Growth through Energy Products

Petroleum Refining and retailing is the second link in RIL's drive for growth and global leadership in the core energy and materials value chain. RIL has 1.24 million barrels per day (MBPD) of crude processing capacity, the largest at any single location in the world

The crude oil demand recovered strongly after a period of contraction in 2009. As a consequence, oil inventories reduced to five-year averages resulting in lowering OPEC spare capacity. Higher oil production also resulted in lower spare capacity and consequently putting upward pressure on prices. Higher demand for light products and higher refining utilisation rates resulted in widening light-heavy differential.

The growing gap between demand and oil supply, coupled with strong crude prices, is encouraging OPEC producers to further ramp up production. This is resulting in increased supplies of heavier crudes and further impacting lightheavy differentials. This should cause light-heavy spread to widen, and hence improved complex refining margins.

For FY-11, Arab light-heavy differential averaged at $ 3.2/ bbl, an increase of 86% over the previous year.

According to IEA, oil demand in 2010 grew to 87.9 MMBPD, up 3.4% in 2010 vis-à-vis 2009. It is pertinent to note that demand growth in 2009 was (-)1.3% vis-à-vis 2008 and therefore, seen in the context of the change over the last 2 years, growth in 2010 was in excess of 4.5%, the fastest recovery in over a decade. Demand growth in 2010 was driven by non-OECD countries which contributed to an additional growth of 2.2 MMBPD (5.7% on a year-onyear basis) which was 76% of global demand growth.

Average crude oil prices ($/bbl)

The consumption of middle distillates, the part of the barrel that is most levered to the economic cycle has picked up particularly strongly in recent months, leading to higher global oil demand. Middle distillate product cracks are expected to continue to rise due to strong demand for these products across Asia. Stronger oil demand, delays in new refining capacities in Asia, and widening lightheavy oil price differential going forward provide a further upside to complex refining margins in Asia. Geopolitical unrest in the Middle East/North Africa regions has been a major cause for the oil price increase in early 2011, with increasing focus on potential contagion to major oil exporters beyond Libya. Since the oil price spiked in February 2011, refining margins have strongly recovered and remain higher across all regions, driven by strong diesel margins, with Asian margins close to all-time highs.

Refinery outages of around 1.4 MMBPD in Japan have taken away around 350,000 BPD of diesel supply from the domestic market. Prior to the earthquake, Japan's 4.5 MMBPD refining capacity was running at close to 90% with diesel production of around 1.25 MMBPD. Large Asian export-oriented refiners are likely to shift products to Japan, leading to tightening supply in the European market.

Refinery capacity and utilization

It is estimated that the net refining capacity addition in 2009 was 2.6 MMBPD and a further 0.5 MMBPD in 2010. Limited capacity addition in 2010, strong demand growth and wider margins have helped utilization rates improve during the year. The average capacity utilization rates in FY-11 for refineries in North America, Europe and Asia were at 83.8%, 77.8% and 83.9% as compared to 81.6%, 76.6% and 83.5% of last year's respectively.

With higher global GDP forecasts and higher global oil demand forecasts coupled with minor capacity additions, refining utilisation rates are expected to improve over the next few years.

Demand for petroleum products

Light distillates

Gasoline was a weak link in the otherwise improving refining business. For most of the year, high inventories kept gasoline markets in USA amply supplied. Structural issues, like tightening fuel standards and rising share of ethanol, are likely to impact the gasoline cracks in the medium term.

Recent improvement in overall economic condition has had its positive impact. Gasoline inventory draws are presently higher at 1.9% and below the 5-year average and 5.3% below the year-ago level. On a year-on-year basis, the DOE of USA estimates gasoline demand is up 1.1% as Americans drove 0.2% more in early 2011 compared to the year-ago period.

Gasoline consumption in non-OECD is underpinned by rising incomes, younger demographics and surging car sales of China, India, Brazil and other emerging economies.

Middle distillates

These have been the harbinger of the improvement seen in refining margins during the year. Better demand and improving prospects have resulted in diesel cracks at early 2008 levels. It is pertinent to note that the refining industry has actually had to operate at close to 2008 peak diesel yields in 2H FY-11 in order to meet demand.

Given the loss of refinery capacity in Japan, growing industrial demand for diesel generators in the country and on-going diesel demand from emerging market economies, the supply cushion is clearly smaller than it otherwise would have been.

Middle distillate stocks are at a virtually identical level to those seen at the beginning of 2007, six months ahead of the start of the rally that culminated with diesel cracks close to $50/bbl. With crude oil stocks once again tight, and concern rising as to whether OPEC supplies will be sufficient to meet peak summer demand, the conditions for a rapid distillate stock draw - similar to the one seen in 2007 - are highly possible.

A much faster and stronger economic growth in non-OECD has resulted in higher demand for diesel. Supporting factors for Asian diesel market were strong demand for low sulphur diesel from India. China suffered from diesel shortage in the second half of the year, prompting increased import requirements.

Demand for Petroleum Products

As per IEA estimates in April 2010, the fall in OECD demand was largely attributed to Europe and North America. Oil demand in OECD Europe fell by 5.2% to 14.5 MBPD whereas demand in North America fell by 3.7% to 23.3 MBPD in 2009. On the contrary, demand in non-OECD markets remained resilient with Asia, including China and India growing at 5.1% to 18.5 MBPD. Demand in other non-OECD markets including Latin America, Middle East and Africa remained stable to marginally positive by 1.2% at 16.4 MBPD.

As per IEA estimates, world oil demand in 2010 is expected to rise to 86.60 MBPD, an increase of about 1.67 MBPD over 2009. Demand growth in non-OECD markets is expected to remain robust and is expected to rise by 1.78 MBPD, an increase of 2% to 41.24 MBPD. Asia, Middle East and South America are expected to account for over 83% of global demand growth.

Increased business, personal travel and global trade led to demand growth and better aviation fuel margins.

Changing trends

Petroleum products demand growth, product mix redistribution and progressively stricter quality requirements will continue to reshape the refining industry. The trend is towards lighter and lower sulphur refined transportation fuels. All regions of the world, except Africa, will reduce sulphur in gasoline to below average 150 ppm by 2020. For diesel, all regions except Africa will have sulphur content below an average content of 50 ppm.

Changing product specifications for sulphur (parts per million)

Equally important is the growth in demand for gasoline in the non-OECD markets, large parts of which are witnessing significant economic development and increase in personal vehicle growth in Asian, Latin American and Middle Eastern countries. There is strong correlation between the non-OECD gasoline demand growth and their GDP. As a result, worldwide gasoline consumption could increase by an average of 1.6% annually over the next 2 years.

The continuing global trend of tightening product specification presents new trade and margin opportunities for large modern refiners like Reliance, which has the ability to produce large quantities of ultra-clean fuels.

Demand for petroleum products in India

The demand for petroleum products in India increased from 130.5 MMT to 134.4 MMT, reflecting a growth of 2.9% in FY-11. The Indian refining capacity increased to 184.1 MMT from 179.9 MMT. Details of product-wise demand and growth during the last year are as follows:

A robust demand in Asia led to improvement in key product cracks virtually throughout the year. A strong growth in personal automobile ownership in developing Asia resulted in healthy gasoline cracks in the region. Middle distillates were the largest contributors to improved refining margins in the region. Economic growth, shortage of diesel in China, particularly in the second half of the year and cold winters, were seen to be the key contributors to the strength seen in diesel cracks. Robust petrochemical demand also meant that for most part of the year, naphtha cracks remained strong. Fuel oil crack was the notable exception and remained in the negative, thus creating a drag to simple refining margins. This was mainly on account of abundant supply as US became a major exporter to key Asian markets.

Singapore margins benefit from growth in demand fuelled by emerging Asian economies. Widening of light-heavy differentials added to the widening complex margins in the region. Europe was impacted by lacklustre petroleum demand and strong Brent price resulting in higher feedstock prices.