DEMYSTIFYING INDIAN REFINERIES AND THEIR GRMs
In India, we have six standalone refineries, of which three are in public sector while three are in private sector, which are Reliance Industries (33 million tonne) Essar Oil (7.5 million tonne) being operational and Reliance Petroleum setting up 29 million tonne and would be operational in December 08. In public sector, we have MRPL (10.5 million tonnes) Chennai Petroleum (9.5 million tonnes) and Bongaigaon Refinery with 2 million capacity, per annum. Oil marketing companies (OMCs) like IOC, BPCL and HPCL also have refineries but they are not standalone and hence performance of these refineries are not available, though these OMCs have been reporting GRMs of its refineries. BPCL has two refineries, one in Mumbai and another one at Kochi while HPCL has two with one in Mumbai and another one at Vishakhapatnam. IOC has 8 refineries spread across the country.
Now let us understand what is GRM. It is Gross Refining Margins being difference between crude oil price and total value of petroleum products produced by the refinery. Suppose a refinery has purchased crude at $ 140 barrel and have realized $ 155 barrel on sale of petrol, diesel, ATF, Kerosene, LPG and Naptha etc., hence, in this case GRM is at $ 15 per barrel.
The standalone domestic oil refineries are paid import parity price, which is the international price of the product plus insurance, freight and custom duty. So, higher custom duty on product would result in higher GRM. It may be seen that June quarter results having reported by MRPL and Chennai Petroleum, has posted higher GRM of $ 18.03 and $ 15.89 per barrel, respectively, due to this reason, while Reliance Industries Ltd. (RIL) has posted GRM of $ 15.70 as RIL refinery is an EoU and not catering to the domestic market. In June 08 the government reduced custom duty on Petrol and Diesel from 7.50% to 2.50% while on Petro products from 10% to 5%. Though the country is not importing any Petrol and Diesel, this reduction of the custom duty has reduced the GRM of standalone refineries.
The second point which determines the GRM of a refinery is its Nelson Complexity. Higher Nelson Complexity of a refinery enables it to process sour crude which gives a better GRM, due to price differential of crude between sweet crude and sour crude. Sweet and sour depend on sulphur content of crude oil and sweet has less than 0.5 per cent sulphur while sour crude has more than 0.5 per cent. India largely imports the sour variety as environmental standards in India permit higher suplur content in petrol and diesel. RIL refinery has complexity of 11.7 while Essar Oil has 12 and Reliance Petroleum would be having 14. In public sector, MRPL has complexity of 7.5 while Chennai Petro has 7 and Bongaigaon Refinery is at 5.
Profitability of a refinery also increases due to better product mix. Also, in the last 18 months, price of sulphur has gone up by over 20 times and processing of sour crude gives higher sulphur as residue or waste product which has been giving better realization, thus improving the profitability of the refinery.
However, in June 08 quarter, there has been a steep rise in GRMs of two public sector refineries while that trend was not noticed in case of RIL. Chennai Petroleum had a GRM of $ 15.89 per barrel against $ 9.59 per barrel for March 08 quarter while it is at $ 18.03 per barrel in case of MRPL for June 08 quarter. On the other hand RIL had a GRM of $ 15.70 per barrel against $ 15.50 per barrel of March 08 quarter. Traditionally, RIL has always been posting higher GRM by about $ 5 per barrel, over GRM earned by Chennai and MRPL. So what went wrong in this quarter?
Also, why has there been a sudden rise in GRM of MRPL and Chennai Petroleum in this quarter? As we have seen earlier, due to reduction in custom duty on petrol and petro products, the same has not helped these two PSU refineries to improve its performance. However, stock of crude held by them seems to be instrumental for this improved performance.
Why benefits of inventory gain has not accrued to RIL, inspite of the fact that RIL had an inventory of Rs.14,248 crores as at 31st March 08, of which over 50% must be of Refinery Segment, as this segment contributes to about two third of the companys topline? RIL seems to have realized Rs.5,533 per barrel or $ 133 per barrel, for its finished products while the crude has been hovering between $ 120 to $ 140 per barrel. So, what is the reason for lower realization of finished products? Maybe, forward contracts having entered by RIL, without matching procurement of crude at those levels. Alternatively, RIL may not have booked the inventory gain and increase in stock in trade and work in progress of Rs.2,607 crores during June 08 quarter has been partly reflected of this gain.
One needs to wait and see the first quarter performance of Bongaigaon Refinery, which would be declared on 30th July 08 as also the GRM to be declared by OMCs for June 08 quarter. If all of them declare a GRM of $ 15 and above, it will create a big question mark on the margins of refinery segment of RIL for June 08 quarter.
In that event, only two inferences could be drawn. One, whether RIL has suppressed the performance on fear of Windfall Profit Tax? And if it is so, then it leaves a big question mark on the transparency and authenticity of quarterly results. Secondly, it could question the capability of RIL, in future, to capitalize on its complexity advantage, which probably may not be enjoyed and earned by Reliance Petroleum, having Nelson Complexity of 14.
In India, we have six standalone refineries, of which three are in public sector while three are in private sector, which are Reliance Industries (33 million tonne) Essar Oil (7.5 million tonne) being operational and Reliance Petroleum setting up 29 million tonne and would be operational in December 08. In public sector, we have MRPL (10.5 million tonnes) Chennai Petroleum (9.5 million tonnes) and Bongaigaon Refinery with 2 million capacity, per annum. Oil marketing companies (OMCs) like IOC, BPCL and HPCL also have refineries but they are not standalone and hence performance of these refineries are not available, though these OMCs have been reporting GRMs of its refineries. BPCL has two refineries, one in Mumbai and another one at Kochi while HPCL has two with one in Mumbai and another one at Vishakhapatnam. IOC has 8 refineries spread across the country.
Now let us understand what is GRM. It is Gross Refining Margins being difference between crude oil price and total value of petroleum products produced by the refinery. Suppose a refinery has purchased crude at $ 140 barrel and have realized $ 155 barrel on sale of petrol, diesel, ATF, Kerosene, LPG and Naptha etc., hence, in this case GRM is at $ 15 per barrel.
The standalone domestic oil refineries are paid import parity price, which is the international price of the product plus insurance, freight and custom duty. So, higher custom duty on product would result in higher GRM. It may be seen that June quarter results having reported by MRPL and Chennai Petroleum, has posted higher GRM of $ 18.03 and $ 15.89 per barrel, respectively, due to this reason, while Reliance Industries Ltd. (RIL) has posted GRM of $ 15.70 as RIL refinery is an EoU and not catering to the domestic market. In June 08 the government reduced custom duty on Petrol and Diesel from 7.50% to 2.50% while on Petro products from 10% to 5%. Though the country is not importing any Petrol and Diesel, this reduction of the custom duty has reduced the GRM of standalone refineries.
The second point which determines the GRM of a refinery is its Nelson Complexity. Higher Nelson Complexity of a refinery enables it to process sour crude which gives a better GRM, due to price differential of crude between sweet crude and sour crude. Sweet and sour depend on sulphur content of crude oil and sweet has less than 0.5 per cent sulphur while sour crude has more than 0.5 per cent. India largely imports the sour variety as environmental standards in India permit higher suplur content in petrol and diesel. RIL refinery has complexity of 11.7 while Essar Oil has 12 and Reliance Petroleum would be having 14. In public sector, MRPL has complexity of 7.5 while Chennai Petro has 7 and Bongaigaon Refinery is at 5.
Profitability of a refinery also increases due to better product mix. Also, in the last 18 months, price of sulphur has gone up by over 20 times and processing of sour crude gives higher sulphur as residue or waste product which has been giving better realization, thus improving the profitability of the refinery.
However, in June 08 quarter, there has been a steep rise in GRMs of two public sector refineries while that trend was not noticed in case of RIL. Chennai Petroleum had a GRM of $ 15.89 per barrel against $ 9.59 per barrel for March 08 quarter while it is at $ 18.03 per barrel in case of MRPL for June 08 quarter. On the other hand RIL had a GRM of $ 15.70 per barrel against $ 15.50 per barrel of March 08 quarter. Traditionally, RIL has always been posting higher GRM by about $ 5 per barrel, over GRM earned by Chennai and MRPL. So what went wrong in this quarter?
Also, why has there been a sudden rise in GRM of MRPL and Chennai Petroleum in this quarter? As we have seen earlier, due to reduction in custom duty on petrol and petro products, the same has not helped these two PSU refineries to improve its performance. However, stock of crude held by them seems to be instrumental for this improved performance.
Why benefits of inventory gain has not accrued to RIL, inspite of the fact that RIL had an inventory of Rs.14,248 crores as at 31st March 08, of which over 50% must be of Refinery Segment, as this segment contributes to about two third of the companys topline? RIL seems to have realized Rs.5,533 per barrel or $ 133 per barrel, for its finished products while the crude has been hovering between $ 120 to $ 140 per barrel. So, what is the reason for lower realization of finished products? Maybe, forward contracts having entered by RIL, without matching procurement of crude at those levels. Alternatively, RIL may not have booked the inventory gain and increase in stock in trade and work in progress of Rs.2,607 crores during June 08 quarter has been partly reflected of this gain.
One needs to wait and see the first quarter performance of Bongaigaon Refinery, which would be declared on 30th July 08 as also the GRM to be declared by OMCs for June 08 quarter. If all of them declare a GRM of $ 15 and above, it will create a big question mark on the margins of refinery segment of RIL for June 08 quarter.
In that event, only two inferences could be drawn. One, whether RIL has suppressed the performance on fear of Windfall Profit Tax? And if it is so, then it leaves a big question mark on the transparency and authenticity of quarterly results. Secondly, it could question the capability of RIL, in future, to capitalize on its complexity advantage, which probably may not be enjoyed and earned by Reliance Petroleum, having Nelson Complexity of 14.