Rising energy prices spell gains for oil producers

ONGC, Oil India stand to gain, but downstream players may feel the heat

Global energy markets always see some turmoil as the northern winter approaches and demand for fuel oil and gas rises. This year could see bigger spikes than usual because apart from normal seasonal demand, global economic activity may accelerate due to wider vaccination coverage.
 
Taking the Indian crude basket as a benchmark, crude prices rose from $50 per barrel in December 2020 to $74.2 in August. Gas prices are more seasonally driven. But Asian spot LNG prices (Japan Korea Marker or JKM) are at historical highs and European gas prices rose by 22 per cent in the past week. European gas storage is at a multi-year low and Russian supply may be lower this year, leading to a demand-supply mismatch especially, if the winter is severe.
 
India is very vulnerable to shifts in global prices. Import dependency will rise, as energy demand correlates to economic growth. Moreover, India is trying to reduce its carbon footprint. In terms of policy, this means, apart from encouraging renewable options, the energy mix will involve far larger gas components in future. This involves the rollout of city gas networks, alongside building national pipeline grids and port terminal capacity for LNG.
 
Apart from being energy deficient, India’s tax structure is reliant on central and state-level duties on petroleum products and gas. The imposts raised around Rs 4.18 trillion in central levies and Rs 2.2 trillion in state levies in FY21.
 
There are proposals to move petroleum and gas into the goods and services tax’s ambit while setting revenue-neutral GST rates. It was discussed at Friday’s GST Council meeting but did not find favour.
 

Going ahead, it will be a delicate political exercise, since states ruled by non-BJP governments often complain of delayed GST disbursements and may not wish to give up their right to collect taxes directly. It would also change the tax collection pattern, since GST is a consumption tax.
 
The retail prices of petrol, diesel, and ATF are adjusted daily. Gas prices are set through an administered pricing mechanism (APM) revised every six months. This reflects prices at Henry Hub, National Balancing Point UK, Russia, Alberta, etc. It’s likely that APM will be pushed up from $1.79 per metric million British thermal unit (mmbtu) at present to $3.1 in October. By April 2022, it could rise to $5.6 if global prices stay around current levels for the next few months.
 
Rising prices would benefit producers like ONGC and Oil India. The APM of deep-water gas would also rise. This is already at $3.62 per mmbtu and it could rise to $7. Higher prices would benefit Reliance Industries as well. However, downstream refiners and retail marketers may see refining margins falling, though this will be offset to some extent by upwards revaluation of inventory.
 
GAIL has reportedly tied up gas supplies at lower rates so it should be a gainer. City gas distributors such as IGL (Indraprastha Gas) would have to hike prices by 10 per cent or more, if APM does rise past $3. This may or may not impact demand. Gas is an essential item and petrol and diesel prices will rise in tandem.
 
Stocks of ONGC and Oil India have moved up in the past month. So have GAIL and HPCL (55 per cent owned by ONGC). BPCL has been sold down, after the dividend payout of Rs 58 per share. Indian Oil has also moved up, despite being a downstream player and so has IGL. Gujarat Gas has lost ground.