impact of rising oil prices and possible solutions industry perspective

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



•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



•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


10



•Oil importing nations (eg. India, Pakistan)

Oil price rise partially passed to the final consumer


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



•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


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


• 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


• 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


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


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