Impact of rising oil prices and possible solutions
Industry Perspective
Crude
• Increase in finding and development cost
• Increased marginal cost of production esp. Non-OPEC
• Market uncertainty affecting fresh investments by oil producers
• Rising producer taxes, transportation and quality premiums
Products
• Inadequate refining and upgrading capacity
• Better and environmental friendly fuels needing high investment in technology upgradation
2
What is behind rising oil prices ?
Current price rise due to structural changes in fundamentals and business drivers
3
What is the Outlook for Crude ?
World adjusting to new OPEC unofficial price band of $ 40 - $ 50 per barrel
Long term crude price forecast (WTI)
0
10
20
30
40
50
60
70
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Year
Pri
ce (
$/b
bl)
PIRA PEL ESAI
Source:PEL, PIRA, ESAI
Based on Saudi Arabia’s Oil minister,
Mr. Naimi’s statement
4
What is the Outlook for Products ?
• Demand for transportation fuels expected to grow faster than
other fuels in line with growth in GDP
• Refining / upgrading capacity is currently constrained leading to
high crack margins and subsequent high prices
• Changes in product quality driven by environmental
considerations are further constraining the upgrading capacity
• Most incremental crude in future likely to be heavy and sour there
by necessitating higher investments in cracking / upgrading
capacities
• Refining business is highly capital intensive and cyclical in nature
with prolonged periods of zero / negative margins following
periods of high margins
Structural changes stable enough to keep product prices high in the near term
5
Refining - a hedge to achieve Energy Security
• Investments in upstream essential to achieve Energy security
• They are high risk in nature due to huge earnings variability /
uncertainty
• Investments in downstream especially refining can provide stable
earnings during good times like at present
• This can mitigate the risk involved in upstream and help achieve product sufficiency in the country
• Fresh investments possible only if refineries are allowed to generate profits during good times
• Any attempt to prevent refineries from generating profits by way of subsidy burden would be detrimental to Energy security in the long run
Investments in refining can hedge risky investments in E&P sector
6
Need for stable long term policy
• To minimise the impact of high oil prices there is a need for
adopting a stable / consistent policy -
•Eliminate / Reduce subsidies and move towards completely
market determined pricing
•Encourage investment in upstream and downstream assets
and allow them to realise full legitimate margins
•Rationalise / reduce taxes, duties and other levies and
implement VAT on a speedy basis to moderate prices
•State governments should help by reducing the sales tax
rates
•Promote energy conservation among consumers by true
pricing of products
•Integrated model of energy, economy and environment
using country specific data necessary for stable long term
policy development to meet growth objectives.Opportunity to become a global player through higher investment in refining and upgrading capacity
7
Responses of other countries to high oil prices
Passing of oil price rise to final consumer only long term viable option for oil importing nations
•Developed nations (eg. OECD nations)
Oil price rise passed to the final consumer
Gasoil ($/bbl)
France 42.73 86.09 36.96 165.78Germany 40.73 97.03 44.33 182.09Italy 42.04 83.20 46.32 171.56Spain 40.82 60.70 45.68 147.20UK 41.8 138.66 36.21 216.67Japan 41.89 56.98 55.25 154.12Canada 46.74 31.00 35.13 112.87USA 40.89 19.08 30.49 90.45
RSPCountry Crude Cost TaxesR & M
margins
Source: IEA
8
Responses of other countries to high oil prices
Passing of oil price rise to final consumer only long term viable option for oil importing nations
•Developed nations (eg. OECD nations)
Oil price rise passed to the final consumer
Source: IEA
Gasoline ($/bbl)
France 42.73 158.35 23.13 224.21Germany 40.73 168.05 29.67 238.46Italy 42.04 155.67 43.64 241.35Spain 40.82 107.36 37.84 186.02UK 41.8 175.46 30.62 247.88Japan 41.89 92.35 60.34 194.58Canada 46.74 40.54 21.75 109.03USA 40.89 16.37 26.20 83.46
R & M margins
RSPCountry Crude Cost Taxes
9
Responses of other countries to high oil prices
Passing of oil price rise to final consumer only long term viable option for oil importing nations
•Oil importing nations (eg. India, Pakistan)
Oil price rise partially passed to the final consumer
Source:PSOCL, EPPO, Fuelwatch, Shell Singapore
Gasoline ($/bbl)
Pakistan 36.32 44.26 17.71 98.29Thailand 40.79 22.08 18.71 81.58Australia 56.46 59.08 13.25 128.79Singapore 39.54 49.16 53.41 142.11India Nov-04 44.80 71.90 17 133.65
RSPCountryCrude Cost (estimated)
TaxesR & M
margins
India Current 52.5 98.1 5.8 156.4
Source:PSOCL, EPPO, Fuelwatch, Shell Singapore
10
Responses of other countries to high oil prices
Passing of oil price rise to final consumer only long term viable option for oil importing nations
•Oil importing nations (eg. India, Pakistan)
Oil price rise partially passed to the final consumer
Source:PSOCL, EPPO, Fuelwatch, Shell Singapore
Gasoil ($/bbl)
Pakistan 36.32 44.26 17.71 98.29Thailand 40.79 22.08 18.71 81.58Australia 56.46 59.08 13.25 128.79Singapore 39.54 49.16 53.41 142.11India Nov 2004 44.80 37.10 10.9 92.82
RSPCountryCrude Cost (estimated)
TaxesR & M
margins
India Current 52.5 52.5 14.7 119.7
11
Responses of other countries to high oil prices
Passing of oil price rise to final consumer only long term viable option for oil importing nations
•Oil exporting nations (eg. Malaysia, Indonesia)
Oil price rise borne by the government through subsidy
Gasoil ($/bbl)
Malaysia 54.46 34.76Indonesia 49.04 29.14@ Tapis for Malaysia, Minas for Indonesia
CountryMarker @
Crude Cost RSP
Gasoline ($/bbl)
Malaysia 54.46 57.31Indonesia 49.04 31.97@ Tapis for Malaysia, Minas for Indonesia
CountryMarker @
Crude Cost RSP
12
Response of China to high oil prices
Passing of oil price rise to final consumer only long term viable option for oil importing nations
Gasoline and Diesel Prices in China v/s Dubai
0
10
20
30
40
50
60
70
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Month
RS
P (
inc
l ta
xe
s)
($/b
bl)
Gasoline Gasoil Dubai
Source: ESAI
13
Options for India
• Current oil price rise is long term fundamental increase due to
structural changes and not a speculative increase
• The only viable option for India is to pass this price increase to
the final consumer
• RBI governor Sh. Y V Reddy has also acknowledged in a recent
interview
“As the policy itself has indicated, the headroom is less. If the
supply shock persists for long, the relative burden sharing will
have to change.
For instance, if we assumed that the oil shock is temporary, the
entire burden cannot be shifted to the consumers.
If it is seen to be less temporary, then we will have to start
shifting the relative sharing of the burden.”
Completely deregulated market need of the hour
14
Conclusion
• Indian oil industry is highly matured matching best global
standards.
• Indian refining company (RIL) became the 1st Asian company to
be recognised as “International Refiner of the Year 2005” by
World refining magazine
• Golden opportunity for India to become a global player and hence
need to encourage investment in upstream and downstream
sector
• Reduced product prices in domestic market will lead to inefficient
utilisation of petroleum and affect cashflows of oil industry
preventing them from making fresh investments in India and
abroad.
• Elimination / reduction of subsidies / taxes / duties and move to a
market determined pricing regime in the long term interest of
consumer, oil industry and the government
Pragmatic solution required to deregulate the pricing process
Thank You
16Increase in F & D costs predicts increase in price of oil
Increase in Finding and Development Cost
Source: Goldman Sachs Commodities Research
• Average day rates have increased more than 50% over 2002 levels
• The prices for tubings and well casings have more than doubled over 2002 levels in line with increase in international steel prices
Costs of tubing and well casings v/s US steel prices
0100200300400500600700800
1Q19
97
1Q19
98
1Q19
99
1Q20
00
1Q20
01
1Q20
02
1Q20
03
1Q20
04
1Q20
05
Year
US
Ste
el P
rice
($
/MT
)
0
50
100
150
200
Ind
ex
US Steel Prices OCTG Index
Average Day Rates for Rotary Rigs
0
2000
4000
6000
8000
10000
12000
14000
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Day
Rat
es (
$)
Day rates
17Higher marginal cost predicts increase in price of oil
Increase in marginal cost of production
Source: Goldman Sachs Commodities Research
• Nearly 14% of current non OPEC production needs a WTI breakeven price above $30/bbl to generate 8 % return on capital
Marginal cost of Production
0
5
10
15
20
25
30
35
40
45
Africa
Q1
Africa
Q2
Syria
Asia
Q2
Oman
USA Q1
Asia
Q1
Lat A
m Q
2
USA Q2
Europe
Q1
Lat A
m Q
3
Asia
Q3
Lat A
m Q
4
Other
Q3
Canad
a Q
2
Asia
Q4
Europe
Q4
Africa
Q4
Pemex
Co
st
($/b
bl)
18
Expected Demand (MMBPD) 2010 2020
OECD 50.7 53.0
Developing Countries 33.8 45.1
Transition economies 5.3 5.9
Total 89.9 104.0
Expected Supply (MMBPD) 20102020
OECD 21.7 20.6
Developing Countries 17.6 18.8
(excl OPEC)
Russia 13.3 15.2
Non OPEC 54.8 57.2
Call on OPEC 35.0 46.8
Investments required by OPEC
Uncertainty may hold back investments and drive up prices
OPEC’s capital requirement $ 70 - 95 billion $ 185 - 269 billion
• If growth slows - $ 25 billion can become dead investment by 2010
Source: OPEC Research division
19
Cumulative OPEC investment required
Uncertainty may hold back investments and drive up prices
• Huge uncertainties in future oil demand translate into high uncertainties and risks for future OPEC investment
Cumulative OPEC Investment
0
100
200
300
400
500
2010 2015 2020 2025
Year
$ (
20
03
) B
illi
on
Impact of lower economic growth
Source: OPEC Research division
20Higher producer taxes predicts increase in price of oil
Rising producer taxes, transportation and quality premium
0
5
10
15
20
25
30
35
40
1990s 2000s
Co
st (
$/b
bl)
Upstream cost Producer tax Transportation & Quality Premiums
Source: Goldman Sachs Commodities Research
• Rising producer taxes have increased the price by $6/bbl• Transportation and quality premium have risen by $5/bbl
21Investments in refining dropped after late 1990s due to low oil prices
Inadequate refining and upgrading capacity
Source: PEL
• Investment in refining assets dropped after late 1990s due to glut in the oil products market
Annual Incremental Oil demand, CDU and Cracking capacity (1996 - 2004)
0.00.51.01.52.02.53.03.5
1996 1997 1998 1999 2000 2001 2002 2003 2004
Year
Cap
acit
y (M
MB
PD
)
CDU capacity Cracking capacity Oil Demand
22
Refining a cyclical business
• Asian refining margins below break even levels since late 1990s
• No new investment planned during this period leading to capacity
constraints
• Tremendous opportunity for India to become a Global Player in
refining by investing in world class assets
Refineries should be allowed to make legitimate margins for future investments
Singapore Refining Margins (1995 - 2005)
-4
-2
0
2
4
6
8
10
Jan
-95
Jan
-96
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Month
Gro
ss M
arg
in (
$/b
bl)
Dubai Hydrocracking Dubai Hydroskimming
Source: IEA
23
Responses by OECD countries
Consumer prices raised in line with crude prices
Source: IEA
Diesel Prices v/s Marker Crude Prices
0
50
100
150
200
250
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Month
RS
P (
incl
tax
es)
($/b
bl)
France Germany Italy
Spain United Kingdom Japan
Canada United States Dubai
Brent WTI
24
Responses by OECD countries
Consumer prices raised in line with crude prices
Source: IEA
Gasoline Prices v/s Marker Crude Prices
0
50
100
150
200
250
300
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Month
RS
P (
inc
l ta
xe
s)
($/b
bl)
France Germany Italy
Spain United Kingdom Japan
Canada United States Dubai
Brent WTI
25
Responses by Other oil importing countries
Developing nations responding differently than developed nations
Source:PSOCL, EPPO, Fuelwatch, Shell Singapore
Diesel Prices v/s Dubai
0
20
40
60
80
100
120
140
160
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Month
RS
P (
incl
tax
es)(
$/b
bl)
Pakistan Thailand Australia Singapore India Dubai
26
Responses by Other oil importing countries
Gasoline Prices v/s Dubai
0
20
40
60
80
100
120
140
160
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Month
RS
P (
inc
l ta
xe
s)
($/b
bl)
Pakistan Thailand Australia Singapore India Dubai
Source:PSOCL, EPPO, Fuelwatch, Shell Singapore
Developing nations responding differently than developed nations
27
Responses by oil exporting countries
Consumer prices subsidies by government
Diesel Prices v/s Marker Crudes
0
10
20
30
40
50
60
70
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Month
RS
P (
incl
tax
es)
($/b
bl)
Indonesia Malaysia Tapis Minas
Source:ESAI
28
Responses by oil exporting countries
Consumer prices subsidised by government
Gasoline Prices v/s Marker crudes
0
10
20
30
40
50
60
70
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Month
RS
P (
inc
l ta
xe
s)
($/b
bl)
Indonesia Malaysia Tapis Minas
Source:ESAI
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