Rising Demand To Boost Petroleum Sector
India has built itself up as a refinery hub and has charted plans to increase its refining capacity to 400 MMTPA by 2025. This is in view of the positive demand and supply situation which is likely to gain an upward thrust once the impact of the pandemic has softened
The oil and gas sector holds an important place among the eight core industries in India and plays a major role in influencing decision-making for all the other important sections of the economy. India’s economic growth is closely related to its energy demand. As such, the sector is favoured for investments. The government has also internalised several policies to satiate the increasing demand. Up to 100 per cent foreign direct investment (FDI) is being allowed in many segments of the sector, including natural gas, petroleum products and refineries. The sector attracts both domestic and foreign investment – Reliance Industries Ltd. (RIL) and Cairn India being two examples.
Market Size of Petroleum Industry
According to India Energy Outlook 2021, primary energy demand is predicted to nearly double to 1,123 million tonnes of oil equivalent, backed by the expected increase in gross domestic product (GDP) to USD 8.6 trillion by 2040. Consumption of petroleum products in India grew 4.5 per cent to 213.69 million metric tonnes (MMT) during FY20 from 213.22 MMT in FY19. India exported petroleum products from the country bearing total value of USD 35.8 billion in FY20 from USD 34.9 billion in FY19. In April 2021, crude oil production stood at 2.5 MMT whereas for FY21 it was 30.5 MMT. On the other hand, natural gas consumption is predicted to reach 143.08 million tonnes (MT) by 2040.
As of May 1, 2021, the sector’s total installed provisional refinery capacity stood at 249.9 MMT and Indian Oil Corporation (IOC) emerged as the largest domestic refiner with a capacity of 69.7 MMT. Private companies owned about 35.29 per cent of the total refining capacity in FY20. As of December 31, 2020, Gas Authority of India Ltd. (GAIL) bore the largest share – 69.39 per cent or 11,884 km of the country’s natural gas pipeline network of 17,126 km. The impact of disruptions caused by the pandemic along with various other factors has resulted in India’s crude and natural gas production falling during the fiscal year ended March 31, 2021.
Natural gas production of 2,683.9 million standard cubic metres (MSCM) in March 2021 was, however, the highest monthly output recorded in 24 months. The high output in March 2021 can be explained by the commencement of production from Reliance Industries and Bharat Petroleum’s ultra-deep-water field in the KG D6 Block of the Krishna Godavari basin on the east coast. This new field started production in December 2020 at 1.3 MSCM per day (MSCMD) and ramped up to 9.6 MSCMD in March 2021.
Three-Year Performance
In terms of performance of the petroleum industry in the equity markets, the BSE Oil and Gas index has gained around 9 per cent in the last three years and 15.72 per cent in the last one year and 11.54 per cent in 2021. Refex Industries tops the list as the stock has delivered 943.1 per cent returns to its shareholders in three years. It is followed by Gujarat Gas giving 375.3 per cent returns. Linde India and Tamil Nadu Petro Products delivered returns of 287.54 per cent and 254.05 per cent, respectively. Without any doubt, these returns have cheered the investors and generated a bullish sentiment for the petroleum companies’ stocks in their portfolio.
Impact of the Pandemic
The global economy has been hit hard by the pandemic and the subsequent lockdowns and restrictions have led to business disruptions in the global scenario. At the beginning of the crisis i.e. March 2020, oil, gas and chemical companies were in the midst of a two-faced crisis: an oil price war and the impact of the pandemic. Oil prices dipped when OPEC and Russia failed to agree on production cuts. Industrial slowdowns and travel restrictions in the wake of the pandemic caused oil supply and demand imbalance with depressed need for chemicals and refined products.
The short-term and medium-term outlooks for the oil, gas and chemical producers have become shaky till the situation gets normalised. The global economy and capital markets rebounded faster than expected in the third quarter of 2020. In the equity markets, by the end of the fourth quarter of 2020, when the Sensex had recovered and gained around 60.55 per cent, the BSE Oil and Gas index gained around 57.53 per cent, almost parallel to the recovery of the domestic benchmark indices.
The fiscal and monetary stimuli provided by the government transferred into enhanced government and private expenditure and positive signs of recovery and growth were visible in the fourth quarter of 2020. Adani Total Gas shone on this list by recovering and bagging 320.76 per cent gains, followed by Vikas Lifecare zooming by 272.22 per cent. Continental Petroleum and Refex Industries posted a rise of 217.27 per cent and 211.57 per cent, respectively.
Oil and Gas Industry in 2021
In 2021, the oil and gas industry began with the arduous task of helping the economy revive quickly while negotiating the headwinds of global recession, protectionism and geo-political upheaval. The oil industry began the year 2021 with its drive towards universal accessibility, availability and affordability while adopting de-carbonisation and digitalisation. The volume of oil and gas consumption in 2021 was estimated to bounce back to the 2019 levels. The consumption in 2020 witnessed a slump of 10 per cent and 2021 was expected to recover by 12 per cent, displaying a V-shaped recovery.
Approaching the second quarter of 2021, the energy demand in India took a big hit due to the second wave of the pandemic which ran rampant across the country. The demand destruction was less severe than last year when the government imposed the world’s biggest national lockdown. However, the lack of a coordinated effort to shut down activity to halt the virus’ spread was likely to lead to a longer, although less pronounced, economic slump. Diesel and gasoline, which contribute to more than half of oil consumption in India, began to bear the brunt of localised lockdowns. Sales of the two fuels at the three biggest retailers recorded about a third lower in May compared with pre-virus levels two years earlier. However, they were not as bad as April 2020 when the demand nearly halved. This time round, more factories remained open and cargo movements between states weren’t as badly affected.
Petroleum Companies’ Quarterly Performance
We have taken into consideration 16 companies in the petroleum and natural gas sector and analysed their FY21 results. Companies involved in the production of crude and natural gas on the whole reported revenue de-growth in FY21. On an average, these companies have seen their revenue reducing by 14 per cent as compared to FY20. Oil-to-telecom conglomerate Reliance Industries Ltd. (RIL) reported a 34 per cent increase in consolidated net profit at Rs 53,223 crore at the end of the financial year ended March 31, 2021. The Mukesh Ambani-led company had posted a net profit of Rs 39,773 crore at the end of the previous fiscal. Adani Total Gas (ATGL), a leading private player in developing city gas distribution (CGD) networks, reported an 8.2 per cent growth in net profit to Rs 471.95 crore in FY21 on a standalone basis.
This was because the company utilised lower natural gas prices amid a drop in demand during lockdowns. Following the industry trend, the revenue from sales dipped 10.4 per cent annually to Rs 1,784.5 crore in FY21. Bharat Petroleum Corporation reported the highest growth in profits, posting more than a seven-fold increase in net profits to Rs 17,645.36 crore in FY21 despite a 7.74 per cent decline in the top-line. The profit included a one-time gain of Rs 6,992.9 crore during the quarter on account of the sale of its entire shareholding in Numaligarh Refinery.
Recent Developments
Some of the major initiatives taken by the Government of India to promote the oil and gas sector are:
✓ In February 2021 Prime Minister Narendra Modi announced that the Government of India plans to invest around Rs 7.5 trillion (USD 102.49 billion) on developing oil and gas infrastructure in the next five years.
✓ In the Union Budget 2021, the government allocated funds worth Rs 12,480 crore (USD 1.71 billion) for direct benefit transfer of LPG (liquefied petroleum gas) and Rs 1,078 crore (USD 147.31 million) to feedstock subsidy to BCPL.
✓ In the Union Budget 2021, Finance Minister Nirmala Sitharaman announced a provision of 1 crore more LPG connections under the Pradhan Mantri Ujjwala Yojana (PMUY) scheme.
Outlook
The following growth drivers can be identified for expansion of the oil and gas industry:
✓ India’s current refining capacity stands at 249 MMTPA, comprising 23 refineries—18 under public sector, three under private sector and two in a joint venture.
✓Currently, about 17,900 km natural gas pipeline is operational and about 16,600 km gas pipelines are under development.
✓ India has achieved a steady increase in production and consumption of petroleum products over the past years.
✓ 74 lakh new LPG connections were issued by OMCs in FY20-21.
✓Liquefied natural gas (LNG) supply is riding ahead on both coasts with five new LNG terminals and one expansion project under construction out of which three are on the west coast and two on the east coast. Together with the projects under construction, overall capacity will reach 62.5 MMTPA.
✓On the back of strong demand revival for petroleum products and sound liquidity, the overall outlook for the petroleum sector remains stable. Given the government’s thrust towards propagating the use of natural gas, consumption is to be supported by the increase of its use in the CGD network and the demand for natural gas is likely to be on the rise.