Larsen & Toubro (L&T) expects capital expenditure by the international hydrocarbon industry to pick up as global energy majors resume investments following a drop in crude oil price volatility, Subramanian Sarma, whole-time director and senior executive vice president of energy business at engineering major, told Moneycontrol in an interview.
As an engineering, procurement and constriction (EPC) company, L&T’s order pipeline from the hydrocarbon sector tracks the capex in the sector. While global energy majors moderated their capex plans, the Indian counterparts have steadily invested in expansion despite high volatility in crude oil prices and Covid-related disruption.
“Internationally, particularly in the upstream side, there was a slowdown post-Covid for different reasons. Now even to maintain and sustain production, the capital has to come back. So I expect in the next three-four years, the capital expenditure will remain at a decent level,” Sarma said.
In the first quarter of 2022-23, L&T bagged orders worth Rs 4,366 crore, registering a substantial growth compared to the year-ago period, driven by a large order win from the Middle East in the Offshore vertical. International orders accounted for 91 percent of the total orders of the segment during the quarter.
“In India, companies have been very steady in expanding refineries and downstream petrochemical capacities. A lot of new projects have been announced in the last two-three years and it will continue for some more time, maybe not at the same pace,” Sarma said.
Supply chain disruption
But he cautioned that the global supply chain is not yet streamlined and may cause challenges.
“In terms of our revenue, our target is always to at least backfill what we burn in orders. So we have to win close to around $3 billion of orders every year. That means the pipeline has to be four-five times that because our success rate is 20 percent to 30 percent. The supply chain globally has still not come to normal and there are still problems, so that might create some disruption,” Sarma said.
Crude oil prices rise
Crude oil prices soared to $147 a barrel, close to record highs, in March this year amid supply constraints and concerns over disruptions due to Russia's invasion of Ukraine. Prices have cooled off since then with the benchmark Brent crude futures trading around $105 a barrel now.
When asked where the crude oil price is headed, Sarma said, “If I had to put a sustainable range, I would say it will be around $85 a barrel. That's what my personal prediction is; there will be aberrations. But I think somewhere it will kind of get anchored over a longer period around $85.
So there is a $20 increase with respect to that average pricing in the near future in the next two to three years. Oil producing companies will be very happy with that number but it will be a problem for oil-consuming countries like India because they would want it to be around $50-$60.”
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