Gloom for the downstream oil and gas

BR Research July 25, 2019

The listed oil marketing companies and refineries have their board meetings lined up and they will soon be announcing their financial performance for FY19. While their individual performance will be analyzed separately in this space, the year has generally been dreary for the OMCs and the refineries (also indicated by the poor quarterly performances), and it doesn’t look like there is a rebound in the near future.

What has weighed down the on the oil marketing segment of the downstream oil and gas sector is here to stay for some time: effects of monetary and fiscal tightening, be it the currency depreciation or slowing demand. Lower demand means that the volumetric sales suffer. This has been quite evident from the monthly sales of the petroleum products by the OMCs. (For product wise details, read Petroleum sales FY19: cratering). Add to this the budgetary modifications like no decrease in the corporate taxes and the increase in the minimum tax for the oil marketing companies; the OMCs are in for some tough time to defend the declining earnings.

And now the hue and cry over losses accumulated losses by the OMC sector from the currency depreciation recently has seen a proposal to OGRA for passing on the losses into the consumer prices and linking the revision of POL prices with three-month letter of credits (LCs). Whether these requests hold any ground will be taken up later in this space. But for now, suffice to say that it makes little sense to pass on the impact of exchange rate vulnerability to the consumers in form of higher prices.

The situation has been the same for the refineries – or maybe worse. The Petroleum Division has directed oil refineries to maintain a prescribed standard of fuel that meets the demand of the auto sector in terms of fuel quality; and upgrade their facilities – both of which seem difficult given the current financial position these refineries are in. Apart from the currency depreciation resulting in huge exchange losses for the refineries, the segment is beleaguered as a result of the phasing out of furnace oil, inadequate refining capacity and no upgrade in the refining process as isomerization plants and DHDS units have remained stalled due to operational and financial bottlenecks.

Copyright Business Recorder, 2019

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