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High refining margins come to the rescue of India's refiners

By Kumar Amitav Chaliha

Indian oil companies are posting strong growth in profits and healthy refining margins, despite apprehension about the increasing cost subsidizing petroleum product sales.

High refining margins have rescued state oil companies from incurring losses from domestic product sales because of a steep increase in global crude prices. The government has barred oil companies from increasing local product prices since January, even as crude prices rose by a third.

State oil companies are maximizing run rates to capitalize on high refining margins. One outcome of this is an increase in naphtha production and exports. India exported 42,000 barrels per day of naphtha in May, up 17 percent from April. Increased Indian exports are putting pressure on naphtha prices in Singapore, as most petrochemical plants in North Asia are closed for routine maintenance. According to traders in Singapore, excess cargoes from India are hurting the market because there is less demand now for naphtha. Mangalore Refineries, Kochi Refineries and Indian Oil Corporation (IOC) are exporting more naphtha by tender as industrial consumers in India switch to cheaper natural gas. Naphtha prices in India are around $6-$7 per million Btu, compared with around $4.70/MMBtu for delivered natural gas.

State oil companies posted a 30 percent increase in refining margins and profit growth of 20 percent or more for the fiscal year to March 2004, compared with the previous year. Bharat Petroleum Corporation's net profit rose 36 percent, while refining margins rose to $4.64 per barrel, up from $3.71 the previous year. Net profits for Kochi Refineries and Chennai Petroleum — stand-alone refiners owned by Bharat and IOC, respectively — increased by 21 percent and 32 percent. Margins for all state refiners including IOC and Hindustan Petroleum averaged around $4.50. Private sector player Reliance Industries posted gross refining margins of around $6 and posted a 49 percent increase in profits before interest and taxes from its refining business, compared with the previous fiscal year. Senior Bharat officials admit that high refining margins have protected the company’s bottom line. Marketing margins for state oil companies have suffered because of the product price freeze.

Meanwhile, critics are accusing oil companies of manipulating pricing formulas and overcharging customers. Since the government deregulated the oil sector in 2002, state oil companies evolved a formula whereby refinery gate prices are set at import-parity levels. The import parity price is the sum of the actual product price, the cost of transport and customs duties, which for most products such as gas oil, gasoline and kerosene are 20 percent. The import tax for crude is 10 percent, however. Also oil companies earn a margin on transport charges, as they can pay lower fees for crude but charge higher transportation costs for products. Some say the refiners make an extra $11 per ton through the “import parity” pricing formula. This cushion has again helped refiners absorb losses on domestic product sales in recent months.

Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Keith W. Rabin, Robert Windorf, Sergei Blagov, Darrel Whitten and Jonathan Hopfner

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