Swinging forex rates add to oil refiners’ woes

Rising crude oil has raised the spectre of higher under-recoveries for PSU oil refiners in FY11 but SK Joshi, director (finance) of BPCL, tells ET’s Ram N Sahgal that exchange rates and product prices are equally important determinants of the possible losses for selling fuel products below cost. While Joshi shies away from forecasting the crude price for this year, he believes there will be an increased domestic demand for transportation fuels as economic recovery becomes more pronounced. Excerpts.

Mukesh Ambani said at a recent conference that refiners should be prepared for crude at $100 a barrel? What is your view?

The world has seen a crisis and is dealing with it, as a result of which prices have begun to move into a higher trajectory during the past three months. During the financial year 2009, the Indian industry paid an annual average price of around $83 for a crude barrel, which dipped to $69 in FY10 as a fallout of the recession. The price moved up from $40-50 at the beginning of FY10 and by the fag end of the year it was much higher, which is how we got $69. Expert consensus suggests a price of $80 for 2010.

In that case, the domestic industry would be saddled with higher under-recoveries....

While under-recoveries are undoubtedly driven by rising crude prices, product prices and exchange rate also have a bearing. In FY10, in diesel, which is a volume product, the spread — difference between the price of a barrel of diesel and a barrel of crude — fell from double digits to between $6 and $8. Gasoline also witnessed a similar trajectory considered to be abnormally low, which contained the industry’s gross under-recoveries at Rs 46,000 crore. A $1 change in the price of crude oil impacts under-recoveries to the tune of Rs 3,000 crore. So, when we talk of oil at $80 and above, under-recoveries could range between Rs 80,000 crore and Rs 1 lakh crore. But the rupee-dollar rate also plays an important part in determining the under-recoveries. A Re-1 change in the exchange rate impacts under-recoveries to the extent of Rs 7,000 crore. Recently crude prices dipped from $85 to $70 a barrel. However, out of (the drop of) $15, we got benefit only of $9.7 as the rupee’s decline from 44.5 to the dollar two months ago to 47.5 last week shaved $5.3 off this fall.

In the light of robust domestic economic growth forecasts, how do you see demand for fuel products panning out in FY11?

In FY10, the Indian economy grew by 7.4% despite the global economic crisis and we saw the resilience being reflected by the increased demand for transportation fuels such as diesel, whose consumption grew by around 8%, and gasoline, which recorded a 10%-plus growth. Products such as naphtha and furnace oil were exported and so were not reflected in the domestic demand growth. If India continues to grow, the demand for these products is bound to be high. But since we are 80% import-dependent in respect of crude oil, a higher demand could aggravate the under-recovery scenario.

Does the recent Euro area crisis pose a threat to crude oil demand?

I would not be able to put a finger on whether or not we have reached a bottom in the case of either Europe or the US where demand for crude has contracted. But I can say that the movement of crude from last year’s lows suggests an upward bias. Also, the demand growth in China and India have provided some mitigating relief. Apart from this, the hurricane season in the US is expected to be more severe this year, as it was in 2005. If the storms hit the Gulf of Mexico, crude production could be impacted and if they hit the north, refinery assets could be impacted, which, in turn, could widen the spreads and increase refining margins.