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Oil Gas

Oil Gas

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Published by: anon-739503 on Jun 29, 2007
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Institutional Equity
Amit Agarwal 1 Oil & Gas+91 22 55069927
Sector Update
Sensex: 10,595, Nifty: 3,147Amit Agarwal
+91 22 55069927amit.agarwal@investsmartindia.com
Oil & Gas
March 3, 2006
Hopes lies ahead
We expect the government to consider the implementation of theRangarajan Committee recommendations in part or whole within thenext three months and address the core issues pertaining to this muchbeleaguered sector. The lack of any budgetary measures/support to thesector had resulted in a sharp decline in prices of oil stocks even as therest of the market rallied after the budget.Till the time the government plans decisive action on the RangarajanCommittee recommendations and addresses the core issues, wemaintain our Neutral stance.In this report, we have given details of the Rangarajan Committeerecommendations and the different scenarios – if the suggestions areimplemented in whole or parts.
The Rangarajan Committee submitted its report to the government withrecommendations on the petroleum product pricing policy and related issuesin February 2006. The key recommendations of the report were:
Shift from import parity pricing for petroleum products to a mix ofimport and export parity pricing.
Reduction in customs duty for MS and HSD.
Specific excise duty for MS and HSD instead of a mix of ad valoremand specific duty.
Higher prices of MS, HSD, LPG and SKO.
Removal of subsidy burden from upstream companies and increasein cess on crude oil to compensate (partly) for it.In our view, the government would not increase the prices of LPG and SKOon the back of political issues. Assuming all other recommendations areimplemented, we expect:
Adverse impact on refiners due to decline in ex-refinery prices.
Lower overall subsidy burden, and the payment of subsidy throughcess would exclude the direct involvement of upstream companiesin subsidy.
Positive impact on ONGC as a pre determined rate of cess woulddepict a clearer picture in terms of net earnings of the company.Currently, ONGC contributes to the subsidy burden on a quarterlybasis as determined by the government in an ad hoc manner.Therefore, this would lead to better visibility of earnings.
Institutional Equity
Amit Agarwal 2 Oil & Gas+91 22 55069927
Sector Update
As the marketing capacities of BPCL, HPCL, IOCL are higher thanthe refining capacities, we expect them to benefit marginally by theshift from import parity pricing to trade parity pricing. BPCL, HPCLand IOCL stand to gain to the extent of the differential in marketingand refining capacities.
A quick glance at Rangarajan Committee’s recommendations:
Current Comments/implicationsEx-refinery pricing
Change from import parity pricing Import parity pricing Reduction in subsidiesTo mix of import and export parity Negative for refinersPricing in ratio of 80:20 for ex-refinery price Positive for ONGC
Petroleum product price rise
Increase in prices of MS by Rs1.21/ltIncrease in prices of HSD by Rs1.96/ltIncrease in prices of LPG by Rs75/cylinderIncrease in price of SKO by approx Rs6.01/lt
Duty structure on petroleum products
Reduction in customs duty on MS and HSD Reduction of subsidyTo 7.5% At 10% Negative for refinersExcise duty- MS to be specific at Rs14.75/lt 8% +Rs13/lt Neutral for GovernmentExcise duty- HSD to be specific at Rs5/lt 8%+ Rs3.25/lt At current rates
Cess to be Rs4, 800/MT on crude oil Rs1,800/MT Increase fromUSD5.4/bbl toUSD14.6/bblUpstream not to be involved in subsidy burden Positive for ONGC
Source: MOPNG 
We have analyzed the changes in the subsidy burden assuming threescenarios to illustrate the possible impact of Rangarajan Committee on the oilsector and its constituents.These are
Case A
: The shift in the petroleum product pricing policy fromimport to trade parity pricing and its impact. (Excluding therecommendation to raise the prices of petroleum products)
Case B
: The full implementation of Rangarajan Committeerecommendations.
Case C
: Implementation of Rangarajan Committeerecommendations except for increase in prices of LPG and SKO.
Institutional Equity
Amit Agarwal 3 Oil & Gas+91 22 55069927
Sector Update
Case A: If the pricing policy is changed from import to trade paritypricing and its possible impact
The Rangarajan Committee has recommended a shift from import paritypricing (ex-refinery) to a mix of import and export parity in ratio of 80:20 (tradeparity). Assuming every thing else remains constant, we expect the subsidyburden to decline from Rs413bn to Rs351bn in FY06E. Subsidy burden is thedifference between the import parity based retail price and the actual retailprice. A shift in this direction will reduce the ex-refinery price leading to lowersubsidy burden as shown in Table 1 below. The table below shows thechange in contribution from every participant after the committee report isimplemented.
Table1: Change in subsidy burden based on change in pricing policy
Rs mn
Contribution to total subsidy New pricing (%) Old pricing (%)
Government 24,696 7 24,696 6Upstream 115,852 33 136,578 33Refinery 28,085 8 33,110 8Oil bonds 94,788 27 111,746 27Increase in prices 45,639 13 53,804 13Marketing companies 42,006 12 53,940 13
Total 351,066 100 413,873 100
Source: IL&FS Investsmart 
The Table 2 below gives the subsidy burden (Rs/per unit or litre) if the new pricingpolicy is implemented.
Table 2: Change in subsidy burden
In Rs per unit
Decline in the ex-refinery priceImportparitypricingpolicyNew pricingpolicySale price(April FY06)CurrentsubsidyNewpricing*subsidy
MS (Rs/lt) 50.3 48.2 44.5 5.8 3.7HSD (Rs/lt) 36.3 34.6 32.8 3.5 1.8LPG (Rs/cylinder) 457 444.3 295 162 149.3SKO (Rs/lt) 22.9 22.1 9.01 13.9 13.1
Note (1): These estimates do not include the hikes in petroleum prices as recommended by the Rangarajan Committee.Source :IL&FS Investsmart, Media.

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