 "Easing likely in margins of private oil refiners")
With China expected to add about 1.5 million barrels a day capacity over 2015-2018, and Saudi Arabia alone adding a total of 1.2 million barrels a day capacity over three new refineries between 2013 and 2019, they will have feedstock advantage and produce ultra-clean fuels destined for the European market.
"However, the main threat to the export-oriented Indian refiners such as Reliance and Essar currently comes from the US, which is sending increasing amounts of product into South America and Europe. And, in a few years, will come from the new and expanded refineries in West Asia," said Vandana Hari, the Singapore-based Asia editorial director of Platts, the premier watchdog on energy issues.
Adding: "It does not bode well for the GRMs in India. The US refiners have a significant cost advantage from the growing flood of domestic tight oil production, currently affording them the best margins in the world currently. Cracking margins against Light Louisiana Sweet on the US Gulf Coast have been as much as 20 times higher than Dubai cracking margins in Singapore at times in previous months."
Reliance Industries and Essar Oil have, over the past two to three quarters, seen their GRMs perform better (see chart). GRMs are the earnings from processing every barrel of crude oil. Essar Oil posted a five-fold jump in net profit at Rs 1,008 crore, for the fourth quarter of 2013-14.
"GRMs are subject to many factors. Opening of new capacities is expected to put pressure on them. But the quantum of this will depend on factors such as demand growth in other markets such as Europe, Southeast Asia, India, West Asia, etc, and how quickly these markets will absorb this additional capacity. However, closure of capacities in some markets such as Europe and Australia will help in absorption of incremental capacity," said an Essar Oil spokesperson in an emailed response.
Analysts said the refining margins could see a decline of $1-2 a barrel. "India's status as the refining hub could be challenged and crude sourcing strategies will have to be very agile, as even a $1-2 per barrel difference in crude cost impacts the GRMs," said a senior official from a professional services firm, who did not wish to be named.
Reliance and Essar export to countries in Africa (Tanzania, Kenya, Mozambique, South Africa), to Fujairah and Saudi Arabia in West Asia, and to Singapore.
"Competition for the export markets is definitely heating up, as the US continues to export growing amounts of refined product and as the next tidal wave from the Middle East also starts aiming for the European and African markets in the coming years," said Hari.
Reliance and Essar Oil currently export a little over a million barrels a day of refined products to markets abroad, based on Platts' analysis of shipping data. Around 40-50 per cent of this is typically gas oil (normally used as a fuel oil). The second largest export is petrol, at 20-30 per cent of the total, followed by naphtha and aviation turbine fuel (jet fuel).
Essar exports some vacuum gas oil, and the occasional fuel oil cargo. Public sector refiners together export around 250,000 barrels a day. Naphtha and fuel oil account for the bulk of their exports, with gas oil, gasoline and jet fuel holding small shares.
Essar said it was constantly exploring new crude markets and crude varieties. It has processed about 75 different varieties of crude. "Expanding our crude basket to optimise returns is a constant exercise," it said.
To meet their fast-growing domestic demand, China and India have for the past decade or so been growing their refining capacity. A crucial difference between the two, however, is while Indian refiners are free to export surplus product, the Chinese government exercises strict control on any sales abroad, through a system of export licences and quotas. This is one reason why the Indian refining sector has more than 100 per cent capacity utilisation; in China, the combined average refining rates for the two state-owned giants, Sinopec and PetroChina, slipped to 83 per cent in 2013 from 86-87 per cent in 2007-08.
Analysts have warned that by 2015, China could be sitting on around four million barrels a day of excess refining capacity. This March, Sinopec Chairman Fu Chengyu warned if the country did not rein in such addition, utilisation rates could slip to 67 per cent by 2020.
"In our estimate, some 2.5 million barrels a day of capacity will be added in the Middle East region by the turn of the century, with a total of nearly 3.6 million barrels a day of the currently planned projects seen likely coming to fruition in the coming decades. This new wave of capacity is characterised by high-complexity mega-refineries," said Hari.
Also, with a narrowing premium of light sweet grades over heavy sour ones, US crude imports from Angola, Nigeria and Algeria are down ninety per cent in the past four years. The US imported an average of 170,000 barrels a day from these three producers in January-April, compared with two million barrels a day in 2010, according to the US Energy Information Administration. "So, the Indian refiners can't really bank upon a competitive edge from their cracking/coking capacities by maximising heavy sour grades in their crude slate to the extent they could until about five years ago," said Hari.
As for public sector refiners, as these largely cater to the domestic market, expected to continue growing, they would not be impacted by the changing international scene unless India moves towards complete market deregulation and Reliance and Essar make a retail push within the country.