Future Refined

Encouraged by a robust domestic demand for petroleum products and lucrative overseas markets, Indian refiners are undertaking capacity expansion on a massive scale. To take advantage of the widening light-heavy crude price spread in the international markets, Indian refiners are also upgrading their existing capacities in a big way in order to increase their margins.

Meanwhile, as governments across the globe tighten environmental norms for the transportation industry in view of the global warming threat, Indian refiners are adding facilities for bringing down sulphur content in petrol, diesel and jet fuel production. Besides, Indian refineries are also implementing projects to manufacture valued-added products like alkylate, which raise fuel efficiency of vehicle engines and are in great demand in developed countries. The government has envisaged making India a global refining hub. And with this objective in mind, it is liberalising its policy for foreign direct investment (FDI) in the refining sector.

While a policy for 100 per cent FDI in private refining projects through the automatic approval route was already in place, the government has recently increased ceiling for foreign equity participation in refinery projects of state-run oil companies from 26 per cent to 49 per cent. This has paved the way for 49 per cent equity investment in Hindustan Petroleum's (HPCL) Bhatinda refinery and Bharat Petroleum's (BPCL) Bina refinery by Mittal Energy Investments and Oman Oil Company. The government is also providing tax sops for export-oriented refineries. This has encouraged Reliance Industries and Essar Oil to undertake ambitious capacity expansion at their existing refineries in Jamnagar and Vadinar in Gujarat. Thanks to policy support from the government, the refined petroleum product sector has become India's largest merchandise exporter. The foreign exchange inflows have helped the government bear the impact of the rising crude bills to an extent.

The concept of petroleum, chemical and petrochemical investment region (PCPIR) envisioned by the government is expected to give a further fillip to the country's petroleum product exports. Meanwhile, vertical integration is a buzzword in the Indian refining industry. Refiners are integrating into the downstream petrochemicals business for better margins even as they are scouting for assets to assure their crude supply. However, the government's decision to withdraw income-tax sops for new private refinery projects starting production after March 2009 might adversely affect investors' sentiments. More so, because the refining margins are prone to cyclical downturns.

Petroleum products account for about 37 per cent of India's primary energy consumption. And the additional requirement is growing at 5-6 percent a year, driven by a sustained demand from the transportation sector. According to Keystone, a US-based consultancy, automobile sales -- which number about a million vehicles -- are likely to grow to about 20 million a year by 2030, making India the third largest automobile market in the world. In the short term, even the high crude oil prices are unlikely to impact demand for transportation fuels in India, with the government continuing the policy of subsidisation.

According to statistics available with PPAC, India has 149 million metric tones per annum (mmtpa) of installed refining capacity against its domestic demand of 120 mmtpa. Indian refiners are undertaking additional projects to increase existing capacity to 242 mmtpa by 2012 against a projected demand of 196 mmtpa. This indicates higher potential for exports.