Oil giants the world over are worried. With the price of crude oil on the slide, profit margins are shrinking, and for some the decrease in price means huge losses. Many hugely expensive investments were made in hard-to-access areas, often squeezing oil out of regions that would never have been contemplated before, such as the tar sands projects in Canada, oil exploration in the Arctic, or deep sea exploration. These kinds of projects require time to explore and build, they also typically require huge outlays of capital and therefore a high price of oil to be profitable. With the price of a barrel of Brent crude, a global benchmark, sinking to around $82 and expected to fall even further, major oil companies are right to worry. Many existing projects are bleeding money and potential investments have been put on hold. If prices don’t recover to above the $100 per barrel mark, they may be scrapped altogether. Such concerns have played out in the stock markets, with the share prices of oil majors such as Chevron, Shell, BP, and Total all falling by one percent or more.
The story is a little bit different for large oil corporations in India. As D K Sarraf, chairman and managing director of ONGC put it, “We are perhaps the only crude oil producing company in the world which feels happy about prices [of crude oil falling].” ONGC and Oil India have had to shoulder about half of the under-recovery burden of the government’s fuel subsidies. The fall in the international price of crude oil means a smaller subsidy, and more breathing space for ONGC. That may be why decreases in the stock prices of ONGC and Oil India are relatively low, only -o.2% and -0.13% respectively.
The situation is not so good for others. Hindustan Oil Exploration Company’s stock price fell by 5.36%. Perhaps this is an indication that firms more heavily involved in the upstream part of the oil business, namely exploration and production are more at risk from the fall in oil prices than better integrated corporations. Then again, this might be due to doubts over the company’s leadership, as about a month ago a flurry of directors tendered their resignations. Share prices of companies that do similar work such as Aban Offshore and Asian Oilfield have posted healthy growth at 1.15% and 2.77% respectively. So aside from one or two outliers, the slide in the price of crude shouldn’t trouble Indian oil companies, nor should it trouble investors.
Writer: Ronojoy Mazumdar
