Oil's not well

BEATING THE STREET

At the time of the invasion of Iraq in April 2003, US Light crude prices were around $28 per barrel. By last week, the price of this benchmark grade had risen past the $50 per barrel level.

The mess in Iraq isn't the only reason for the surge though it was a major contributory factor. Russian president Putin's vendetta against oil major Yukos caused some problems even as rebels in Nigeria disrupted supplies in a mini civil war and industrial strife in Venezuela hit supplies. Successive hurricanes have also hobbled US production.

As global supplies contracted, strong demand in China and speculative action in the global futures markets has kept prices on the boil. The obvious hedge against further price rises is the oil-production sector itself.

Major oil-producers have reaped a bonanza riding the bullish price trend. Exxon Mobil saw a 20 per cent rise in 2003 revenues compared to 2002 revenues. Exxon also saw a 90 per cent rise in its 2003 net profits and net margins went up from 6.5 per cent in 2002 to over 10 per cent in 2003.

These are unreal numbers when we're referring to $200 billion worth of revenues in a commodity sector. But Exxon did even better in the first half of 2004 as prices continued to rise.

Between Jan-June 2004, Exxon's revenues rose 18.5 per cent compared to the corresponding period of 2003. And, net profits rose 44 per cent. In the past 12 months, the shareprice has gone from a low of $35 to $48.

Shell had many more internal problems in comparison to Exxon. Still, the Anglo-Dutch energy major saw an 88 per cent rise in 2003 net profits and the shareprice has gone from $44 to $52.

These are integrated companies; they extract oil (and gas) and refine it as well as handling transport, marketing, etc. That smooths out performance across the petro-cycle "" rising primary margins compensate for squeezed retail/ refining margins. Rocketing production margins have more than compensated for downstream losses.

India doesn't have integrated O&G companies though most players are making an effort to integrate. We might however expect this global pattern to replicate across the Indian energy sector; refining companies should be badly affected while primary producers should deliver terrific performances.

Indeed, refining and marketing companies have been hurting. Unfortunately, so has the major primary producer! ONGC saw an 18 per cent decline in 2003-04 net profits and lower revenues as well. Although there was revenue growth across group operations, profits were also lower across the group.

This has nothing to do with ONGC's efficiency. The Navratna was forced to sell at lower prices, offering an effective subsidy to refiners. However that subsidy wasn't enough to fully compensate for inevitable losses in downstream companies.

Government policy has been consistent; both NDA and UPA implicitly believe that total petroleum decontrol would lead to rampant inflation and hence, instability. That's arguable.

What's clear is that this policy leaves the domestic investor stranded. As Indians, we are often exhorted to display pride in successful Navratnas like ONGC. However, if we actually want a hedge against rising crude prices, we have to take our money overseas to invest in Exxon!