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Oil and Gas Industry in India

Oil and Gas Industry in India. Rapidly Increasing Refining Capacity . IOCL. BPCL. HPCL. NRL. Gap Between Refining Capacity and Product Demand. Consideration. RBI Regulation. Refining capacity additions to exceed incremental demand over 2014-2017, pointing towards weak refinery margins

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Oil and Gas Industry in India

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  1. Oil and Gas Industry in India
  2. Rapidly Increasing Refining Capacity IOCL BPCL HPCL NRL
  3. Gap Between Refining Capacity and Product Demand Consideration RBI Regulation Refining capacity additions to exceed incremental demand over 2014-2017, pointing towards weak refinery margins Export outlook is not promising amidst competition in international market for export oriented refinery products Currently BPCL and IOCL actively hedge their refinery margins through Crack Spreads Individual Crack Spreads helps companies to hedge their real risk exposure Permits hedging of risks to existing refineries like margins, inventory, product sales, etc. Refinery Margin Hedging
  4. Understanding Crack Spreads Naphtha: 15% (Sell 150 bbls) Crack Spread Kerosene: 15% ( Sell 150 bbls) Refiners’ profits are tied directly to the spread between the price of crude oil and the prices of refined products This spread is referred to as a crack spread. Reference is due to the refining process that “cracks” crude oil into its major refined products. Refiners are LONG crack spreads and to hedge they SHORT crack spreads Gasoline Crack Kerosene Crack Naptha Crack High Sulphur Fuel Oil (HSFO) Crack 1:1 Crack Spread 3:2:1 Crack Spread 5:3:2 Crack Spread Crude 100% Buy 1000 bbls Gasoil: 50% (Sell 500 bbls) HSFO 20% (Sell 200 bbls) Common Crack Spreads Types of Crack Spreads
  5. Latest Views about Refinery Margins “BPCL was successful in hedging the refinery margins to cover the operating cost of its refineries in an extremely volatile environment. Apart from hedging the refinery margins, BPCL undertook hedging of fuel oil bunker and freight cost of the tankers taken on spot charter and COA” – Annual Report BPCL – 2012-13
  6. Changing Landscape of Commodities Market “Citibank increasing its gas and power business in Europe as competitors such as Bank of America Merrill Lynch and Barclays are pulling back” – Reuters, May 2014 “ Deutsche Bank slashes commodity trading operations” – Financial Times, Dec 2013 “JPMorgan has put up for sale its physical commodities business”- Reuters, May 14 “Barclays has reduced its presence in commodities, while other banks including CréditAgricoleand UBS have virtually closed their commodities businesses.”- Financial Times, Dec 2013 “Morgan Stanley agreed to sell its physical oil business to OAO Rosneft (ROSN) as the investment bank backs away from owning some physical commodities businesses.” - Bloomberg, Dec 13
  7. Derivatives offered on Crack Spreads Forwards Swaps Options Collar Major Counterparties- Goldman Sachs Morgan Stanley Deutsche Bank JP Morgan Chase Citibank
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