Yet global demand is expected to keep rising during that time, which means that at some point in the future, demand is likely to outstrip supply again. When that happens, the failure to invest in new capacity will lead to supply disruption. It could mean the beginning of a new super cycle, and the inability of Indian oil PSUs to capitalise on that will not just hurt the companies, but the country’s finances.

What does that mean for Indian oil companies across the petroleum value chain? Low oil prices will lead to low investment in new production capacity over the next few years. Till July 2015, more than $140 billion of spending cuts have already happened across the petroleum value chain.

Infighting in the petroleum producing bloc and the U.S. decision to push hard on shale, have muddied the waters for the rest of the world. Barring unexpected events such as fresh conflict in West Asia, it is difficult to see oil prices recovering in the short term. “Oil is likely to stay cheap for another year or two at least,” goes an IEA statement.

There has been a lot of talk regarding the OPEC nations calling for a production freeze; at a recent OPEC conference, Russia, Saudi Arabia, Venezuela, and a few others pushed for oil production to be maintained at January levels. However, given the history of internal competition, it seems unlikely that this will happen, or that countries like Iran will be reined in. The reason, say some experts, is that these countries hope that lower prices will mute the U.S. boom in shale oil production.

On its part, the Organization of the Petroleum Exporting Countries (OPEC), the largest group of oil producers (with 13 member countries) led by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, did not try to prop up prices. Rather, member countries battled among themselves to protect their market share, and like the U.S. producers, Libya and Iraq also stepped up production. Iran has begun to increase its exports now that the U.S.-Europe sanctions (imposed on Iran’s nuclear programme) have been eased.

Even as demand crashed and prices fell to a 12-year low, high-cost U.S. drillers continued to produce oil; their strategy was to slash costs and boost productivity, which meant that production actually went up.

Although reams have been written on the subject, it’s still worth asking the obvious question: Why did crude prices fall so dramatically? Analysts point out that through the 2000s (the oil super cycle), crude demand was rising fast, supply struggled to keep pace, and prices soared as a result. These high prices, in turn, made it profitable for private drillers in the U.S. to extract oil from hard-to-reach places like shale formations in North Dakota and Texas. Then global demand started sagging after June 2014, led primarily by the Chinese slowdown and low growth in the European Union. The result was a supply glut—an excess supply of nearly 1.5 million barrels of oil per day, according to data from the International Energy Authority (IEA).

Interestingly, Tripathi adds that with the country importing some 30% of its petrochemicals, the question is clearly not about demand. It is about whether it can produce at a lower price than the imported product.

“Now LNG prices have come down,” he says, with some satisfaction. “We will consider whether we should go for ethane-based or naphtha-based petrochemicals because once the price of petrol goes up, these prices will follow suit.” (Read the full interview on page 84.)

I’m expecting him to say GAIL would reduce exposure to this segment. Instead, Tripathi admits there was a loss, but is quick to add that it was not a cash loss. “It was because of depreciation and interest rates,” he says. High liquefied natural gas (LNG) prices, combined with the extra cost during commissioning and the extra feedstock that had to be procured, led to the loss.

Not all oil companies, PSU or private, are in belt-tightening mode. I asked Bhuwan Chandra Tripathi, chairman and managing director of gas major GAIL, about his company’s exposure to petrochemicals, a segment that made losses for GAIL this year.

It’s cold comfort, but things are hardly better in the private sector for exploration and production companies. Cairn India, for one, is in a dismal state. With oil at $30 a barrel, a back-of-the-envelope calculation shows that after paying the cess (Rs 4,500 per tonne), royalty (Rs 481 per tonne), and profit petroleum (ranging from 10% to 60% depending on the field) and other taxes, the company is left with just 9 pence a barrel. Little wonder, then, that Cairn has slashed capital expenditure from $1.1 billion to $300 million for this fiscal, not to mention a drastic reduction in headcount to tide over the current crisis.

Things are no better for Oil India (No. 16 on the 2016 Fortune India PSU 50), the other public sector exploration and production company headquartered in Assam. The selling price of its crude has drastically fallen from $79.43 per barrel in Q3 last financial year to $42.02 in this fiscal’s third quarter. Revenues are down by 42%, operating profits by 69%, and net profit by 99% compared to the same period last year. And its stock price has slipped nearly 28% over the past two years.

Its stretched balance sheet has not escaped the attention of the stock market, and ONGC’s stock price has nosedived nearly 54% over the past two years—from Rs 463.40 per share on June 6, 2014, to 215.35 on February 26, 2016. It has also capped its capital expenditure at Rs 29,000 crore this year, nearly Rs 7,000 crore less than what it spent last year. A high-ranking manager in another oil PSU says his company—and most of its peers—“are on life support”, thanks to this volatility.

The oil super cycle started in 2000, when oil prices stayed at above $100 a barrel. ONGC then was unable to take full advantage of these prices since its gains were offset by the subsidies it had to bear to help oil PSUs sell diesel, petrol, cooking gas, and kerosene at government-set prices.

Here’s the big problem for ONGC. The cost of producing a barrel of crude—lifting, shifting, and transportation—is around $12 to $18 depending on the age of the field. But the company pays 10% royalty, $9 in cess, and the balance in depreciation and amortisation, all of which take the cost up to $36 or so a barrel. That leaves the company with little money for new investments at this time. Which is also why, when I had met ONGC’s chairman and managing director, Dinesh Kumar Sarraf, he said that the company can start making fresh investment when oil prices are at $60 a barrel or more. With oil prices set to touch $25, Mahurkar says ONGC could start making losses.

But there’s a flip side to this good news. India’s biggest oil producer, Oil and Natural Gas Corporation (ONGC; No. 1 on the 2016 Fortune India PSU 50), has reported a 64% drop in net profits and a 68% drop in profits before tax in Q3, compared to the same period a year before—its worst result in the past 15 years. Sustained low global crude prices have meant that the company had to sell its crude in the domestic market at $44.34 a barrel in Q3—much lower than in the previous year. The company has also been forced to write down Rs 3,994 crore worth of reserves because it no longer made economic sense to continue with its east coast project (in the Krishna-Godavari field) at current prices.

The gross refining margin or GRM is the difference between the price of petroleum products and that of crude, and is calculated based on the Singapore benchmark. Mumbai-based Hindustan Petroleum (No. 15 on the 2016 Fortune India PSU 50), which reported a profit of Rs 1,042 crore in the third quarter of 2015 compared to a Rs 325 core loss in the same quarter a year earlier, reported a GRM of $7.86 a barrel in Q3 compared to a negative $1 in Q2.

It’s not all unrelieved gloom, though. Oil refining and marketing companies have been making some profits; as seen earlier, Indian Oil’s net profit zoomed in the third quarter. A large part of that is because the company’s gross refining margin had gone up from $0.9 in the previous quarter to $5.83.

Dollar returns in emerging markets are zero over a 10-year horizon and -20% over the past five years. The International Monetary Fund (IMF), in its World Economic Outlook survey update in January 2016, calls 2016 a year of great challenges. Key risks ahead include a sharper-than-expected slowdown in China, which could affect trade, commodity prices, and confidence. Also, any further appreciation of the dollar could raise the vulnerability of emerging markets, adversely affecting corporate balance sheets. “The impact of a decline in oil prices on inflation has to account for currency depreciation,” says Madan Sabnavis, chief economist of Mumbai-headquartered CARE Ratings in a January 18 note on crude. “The overall cost of oil will remain lower and in line with movement in global crude prices,” he adds.

Also, oil importers need to hire rigs and floating vessels used in storage, production, and offloading—often in foreign currency. A weak rupee means that these expenses shoot up, since almost all payments have to be made in dollars.

The bad news doesn’t stop there. A fall in oil prices is an advantage only when the local currency is strong. Consider this. In December 2003, when crude oil was at a monthly average rate of $32.1 a barrel, the monthly average exchange rate was Rs 45.6 to a dollar. The rupee cost of a barrel worked out to Rs 1,465 at the time. In December 2015, with a 46% weakening of the rupee (to Rs 66.6 to a dollar), the rupee cost of a barrel of oil was Rs 2,477, despite crude prices hovering around $37.2 (just 15.9% higher than in 2003).

As the fall stabilised somewhat in 2015, the extent of inventory loss was also somewhat reduced. The point that Sharma and his peers in other oil PSUs are making is that it’s not possible to predict how suddenly and sharply prices will move. Which is why he is sober even as his company has declared a net profit. “Any volatility in crude prices creates huge uncertainty for oil marketing companies like us. We favour stability even at higher crude prices,” he says.

In the kind of jerky price fall we have been seeing, this means prices could tumble between the time the oil is loaded and sold. Oil companies would have committed the cardinal mistake of buying high and selling low. Inventory losses for Indian Oil alone have been steep, touching a high of Rs 12,840 crore in the third quarter of 2014. Plot this against the fall in oil prices ($105.79 in June 2014 to $59.3 in December that year), and the correlation is stark.

Hedging is not the only problem. The biggest hit for oil importers is inventory loss. Here’s how that works. An oil importer buys oil, and pays for it at the prevailing rate when it is shipped. Downstream companies like IOC carry a 60-65 day inventory cycle; broken down, that’s approximately 15 days in transit, five days in unloading, another 15 days in the pipeline to the refinery, then 10-15 days at the refinery for processing, and the rest in post-production. What this means is that while the price of crude is frozen when it is loaded on the ship, the company only gets paid at prices in force at the time it sells its products in the market.

But Sharma looks worried. When I trot out the old line that when the price of oil falls by a dollar, the country saves a billion dollars, he is not amused. He agrees that falling prices are good for the country as a whole, but for oil companies, particularly the public sector ones, the unsteady pace of decline is bad news. If prices had fallen steadily, oil companies could have attempted some sort of hedging strategy. (In the past, hedging was not an option “given the low profitability of oil companies”, says Sharma.) Even a cursory look at the monthly average crude price movement shows that the movement has been far from steady—from $59.3 (Rs 3,746) a barrel in May 2015 to $46.2 in October and $42.4 in November, and then a sudden steep slide to $31.7 in January 2016.

When I meet Sharma after the company reported a net profit of Rs 3,057 crore in the third quarter of 2015, compared to a loss of Rs 2,637 crore in the same period a year earlier, I expect the 57-year-old to be ecstatic. Logic, if not economics, tells us that low oil prices should be good for the country and for the oil companies. Under-recoveries—the difference between the true price and the subsidised rate at which it is sold—have vanished. “Working capital, which was a huge issue in the past when crude prices touched record highs and the government delayed payments by more than six months, is no longer a concern,” says Deepak Mahurkar, leader, oil and gas, PricewaterhouseCoopers in India. For instance, IOC’s under-recoveries, which at one time was around Rs 25,000 crore, is down to a mere Rs 4,000 crore.

A profit of Rs 420 crore after covering for a loss of Rs 2,637 crore in one year is cause for any company to break out the champagne. And if that increase comes after some loss-making quarters, you’d think the company brass would be dancing in the streets. Not Arun Kumar Sharma, director (finance) of Indian Oil Corporation (IOC), the country’s largest oil refining company—and perennial No. 1 on the Fortune India 500 (and No. 5 on the 2016 Fortune India PSU 50).

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