Limited refining capacity to keep margins high: Reliance Industries

The Mukesh Ambani-led Reliance Industries (RIL) expects refining capacity globally to be limited through the calendar year (2022), aiding refining margins. 

In an earnings call after its results on Friday, the RIL management said oil demand would average 99.2 million barrels per day this year. This would be higher by 1.7 million barrels per day versus last year, helping keep refining margins high, even as the overall refining capacity globally remains repressed. 

RIL had benefited from high refining margins in April-June, touching $22-25 per barrel in the first quarter - more than double the average of around $10 a barrel the company had done in the previous periods. Gross refining margin is what a company makes from turning every barrel of crude into fuel.

In the past few weeks, this benchmark of profitability for crude refiners has fallen sharply, bringing most oil companies, including RIL, into sharp relief.

The Singapore-Dubai hydrocracking refining margin has fallen 58 per cent in the past month, on the back of demand concerns triggered by recession fears globally. It now hovers over $16.37 per barrel, according to the Bloomberg data compiled by BS Research.

RIL did point to these recessionary fears at its investor call, saying it remained a challenge for oil companies. 

“Recession fears are overtaking oil-market fundamentals, posing a challenge to prices,” RIL’s Joint Chief Financial Officer Srikanth Venkatachari said on Friday. 

Demand concerns have reflected in the benchmark Brent crude price remaining largely volatile over the past few weeks, falling below $100 a barrel, before picking up again over supply constraints. It currently stands at $103.2 per barrel - down 3.3 per cent over the previous day’s close. 

RIL also expects the price cap for its Krishna Godavari Dhirubhai 6 (KG-D6) gas sales to rise over the current $9.92 per million British thermal units (mmBtu), says Sanjay Roy, senior vice-president for exploration and production. The Centre sets gas prices every six months, based on international rates.

The price of gas from older fields has more than doubled to $6.1 per mmBtu from April 1, while those lying deepsea (such as RIL’s KG-D6) to $9.92 per mmBtu. But Roy says these rates are not in sync with global prices. 

“We see the domestic price ceiling remaining disconnected - whether prices stay elevated or fall. We are continuing our advocacy for removal of ceiling prices. Overall, we expect higher gas price realisations in 2022-23,” he says.

RIL produced 19 million standard cubic metres per day of gas from its newer fields in the eastern offshore KG-D6 block in the April-June quarter. KG-D6 block lies deepsea and gets a price equivalent to that of difficult fields.

Rates are up for revision in October. It is likely that the price of gas from old fields of state-owned Oil and Natural Gas Corporation will be hiked to about $9 per mmBtu and the cap for difficult fields will rise to double digits.