Disruptive changes to alter oil and gas industry to slowdown, says ICRA

Credit rating agency ICRA in its report on Tuesday said that the crude oil era is set for a structural slowdown leading to significant implications for different stakeholders in the Oil and Gas industry according to recent study by ICRA.

Crude oil, since its emergence in early 1900s, showed a secular increase in its share of global energy consumption to ~45 percent by mid-1970s. While its share has decreased over the last four decades to ~30 percent now due to the emergence of other energy sources notably natural gas, it continues to be a fuel to reckon with among policy makers.

Environmental concerns with target temperature increase to below two degree celcius as per recent Paris climate change accord, car-pooling, electric cars, solar power, LNG based commercial vehicles and advent of e-rickshaws, e-bikes and driver-less cars have long-term disruptive potential for oil consumption levels.

According to K Ravichandran, Sr. VP and Group Head, Corporate Sector Ratings, "Electric / battery-driven vehicles are a key threat for demand of auto-fuels. The battery cost of an EV, accounting for almost one-third of the total cost of an EV will remain a key determinant in the rate of acceptance of electric vehicles. With anticipated material fall in battery costs, the break-even crude price for electric cars is expected to decrease from USD185/bbl to USD75/bbl as per ICRA's estimates."

Another major disruption in automotive sector could be LNG based trucks and buses, which could help in reducing pollution from diesel through use of cleaner LNG leading to lower operating expenses offsetting higher capital costs. "As per ICRA estimates, break-even period for a truck would range one to 2.5 years depending upon taxation on LNG. However, developing an LNG-based transport fuel market shall have its own challenges, especially in building a network of fuelling stations to ensure the supply of LNG, when most of the trucks and buses on the road are powered by diesel or petrol engines," said Ravichandran

Furthermore, consistent fall in solar module prices leading to material fall in solar power tariffs have led to material increase in competitiveness against power plants based on liquid fuels, and the trend is likely to continue.

Besides, replacement of diesel, FO, LSHS and naphtha by natural gas or LNG primarily for back-up power generation would also impact the demand of petroleum products.

The upstream crude oil producers would have a direct bearing if disruptions lead to fall in demand or muted demand growth along with pressure on crude oil prices. Considering this long term threat, most E&P companies have been keen to expand presence of natural gas and renewable in their portfolio." As regards the downstream sector, auto-fuels (diesel and petrol) form around ~50 percent of total product volumes derived from every tonne of crude oil processed by a refinery and form a much higher share (65 percent) in terms of value derived from crude oil. Thus, any impact on demand of auto-fuels could have a significant bearing on the demand growth of crude oil and gross refining margins (GRMs) of refineries. Due to the depreciated asset base, existing refineries may be relatively better placed to deal with oil demand disruptions. However, future refining capacity expansions, especially greenfield projects, could find the task of achieving meaningful returns a daunting challenge owing to high capital intensity of refining companies, unless they get significant fiscal incentives to prop up the returns. Gas utilities could gain from increasing use of natural gas a cleaner fuel.