Citi :Oil & Gas: 2011 Sector Outlook

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 Refining margins to see a pick-up — We see a gradual improvement of
refining demand-supply balance into CY11-12 and forecast regional GRMs to
increase by ~US$0.5 per year over CY10E levels of US$4.3. As further GRM
recovery would be driven by mid-distillates and widening of light-heavy
differential, we expect complex refiners to see a better margin upswing vs.
simple refiners, a positive for RIL.


 Petchem: cotton tightness to help polyester chain — We expect polyester
prices to remain strong, given the outlook for cotton prices, benefiting RIL.
On petchems, new capacity starts in CY11 are much smaller than in CY10;
however, effective new capacity (weighted by ramp-up time) is more
balanced, which will keep petchem margins in check.
 Further deregulation could be on the back-burner — At CIRA crude price of
US$85 for CY11E, we anticipate sustained high marketing losses for OMCs.
Diesel deregulation could get pushed back further given a packed election
calendar and continued inflationary pressures, limiting upside for OMCs.
Key driver/themes
 Higher crude prices; diesel deregulation delay — While any move by the
government towards diesel deregulation or to provide full compensation for
losses would be positive for OMCs, higher crude could play spoilsport, albeit
benefiting service providers like Aban Offshore.
 Tightening refining and petchem margins — We forecast GRMs higher by
US$0.5 in CY11 vs. CY10, cotton tightness to continue benefiting the entire
polyester chain, and polymer margins to remain largely flat.
 Gas prices structurally headed higher — While the government in 2010
increased APM prices to US$4.2 and announced higher (US$4.75-5.25)
prices for ONGC’s new production, any move to price incremental KG gas
higher (still at US$4.2) would be positive for RIL and increase reserve
expectations.
 Higher capacity and supplies to buoy gas sector — Infrastructure expansion
likely to be a key theme (authorizations to GSPL for new pipelines; GAIL’s
new capacities coming up). Guidance on KG gas ramp up would be a key
event to watch out for. Robust gas demand and acceptance of higher gas
prices to drive LNG imports, benefiting PLNG. Proactive bidding and
authorization of new pipelines by PNGRB could be a positive for the sector.