MUMBAI (Commodity Online): As US and EU-led oil embargo on Iran bites, India may undergo severe economic stress. At the company level, Cairn India is the obvious gainer from rising crude prices, and Reliance Industries and BPCL should benefit from a potential rise in Light-Heavy (L-H) crude oil spreads. Hardest hit would be Aban Offshore which earns half its revenues from Iran, and MRPL sources half its crude requirements. Implications for Essar OIL and HPCL are mixed
Effect on India
-India imports close to US$ 13bn or 9% of the country’s crude requirements from Iran, which is a very large quantity to replace so quickly. Moreover given that Iran exports 2.5m b/d vs global spare capacity of 3.8m b/d, oil prices and hence India’s oil imports (1/3rd of total) could spin out of control as the embargo bites
-Light-Heavy crude spreads likely to widen. Iranian crude is primarily a light-sweet crude with a 31 deg API and 1.7% Sulphur and would have to be replaced by heavier Saudi crude. Saudi crude would be more difficult to process and hence light-heavy spreads are likely to widen
Effect on Indian oil companies
-MRPL, Essar, HPCL and IOCL import most from Iran. Half of Aban’s rigs in Iran. MRPL imports 7 mtpa of Iranian crude, Essar Oil 5m tpa, HPCL 3.2mtpa and IOCL 2.5m tpa. 7 of Aban’s 17 rigs are deployed in Iran, which typically earn a 30-50% premium over mkt rates. Potential war or payment disruptions could cripple its severely debt ridden balance sheet.
-Indian refineries will be the main beneficiaries of L-H crude spreads widening as they are among the most complex. India secondary units to primary distillation ratio (CDU) is 41% currently vs 36% for Asia. Indian cos with the highest complexity that could benefit from rise in L-H crude oil spread: RIL, HPCL’s Bhatinda, Essar Oil (post Mar 2012 expansion) and BPCL’s Bina
-In addition to imminent gains from the oil embargo on Iran, RIL and BPCL enjoy multiple triggers. RIL is in the process of receiving approvals for developing R1 and 5 satellite wells in KGD6, which would double its gas production. BPCL’s Mozambique affiliate has struck a very large net pay of gas in its 8th consecutive find. Stated gas resources are 15-30 TCF, which is estimated to be worth Rs 121/sh of BPCL.
Source: Macquarie Equities Research report
