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.

India was a net importer of petroleum products until recently. The turnaround began when the government opened up the petroleum sector for private competition in 1999 as part of the economic liberalisation drive. The sector got further boost when the administered price mechanism (APM) pricing regime was scrapped in 2002, in a shift to market-determined pricing for key petroleum products like petrol and diesel.

India's petroleum product exports/imports in million dollars from 1997-98 to 2006-07
Year Exports Imports
1997-98 720 3828
1998-99 86 2895
1999-00 161 3264
2000-01 1676 2642
2001-02 1731 1511
2002-03 2251 1822
2003-04 3661 2114
2004-05 6659 3277
2005-06 11232 6302
2006-07 17,908 9068
Source: Petroleum Planning and Analysis Cell (PPAC) Statistics

While Indian refiners are on a capacity addition binge, refiners in the US and Europe are finding it increasingly difficult to add capacity in line with projected demand growth due to environment concerns. This is expected to lead to widening gaps between demand and supply of petroleum products in these countries. Besides, many Asian countries like Taiwan, Indonesia, Vietnam, Philippines, Sri Lanka, Pakistan and Bangladesh are projected to have refining capacity shortfalls. Indian refiners are well-placed to meet these gaps.

The public sector continues to maintain its dominance in the Indian refining industry with a 72 per cent share of the capacity. Of the rest, RIL holds 22 per cent and Essar 7 per cent. Among public sector oil marketing companies, Indian Oil (IOC) is the biggest player with 40 per cent share of the country's refining capacity, followed by BPCL with 15 percent, HPCL with 9 per cent and Oil and Natural Gas (ONGC) with 7 per cent.

IOC is also the biggest operator of crude oil and petroleum product pipelines in the country with a 47 per cent share, followed by Petronet India with 30 per cent. HPCL and BPCL are other key players in the pipeline business with 16 per cent and 7 per cent shares, respectively.

Constrained by tight capacity in meeting the growing export demand for petroleum products, Indian refiners are raising their utilisation capacity and distillate yield. For example, IOC increased its capacity utilisation to 98.34 per cent in 2006-07 from 93.15 per cent in the previous fiscal. In the same period, it also raised its throughput to 44 per cent from 38.52 percent.

Essar started commercial production from its newly-commissioned 10.5 mmtpa-capacity Vadinar refinery on May 1 this year. The refinery is processing crude at 12.5 mmtpa, well above its rated capacity.

Refining capacity additions have fluctuated considerably through cycles of both excess and tight capacity. In the 1970s and 1980s, the refining industry experienced periods of rapid expansion fuelled initially by rising demand and anticipated sustained growth. Global capacity peaked at 82 mbd in 1981 and declined to 73 mbd by the late 1980s. The 1990s and early part of this century were more balanced with regard to capacity and demand, until the consumption surge of refined products in 2004 and 2005 created a much tighter situation in the refining sector. This led to rising margins and increased profitability for refineries, thus reviving interest in ramping up existing facilities and building new ones.

Apart from India, major refining capacity addition is coming up in the Middle East and China. While the latter is adding capacity to meet its domestic demand, the upcoming 2.6 mbd of grassroots refining capacity in Middle East counties like Saudi Arabia, Kuwait, Qatar, UAE and Iran is envisaged to meeting export demand.

For example, Saudi Arabia is building a 4,00,000 barrels per day (b/d) export refinery at Yanbu, and also setting up a similar-sized capacity at Jubail. Meanwhile, it is also expanding capacity of Ras Tanura and Yanbu refineries by 100,000 b/d and 65,000 b/d. These projects are lined up for commissioning between 2010 and 2012. The UAE is also planning two major refinery projects in Ruwais and Fujairah. Both projects are at an early stage, but together they could produce well above 500,000 b/d of fuel products for export. Expansion of the refining system in the country also continues through conversion and sulphur recovery projects in existing facilities in Jebel Ali and Ruwais. In addition to these projects, in Fujairah the US company Sulphco is installing a total of seven 30,000 b/d units that use its proprietary ultrasound technology to crack and desulphurise heavy sour crude into output lighter, sweeter crude oils.

Iran is adding a total of 350,000 b/d through six refinery projects. It is implementing its largest project in Bander Abbas in the country's southern region in partnership with Indian refiner Essar. The project is expected to be commissioned by 2011 with an initial capacity of 160,000 b/d. Similar capacity additions are also being taken up in Kuwait and Qatar.

Besides lower crude and fright costs, these Middle East refiners are also expected to have advantage of a more favourable tax regime. They could give tough competition to Indian petroleum product exports.