Refinery plans may delay Cairn's Rajasthan output

The government is considering setting up a refinery in Rajasthan to process crude oil found by Cairn India Ltd. The proposal may result in a three-year delay in starting production and a loss of nearly $5 billion (over Rs 20,000 crore) to the exchequer.

Cairn India, which discovered the country's biggest oil reserves in more than two decades, is set to produce 7.5 million tonnes from 2009. But the petroleum ministry now wanted the output reduced to half and ONGC-MRPL"" the official buyers of the crude""to build a 4 million tonne a year refinery, a top official said.

Even as the Rs 8,000-crore refinery will take at least four years to build, the ministry has withheld approval to a pipeline for taking the crude to the refiners in Gujarat.

The ministry has asked the oil regulator, the Directorate General of Hydrocarbons (DGH), to look into prolonging the 1,50,000 barrels per day output for eight years to at least 15 years by bringing it down to 80,000 barrels per day.

The proposal, if accepted, will not only slash the crude oil output but also result in decline in the government's share in revenues from the field to $3.9 billion from the present estimate of $6.88 billion.

The corporate tax collections will dwindle to $1.054 billion from the present estimate of $1.913 billion and royalty will dip to $1.316 billion from $2.372 billion.

In all, total revenue of the government is projected to decline to $6.27 billion from $11.16 billion "" a loss of nearly $5 billion.

The official said a refinery could not be viable unless the state government gave a host of fiscal incentives, including free land and exemption from VAT, sales tax and entry tax.

Interestingly, ONGC-MRPL, which had originally mooted the idea of setting up a 7.5 million tonne refinery in the state, had backed off saying the project was uneconomical.

A similar capacity project in Kakinada in Andhra Pradesh is also being upgraded to 15 million tonnes to make it economically viable.

The official said products from the proposed refinery would have to be necessarily sold within the state to get exemption from VAT/sales tax.

"The problem is that Rajasthan only has a demand for 2.5 million tonnes of products. And if the balance products are moved out of states, the sale would become unviable as no VAT/sales tax exemption will be available," he said.

Besides, Rajasthan does not have vast water resources needed to support a refinery. "Its a question if the scarce water resources should be used for drinking or in a refinery."

The official said the government may be forced to pay heavy penalties as it faulters on the deadline to create offtake arrangements for crude oil that Cairn India will start pumping from its Rajasthan fields from 2009.

"The refinery will take a minimum of 48 months to come up from the date of all approvals and in absence of a buyer of crude oil that starts coming out in first half of 2009, the government will have to pay heavy penalties to Cairn India," he added.