Crude oil $40bbl Impact, Survival and Opportunities

1
Crude oil _at_40/bblImpact, Survival and
Opportunities

• S.V.Narasimhan
• Director(Finance)
• Indian Oil Corporation

2
Presentation covers..

• Oil Prices Some reflections
• Macro-economic perspective
• Economy and oil prices
• Effect on Indian economy
• Downstream sector impact
• Financial health
• Subsidies
• Refining margins
• Crude slate
• Challenges Opportunities
• International developments
• Refiners perspective

3
Demand, Spare Capacity and Price(LHSDemand(mbd),
RHSSpare Capacity (mbd)
Source IEA/Shell
4
Oil _at_40 The real price argument(WTI Actual
vs US inflation adjusted)
/bbl

• Inflation argument often used for justifying high
  oil prices
• Prices adjusted for US inflation (base1990
  2000) do not suggest a link between nominal and
  real prices

5
Price perspective Trip down memory lane

• Asian crises pales in comparison with Current
  Crisis on all indicators.
• Prices may take time to recover?

Source IEA/Trade sources
6
Price slumps and recovery
100
Dubai (/bbl)

• Oil _at_40/bbl looks cheap but still high from
  historical perspective
• Price recovery gradual after demand slumps in
  1979(Iranian revolution), 1992-93 (US recession)
  and 1998-99(Asian crisis).

7
Era of cheap oil over New paradigm

• Incremental barrels viz. bio-fuels, Canadian
  sands, CTL viable over 50-60/bbl.
• If Middle East develops low cost oil capacity
  dramatically, no reason why oil _at_40/bbl is not
  sustainable.
• But unlikely as they may prolong life of oil
  production for future generations.
• Practically, era of cheap oil over. But 100
  prices unlikely in near future.

Source PIRA
8
Refineries Financial health

• Working capital improves
• Significant value locked up in inventories is
  released
• Borrowings come down
• Improved debt/equity and other ratios
• Interest cost declines
• Borrowing rates will soften
• Suppliers willing to take higher volume exposure
  on refiners (w.r.t. crude oil/product imports)

9
Oil _at_40 Macro-economic perspective
?

• Significant relief in oil import bill of the
  country, checks inflation
• Improves export competitiveness of industry and
  services
• Less spending on energy releases money for
  spending on goods and services giving fillip to
  industry

10
Oil _at_40 Relief for OMCs
?

• High prices put huge pressure on Refiners
  margins
• Welcome relief due to fall in prices

Source PPAC, Platt's
11
Oil _at_40 Refineries Margins the keyLHS axis
Dubai Qtrly price(/bbl), RHS axis Qtrly margin
(/bbl)

• High prices associated with high refining
  margins.
• In 1996-99, utilization falls from 89 to 85 due
  to huge capacity build up (5.6 mbd)

12
Refinery Margins Recent trendLHS axis Dubai
price(/bbl), RHS axis Margin (/bbl)

• Refinery margins trending oil prices movements
• During 2007-2013, 8.8 mbd of refining capacity
  additions will exceed demand growth at 6.0 mbd
• Margins will be under pressure

13
Middle Distillates Saviours of refining(GO
Kero (AG) vs Dubai)
Middle distillates were key drivers of refining
margins in 2007/2008 gave a fillip to
conversion capacity buildup.
14
Naphtha cracks - Achilles heel of
refining(Naphtha AG vs Dubai)

• Naphtha, a feedstock for petrochemicals, is
  putting pressure and capping distillates driven
  run in Refining Margins.
• In recent months, the trend is showing signs of
  improvement.

15
Sweet and Sour Changing dynamics(Brent vs
Dubai)

• Recent deep OPEC cuts making crude slate sweeter
  
• Brent vs Dubai differentials reversed in recent
  months

16
Future crude slate

• In next 5 years, crude becoming lighter sweeter
  - may render conversion de-sulphurisation
  capacities redundant temporarily.
• In the long term, conversion/desulphurisation
  capacities needed

Source OPEC
17
Required investment in refining processing
(2007-15)
Source OPEC
18
International developments Refining

• Wood Mackenzie says
• 80 of oil refinery construction projects may be
  cancelled because of drop in global demand.
• Since 2005, 160 projects announced for completion
  2-7 years ahead. Only 30 may go ahead.
• Major Projects cancelled/delayed
• ConocoPhillips/Aramco JV halt bidding on 400 kbd
  Yanbu refinery
• Aramco/Total SA JV delay 400 kbd Jizan refinery
• Kuwait delays new 650 kbd refinery project at Al
  Zour
• Shell Canada cancels 150-200 kbd refinery to
  process Alberta sands
• Oman delays 200 kbd Duqm Refinery project
• Thai refiner IRPC delays 1.3 billion upgradation
  project

19
Oil _at_ 40/bbl SWOT analysis
20
Thank you