Vaccine roll-out points to more certain recovery in 2021, says IOC chairman

The country's largest fuel retailer Indian Oil Corporation is seeing demand recovery at a time when product prices have hit historic highs. In an interview with Jyoti Mukul & Twesh Mishra, its chairman Shrikant Madhav Vaidya discusses the outlook for the petroleum industry amidst global oil supply cuts. Edited Excerpts: 

With the oil price rising again, what is the impact on your margins?

The crude prices are rising, but refining margins are influenced by product cracks. The product cracks are yet to recover fully. Just to give an example, petrol cracks which is normally around $7 a barrel was in the range of $2 to 2.5 a barrel in November-December 2020. Cracks of diesel are only around $3 as against normal levels of around $10. Further, the increase in crude oil prices has an adverse impact on the profitability. However, the increase in crude prices is likely to boost the margins through inventory gains, provided the prices stabilise at these levels. This will unfold in the weeks to come, based on the impact of the second wave of the Coronavirus (Covid-19) pandemic in the European countries, roll out of the vaccines and other factors.

What is the outlook for the refinery sector? What is the global outlook for crude oil?

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 and agencies across the board are unanimous on that.

Vaccine roll-out point to a more certain recovery in the oil market in 2021, but demand uncertainty still looms. While Saudi’s decision to slash crude production by 1 million barrels a day in February and March has provided support to the market, demand concerns remain as Covid-19 retains a strong grip on the US and Europe and has gathered pace in parts of Asia where it was considered to be well under control.

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 GST collections of central and state governments, disinvestments and additional burden of the massive vaccination programme that is being rolled out, among other things. We may have to wait for the fiscal conditions to ease out, before we can see a significant reduction in the excise duty rates.

What are your expectations from the budget?

The petroleum industry’s long standing demand has been to move petrol, diesel, ATF, 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 (ITC) of GST paid on procurement of capital goods, inputs and input services in proportion to non-GST turnover. The industry has been taking up with the government for inclusion of excluded products under GST at the earliest.

Has petroleum demand rebounded and what is the outlook for next year?

Petroleum demand has indeed rebounded. Oil consumption posted a month-on-month 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 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 already seen manufacturing, rail traffic, auto sales, imports, port traffic, GST collections post robust growth and recovery. GST collections in December 2020 showed a significant year-on-year growth of 11.6 per cent to Rs 1.15 trillion, the highest monthly GST collection so far

Talking about products, LPG throughout has shown resilience and posted robust growth even at the height of the lockdown and has grown by around 6 per cent during April-December 2020. The recovery in petrol has been quicker and robust owing to increased preference for personal vehicles over public transport, restrictions on public transport and pent-up demand. Monthly petrol consumption has been above pre-pandemic levels since September now.  Diesel demand had fallen by 33 per cent in Q1 but the contraction reduced to about 16 per cent in Q2 and was only around 1 per cent in Q3. ATF, of course, has been the hardest hit, but with easing of restrictions, the pick-up in air traffic has been encouraging and the rate of contraction has come down to 45 per cent in Q3 from over 80 per cent in Q1. Domestic passenger traffic at 13.6 million in November 2020 while was approximately 55 per cent below its year-ago level, but around 22 per cent  above October 2020 level, following relaxation of the cap on the number of domestic flights from 60 to 70 per cent of their pre-Covid level by the Civil Aviation Ministry in November 2020.

Moving forward, the oil demand is expected to rise and exceed pre-Covid levels in the January-March 21 and in the next fiscal I expect oil demand to cross 2019-20 levels. With vaccine roll out, the government would be in a position to ease restrictions and this coupled with the pent-up demand and the sheer dynamism of the Indian economy will drive the petroleum demand going forward.

With the economy in recession, what kind of impact do you see on the petroleum sector?

The Indian economy was hit severely in the Apr-Jun quarter, and the GDP shrank by 24% year-on-year.  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 RBI’s projections show that recession might have ended in Q3, with a projected growth of +0.1 per cent. Moving forward, GDP is expected to further post a mild expansion in Q4.

With all the economic indicators and quick recovery from Covid impact, I see a very favourable demand outlook for India over the long term for both for oil and gas.

How is the capital expenditure plan progressing this year and what are the plans for next 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 and the current setback in demand is only temporary before oil demand growth in the country picks up. On the project implementation front, though we have faced temporary issues due to the restrictions because of the pandemic in terms of availability of equipment, licensors, labour, etc., but as of now Indian Oil is already on track to achieve its capital expenditure target of Rs 26,000 crore in the current fiscal. Since the easing of the lockdown from April 20, 2020, IndianOil has commenced work on around 2,800 projects at an anticipated project cost totaling to about Rs 2 trillion, overcoming various issues faced on-ground due to the pandemic.

Further, to give an illustration on the investment and project activities, in the past months we have approved projects worth around Rs 40,000 crore, mainly to enhance the integration of our refineries with petrochemicals and speciality products. This includes petrochemical and lube integration project at Gujarat refinery at a cost of around Rs 19,000 crore. With this, the petrochemical intensity of Gujarat refinery will be enhanced 21 per cent on the incremental crude capacity, installation of Green field PX-PTA plant at Paradip refinery at a cost of Rs 14,000 crore and a catalytic iso-dewaxing unit at the Haldia refinery.

Further, the capex plans of Indian Oil would focus on the Crude-to-Chemicals (COTC) with Indian Oil refineries at Panipat and Paradip achieving a Petrochemical Intensity Index (PII) of 15-20% upon completion of the ongoing projects. As a long-term strategy, we intend to enhance our petrochemicals integration to about 14 to 15% of PII on a corporate basis by the year 2030.