Structural slowdown likely in oil and gas industry: Icra

The crude oil era is set for a structural slowdown, leading to significant implications for stakeholders in the oil and gas industry, rating agency ICRA Ltd said in a report on Tuesday. 

ICRA expects viability of greenfield refinery projects to be under pressure over the long term. “Environmental concerns with target temperature increase to below 2?C as per recent Paris climate change accord, car-pooling, electric cars, solar power, LNG-based commercial vehicles and advent of e-rickshaws, e-bikes and driver-less cars have long-term disruptive potential for oil consumption levels,” ICRA noted in its report. 
ICRA said the viability of greenfield refinery projects might find the task of achieving meaningful returns as a daunting challenge. These could be under pressure over the long term without fiscal sops and enhanced competition for auto-fuels from electric vehicles and possible replacement of some petroleum products by renewable and relatively cleaner natural gas. 
“Electric/battery-driven vehicles are a key threat for the demand of auto-fuels. The battery cost of an electric vehicle, accounting for almost one-third of the total cost of an electric vehicle, will remain a key determinant in the rate of acceptance of electric vehicles. With anticipated material fall in battery costs, the break-even crude price for electric cars is expected to decrease 
from $185/bbl to $75/bbl as per ICRA’s estimates,” said K Ravichandran, senior vice-president and group head, corporate sector ratings for ICRA.
ICRA further added diesel and petrol form around 50 per cent of total product volumes derived from every tonne of crude oil processed by a refinery and form a much higher share of 65 per cent in terms of value derived from crude oil. “Thus, any impact on demand of auto-fuels could have a significant bearing on the demand growth of crude oil and gross refining margins (GRMs) of refineries,” the report said. 
In terms of profitability of refining companies, ICRA added, “Demand of other petroleum products like naphtha, furnace oil, LPG could be replaced by natural gas (both domestic gas and LNG) and renewable energy sources; which could put pressure on the profitability of oil refining and marketing companies.”
The report, which raises concerns on greenfield refining projects, added the existing refining assets would prove to be better placed to deal with the likely disruptions in oil demand due to a depreciated asset base. “Future refining capacity expansions, especially greenfield projects, could find the task of achieving meaningful returns a daunting challenge owing to high capital 
intensity of refining companies, unless they get significant fiscal incentives to prop up the returns,” the report said. 
In addition to various brownfield expansions planned at existing refineries by India oil marketing companies, India also plans to set up a 60-million-tonne per annum greenfield refinery in the coming years. For upstream companies, ICRA expects such players to increase focus on natural gas production. 
“The upstream crude oil producers would have a direct bearing if disruptions lead to fall in demand or muted demand growth along with pressure on crude oil prices. Considering this long-term threat, most exploration and production companies have been keen to expand presence of natural gas and renewables in their portfolio,” the report said.


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