Wednesday, July 4, 2012

Low coal prices could change supply side dynamics

ENERGY PRICING

 

Fitch Ratings believes the weakness seen in thermal coal prices in recent months should reverse once demand from major importers recovers, although there is a risk low prices may persist into 2013, changing the industry's supply side dynamics.

 

The price of thermal coal (5,500 kcal coal at Newcastle, Australia on FOB basis) reached a two-year low of US$87 per tonne in early June 2012, down from US$142 per tonne in January 2011. Major reasons for this decline include China's economic slowdown and high coal inventory levels, increased production and exports from Indonesia and Australia, and increased exports by US coal producers due to cheap natural gas displacing coal used in US power generation.

 

Price recovery once India & China enter market

Fitch believes prices can recover from current lows once demand from key importers – China and India – improves, and the supply side adjusts to reflect the price environment. India depends on coal as its major energy source and is increasingly relying on imported coal as it struggles to increase domestic production. Likewise in China, thermal coal fired power represents more than 70% of the country's energy needs; Fitch believes thermal coal demand from China will lift again post sufficient policy easing by the government, and continue rising over the medium-to-long term in line with the country's strong GDP growth outlook, albeit lower than previous years.

 

The weak pricing environment is exposing the business risks of high-cost coal producers, including many Australian producers with high cash costs of production, as coal prices fall near or below the marginal cost of production. According to Fitch, such operators will be significantly affected if prices remain low for an extended period. At the same time, sustained low coal prices can shift buyers from low-rank coal to higher-grade coals and thus negatively affect both demand and realised prices for low-rank coal.

 

Fitch notes that many large coal producers have contracts in place with both volumes and prices fixed, typically for a period of one year. These operators would be insulated from a temporary weakening of coal prices to some extent. However, should low prices persist through 2012 and into 2013, it will negatively affect the prices they negotiate for 2013; such negotiations typically take place in Q4 and Q1 of each calendar year.

 

Production cuts likely

Should the current low price environment persist into 2013, Fitch expects high-cost producers in Australia and the US to undertake production cuts, and review expansion projects under consideration. Fitch also believes that production expansion plans by low-cost producing countries like Indonesia may be curtailed. Such actions would limit coal production levels (or growth) and help address oversupply.

 

ENERGY SUPPLIES

Reddy pitches for more petroleum supplies from Iran, Saudi Arabia, Algeria and Qatar

 

The petroleum minister, Mr. S. Jaipal Reddy held a series of bilateral meetings with his counterparts from different countries at Vienna (Austria) on the sidelines of the 5th OPEC International Seminar. The wide-ranging talks with his counterparts form Iran, Saudi Arabia, Algeria and Qatar were focused on sourcing more crude oil, LNG, LPG and promoting investments in hydrocarbon sector projects.

 

Mr. Reddy met Mr. Ali al-Naimi, Minister of Petroleum & Mineral Resources, Saudi Arabia – the largest supplier of crude oil and LPG – and asked for an additional 5-mt of crude oil and 1.5-mt of LPG, over and above the 32-mt of crude oil India had imported during 2011-12.

 

Investments in downstream refining & petrochemicals

Regarding Saudi Aramco and other companies investing in India's petrochemical and downstream sector, Mr. al-Naimi assured that this would be favorably examined and appropriate advice would be issued to its national oil companies.

 

The Ministers of India and Qatar discussed matters of bilateral interest, including larger supplies of crude oil. During 2011-12, India imported 6.41-mt of crude oil from Qatar. Both sides also discussed the long-term LNG contract between Petronet LNG Ltd. (PLL) and RasGas for another 3.5-mt of LNG, including the need to settle the pricing issue at the earliest. PLL has long-term contract with RasGas for 7.5-mtpa of LNG.

 

Mr. Reddy also met Mr. Youcef Yousfi, Minister of Energy and Mines, Algeria and asked for additional quantities of crude oil. He also expressed interest in investing in Algeria's upcoming LNG sector with the objective of some quantities of LNG being booked for India.

 

Gail India Ltd. is already in talks with the Algerian government-owned company Sonatrach for tying up LNG imports on an annual basis.

SALES TAX LIABILITY

Gujarat HC rejects Essar Oil plea, asks Govt to expedite recovery

 

The Gujarat High Court has rejected Essar Oil Ltd. (EOL) plea for relief in repayment of over Rs. 8,000-crore due as sales tax deferment liability and directed the state to expedite the recovery. The court rejected the petition of EOL, which had sought that the company be allowed to pay the tax dues of Rs. 6,414-crore in eight yearly instalments and grant it exemption from paying penalty and interest of Rs. 2,000-crores.

 

Coming down heavily on the EOL, the bench observed that, "The petitioner should have acted as a good company and furnished the amount to the government and not defrauded the state for its commercial benefit. The state government is directed to expedite recovery process of the entire amount due." The Court also observed that, "We fail to understand why the company, which had collected sales tax from its customers and invested the said amount in its own project, ask for such benefit on equitable grounds."

Earlier this year the Supreme Court had upheld Gujarat government's appeal against the company's sales tax deferral benefit claims for its Vadinar refinery.

 

The crux of the dispute was whether the Vadinar refinery is eligible for sales tax deferment under an erstwhile incentive scheme of the Gujarat government. Since the refinery started production later than the specified time, the Gujarat government held the company ineligible. After the Supreme Court verdict, tax authorities of Gujarat Government had issued a demand notice to EOL for repayment of sales tax deferment benefits utilised by the company. The state government had put the company's tax dues at Rs. 8,414-crore, which included interest and penalty.

 

Seeking bank loan

Meanwhile London-listed Essar Energy has informed that it is in advanced talks with banks for a $1-bn loan to meet its sales tax liability of $1.2-bn to the Gujarat government. Essar Oil is 87% owned by Essar Energy.

"We will be raising a corporate loan of $1-bn to fund the repayment of this sales tax liability and are currently in advanced negotiations with our Indian lender. We plan to close the matter soon," said Mr. Naresh Nayyar, CEO, Essar Energy.

 

Return to profitability this year

Essar Energy has reported a pre-tax loss of $1.14-bn for the fifteen months ending in March, hit by the costs relating to its loss of the Gujarat tax case and interest charges. However, Mr. Nayyar said the company should return to profitability in its current financial year. Following the completion of the expansion and optimisation of its Vadinar refinery, improvements to margins would raise EBITDA by around $700-mn annually, while progress with operational improvements at its Stanlow refinery in the UK was expected to add up to $225-mn to annual EBITDA. These and the addition of new power generation capacity meant that most of the project risks the company had borne over the past year were over, he argued. "We have created assets and increased the capacity of our refinery and power businesses which have all started delivering now," he said.

 

RAISING FUNDS

ONGC likely to list OVL in 2013

 

ONGC is mulling listing its overseas investment arm ONGC Videsh Ltd (OVL) next year to raise funds for aggressive foreign acquisitions. In its 'Perspective Plan 2030', ONGC has set a target of production of OVL's overseas properties jumping to 20-mt of oil and oil equivalent gas by 2017 and 60-mt by 2030 from current over 9-mt.

 

To achieve this, the company will have to pursue aggressive acquisitions of both exploration and producing assets. These kinds of targets need several billion dollars, all of which cannot come from its parent ONGC. To meet the huge requirement, the company may go for an initial public offering of at least 10% equity shares.

 

OVL, which 31 overseas oil and gas projects besides interest in a couple of pipelines, is nation's second largest exploration and production company. It is 100% owned by ONGC.