Macquarie - Indian F&D costs lowest -Refining and petrochemicals update

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Asia oil and petrochemicals
Indian F&D costs lowest
Refining and petrochemicals update


 Singapore GRM rose to US$7/bbl, driven by strength in gasoline, diesel and
kerosene. Petrochemical upstream margins rose while downstream margins
were down on slow buying activity from China.

Theme of the week
 Indian F&D costs the lowest in the world: Indian upstream majors enjoy
world’s lowest F&D costs ranging between US$4–5.3/bbl. Further, the cost
increases in India have been much slower than the rest of the world despite
superior growth, due to higher finding success rate and large finds. We (Jal
Irani /Laban Yu) believe that while Chinese upstream firms are growing at a
staggering pace without caring much for the cost, their Indian peers are
growing fast, and quite profitably. In our view, at US$29/bbl of proved
reserves, CNOOC is overvalued considering its high F&D cost of US$22/bbl,
Oil India (currently trading at US$11/bbl of reserves) has the lowest F&D
costs in the world (US$ 4.2/bbl), and we believe it presents deep value.
Country-specific developments and views

 Korea: Robust oil refining margin is positive. We continue to like downstream
oil plays in Korea, namely S-Oil and GS Holdings. As 4Q10 refining margins
are maintaining healthy trends, we expect Korean oil refiners to finish the year
strong.

 Taiwan: FPCC (6505 TT) should benefit from the continued strength in
refining margin. Meanwhile, the strong MEG and PTA pricing supports our
positive view on NPC (1303 TT) and FCFC (1326 TT)'s 4Q outlook. Our order
of preference in Taiwan's petrochemical space remains: NPC > FCFC > FPC
(1301 TT). We expect NPC and FCFC to continue to benefit from strong
polyester supply demand next year. In addition, with no new MEG capacity
coming on stream next year, we expect a continual margin uptrend for NPC's
MEG business in 2011. NPC, FCFC, and FPC also has ~24%/25%/29% stake
in FPCC respectively to participate in strong oil fundamentals.

 Thailand: The dual themes of refining margin strength and paraxylene price
optimism continues to support major downstream equities: Thai Oil, PTT
Aromatics and Esso Thailand. Changes related to a possible adjustment to
Thailand's LPG price cap is also lifting sentiment. Our favorite downstream
names are PTT, Esso Thailand and Thai Oil.

 Japan: Refining margin in Japan last week was up by 0.1yen/lt, or +1.5% on
WoW. Performance was mix across the products: Gasoline was down by 10%
whereas Kerosene and Diesel were up 3.2% and 5%, respectively.
Outlook and Strategy

 Upstream and downstream oil remain primary areas for investments. Coupled
with our oil economist Jan Stuart’s bullish view on oil demand, our Indian
analyst’s view on India’s low F&D cost analysis indicates a point worth
considering. We continue to like upstream-leveraged firms (Oil India, RIL,
PetroChina, SK Energy) and drilling services companies (ABAN).