India is one the few countries in the world, along with the US and South Korea, that have a heavy dependence on crude oil imports, while also being a significant exporter of refined products. At present, the country imports 80 per cent of its oil requirement. While the recent years marked by depressed crude prices made a strong economic case to import cheap crude, it also resulted in a revenue hit for domestic refiners. Competition too has intensified in the sector, leading refining companies to contemplate ramping up existing refining capacities to retain their export markets.
Indian Infrastructure provides a snapshot of the refining sector, the current scenario, the need for capacity expansion, and some key projects under way…
Current market size and structure
According to the International Energy Agency (IEA), in terms of its total refining capacity, India ranks fourth globally, with only the US, China and Russia ahead of it. The country’s current installed refining capacity stands at about 230 million tonnes per annum (mtpa), spread across 23 refining facilities. Of this, nearly 65 per cent, or 150 mtpa, is owned and operated by public sector players, while the remaining 35 per cent (80 mtpa) belongs to private sector companies.
Player-wise, state-owned Indian Oil Corporation Limited (IOCL) has the maximum refining capacity at 69.2 mtpa. The key refineries of the company include those at Koyali (13.7 mtpa) in Gujarat and Panipat (15 mtpa) in Haryana. In the private sector, Reliance Industries Limited (RIL) tops the list with an installed crude oil refining capacity of 60 mtpa at Jamnagar, Gujarat, followed by Essar Oil Limited’s (EOL) 20 mtpa capacity at Vadinar, Gujarat. Recently, Russia-based Rosneft along with its partners bought a 98 per cent stake in EOL, in the largest foreign direct investment deal in India during the year (2016).
Why do we need refineries?
Geographically, India’s location is quite strategic. Being located in the south of the Asian continent, gives it access to a number of energy importing countries. Its domestic crude oil production at 900,000 barrels per day (bpd) is far less than its refinery capacity of 4.4 million bpd. The country is already a key exporter of petroleum products and is a net exporter of all refined products, apart from liquefied petroleum gas. It is an major supplier of diesel to the European continent and a regular supplier of gasoline to countries in the Asia-Pacific and the Middle East. Its exports are mainly from the private sector refineries, while public sector refineries meet the domestic demand. This is due to the fact that the private facilities are capable of efficiently processing sour/dirty crude imported from the Middle East into high quality products. As a result, these refineries have been able to gain market share from less complex refineries in Europe and Japan.
However, to retain export competitiveness in the global market, expansion in domestic refining capacity is a must. Globally, refiners, especially in the Middle East, are pursuing aggressive expansion plans, so as to diversify their exports that primarily comprise crude/unprocessed oil at present. This has led Indian refining companies to focus on improving their performance through modernising and upgrading their facilities’ configurations as well as expanding their refining facilities.
Key expansion plans
One of the mega plans in the oil refining sector is the 60 mtpa facility (two phases of 40 mtpa and 20 mtpa each) proposed to be set up at Rajapur, in Ratnagiri district, Maharashtra. The facility, entailing an investment of Rs 1.5 trillion-Rs 2 trillion, will be the world’s largest refinery complex. It is being developed by a special purpose vehicle (SPV) formed by IOCL, Bharat Petroleum Corporation Limited (BPCL), and Hindustan Petroleum Corporation Limited (HPCL). The project, announced by the Ministry of Petroleum and Natural Gas in December 2015, is at a nascent stage. At present, site
visits and land acquisition are under way. The government has appointed Engineers India Limited as the technical agency to prepare a detailed feasibility report for the project.
Meanwhile, a number of refining companies have embarked upon their expansion plans. IOCL, for instance, plans to invest Rs 400 billion to expand its refining capacity to 104.55 mtpa by 2022. It is looking to scale up its Koyali refinery to 18 mtpa from the current 13.7 mtpa, while the capacity of the Panipat refinery will be raised to 20.2 mtpa from the current 15 mtpa. Besides, a 3 mtpa capacity addition is planned for the company’s refining facilities in Mathura (Uttar Pradesh) and Barauni (Bihar), which will take their capacity to 11 mtpa and 9 mtpa respectively. The recently commissioned 15 mtpa Paradip refinery in Odisha will also see a capacity addition of 5 mtpa while about 3 mtpa will be added to the Digboi and Bongaigaon refineries.
Other state refiners too have planned capacity additions to meet the rising demand for petroleum products, both in the domestic as well as foreign markets. For instance, BPCL is looking to increase its total refining capacity to 53 mtpa, by ramping up its units at Mumbai and Kochi.
Impact of the Paris Agreement
To restrict the global temperature rise to within 2 °C by the end of this century, 190 countries ratified the Paris Agreement by committing to bring down their greenhouse gas emission levels. A key step to achieve this is to decarbonise the energy sector, particularly through fuels being used in the transport industry. The Indian government too has submitted its Intended Nationally Determined Commitment (INDC), a part of which is to switch to cleaner fuels.
Indian refiners are thus gearing up to meet the strict timeline of April 2020 set for supplying superior fuels in line with Bharat Stage (BS) VI emission norms. According to government estimates, investments to the tune of about
Rs 800 billion will be required for upgrading petrol and diesel quality to meet the cleaner fuel specifications. Previously, fuels meeting Euro-IV or BS-IV specifications were to be supplied throughout the country by April 2017 and BS-V or Euro-V grade fuel by April 1, 2020. Now, instead of the step-wise upgradation from BS-IV to BS-V and then BS-VI, the government plans to switch directly from BS-IV to BS-VI auto fuels by 2020 to meet its INDC.
The refining sector is poised for higher growth, given the elaborate expansion plans chalked out by several refiners. However, equally important will be the development of other downstream infrastructure, such as transmission pipelines. Concerns regarding land acquisition still pose a huge challenge to the development of greenfield projects. The megaproject at Ratnagiri is a case in point, which has been witnessing land issues since its announcement. Such issues push up costs and disturb project economics significantly. Besides, most of the refining facilities in India are very old. It may thus be a good idea to retire some facilities as their operation costs are rising sharply with their age.
Overall, the government’s thrust on the sector’s development bodes well for the future. Continued policy support, rising demand for petroleum products and intensifying competition are likely to shape the country’s refining sector to a large extent.