In the “golden age” of margins, Indian private refineries are profiting

There is a rift in the Indian refining sector as private refineries extract cheap Russian oil and increase export profits, just as state-owned domestic refineries are squeezed by high oil costs and government-limited domestic fuel prices.

While many Western buyers are avoiding Russian oil in response to its invasion of Ukraine, Indian private refineries such as Reliance and Nayara have been among the largest buyers of discounted Russian supplies this year.

He reaps big profits by reducing domestic sales and aggressively boosting fuel exports, including customers in Europe, which is now boycotting Russian energy imports.

In contrast, state-owned refineries are much smaller customers of Russian oil, as they largely purchase oil on the basis of annual supply agreements. According to industry sources, they face potential losses in the June quarter as they face rising global oil prices and controlled retail fuel prices, which have not changed since early April to keep rising inflation in check.

Since Moscow’s invasion of Ukraine on February 24, India has purchased about 62.5 million barrels of Russian oil – more than three times the same in 2021 – more than half for private refineries Reliance Industries and Nayara Energy, according to Eikon Refinitive.

Private refineries, in turn, helped increase India’s total fuel exports by 15 percent in the first five months of 2022 compared to the same period in 2021, according to Kpler.

Private refineries limit domestic sales

To accommodate significantly higher fuel exports, private refineries reduced their market share in domestic fuel sales in April to seven percent from 10 percent in the fiscal year to March 2022, a source at Indian state refineries said.

State refineries had to increase domestic sales, but suffered losses of more than 20 rupees per liter in diesel sales and 17 rupees per liter in gasoline, another official at the state refinery said.

In light of these different operating environments, the brokerage firm ICICI Securities downgraded its IOC, the country’s top refinery and retailer, to “Hold” from “Buy” and suggested Reliance as an alternative stock idea.

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

The state refinery is also losing more than 200 rupees on each cooking gas bottle, a state refinery official added.

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

‘Well placed’

Reliance, the world’s largest refinery complex in Jamnagar, West Indies, recently postponed the refinery’s maintenance plan, bought “arbitrage” barrels in the international oil market and increased fuel exports, said last month.

“RIL remains well positioned to benefit from continued refining margins due to its high complexity, high oil yield and high export ratio,” Citi said in a recent report.

Private refineries set their fuel prices at a higher rate than their state counterparts and limited supplies to their pumps, several retailers from Reliance and Nayara Energy said, leading customers to turn to state-owned retailers’ service stations.

“We achieve refining margins of more than $ 30 per barrel by processing Russian oil and making huge profits by exporting refined fuel,” said an official at a private refinery.

Reliance did not respond to Reuters’ e-mail requesting comments.

Nayara Energy said in an e-mail statement that it maintains fuel supplies to its dealers, and acknowledged a “nominal” increase in its retail prices for the company’s long-term interest.

“Meet the requirements of the nation”

An oil ministry source said state retailers – who control more than half of India’s five million barrels of refining capacity daily – made a profit in March due to rising inventories and profits from other companies, but the results will be severely affected in June.

“They (the state’s fuel retailers) have to bite through and meet domestic demand, while private refineries print money because they get oil at bargain prices and make huge profits by exporting oil to countries like Europe,” Haq said.

Indian fuel retailers have also recently passed on tax cuts to consumers, including fuels produced before the cut, which further affected revenues, the refinery’s third official said.

“Our primary goal is to meet national demand while striving for profit because we are listed companies, so this is a challenging task for us,” said the fourth official, a state fuel retailer.

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