Nayara Energy, which operates 20 million tonnes per year refinery in Gujarat, is facing a sharp demand slowdown. In the first fortnight of March, the combined demand for petrol, diesel, jet fuel and shipping fuel contracted 10% in the country. The demand has fallen off a cliff this week as the entire nation is in lockdown to fight the spread of coronavirus.
“The outbreak of COVID-19 has triggered lockdown in many cities, leading to subdued industrial activity and severe decrease in demand for petroleum products. Inventory build-up has also led to storage constraints. It is critical that the Government enables shared access to strategic petroleum reserves and PSU storage infrastructure for private companies,” Nayara Energy CEO B. Anand told ET.
Nayara didn’t give details on inventory pile-up or capacity utilization. The demand to stock finished products at state firms’ storage will depend on the availability of such spaces and state refiners’ willingness to permit such arrangements given that all refiners are faced with the same rocky market conditions today and adjusting their inventory levels and refinery run rate to changing demand situation.
The demand to temporarily store crude in the country’s strategic petroleum reserve, almost half of which is currently empty, means Nayara might be aiming to buy more crude than it can process and sell in the current climate. Last week, crude oil rates crumbled to their lowest in 17 years under the twin shock of coronavirus-led demand destruction and Saudi Arabia-led war for market share.
India has three strategic petroleum reserves with a combined capacity of 5.33 million metric tonnes, which can provide 9 days of the country’s supplies in case of supply-disruption.
Nayara’s modern refinery, designed to optimally function with supplies of heavy crude, has been hurt in recent times by the US sanctions on Iran and Venezuela, the key suppliers of such oil. An alternative arrangement of mixing fuel oil with lighter grades of crude oil to make the crude heavy and thus optimal for Nayara can work only if taxes on the fuel oil is waived.
“The Government should consider nullifying customs duties and GST on alternate heavy feedstock and bring it at par with crude oil. We also request the government to rationalize taxes across the value chain,” Anand said.
Nayara has also demanded an easing of restrictions on foreign loans to help refinance expensive rupee loans. “We hope the Government will reassess end-use restrictions and pricing cap on ECBs to maintain the financial health of oil companies who can raise external debt and remain competitive,” Anand said. The regulatory pricing cap on ECB for Indian borrowers today stands at Libor plus 450 basis points.
In January, rating agency Moody’s had downgraded Nayara Energy Limited’s corporate family rating to Ba3 from Ba2 on weak refining margin environment in Asia.