‘Vaccine roll-out points to assured recovery in 2021’
The country’s largest fuel retailer Indian Oil Corporation (IOC) is seeing demand recovery at a time when product prices have hit historic highs. In conversation with Jyoti Mukul and Twesh Mishra, its Chairman
SHRIKANT MADHAV VAIDYA discusses the outlook for the petroleum industry amid global oil supply cuts.
Edited excerpts:
With oil prices rising again, what is the impact on your margins?
Crude oil prices are rising, but refining margins are influenced by product cracks. Product cracks are yet to recover fully. Petrol cracks, normally around $7 a barrel, were in the range of $2-2.5 a barrel in November-december 2020. Diesel cracks are only around $3, against normal levels of $10. Further, the increase in crude oil prices has an adverse impact on profitability. However, the increase in crude oil prices is likely to boost margins through inventory gains, provided prices stabilise at these levels.
What is the outlook for the refinery sector?
With the ongoing demand recovery, Indian refiners will continue increasing their runs in 2021. India is set to drive global oil demand over the long term. Vaccine roll-out points to a more certain recovery in the oil market in 2021, but demand uncertainty still looms. While Saudi’s decision to slash crude oil production by 1 million barrels a day in February and March has provided support to the market, demand concerns remain.
Do you think there is a case for reduction in excise duty?
The changes in excise duty rates are to be decided by the government, depending on the goods and services tax (GST) collections, disinvestments, and the additional burden of the massive vaccination programme rolled out. We may have to wait for fiscal conditions to ease before we see significant reduction in excise duty rates.
What are your expectations from the Budget?
The petroleum industry’s long-standing demand has been to move petrol, diesel, aviation turbine fuel, natural gas, and crude oil under GST. Exclusion of these petroleum products, which account for close to 60 per cent of refined product volumes, along with crude oil and natural gas, has resulted in stranded taxes in the hands of oil and gas companies by way of non-availability of input tax credit of GST paid on procurement of capital goods, input and input services in proportion to non-gst turnover.
Has petroleum demand recovered?
Yes. Oil consumption posted a month-onmonth increase for the fourth straight month in December and consequently oil consumption during October-december 2020 was just 1 per cent below last year’s third-quarter (Q3) levels. Easing of restrictions has revived demand from transportation. Agriculture has continued to be a major support throughout, and business activities in the country, too, are roaring back. We have seen manufacturing, rail traffic, automobile sales, imports, port traffic, and GST collections post robust growth and recovery. GST collections in December 2020 showed significant yearon-year (YOY) growth of 11.6 per cent to ~1.15 trillion — the highest monthly GST collection so far.
With the economy in recession, what kind of impact do you see on the petroleum sector?
The Indian economy was hit severely in the April-june quarter, and gross domestic product shrank 24 per cent YOY. However, with the opening up of the economy through the successive unlocks, the economy is getting back on track. India’s manufacturing PMI has been in the expansion zone for three consecutive months. Overall, green shoots have started emerging in the Indian economy. And now the Reserve Bank of India’s projections show recession might have ended in Q3, with a projected growth of +0.1 per cent.
How is the capital expenditure (capex) plan progressing this year?
We are sticking to our investment plans, as these are based on long-term demand potential in the country. Over the long term, India is expected to be the fastest-growing oil market in the world. On the project implementation front, though we have faced temporary issues due to pandemic restrictions in terms of availability of equipment, licensors, and labour, IOC is on track to achieve its capex target of ~26,000 crore in the current financial year. Since the easing of the lockdown, IOC has commenced work on 2,800 projects at an anticipated project cost totalling ~2 trillion, overcoming various issues faced onground due to the pandemic.
WE MAY HAVE TO WAIT FOR FISCAL CONDITIONS TO EASE BEFORE WE SEE SIGNIFICANT REDUCTION IN EXCISE DUTY RATES”