Rajasthan refinery no deterrent for Cairn plan

Cairn and ONGC will not "go slow" on the construction of the pre-heated pipeline to carry the "waxy" crude oil from the Barmer field despite the Rajasthan government saying it will build a refinery to process the same oil, a move that will make the $750-million pipeline redundant.

"The pipeline is the most feasible option and is likely to come up before the start of the crude oil production," said a senior official of Oil and Natural Gas Corporation (ONGC), Cairn's 30 per cent partner in the oil field.

Building a refinery with a capacity of around 7.5 million tonnes per annum takes around 40 months. The work on the pipeline is expected to take 18 months.

"About 83 per cent of engineering design work has been and tenders for laying the pipeline will be opened soon," said a Cairn executive.

Cairn India's oil discovery in Rajasthan is the largest in the country since ONGC found oil in Bombay High in 1972. The field will produce 150,000 barrels per day during the four-year peak production period.

The Cairn executive said a refinery in Rajasthan would mean another buyer for their crude oil. "However, we know the economics of the refinery is dubious at best," he said.

Another senior ONGC official agreed. "It is not just the issue of processing crude oil. There is no assured market in Rajasthan as the state consumes only 5 million tonnes of oil products per year. Moreover, with new refineries coming up in Bina in Madhya Pradesh and Bathinda in Punjab, there will be no market for the Rajasthan refinery," he said.

"There is not enough crude oil in the field to justify a new refinery," he added.

PRICING IMBROGLIO

Pricing is another issue that will have to be resolved before oil from the field starts flowing.

With the oil being of poor quality, Cairn says the price it will get will be around 10 per cent lower than the Brent crude price, the global benchmark. Refiners have, however, set their eyes on a discount of more than 20 per cent on the benchmark.

"The contract allows pricing to follow the international prices of similar oil. If we and the buyers do not agree on the price, we have the option of seeking an expert opinion," said the Cairn executive.

The pricing will determine how cost-effective will the pre-heated pipeline be. The cost of operating the pipeline, with its heating stations, will be higher than normal pipelines. If Cairn does not get a good price, the gains may not justify the cost of the pipeline.

The buyer is also yet to be finalised. "We are in talks with almost all refineries. The Bathinda and Bina refineries are keen on taking our crude oil as well," said the Cairn executive.

Not surprisingly, therefore, Cairn is unwilling to fix a date for the start of production. It earlier said the production would begin in early 2009. ONGC says it is "hopeful" the production will begin in the "end of 2009, though there remains a lot of work to be done".

"There are many things to be done. Design work has to be completed, land has to be acquired, heating stations have to built and more wells are be drilled. All of this has to synchronise with the start of production. Production may be delayed by some time," said the ONGC executive.