RIL’s double-digit refining margins to stay, say analysts
MUMBAI: Severe under-utilisation of refining assets in four countri es—Argentina, Mexico, Brazil and Venezuela—and a shift in feed stock towards ethane by Reliance Industries Ltd (RIL) will help boost the company’ s refining margins, according to analysts. R IL exports a majority of its products from its twin refineries in Jamnagar, Gujarat.
“U ti lisa ti on of the Latin American refineries does not appear to be improving anytime soon. This will enable R IL to continue clocking G RM( gross refining margin) of 11.5 per barrel in FY 19-20,” said Motilal Oswal Securities Ltd in a 13 November report. GRMs are what a company earns from turning every barrel of crude oil into fuel.
The report explains refineries in Argentina, Mexico, Brazil and Venezuela have all been facing severe under-utilisation of refining assets, with a mismatch between domestic crude availability, refining configurations and domestic market product needs. Also, the refineries have not been upgraded for along time, which results in frequent maintenance requirements and shutdowns.
Utilisation of refineries in Mexico and Venezuela has been at 40% in recent months, while in Argentina it is at 76%, the lowest since 1996. Brazil’s refineries have seen utilization of 74.3%, its
lowest in six years according to the report .“Such lowe ru ti lisati on in these four countries alone, home to 6% of global capacity, would boost refining margins.
Additionally, Africa with another 6% of global refining capacity, has also been witnessing utilisation of below 70% since 2011,” the report added.
Over the past few quarters, RIL has been reporting a premium of $4-5 per barrel to the Singapore benchmark.
RI L’ s twin refineries at Jam nagar, with a crude processing capacity of 1.24 million barrels per stream day (bpsd), provide the company with high complexity and flexibility to manage its product yield and crude oil basket better, resulting in a higher yield
over benchmark.
A refinery’s complexity is measured in terms of the Nelson Complexity Index( NC I ). Refineries with a Nelson complexity of 10 or above are considered complex, which allows them to process crude that is cheaper. RIL currently has an average complexity of 12.6. A complex refinery is one with an ability to process heavy/ low quality crude that can be sourced cheaper than light or good quality crude.
Morgan Stanley in a report dated 8 November said ,“Post the $25 billion investment in energy, we believe RIL can take advantage of the flux in feedstock oil, gas and coal prices. RIL’s shift in feedstock towards ethane drives margin expansion in FY19.”