In ‘golden era’ of margins, Indian private refiners benefit


A split is emerging in India’s refining sector as private refineries tap into cheap Russian crude and magnify profits from exports, just as domestically-focused state refineries come under pressure from high oil costs and government-capped domestic fuel prices. .

While many Western buyers are shunning Russian crude in response to the invasion of Ukraine, Indian private refiners such as Reliance and Nayara were among the largest buyers of discounted Russian supplies this year.

They are making big profits by cutting domestic sales and aggressively boosting fuel exports, including to buyers in Europe, which is now boycotting Russian energy imports.

In contrast, state-owned refineries are much smaller buyers of Russian crude, as they largely buy oil under annual supply agreements. They face potential losses in the June quarter, industry sources say, as they grapple with rising global crude oil costs and controlled retail fuel prices that have remained unchanged since early April to curb rising inflation.

India has bought about 62.5 million barrels of Russian oil since Moscow’s invasion of Ukraine on Feb. 24 — more than three times more than the same period in 2021 — more than half for private refiners Reliance Industries and Nayara Energy, Refinitiv data shows Eikon.

In turn, private refineries contributed to India’s total fuel exports being 15 percent higher in the first five months of 2022 than the same period in 2021, according to data firm Kpler.

Private Refineries Reduce Domestic Sales

To accommodate sharply higher fuel exports, private refiners reduced their market share in domestic fuel sales in April from 10 percent in fiscal year to March 2022 from 10 percent in fiscal year to seven percent, an Indian state refinery source said.

State refineries have had to ramp up domestic sales but are suffering losses of more than rupees 20 per liter on sales of diesel and 17 rupees per liter on petrol, said a second official at one of the state refineries.

In light of such different business environments, the brokerage firm ICICI Securities downgraded the IOC, the nation’s largest state-owned refiner and fuel retailer, to “Hold” from “Buy” and touted Reliance as an alternative stock idea.

“This is the golden age of refinery margins. But in India, the negative marketing margins of the state refineries offset the profits of the refining activities,” said Ehsan Ul Haq, analyst at Refinitiv.

State refineries are also losing more than 200 rupees on every cylinder of cooking gas, the state refinery added.

“The more we sell in the Indian market, the more we lose,” said the second source.

‘Well placed’

Reliance, operator of the world’s largest refining complex at Jamnagar in western India, recently delayed its refinery maintenance plan, bought “arbitrage” barrels in the international crude oil market and boosted fuel exports, it said last month.

“RIL remains well positioned to benefit from the continued increase in refining margins, given its high complexity, high diesel efficiency and high export ratio,” Citi said in a recent report.

Private refiners have priced their fuels more expensively compared to their state peers and have reduced deliveries to their pumps, several Reliance and Nayara Energy dealers said, leading customers to turn to the gas stations of state stores.

“We are achieving refining margins of more than $30 a barrel by processing Russian oil and making huge profits by exporting refined fuel,” said an official at one of the private refineries.

Reliance did not respond to Reuters’ email seeking comment.

Nayara Energy said in an emailed statement it will maintain fuel supplies to its dealers, acknowledging a “nominal” increase in its retail prices for the company’s long-term interest.

‘Meets the Nation’s Demand’

An oil ministry source said the state’s retailers — who own more than half of India’s five million barrels per day of refining capacity — made profits in the March quarter thanks to inventory gains and revenues from other companies, but the results will be hard hit in the June quarter.

“They (state fuel retailers) have to push through and meet domestic demand, while private refiners print money because they get oil at discounted rates and make huge profits exporting diesel to countries like Europe,” Haq said.

Indian fuel sellers have also recently passed on tax cuts to consumers, including on fuels produced before the cuts took effect, further hurting revenues, a third refinery official said.

“Our primary goal is to meet the country’s demand while striving to make a profit as we are publicly traded companies, so it is a challenging task for us,” said a fourth official at a state fuel trader.

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