mr s v narasimhan director finance indian oil corporation ltd n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Mr. S.V.Narasimhan Director(Finance) Indian Oil Corporation Ltd PowerPoint Presentation
Download Presentation
Mr. S.V.Narasimhan Director(Finance) Indian Oil Corporation Ltd

Loading in 2 Seconds...

play fullscreen
1 / 33

Mr. S.V.Narasimhan Director(Finance) Indian Oil Corporation Ltd - PowerPoint PPT Presentation


  • 124 Views
  • Uploaded on

Refining Outlook and Risk Management. Mr. S.V.Narasimhan Director(Finance) Indian Oil Corporation Ltd. Presentation Covers…. Refining Outlook Features of oil refining Refining capacity utilization Capacity addition vs demand Risk Management Need for Risk Management

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Mr. S.V.Narasimhan Director(Finance) Indian Oil Corporation Ltd' - Anita


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
mr s v narasimhan director finance indian oil corporation ltd

Refining Outlook

and

Risk Management

Mr. S.V.Narasimhan

Director(Finance)

Indian Oil Corporation Ltd

presentation covers
Presentation Covers….
  • Refining Outlook
    • Features of oil refining
    • Refining capacity utilization
    • Capacity addition vs demand
  • Risk Management
    • Need for Risk Management
    • Hedging tools and markets
    • Practical considerations
oil refining defining features
Oil Refining – Defining features
  • Capital and Technology intensive
  • Long gestation period
  • Large investment needs:
    • To meet rising demand for oil
    • Spec changes for modern engines & environment issues
    • Transport fuel the drivers – need for upgrading bottom of the barrel
  • Low margin – occasional cycles of boom

Investment - a risky proposition

singapore gross refining margin dubai
Singapore: Gross Refining Margin (Dubai)

Occasional boom

Source- IEA

  • Prolonged periods of low, even negative margins
  • Considerable volatility in the margins from month to month
  • Occasional boom serves to tide over long periods of poor margins
  • Domestic pricing policies restrict oil companies much needed margins to fund future expansions,quality upgradation projects, etc
global refinery utilization rate
Global refinery utilization rate

Source:BP

  • In last 5 years, despite refining capacity additions, utilization rates soared to new highs.
  • Effective utilization rates exceeded 95% at times considering planned and unplanned shutdowns.
refining additions vs demand 2001 12
Refining additions Vs. Demand- 2001-12

(million barrels per day)

  • Trend reversal
  • Substantial refining capacity additions - 2008 onwards
  • During 2002-07, Refinery capacity additions lagged demand, leading to high margins/prices.
  • Refining capacity additions to exceed incremental demand over 2008-2012, pointing towards softening margins

Source: BP,Goldman Sachs and PEL

refineries dilemma to build or not
Refineries’ Dilemma : To build or not?

Build capacity

Risk of unsustainable margins

Delay capacity additions

Loss of opportunity

  • Risks to Refining investments:
  • Demand growth uncertainty, particularly transport fuels
  • Light/Heavy differentials and sweet/sour differentials
  • NOC structure of Asia– not geared purely to economics – can lead to overcapacity

Derivatives available to mitigate risk of poor economics.

indian refiners need for risk management
Existing refineries

Extreme volatility in refining margins

Under-recoveries from domestic products sale

Customers seeking fixed prices

Fluctuation in inventory valuation

New Refinery Projects

Over capacity- weak margins

High investment – poor returns

Competition in international market for export oriented refineries

Indian Refiners:Need for Risk Management
  • RBI regulations:
  • Permits hedging of risks to existing refineries like margins, inventory, domestic product sales, etc.
  • Hedging of new refinery projects not permitted
risk management advantages
Risk Management - Advantages
  • Smoothens/reduces revenue volatility for existing refiners
  • Facilitates remaining within budget
  • Enables judicious deployment of funds, thereby ensuring timely project implementation
  • Protect against price spikes
  • Flexibility to hedge limited volumes allowing to tap market opportunities for remaining volume
  • Exit possible under unfavourable circumstances
markets for hedging
Markets for hedging

MARKETS

OTC MARKETS

1. SINGAPORE

2. LONDON

3. NEW YORK

PETROLEUM EXCHANGES

1. NYMEX, NEW YORK

2. IPE,LONDON

3. TOCOM, TOKYO

4. DME,DUBAI

5. MCX/NCDEX, INDIA

dubai forward price volatility q308
Dubai Forward price volatility:Q308

Final settlement price for Q308:$113.48/bbl

Source: Morgan Stanley, Platt’s

go vs dubai forward price volatility q308
GO vs Dubai Forward price volatility:Q308

Final settlement price for Q308:$25.7/bbl

Source: Morgan Stanley, Platt’s

hedging tools available for refiners
Hedging tools available for Refiners
  • Refining margins hedging
    • Options and swaps
      • Individual Crack spreads
      • Composite refining margins
  • Inventory hedging
    • Options and swaps
      • Crude oil
      • Products
refiners hedging illustration
Refiners hedging (illustration)
  • Hedging assures fixed margin
  • Mechanism of hedging margin:
    • Margins go up: Higher revenue on physical sales offsets outgo on derivative contract.
    • Margins go down: Lower revenues on physical sales offset by inflow on derivative contracts
  • Domestic price controls: Higher margins not realised on physical sales but cash outgo on derivatives occurs. This poses additional risk. Hence, need for a consistent and transparent policy.

Refinery Margin hedging- Illustration

Crack ratio is based on product pattern of the refineries

Naphtha: 15%

(Sell 150 bbls)

Crude 100%

Buy

1000 bbls

Kerosene: 15%

( Sell 150 bbls)

Gasoil: 50%

(Sell 500 bbls)

HSFO 20%

(Sell 200 bbls)

swap gasoil dubai crack illustration
Swap: Gasoil-Dubai Crack (illustration)

Swap transaction

Swap level - $25/bbl

put option gasoil vs dubai illustration
Put Option- Gasoil vs Dubai (illustration)

Strike-$25/bbl

Premium-$3/bbl

Strike Price: $25/bbl, Premium : $3/bbl

hedging practice oil companies
Hedging practice – Oil companies

Oil companies follow diverse hedging strategies, but volume is typically limited unlike end users who hedge large volumes.

practical considerations steep backwardation
Practical considerations- Steep backwardation

Source: Platt's, Morgan Stanley

  • When Gasoil/Dubai spot cracks were at record high of $42.67, Q-4-08 and Q-1-09 were available at $6.6/bbl and $7.7/bbl respectively higher than the spot level.
  • Such Backwardation present a serious dilemma for the hedgers!
practical considerations steep contango
Practical considerations-Steep contango

Source: Platt's, Morgan Stanley

  • When Brent spot price was at $86.69/bbl on 16th Sep 08, Q-1-09 and Q-2-09 were at $94.81/bbl and $96.26/bbl respectively viz. almost $8.1/bbl and $9.6/bbl higher than spot price.
  • Such sharp contango present a serious dilemma for the hedgers!
slide22

Practical considerations: When to hedge

15/7/08

31/7/08

15/8/08

15/9/08

  • Forward prices changed dramatically in a span of few days .
  • Timing of entry is crucial – Yet no scientific way to time the market

Source:Morgan Stanley

practical consideration options premium
Practical Consideration: Options premium

Source: NYMEX

  • Buying Call Options ‘At the Money(ATM)’ or ‘Out of the Money’(OTM) involve significant premium payout.
risk management adequate controls

Derivative Disasters

China Aviation Oil (2004)

Amaranth (2006)

$ 550 million loss. Resulted from selling Options & faulty M2M reports

$ 6 billion loss. One of the biggest collapses in Hedge fund history

Mitsui (2006)

$81 million loss. Inappropriate trading and reporting

Societe Generale (2008)

Euro 5 billion(approx) loss. Failure of internal controls and faulty reporting systems.

Risk Management - Adequate Controls
  • Prudent Risk Management strategy is essential.
  • Systematic reconciliation of internal transaction/positions
  • Periodic reporting to Board, Management and regulatory agencies
us gulf coast usgc gross refining margin brent crude
US Gulf Coast(USGC)-Gross Refining Margin (Brent crude)

Source- IEA

  • Prolonged periods of low, even negative margins
  • Considerable volatility in the margins from month to month
  • Occasional boom time serve to tide over long periods of poor margins

Source- IEA

north west europe gross refining margin brent crude
North West Europe- Gross Refining Margin (Brent crude)

Source- IEA

  • Considerable volatility in the margins from month to month
  • Occasional boom time serve to tide over long periods of poor margins

Source- IEA

dubai forward price volatility q408
Dubai Forward price volatility:Q408

$/bbl

Source: Morgan Stanley

trading on exchanges some issues
Trading on Exchanges – Some issues
  • NYMEX and ICE are the major energy international exchanges.
  • Use of exchanges involves huge basis risk
  • During the period Jan’07 to Sep’08,
    • Brent dated and ICE Brent showed a strong positive correlation of 0.93.

Actual ICE Brent vs Brent (Dated) differential showed substantial variation viz high basis risk

Source: Platt’s

risk management to summarise
Risk Management – To summarise

India Specific

  • Exposure of Indian companies essentially to Asian oil and petro-products
  • NYMEX and IPE are major petroleum exchanges but do not have liquid Asia specific commodity contracts.
  • No AG related derivative contracts – Singapore market used as proxy.
  • Universal
  • Does not ensure best margin – Only predetermined margin can be hedged.
  • Options hedging involves substantial costs
  • Backwardated markets – can lock into lower margins than currently prevailing
  • Timing of entry – crucial in margin that can be locked into