Party over for Indian refiners?

Indian petroleum refiners are fumbling for response as global economic slowdown pulls down demand for petroleum products

Noor Mohammad Delhi, Hardnews

The party seems to be over for Indian petroleum refining companies as the dwindling demand amid deepening economic recession starts to erode their margins and profitability. Export-oriented refineries are hit hard as demand for petroleum products in lucrative overseas markets such as the US has shrunk sharply in the wake of the economic downturn. Coming after four years of hefty growth, the demand destruction has left refiners fumbling for an effective response.

While Reliance Industries Ltd (RIL) reduced crude processing from 8.2 million tonnes in the second quarter to 7.87 million tonnes in the third quarter in response to the demand slump, Essar has decided to reschedule commissioning of its 34 million tonnes per annum (MMTPA)-capacity expansion project at Vadinar.  

Hardnews argues that when international crude oil prices surged in recent years, these export refineries were able to make hefty profits on the back of high spread between prices of crude oil and transportation fuels such as petrol and diesel. At the same time, they also benefited from the wide differential in the prices of light, sweet and heavy, sour variety of crude oil.

RIL's Jamnagar refinery, which is configured to process higher proportion of heavy crude, utilised this market condition to turn in a spectacular financial performance. RIL's gross refining margin for the fiscal year 2007-08 was pegged at $15 per barrel.Indian Oil Corp (IOC) raised its GRM from $3.64 per barrel to $9 per barrel in the same period. GRM for the Hindustan Petroleum's (HPCL) Vizag refinery rose from $3.35 per barrel to $6.30 per barrel while the GRM of BPCL Kochi refinery went up from $2.2 per barrel to $6.58 per barrel.

But the current global economic slump has significantly dented GRMs of Indian refiners. Hardnews found that RIL's GRM in the third quarter of the current financial year slumped to $10 per barrel and IOC's to less than $3 per barrel. The GRM for the Essar Oil's recently commissioned Vadinar refinery in the latest quarter was pegged at $2.26 per barrel, compared with $6.59 per barrel in the previous quarter.