The special additional excise duties imposed by government on export of petroleum products and sale of crude in domestic market will impact the profitability of oil explorers by up to 30% in FY23. It will additionally impact the gross refining margins of private refiners by $6-$8 per barrel, if the measures continue for the full year.
On Friday, the shares of state run explorers, Oil and Natural Gas Corporation (ONGC) and Oil India tanked between 13 and 15% respectively on the Bombay Stock Exchange, while shares of Reliance Industries fell 7% from its previous close following the announcement.
Domestic producers of crude sell the crude to refiners at international parity price even as their cost of production ranges between $40-$45 per barrel. There is a differential of around $60 per barrel that producers make on sale to refineries after sharing the excise duty and other over heads with them.
“However, the crude prices are volatile and earlier last year oil producers faced issues of high royalty and cess when the prices dropped to $30 per barrel and they could not recover their cost of production,” said an official from an oil company. These are special measures and will be waived once the Russia-Ukraine crisis ends, the official said.
The government has also levied taxes on windfall gains made by domestic refineries. The levy of Rs 6 per litre on exports of petrol and ATF and Rs 13 per litre on diesel which is likely to impact the gross refining margins of refiners such as Reliance Industries and Nayara Energy by $6-8 per barrel in FY23.The government has also mandated a compulsory sale of half of refined products domestically for refiners. This however does not apply to Special Economic Zone (SEZ) refinery units, Reliance. The standalone PSU refiners like MRPL and Chennai Petroleum could see challenges in earnings as well as profitability in near to medium term. Private refiners will also be impacted due to the mandate of selling half of the refined products domestically (except for SEZ units).
“Levy of special excise duty on SEZ/DTA units if made applicable will hurt private refiners. OMC companies like HPCL, BPCL and IOC do very little exports and hence will not be impacted much by this. However removal of the uncertainty and placing private refiners on par with PSU will be positive for these companies,” Jasani of HDFC Securities said.
Morgan Stanley analyst in a note said, as the government will tax exports of gasoline at Rs 6/litre ($12/bbl) and diesel at `13/litre ($26/bbl), export-oriented units like RIL will have to sell 30% of diesel locally to not attract this tax. RIL currently via its petrochemical, B2B and retail fuel stations sells about 40-50% of its products locally. However, the sales are
heavily naptha weighted. “Assuming the full impact of the regulations on both diesel and gasoline, RIL’s GRM would be negatively impacted by US$6-8/bbl realistically vs last week’s margin of US$24-26/bbl. This would still be above our base case estimates on earnings. Every US$1/bbl impacts RIL’s earnings by 2.5-3%,” the Morgan Stanley note said.
Most other refiners largely sell locally and the impact on earnings will be limited. Overall India exported 42% of its diesel and 44% of its gasoline production in FY22 and 40% of its diesel and 44% of its gasoline production year to date, the note added.
Bhaskar Chakraborty, an analyst with Jefferies, noted, since there is no sunset date specified for the special excise duties, this is an extraordinary measure given the inflated profit environment in refining today.
“Gasoline and diesel are the key contributors to Reliance’s refining slate contributing around 72% of refining throughput. We estimate around $7/bbl blended impact on RIL excluding any exemption . With around 58% of RIL’s refined products being exported, the blended impact for Reliance could be Rs 3.4/litre translating to around $7/bbl impact on realized GRM,” Chakraborty said.
Jefferies currently estimates $13/bbl GRM in FY23 for RIL which is much lower than the current Singapore GRM of around $30/bbl. “We expect refining to remain strong in calendar year 2022 leading to significant upgrade to RIL’s refining Ebitda. So, the impact on RIL’s FY23 Ebitda could be limited even if SEZ is not exempted since we and the Street are not building in very elevated GRM into our estimates currently,” Chakraborty said.
Sourav Mitra, director – energy, Crisil Ratings, said private refiners might experience a slowdown from their recent increased earnings in the short-term. It is possible that major companies could have anticipated such a levy, and how they adapt their strategies shall determine the medium- to long-term impact. The government has ensured that certain export-focused units remain exempt from these additional taxes. One such example is Reliance’s refinery in Jamnagar.