Egypt turmoil set to hit oil marketing cos

Written by MG Arun | Nikita Upadhyay | Nikita Upadhyay | Mumbai | Updated: Feb 9 2011, 04:31am hrs
The crisis in Egypt may take a toll on Indian oil marketing companies like Bharat Petroleum Corporation, Hindustan Petroleum and Indian Oil, as they will not only have to deal with higher crude prices, but also hardening freight rates. With West Asia producing 30% of the worlds oil, prolonged unrest will not only result in oil prices moving higher but would affect the movement of tankers through the Suez Canal, leading to higher freight costs. India meets as much as 60% of its crude oil requirement from the Gulf countries.

According to government statistics, in 2009-10, India imported 159 million tonnes of crude oil for Rs 3.75 lakh crore. Currently, the average freight rate for a very large crude carrier (VLCC) is around $15,000 per day. Experts say even a 3-5% increase in crude demand might take freight rates up by as much as 20-30%. BPCL, for instance, imports 60% of its total crude requirement of 22 mtpa from countries like Saudi Arabia, UAE, Dubai and Qatar, and is bracing up for higher freight rates. We used to import from Egypt earlier, but not any longer. However, freight rates may harden, which is not a good sign, a BPCL official said. Companies that have a direct exposure to Egypt will be impacted, but not otherwise, said B Mukherjee, director finance, HPCL. The indirect impact would be the rising crude prices, but we cannot say prices have gone up to $100 a barrel due to the current crisis.

Freight rates in the tanker segment are not significantly impacted till now. However, with growing unrest in Egypt there is a possibility of closure of Suez Canal for trade movement, which can impact freight rates positively or negatively, said AR Ramakrishnan, director, Essar Shipping, Ports & Logistics.

With disruption in crude oil supply, countries may rush to stock up crude. With this, more ships will be needed to carry oil and freight rates will inch upwards. On the other hand, increase in crude oil prices may also moderate oil demand and hence, freight rates would not be significantly impacted because there are already more ships than needed, he added.

BPCL sources 60-70% of its crude oil requirement on a term contract basis, while the rest in sourced from the spot market. HPCL, on the other hand, imports 11 million tonnes of crude every year, of which 3.35 million tonnes is sourced from the National Iranian Oil Company (NIOC), a government-owned corporation under the ministry of petroleum of Iran. HPCL also imports from Saudi Arabi (Saudi Aramco), Abu Dhabi, Kuwait and Malaysia. Shares of BPCL were up 1.34% on the BSE on Monday to close at Rs 595.15, while HPCL shares closed at Rs 346.65, up 1.72%.

Increase in freight rate is a demand-supply economics. The Suez Canal connects the western world to the eastern world. If traffic through it is stopped, ships would have to take a longer route of going around the Cape of Good Hope. The turnaround time of ships will double as the distance increases three times, said Anand Sharma, director, Mantrana Maritime Advisory. As protests in Egypt and other countries intensified, oil prices crossed the $100 a barrel mark last week, from $97 levels the previous week.

With the Middle East producing nearly 30% of the worlds oil, prolonged unrest could result in oil prices trending higher. This would impact Indias already deteriorating current account deficit, lead to higher subsidies and inflation, said Citigroup Global Markets in a report.