Creating Capacity: Refining segment gears up for significant expansion

Refining segment gears up for significant expansion

According to the Ministry of Petroleum and Natural Gas (MoPNG), India will need crude oil refining capacity of 439 million tonnes per annum (mtpa) by 2030 and 533 mtpa by 2040 to meet domestic demand. This is almost double the current refining

capacity of 247.56 mtpa. The ministry released a report on “Enhancing Refining Capacity by 2040” recently, which states that this additional capacity is expected to come from commissioning of new refineries as well as augmenting the existing ones.

Demand in India, currently the third largest oil consumer in the world, is likely to rise to 335 mtpa by 2030 and about 10 per cent of the world energy is estimated to be consumed by it by 2035. At present there are 23 refineries in the country producing diesel, petrol and other products from heavy or higher density crude oil, most of which is imported. They also produce

petroleum, naphtha, asphalt base, heating oil, kerosene, liquefied petroleum gas, jet fuel and fuel oils. Of the refineries, 18 are operated by public sector units, two are joint ventures (JVs) and three are operated by the private sector.

Current capacity and utilisation

India’s current crude oil processing capacity not only fulfils domestic demand but also enables the export of petroleum products. At present, the 18 public sectors refineries have a capacity of 142.06 mtpa, JVs have 17.3 mtpa and the balance 88.2 mtpa is in the private sector. In 2016-17, India, with a capacity of 230.06 mtpa exceeded its fuel demand of 193.74 mtpa, emerged as the second largest refiner in Asia after China.

The biggest domestic refinery is the 27 mtpa plant built by Reliance Industries Limited (RIL) at Jamnagar in Gujarat, which was subsequently expanded to 33 mtpa. RIL then built another unit adjacent to it for exports, with a current capacity of 35.2 mtpa. Bharat Petrol-eum Corporation Limited’s (BPCL) Kochi refinery recently augmented capacity from 12.4 mtpa to 15.5 mtpa to become the biggest public sector refinery in the country, unseating Indian Oil Corporation Limited’s (IOCL) 15 mtpa unit at Paradip in Odisha.

Refinery production continues to exhibit a growth trend. In 2016-17, production not only grew 5.37 per cent to 245.36 mtpa but was also 2.06 per cent higher than the target. During the previous year (2015-16), the production was almost 4 per cent higher than the preceding year at 232.05 mtpa and exceeded the target by 3.48 per cent.

In the first nine months of this fiscal year (April-December 2017), production of public sector refineries was 5.16 per cent higher at 108.1 mtpa than the corresponding period of the previous year. A few refineries had lower production due to maintenance or other reasons. IOCL’s refineries at Barauni, Haldia and Mathura had lower throughput during the year versus the previous year due to maintenance and inspection shutdown while at Paradip it was due to VGO (vacuum gas oil) containment. BPCL’s Mumbai refinery also had a planned outage of crude distillation unit//hydrogen/hydrocracker units.

The two JV refineries – Bharat Oman Refineries Limited (BORL) and HPCL-Mittal Energy Limited – reported 13.82 per cent lower production during April-December 2017 at 10.94 mtpa compared to the corresponding period of 2016. The HPCL-Mittal Energy Limited refinery at Bhatinda, a JV between HPCL and Mittal Energy Investment Pte Limited, Singapore, was shut down for 45 days starting April 30, 2017 to increase capacity. Both partners hold a stake of 49 per cent each in the company and the remaining 2 per cent is held by financial institutions. BORL is a JV between BPCL and the Oman Oil Company and operates a 6 mtpa refinery in Bina. Production at the two private refineries, at Jamnagar (RIL) and Vadinar (Essar Oil Limited) was 68.9 mtpa during the first nine months of this fiscal year, marginally higher than the production during the corresponding period of the previous year.

Expansion through greenfield and brownfield projects

India’s 23 refineries make its refining capacity the fourth largest in the world. The government now aims to make the country the refining hub of the world by creating integrated refinery-petrochemical complexes. It is expected that brownfield expansion would add 120 mtpa and greenfield projects would add 69 mtpa of capacity.

The single biggest addition is expected to come from the long-awaited ambitious 60 mtpa refinery complex at Ratnagiri in Maharashtra. Three public sector companies – IOCL, HPCL and BPCL – have formed a JV to set up the refinery-cum-petrochemical complex by 2022 at Babulwadi in Ratnagiri district. One of the largest refinery projects in the world, it is estimated to cost Rs 2.7 trillion. According to the JV agreement, IOCL will hold a 50 per cent stake in the refinery complex while HPCL and BPCL will hold 25 per cent each.

Phase 1 of the project is likely to cost between Rs 1.2 trillion and Rs 1.5 trillion and is expected to be ready within five to six years from the date of land acquisition. The first phase will be a 40 mtpa unit with an aromatic complex, naphtha cracker plant and polymer complex. Once complete, the complex will produce Euro-IV and above grade transportation fuels and have inbuilt flexibility for processing a wide spectrum of light and heavy crude oil grades, utilising various blending techniques. It is also likely to produce on-demand product mix of petrol and diesel streams and other petrochemical streams. Located on the west coast, the refinery will have strategic advantages as sourcing crude oil from the Middle East and Africa will be easier. Also, moving products to consumption centres in the heartland will not be difficult.

Land acquisition and development and other pre-project activities have already started. The preliminary configuration study of the project is being carried out by Engineers India Limited along with an international consultant, which will conduct the market study for the chemicals and petrochemicals to be produced at the complex. International oil and gas players have shown interest in buying a stake in the upcoming refinery and initial talks have already begun with Saudi Aramco, according to media reports.

The second greenfield project is the long-delayed 9 mtpa Barmer refinery at Pachpadra, Rajasthan. The project was approved in 2013 but could not be started due to issues in land acquisition and environmental clearances. HPCL will have a 74 per cent stake in the Rs 431.29 billion refinery while the remaining 26 per cent will be held by the Rajasthan government. It will produce BS-VI products and will take four years to be completed.

According to the MoPNG, statutory clearances for commencement of work have been obtained and the construction of the boundary wall has started. Pre-project activities such as route surveys of crude pipelines, product pipelines and water pipelines and topographic surveys and soil investigations have also started.

Capacity addition through brownfield expansion will be undertaken by both private and public sector companies over the next decade. While RIL plans to add 30 mtpa of refining capacity by 2030, a 50 per cent increase , Essar’s Vadinar refinery, now controlled by Russian energy giant Rosneft, is targeting to more than double capacity by adding 25 mtpa by 2025. IOCL plans to raise its refining capacity to 153.55 mtpa by 2030 (including the Babulwadi refinery), from 80.7 mtpa at present while BPCL is likely to raise refining capacity to 56 mtpa from the current 36.5 mtpa.

The companies seem equipped to make investments in refinery expansion as gross refining margins (GRMs) have been increasing. GRM is a key measure of profitability for a refining firm derived by deducting the cost of the crude oil it consumes from the total market value of the refined products it produces. For the quarter ended December 2017, RIL’s GRM stood at $11.6 per barrel as against $10.8 per barrel in the third quarter of 2016-17. The company’s GRM outperformed Singapore complex refining margins by $4.4 per barrel. IOCL reported a higher GRM for the April-December 2017 quarter at $8.28 per barrel as against the GRM of $7.36 for the same nine months of 2016.

In addition, the government is encouraging the creation of integrated public sector oil majors through consolidation and mergers and acquisitions so that the merged entity has the capacity to bear higher risks, avail of economies of scale, and take higher investment decisions and is also able to match the performance of international and domestic private companies.

To this end, the government entered into an agreement to sell its 51.11 per cent equity stake in HPCL to the Oil and Natural Gas Corporation (ONGC) for Rs 369.15 billion. The integration offers consolidation in the petrochemicals and refining business. With this, ONGC will become a vertically integrated oil major, with a presence across the entire value chain, while HPCL will maintain its distinct identity and brand value. Moreover, ONGC (including HPCL) plans to add about 20 mtpa to its existing capacity of 42.2 mtpa.

To sum up, India will be well on its way to becoming a global refining hub once capacities are enhanced. The planned greenfield projects, brownfield expansions and integrated petrochemical complexes are likely to get commissioned by 2025, meeting domestic fuel demand and catering to exports till 2035. Future refinery configurations will be flexible to meet the growing demand for petrochemicals and allowing diversification into other non-refining businesses to take care of any market disruption. Though it is difficult for companies to make concrete plans beyond a 10-15 year horizon, given the projected economic growth and improvements in infrastructure that will make fuel and other products more accessible to consumers, refinery capacity could fall short of the estimated 472 mtpa domestic fuel demand by 2040.