Saturday Oct 21 2000

Icra predicts hard days ahead for oil importing countries

Our Bureau MUMBAI ENERGY intensive developing countries like India with limited oil reserves are expected to have a tough time in the coming months, said rating agency Icra.

Apart from Saudi Arabia, only three nations  Kuwait, the UAE and Nigeria  have spare capacities exceeding 100 kbd (kilo barrels per day) which complicates the allocation of any volume increases. Whats more, Iraq is currently operating at almost full capacity utilisation.

For maintaining production at this capacity level, there are critical bottlenecks (such as access to capital and spares for maintenance) because of the sanctions imposed by the United Nations (UN).

Further, if Iraq decides to withdraw supply from the market (so as to pressure the UN into lifting the sanctions), the OPEC nations may not be in a position to balance the supply because of the constraints on their capacity utilisation level, said Icra.

The investments of oil companies internationally are now focused on other areas such as share repurchase, given their low market capitalisation. In the light of the prominence enjoyed by Information Technology (IT) stocks, many oil companies are allocating budgets for repurchasing shares.

For example, BP has announced plans to repurchase 10 per cent of its shares at a possible cost of $30 billion. Shell has also announced a plan to repurchase its shares for $ 5 bn.

Indias crude self-sufficiency has declined from more than 60 per cent ten years back to approximately 28 per cent on Friday.

The stagnation of crude oil reserves, coupled with the expected addition of new refining capacities, implies that Indias reliance on imported crude is likely to increase further. High international prices of crude, along with rising import of crude oil, signal pressures on the value of the Indian rupee, said Icra.

The rupee has in fact already depreciated from Rs 43.3 (average for 1999-00) to over Rs 46 now. Oil and oil products have a share of approximately 11 per cent of the Wholesale Price Index (WPI) in India.

The increase in retail prices of petroleum products such as liquefied petroleum gas (LPG), superior kerosene oil (SKO), motor spirit (MS), aviation turbine fuel (ATF) and high speed diesel (HSD) may decelerate economic growth, in India.

Further, any rise in the prices of petroleum products such as HSD would also affect the profitability of freight intensive industries like steel, cement and fast moving consumer goods, said the report.

Though rising oil prices signal good news for the upstream oil producing companies, the benefits to the national oil companies (Oil & Natural Gas Corp and Oil India) are limited because of the price cap of Rs 5,570/tonne on the basic price of crude oil produced from their fields.

The earnings of the downstream companies on the other hand, are now linked to the international refining margins which have historically shown a low and volatile trend.

http://www.economictimes.com/today/21econ04.htm

-- Martin Thompson (mthom1927@aol.com), October 20, 2000