Financial Daily from THE HINDU group of publications
Monday, Oct 04, 2004
Money & Banking
Industry & Economy - Petroleum
Oil import bill may queer the pitch for Govt
ONE factor that has made any economic forecasting and projections difficult this year has been the surging crude oil prices.
The possibility of an oil shock is looming as the NYMEX futures for short month has been trading firm around $50 dollar a barrel.
The impact on various economies would differ on the basis of their dependence of crude oil imports, its composition and demand forecast. In this article, we look at the country's crude oil dependence and the impact from high oil prices to the oil bill.
We first look at the various products and their pricing. Crude oil is classified on the basis of gravity and sulphur content.
The gravity is measured by the API gravity measure. The crude is divided as `heavy' and `light' on the basis of the gravity. API gravity is a measure that is inversely proportional to the specific gravity. This would mean that light crude would have a high API gravity.
This measure is used by the oil industry to indicate the type of oil. A high API gravity intuitively indicates that easily more diesel and petrol, which are lighter products, can be distilled from the crude.
On the other hand, oil is divided in to sweet and sour according to the sulphur content.
If oil has high sulphur content, then it would take extra processing to generate products which conform to new pollution standards. The pricing of the crude oil is dependent on the type of crude, place of pumping and proximity to users.
Light crude oils are generally priced higher than heavy crude. The two types of crude oil the country imports are Dubai Crude, which is a heavy crude oil and the rest is Bonny light, Malaysian Crude which are priced around Brent oil.
Oil and Natural Gas Corporation and its joint ventures mainly do the domestic crude production, which currently is around 33.4 million metric tonnes per annum (MMTPA). According to the Ministry of Petroleum data, the refining capacity is around 127.5 MMTPA.
There is around 33 MMTPA capacity in the private sector, which is primarily with Reliance Industries.
The rest is divided among public sector units like Indian Oil, HPCL, BPCL and MRPL.
The refineries are broadly running at capacity and the gap between the capacity and domestic production is met from imports.
Refineries can extract more distillate from heavy crude oil if they put up a complex unit like hydrocrackers.
In India, complex refineries are limited to Chennai Petroleum, few units of Indian Oil Corporation and Reliance Industries.
Import data and discussions with some oil majors suggest that oil import is approximately around two-third Dubai heavy crude and one-third is benchmarked to Brent.
Oil imports has risen from $7.15 billion in 1996 fiscal to $20.17 billion in 2003 fiscal.
To determine how the high crude oil would affect the oil import bill, we use the data on Indian oil imports.
We take the average price of Dubai crude and Brent for the fiscal year. The data on the oil import is taken from the Ministry of Petroleum.
As is evident the oil import bill was close to $ 20 billion in the last fiscal year where the price of import oil basket was around $27.4 a barrel.
The Indian crude oil import is now around 1.98 million barrels per day, according to the Petroleum Intelligence Weekly. This would translate to around 98 MMTPA.
The outlook for crude remains firm as the high demand from Asian countries continues, while threat of supply disruptions and winter season loom large.
The price of Brent and Dubai crude has now moved up to $46 and $37.60 per barrel respectively. If we assume that the prices remain at the current level for the rest of the year, the average Indian basket price for the current fiscal would move up to $37.79.
This would take the oil import bill about $7 billion higher to $27.2 billion.
One factor that is helping India is that the spread between Dubai crude and Light crude has widened from between $2 and $3 a barrel to between $10-12 a barrel.
Any addition to the output or cut by OPEC is usually in the form of heavy crude oil and such a move affects the spread.
If OPEC increases the output, the supply of heavy crude goes up vis-à-vis light crude oil and this widens the spread.
There is surge in demand of gas and gasoline products, which is also pushing up the light crude oil prices, thereby increasing the spread between Dubai crude and Light crude oil.
One thing that clearly emerges that the headline numbers of crude (light crude prices) would not affect the economy to the same extent as the imported Indian basket price of crude is much lower than this number.
This would mean that the domestic oil companies might not have to resort to high price increases as what light crude price jump might indicate.
(The author is Senior Manager, Corporate Treasury Sales - Western India for HSBC. The views expressed herein are his own and not necessarily those of his employer.)
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