Indian oil companies are scaling up their refinery expansion plans as capacity additions around the world are either being delayed or scrapped.
In the pipeline
- Reliance Industries is mulling the addition of 34 million tonne per annum (mtpa) new refinery capacity
- Essar Oil is expanding its refinery capacity to 34 mtpa
- The additional capacity will cater to the export market
Reliance Industries, which operates the country's largest refinery and the world's third largest, is reportedly studying the feasibility of adding 34 million tonne per annum (mtpa) new refinery capacity to its current 33 mtpa and upcoming 27 mtpa capacity in Gujarat.
Essar Oil is expanding its refinery capacity to 34 mtpa from the existing 10.5 mtpa.
The additional capacity will cater to the export market.
The delay in new capacity additions is keeping the global refining margins strong. "The refining margins are expected to remain strong in the near to mid-term," said Ajay Arora, Partner, Transaction Advisory services, Ernst & Young.
The average refinery margins in the country are currently around $7-8 a barrel. They are expected to be in the range of $6-8 a barrel over the next five years, which is atleast $2 higher than the benchmark Singapore margins.
The strong refining margins are fueling the rush by Indian companies to meet the deficit of petroleum products, which is likely to be around 112 mtpa globally by 2010.
The country is planning to spend over Rs 70,000 crore (Rs 700 billion) in the next five years to set up new refining capacity. The delay in commissioning nearly 100 mtpa of new capacity in West Asia makes it feasible to add new refining capacities.
Global Oppurtunity
"The expected new refinery capacity in West Asia has either been delayed or abandoned. Moreover, the addition of refinery capacity in India makes the more expensive refineries in West Asia unviable," said an executive belonging to one of the country's largest crude oil refining companies.
The proposed West Asian refineries have been held up due to rising capital costs and delays in equipment supply. "Moreover, the labour cost is high, which inflates expenditure," said a Delhi-based analyst, who added that refineries in West Asia are almost twice as expensive as those in India.
China, which has a refinery capacity of around 300 mtpa, is likely to increase this to around 450-500 mtpa over the next 2-3 years. "The increased capacity will, however, mostly cater to its local demand," the analyst said.
In the last five years, the world-wide demand for petroleum products has grown by around 2.5 per cent, while the rate of refining capacity addition has been around 0.7 per cent. No new refineries have been set up in the US and Europe in the last 20 years due to strict environmental norms.
RIL and Essar exports a bulk of the products from its Gujarat-based 10.5 mtpa refinery to the US and Europe, analysts said.
High Domestic Demand
"Almost the entire refining capacity of RIL and Essar will be export-oriented and this leaves enough space for new refineries for catering to the growing demand within the country," said the managing director of an upcoming refinery.
Government data shows that the demand for petroleum products is expected to be around 119 mtpa in 2008-09. The refinery capacity in the country is expected to be 178 mtpa at the end of 2008-09.
However, with RIL converting its entire 33 mtpa refinery into an export-oriented one, and Reliance Petroleum's 29 mtpa refinery and Essar Oil's 10.5 mtpa refinery also targetting the export markets, the refinering capacity serving the domestic market will fall short by around 13 mtpa.
"This gap still gives us a lot of space to operate our refineries," the managing director of an upcoming refinery said. Bharat Petroleum and Hindustan Petroleum are setting up new inland refineries for catering to the domestic demand.
Demand is growing at a rate of around 5 mtpa. Since it takes about 3 years to set up a new refinery, it is feasible to set up a new 15 mtpa refinery every three years, the refinery executive added.
