Reliance Beats Sinopec as Exports Lift Refining

By Rakteem Katakey and Pratish Narayanan - Oct 16, 2012

Reliance Industries Ltd. (RIL) is raising sales from the world’s biggest refining complex, helping boost profit from crude processing and beating rivals including Asia’s largest refiner China Petroleum & Chemical Corp. (600028)
The company controlled by billionaire Mukesh Ambani said yesterday it earned $9.5 a barrel from refining in the quarter ended Sept. 30, the highest in a year. China’s two biggest processors, whose shares have lagged behind Reliance this year, incurred losses from fuel production in the first half of 2012. Mumbai-based Reliance’s margin will increase further as the onset of winter in Europe lifts demand, according to consultants FACTS Global Energy and KBC Energy Economics.
Reliance is better placed than competitors from the Asian economies of China and Japan because of its ability to meet demand in markets as far as Europe and the U.S., said Praveen Kumar, a Singapore-based analyst at FACTS Global Energy. Ambani, 55, is betting on turning crude into fuels to boost profit amid declining natural-gas production at its biggest field, while China Petroleum and PetroChina Co. (857) turn to exploration to counter losses from processing crude.
“In refining, Reliance is a cut above the rest,” said FACTS Global’s Kumar. “They are well positioned to sell fuels to Europe to meet winter requirements and in India, where demand continues to grow. Due to this ability to switch markets, the higher profit margins will stay.”
Growing refinery profit has meant Reliance’s shares have climbed 19 percent this year. Cosmo Oil Co. (5007), a Japanese refiner partly owned by the government of Abu Dhabi, has slumped 33 percent, while China Petroleum, also known as Sinopec, has dropped 3.4 percent. PetroChina, Asia’s biggest company by market value, has gained 8.2 percent.

Share Performance

Reliance Industries rose as much as 2 percent to 840 rupees and traded 832.60 rupees as of 9:28 a.m. in Mumbai. The shares have gained 20 percent this year, compared with a 22 percent increase in the benchmark Sensitive Index. (SENSEX)
Ambani plans to spend 1 trillion rupees over the next five years to expand chemical-producing capacity, bolster refinery operations and enter telecommunications as he seeks to revive net income that has dropped for four straight quarters.
The Indian company yesterday reported a 5.7 percent decline in second-quarter profit to 53.8 billion rupees from a year earlier. The median estimate of 28 analysts in a Bloomberg survey was 53.7 billion rupees. Reliance produced an average 30 million cubic meters of gas a day from the KG-D6 block in the quarter ended Sept. 30, compared with 46.6 million a year earlier, according to presentations on its website.
Reliance’s quarterly revenue from refining rose 23 percent to 838.8 billion rupees. Exports of refined products fell 9.1 percent to $18.9 billion in the six months ended Sept. 30.

Refinery Shutdowns

A series of plant disruptions in the west may have curbed fuel supplies and helped Reliance get better prices for its products, Ehsan Ul-Haq, senior market consultant at KBC, said by phone from Walton-on-Thames, England.
Chevron Corp. (CVX) last week said a crude unit closed by a fire in August at its Richmond refinery, near San Francisco, will remain shut until end-December. Petroleos de Venezuela SA said last month that its 645,000-barrel-a-day Amuay refinery, the biggest in the Western Hemisphere, is operating at about half its capacity after an Aug. 25 explosion.
Reliance’s two adjacent refineries at Jamnagar in the western Indian state of Gujarat have the capacity to turn 1.24 million barrels of crude a day into fuels. The plants can process heavier grades of oil, that are typically cheaper than lighter types of crude, into lucrative products that can be sold in Europe and the U.S.

European Stockpiles

“Currently, there are several European refineries undergoing maintenance as well, so gasoil stocks are quite low in the region with winter coming up,” Ul-Haq said.
Gasoil, or diesel, stockpiles in independent storage in Europe’s oil-trading hub of Amsterdam-Rotterdam-Antwerp fell to the lowest level in nine months, according to PJK International BV. Gasoil inventories decreased 3.9 percent to 2.08 million metric tons in the week to Oct. 11, according to the researcher. That’s the lowest level since Jan. 12.
Reliance is considering raising its diesel output, Tony Fountain, chief executive officer at its refining business, said in New Delhi yesterday.
Reliance’s profit from fuel sales may be constrained as capacities are restored and Chinese and Indian companies plan further additions, said Sandeep Randery, a Mumbai-based analyst at Brics Securities Ltd.
Globally, a net 1.3 million barrels a day of refining capacity may be added this year, according to a Citigroup Inc. report on Aug. 30.
“Maintaining refining margins may be a challenge for Reliance,” said Randery, who has an add rating on the stock.

Indian Consumption

The company will focus on expanding its flagship processing operations rather than on exploration and production, Dayanand Mittal, a Mumbai-based analyst with Ambit Capital Pvt. said in an Oct. 3 report. Reliance’s $4-billion plan to set up a petcoke gasification facility by the financial year 2015 will help expand refining margin by $2.5 a barrel, Mittal said.
India’s fuel consumption, including gasoline and diesel, increased 10 percent in the April-August period from a year ago, according to Oil Ministry data. Demand may increase 6.1 percent in the year ending March 31, the data show.
Japan’s oil-product demand may decline at a rate of 3.5 percent a year through March 2015, according to an estimate by the country’s trade ministry. The nation’s refineries are also being asked by the government to cut capacity or modernize in an oversupplied market so they can compete better with rivals.
Oil-product use in China fell 0.40 percent in August from a year earlier to 8.955 million barrels per day, the lowest since September 2011, according to data compiled by Bloomberg.

Sinopec Profit

“Japanese domestic demand is shrinking due to an older population that doesn’t drive as much as young Indians do,” FACTS’ Kumar said. “In China, refiners primarily have to serve the domestic market and cannot capitalize on demand in Europe because they can’t shift to exporting products quickly.”
Sinopec posted its lowest half-yearly profit since 2008 after the sale of fuels at state-controlled prices reduced earnings. The company posted a loss of 18.5 billion yuan ($3 billion) from processing 811 million barrels of oil in the first half of 2012. PetroChina, the country’s second-largest refiner, incurred a loss of 23.3 billion yuan from refining 489.7 million barrels in the period.
Reliance posted an operating income of 38.5 billion rupees from refining in the six months ended June 30.
China increased gasoline and diesel prices for the second time in about a month on Sept. 10 because of rising crude costs and slowing inflation. The rate increase may help Sinopec break even on refining in the quarter ended Sept. 30, Neil Beveridge and Ying Lou, Hong Kong-based analysts at Sanford C. Bernstein & Co. said in an Oct. 5 report.
“Reliance has its own port for imports and exports and is situated quite close to the Middle East to get crude,” Kumar said. “Its refinery is sophisticated enough to use different crude from Venezuela to Saudi Arabia. All this keeps operating costs relatively low compared to peers.”
To contact the reporters on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net; Pratish Narayanan in Mumbai at pnarayanan9@bloomberg.net
To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net; Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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