Reliance Industries pins GRM growth to IMO's implementing new bunker oil norms

The largest private sector oil refiner Reliance Industries, which Friday reported a plunge in the June quarter refining margins, guided towards a stable scenario, saying any improvement depends on the implementation of the new bunker oil norms.

Earlier in the day, the company that runs the world's largest refinery with a 60 million tonne annual capacity, said it could earn only USD 8.1 on turning every barrel of crude into fuel, steeply down from a gross refining margin (GRM) of USD 10.5 a barrel in the year-ago period.

The margin was also lower than USD 8.2 a barrel it had earned in the March quarter. This capped its standalone profit growth of a low 2.4 percent at Rs 9,036 crore.

The International Maritime Organization will enforce a new 0.5 percent global sulphur cap on fuel content from January 1, 2020, lowering from the present 3.5 percent cap.

"GRM outlook is a tough one to make, but the only near-term positive sign is the IMO (International Maritime Organisation)-related impact on new bunker oil norms, which should weaken fuel oil and boost the mid-distillates," group joint chief financial officer V Srikanth told reporters.

He further said the benefit from a refining point of view really comes from the IMO regulation (on new bunker oil norms) and its implementation. Given this, "we are expecting in and around stable GRM going forward...such a range looks positive," Srikanth said.

On the ongoing geopolitical tension in the Middle East, Srikanth said it's business as usual and their operations have not been impacted.

"All shipments are going through, but the lingering tension has led to uncertainties, but that is something businesses have to factor in as they operate," he said.

It can be noted that the global fuel sulphur cap is part of the IMO's response to heightening environmental concerns, contributed by harmful emissions from ships and the new bunker oil rules have everyone from OPEC oil producers to bunker fuel sellers and shipping companies worried.

The rules, drawn up by the IMO, which is a UN body, seeks to ban ships using fuel with a sulfur content higher than 0.5 percent, steeply down from 3.5 percent now, unless a vessel has equipment to clean up its sulfur emissions.

Any vessels failing to comply will face fines, can find their insurance stopped and can even be barred from sailing by declaring them to be unseaworthy.

The global shipping fleet now consumes about 4 million bpd of high sulfur fuel, but about 3 million of that demand will disappear from January 2020, according to industry forecast and it is expected that most if this demand will shift to marine gasoil, a lower sulfur distillate fuel.

According to Morgan Stanley, this will generate at least 1.5 million bpd in extra demand for distillates over the next three years, pushing up total distillate demand to 3.2 million bpd, which in turn, can drive up prices.

Already Gasoil now trades at a premium of about USD250 a ton to fuel oil, but this is seen ballooning to USD380 a ton by early 2020.