Commodities » Energy

Mid- and down-stream oil and gas review (March 2010)

By PSQ Analytics

Review of the past quarter

Global refining margins fell from USD6.20 per barrel in 1Q 09 to USD1.49 per barrel in 4Q 09 Source: BP, reflecting weak demand for fuels and excess refining capacity in the US and Europe. Rising upstream oil prices have outpaced the rise in prices of refined fuel, squeezing downstream margins. As a result, downstream majors such as BP and Royal Dutch Shell have reported net losses in their refining segments for 4Q 09. However, midstream companies benefited as rising oil prices drove up freight rates during the final quarter of 2009; the Baltic Dirty Index hit its highest level (1,216) in over a year on 15 January 2010. Since then, the index has softened in line with a correction in oil prices during January 2010.

Transactions and developments

Transaction activity in the refining & marketing and the storage & transportation industries was flat q-o-q in 4Q 09, with 82 transactions (including M&A deals, private placements and IPOs) compared to 87 in 3Q 09. To date in 2010, 53 deals have been closed Source: Capital IQ. The only two primary offerings in the period, by Chu Kong Petroleum & Natural Gas Steel Pipe and Shengli Oil & Gas Pipe Co. Ltd. (both oil storage and transportation companies) raised USD237 mn and USD203 mn, respectively, on the Hong Kong Stock Exchange, although their shares fared dismally on the first trading day.

Meanwhile, in India, the Kirit Parikh committee submitted its report to the Petroleum Ministry on 03 February 2010. The expert panel, set up with the intention of establishing a new fuel policy for the Indian government, recommended deregulating petrol and diesel prices, and raising cooking gas and kerosene prices by INR100.00 (USD2.17) per cylinder and INR6.00 (USD0.13) per litre, respectively. If these proposals are adopted by the Indian government, they would provide relief to oil marketing companies in India, which currently absorb the cost of these subsidies.

Outlook

In its latest Oil Market Report, dated 11 February 2010, the International Energy Agency (IEA) forecast growth in worldwide demand for oil of 1.8% y-o-y to 86.5 mn barrels per day in 2010 (+0.3 mn barrels per day from the November 2009 forecast), taking into account higher GDP growth projections by the IMF. Economic indicators remain strong, with Chinese crude oil imports rising by 33% y-o-y to 17.1 mn tonnes in January 2010. However, considering that major capacity additions are looming in China, India and the Middle East, and taking note of the upward trend in oil prices, we expect refining margins to remain weak over the near-to-medium term. Meanwhile, demand for oil tankers from oil transportation companies fell by 2-3% in 2009, while on the supply-side, global oil tanker fleet volumes increased by 7%. Growth in the oil tanker fleet is expected to remain at a robust 5% CAGR over the next three years, reflecting the significant order backlog for oil tankers. In our view, this fleet growth will suppress freight rates over the near term, as the global economic recovery is still at an early stage. However, as economic conditions improve further, we expect to see higher prices for oil products and higher freight rates during the latter half of 2010.