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MOSL: OIL & GAS: Government of India makes hay while the sun shines; levies duties on export of diesel, petrol & ATF; imposes export duty on crude oil production.

• Brent jumped to USD114/bbl in 1QFY23 from USD80/bbl in FY22 led by the ongoing geopolitical crisis. SG GRM also expanded to USD21/bbl in 1QFY23 from USD5/bbl in FY22, aided by lack of sufficient supply from COVID-ridden China. Domestic APM gas price also spiked to USD6.1/mmBtu in 1HFY23 from USD2.9/mmBtu in 2HFY22 and it is expected to rise to ~USD9/mmBtu in 2HFY23.
• A rise of USD1/bbl in GRM results in incremental INR40b of EBITDA for RIL; 1QFY23 extrapolated for full year would have generated incremental ~INR400b of EBITDA for RIL, considering the base GRM at USD10-11/bbl.
• Similarly, an increase of USD5/bbl in GRM raises ONGC’s EPS by ~9%; 1QFY23 Brent if extrapolated for the full year would have raised its EPS by ~60%, where additional gains would arise from the gas price hike. Government appears to have taken away a part of the booty by levying the new duties, which are likely to be reviewed every 15 days.

What has the government done?

• The government has restricted exports of diesel and petrol stating that 50% of what is exported, must be sold in India, meaning ~66% of production can be exported while the rest 33% has to be sold in the domestic market.
• On export of diesel, petrol & ATF, the government has imposed duties of INR13/ 6/6 per liter, respectively. This corresponds to a hit of ~INR27/12/12 per bbl in crack spreads of diesel/petrol/ATF, which are likely to hit the GRM of RIL by USD8/bbl. However, it may be noted that the crack spreads of diesel/petrol/ATF have risen to USD40/33/39 per bbl in 1QFY23 from the long-term average (20-year) of USD12/11/13 per bbl, respectively. Even after the knock, the revised crack spreads of USD28/21/27 per bbl for diesel/petrol/ATF remained significantly higher than the long-term averages, respectively.
• Duty of INR23,250/mt on oil production is expected to hit upstream companies by under-realization of ~USD40/bbl. The smaller companies that produce less than 2mnbbl/year are exempted. Additionally, any rise in oil production over FY22 is also exempted to incentivize production.