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No replacing ‘Black Gold’ in investment portfolios even if there are substitutes

Production and consumption of petroleum products has increased steadily in India over the decades, a trend that’s expected to continue.

July 26, 2021 / 01:11 PM IST
 
 
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Black Gold, as the petroleum industry is widely known, plays an influential role in the global economy. In India, the oil and gas sector is among the core industries that are directly linked with economic growth and the overall sector is projected to grow at a faster pace, making it quite lucrative for investment.

India holds the third place on the global podium when it comes to oil and energy consumption, behind the US and China. India has also emerged as an oil refining hub and plans to increase refining capacity to 400 million metric tonnes per annum by 2025 from almost 249 MMTPA at the current level.

About 67 percent of the country’s refining production is controlled by three giant conglomerates – Indian Oil Corporation, Bharat Petroleum Corporation and Reliance Industries. Production and consumption of petroleum products has increased steadily in India over the decades, a trend that’s expected to continue.

The Indian government recently decided to invest about Rs 7.5 lakh crore on oil and gas infrastructure in the next five years, followed by an allocation of $1.7 billion for liquefied petroleum gas and almost $147 million as feedstock subsidy for Bharat Petroleum.

The oil & gas industry is expected to attract investments of about $25 billion in exploration and production by 2022, according to a report by India Brand Equity Foundation, a trust established by the Department of Commerce, indicating strong prospects for companies in the segment and a great investment opportunity for retail participants.

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The leeway provided to foreign direct investment in oil exploration and infrastructure related to marketing of petroleum products and natural gas under the automatic route, followed by the enabling of 49 percent stake-holding in petroleum refining without any dilution of domestic equity in existing public sector undertakings under the same route has not only boosted liquidity in the segment but can also be seen as a major driver for the economy.

Demand in the sector is anticipated to grow at a faster pace as consumption of crude oil is expected to increase at a CAGR of 3.6 percent to 500 million tonnes by 2040 as India’s oil demand is projected to advance at the fastest pace in the world to 10 million barrels a day by 2030 from 5.05 million barrels a day in 2020. This clearly indicates the growth potential for oil exploration companies.

Discussions on disinvestment in Bharat Petroleum are on track amid the COVID-19 pandemic and the process is expected to be completed by September-end, as announced by the finance minister. Natural gas consumption is expected to increase at a CAGR of 4.18 percent by 2040, for which the natural gas grid is being expanded.

Oil & Natural Gas Corporation is expected to grow at a faster pace. The government is even examining a proposal to reconsider the current administered pricing mechanism, which could be the main trigger for the company’s growth.

Considering these developments and prospects, the oil & gas sector looks lucrative even with major technological advances in sustainable energy options. Substitutes or alternatives can be arranged, developed or produced, but there is no replacement for the classic Black Gold. Retail investors must understand this chronology and include this sector in their portfolio to be future-ready.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Disclaimer: MoneyControl is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.
Osho Krishan

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