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Markets wait for synergies and resultant profits

india Updated: Mar 02, 2009 21:16 IST
Anupama Airy
Anupama Airy
Hindustan Times
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The RIL-RPL merger has resulted in creating a refinery behemoth —nowhere in the world exists an entity that can refine 1.24 million barrels of crude oil a day (or 62 million tonnes per annum) at a single location.

Post-merger, the RIL-RPL combine also figures amongst the top 10 non state-owned refiners in the world. It will displace US energy major Chevron Corp to become the 13th largest oil refining company in the world.

The move will undoubtedly create business synergies for the two companies in terms of crude sourcing, operating efficiency and logistic cost-benefits. But shareholders of RPL will perhaps have to wait a little longer to gain from this merger.

A look at the global refining scenario shows that margins from processing crude have been squeezed from the highs of $18 a barrel in May-June 2008 to less than $4 a barrel now. This follows a steep fall in international crude oil prices from $149 a barrel to $35-40 per barrel.

This pressure on margins is likely to stay through 2009, as developed economies get into recession. As a result, no new investments are expected in the refining sector.

Moreover, the ongoing economic slowdown has resulted in flattening of oil demand worldwide. In fact, according to OPEC, oil demand is likely to dip by as much as 0.8 per cent in 2009, the first time since 1983; it fell 0.6 per cent in 2008.

Meanwhile, on Friday, Chevron that held a 5 per cent stake in RPL, decided to sell it to RIL at Rs 60 per share.

A silver lining for RPL investors is a default diversification to the oil and gas exploration business, including the D6 gas field in Krishna Godavari basin.

While the merger will come into force from April 1, 2009, markets wait for the synergies and the resultant profits to flow.