone up in recent times due to global LNG prices tightening. That further adds to the woes. The situation may not ease any soon,” said Deepak Mahurkar, partner and leader, oil and gas, PwC India.

Prashant Vashisht, vice president, ICRA said: “The cost of shift to alternatives may vary. While a shift to naphtha may be cheaper, a shift to diesel would be expensive and impact the GRMs. Several refineries have already stopped using gas with the surge in prices.”

A recent report by S&P Global Commodity Insights said that many Indian refineries have now planned their maintenance in the second half of CY2022 and the run-rate of Indian refineries in the second half is likely to be about 10% lower than the first six months of the year. India’s average run-rate for all categories of refineries fell to 96% in August from 100% in July, according to the petroleum ministry.

This week, the union cabinet approved a one-time payment of 22,000 crore for OMCs to compensate for their losses in selling cooking gas below cost.

The supply crunch comes when the US has proposed a price cap on gas supplied from Russia.

As a result, LNG suppliers now prefer to sell in the spot market than under long-term contracts.

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