BP Eyes Slice of Indian Petroleum Retailing Market

Oil major to set up 3,500 fuel stations across India over the next two years

b1India is fast replacing China as the driver of global oil demand growth as the Indian economy expands and its burgeoning middle class spurs vehicle sales. British oil major BP PLC (NYSE: BP) is setting up 3,500 fuel stations in India, becoming the second overseas firm to tap opportunities in catering to the rising gasoline demand in the Indian market. European oil major Royal Dutch Shell PLC (NYSE: RDS.A) has 82 fuel stations in the Indian petroleum and diesel retailing market, which is dominated by three state-owned oil marketing companies (OMCs), Indian Oil Corporation, Hindustan Petroleum Corporation Limited, and Bharat Petroleum Corporation Limited. These three OMCs together own 52,604 (93.6%) of the 56,190 retail outlets in the country as of April 2016.

Earlier, private petroleum marketing firms like Reliance Petroleum Limited and Essar Oil Limited, which had forayed into petroleum and diesel retailing, had to shut outlets because they could not match the subsidized prices offered by state-owned outlets. Once the fuel outlets are operational, BP would have to compete with 10 other petroleum retailing companies in India: the three state-owned OMCs, Reliance, Essar, Oil and Natural Gas Corporation Limited, Numaligarh Refineries Limited, Mangalore Refinery and Petrochemicals Limited, Haldia Petrochemicals Limited, and Royal Dutch Shell.

India seen to be lucrative market for BP

India’s oil consumption is seen rising by 6 million barrels per day (bpd) to about 10 million bpd by 2040, according to the International Energy Agency. b2India’s fuel demand rose by 11.6% in 2015-16, its highest rate in at least 16 years. Given this scenario, the Indian petroleum and diesel retailing market could offer lucrative opportunities for BP, which reported a 45% drop in Q2 FY16 earnings.

Moreover, BP has also been granted approval to market aviation turbine fuel in India. At present, India’s pricing formula gives higher profits to retailers with refining plants or domestic supply sources. Currently, fuel sales are driven by the higher demand for diesel, which accounts for 40% of the petroleum products sold in the country, with petrol accounting for 11%.

BP to leverage Reliance tie-up

b3BP already has a tie up with Reliance Industries Limited for gas sourcing; hence, BP may strengthen this relationship further to the downstream side of the business. In 2011, BP acquired a 30% stake in Reliance Industries in some exploration blocks and formed a gas sourcing and marketing tie-up with the Indian conglomerate. Reliance, which owns the world’s biggest refining complex, currently has a marginal share in the domestic fuel retailing market. Hence, industry experts believe that BP’s entry into retail fuel sales may not dent the market share of the state-owned OMCs since India’s rising fuel demand has the potential to absorb a new player.

BP to buy LNG from Eni’s Mozambique field

BP, as part of its strategy to transition to a low-carbon future, has agreed to buy the entire liquefied natural gas (LNG) production from a field off Mozambique over a period of 20 years, as reported by Bloomberg on October 4th, 2016. BP will purchase cargoes from the Coral South Floating LNG plant, being developed by partners including Italy’s Eni SpA, which is due to get final approval by the end of 2016.

The project is expected to have a capacity of more than 3.3 million tons a year, which at current prices of about $6 per million British thermal units, would be worth about $1 billion a year, according to Bloomberg. Production at Coral South, in which Eni is the operator with a stake of about 50% through a subsidiary, is expected to start in late 2021.

BP buys first Iranian oil since sanctions eased

Iran’s state-owned National Iranian Oil Co. (NIOC) has sold condensate to BP for the first time since sanctions were lifted in January 2016, as reported by Bloomberg on October 5th, 2016. NIOC will supply South Pars condensate to BP between September and October, at spot prices. The shipment may be used by one of BP’s own refineries or resold to other users. BP’s purchase comes at a time when the availability of condensate from the Middle East looks set to fall.

Q2 FY16 results fall below estimates

BP’s Q2 FY16 results, announced on July 26th, 2016, were dented by the slide in crude oil prices and costs related to the Gulf of Mexico 2010 oil spill. During Q2 FY16, BP’s revenues plunged to $46.44 billion from $60.46 billion in the year-ago period. To add to its woes, BP’s adjusted net income nosedived to $720 million from $1.3 billion in the year-ago quarter.

BP is among the large oil companies that are going through a tough phase following a 70% slide in oil prices since the middle of 2014, when crude oil prices were below $40 per barrel, the lowest level since 2009. The plummeting crude prices has forced oil majors to announced massive job cuts and slash spending on drilling wells, finding reserves and developing fields to a large extent. What’s more, oil majors are being threatened on one hand by the rise of renewable energy and climate policies that will curb demand for fossil fuel, and on the other hand, by the smaller companies that have taken the bold step to diversify into shale oil and gas production.

BP’s earnings from its downstream operations fell from $1.87 billion to $1.51 billion during the reporting quarter. On the brighter side, BP managed to reduce operational costs by $5.6 billion in Q2 FY16 and is further targeting to reduce expenses to $7 billion by 2017. However, despite the reduction, the company saw a rise in its Gulf of Mexico oil spill liabilities to $61 billion during Q2 FY16.

b4BP announces job cuts

BP, which is still struggling with about $55 billion of costs from the 2010 oil spill, said it would cut 7,000 jobs by the end of 2017, or nearly 9% of its workforce. BP plans to cut 3,000 jobs in its downstream division by the end of 2017, on top of the 4,000 cuts in its oil and gas production business announced in 2015.

Stock Performance

b5BP’s stock stood at $36.67, gaining 1.38%, at the close on Monday, October 10th, 2016, having vacillated between an intraday high of $36.83 and a low of $36.42 during the session. The stock’s trading volume was at 4,329,561 for the day. The Company’s market cap was at $115.76 billion as of Monday’s close.

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