March 8, 2018

Oil & Gas Industry Analysis


Oil & Gas Industry Analysis:

Must know facts:

  • Import content in oil & gas sector is in the range of 15% for refinery to 67% for upstream.
  • The oil and gas sector is among the six core industries in India and plays a major role in influencing decision making for all the other important sections of the economy. This sector is highly liberalized to attract private investment and to increase domestic production. It is a transparent and level playing field for Indian private/foreign investors and national oil companies — both enjoy the same fiscal and contract terms.
  • Growing economy and population growth are the main drivers for oil & gas demand, increasing every year.

Influencing Factors for price change:

  1. Stocks in Oil & Gas sector are best judged when benchmarked against ‘S&P BSE OIL & GAS’ indices.
  2. News from OPEC consortium meetings. (OPEC- Organization of the Petroleum Exporting Countries)
  3. Completion of national gas grid by construction of another 15,000 km of gas pipeline network, which is currently under various stages of implementation. Several industries are increasing consumption of natural gas in operations. This is a major build off, which could lead to total stop in potential logistical barriers that could could break demand/supply zones in the country.
  4. Government announcements indicating off loading of its stakes in PSU’s.
  5. Watch out for changes in Gross Refinery Margins (GRM) that may impact Oil marketing companies.
    For example, if a refinery receives $80 from the sale of the products refined from a barrel of crude oil that costs $70/bbl, then the Refinery Gross Margin is $10/bbl. The Net or Cash Margin is equal to the gross margin minus the operating costs (excluding income taxes, depreciation and financial charges). Continuing the example, if a refinery experiences operating costs of $2 per barrel, then the Net Margin is$8/bbl.


Understanding the Industry:

The oil and gas industry is recovering from the upheaval caused by the fall in global oil prices and weak demand. The price per barrel of Brent crude touched $70 mark this month, against $40 a year ago; still well below the $115 peak reached in 2011. Even with the uptick in oil prices expected to continue, it is a buyer’s market and India needs to be aggressive in scouting for the best prices and competing supply sources. Recently, government-owned refiners started taking supplies of US crude in a bid to curtail dependence on West Asian crude and Opec (Organization of the Petroleum Exporting Countries) in an expanded supply market.


Estimated Market Size:

India is expected to be one of the largest contributors to non-OECD petroleum consumption growth globally. Oil imports rose sharply year-on-year by 27.89 per cent to US$ 9.29 billion in October 2017. India’s oil consumption grew 8.3 per cent year-on-year to 212.7 million tonnes in 2016, as against the global growth of 1.5 per cent, thereby making it the third-largest oil consuming nation in the world.

India is the fourth-largest Liquefied Natural Gas (LNG) importer after Japan, South Korea and China, and accounts for 5.8 per cent of the total global trade. Domestic LNG demand is expected to grow at a CAGR of 16.89 per cent to 306.54 MMSCMD by 2021 from 64 MMSCMD in 2015.

The country’s gas production is expected to touch 90 Billion Cubic Metres (BCM) in 2040 from 21.3 BCM in 2017-2018 (Apr-Nov). Gas pipeline infrastructure in the country stood at 16,470 km in September 2017.


Road Ahead:

While the slump in oil prices did not spell good news for global upstream firms and many curtailed their exploration and production efforts, it worked differently for Indian government-owned upstream companies, which hit the gas on exploration, production and asset acquisition. This was on account of a significant decline in the cost of equipment and services associated with exploration and production. That effort must continue.

With 3.14 million sq. km of potential reserves lying unexplored until 2016, India’s potential in the oil and gas sector is immense and there exists vast headroom for new discoveries.

Another area that calls for attention is enhanced oil recovery. With the global average recovery factor for a typical oilfield being around 40%, a substantial amount of identified oil ends up as leftover despite existing production infrastructure. There is a need to enhance recovery from oilfields to reduce import dependence.

Adoption of digitization, automation and robotics, which can substantially reduce operational costs and increase oilfield productivity, should be considered seriously.


Top Stocks in the industry:

ONGC, GAIL, Oil India, IGL, HPCL, BPCL, Aban Offshore & many more.

(Please note above stocks are not recommendations, they are purely for information purpose only)

Information Source / References: IBEF, livemint, MakeinIndia, Ministry of Petroleum and Natural Gas, The Economic Survey 2016–17 & 17/18, Agricultural and Processed Food Products Export Development Authority (APEDA), Department of Commerce and Industry, Union Budget 2017–18, Press Information Bureau, Ministry of Statistics and Programme Implementation, Press Releases, Media Reports.

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