Why RIL is upbeat about petrochemicals even as it moves out of auto fuels

The company's oil-to-chemical strategy assumes significance in the face of an electric vehicle-dominated future

India's largest private sector oil company will be moving out of automobile fuels. Mukesh Ambani-led Reliance Industries (RIL) has lined up an oil-to-chemical strategy through which it will produce only petrochemicals and jet fuel from its Jamnagar refinery complex, the world's largest refinery at a single location. 

The refinery's current product mix is dominated by petrol, diesel, LPG, aviation turbine fuel (ATF), LPG, naphtha and other value-added fuels. According to an estimate by the Boston Consulting Group, investments worth around $20 billion are lined up for petrochemical-cum-refinery projects in India, excluding the $45 billion West Coast refinery, in which Saudi Aramco and Abu Dhabi National Oil Company (Adnoc) have already shown interest in participating. This investment figure includes 19 projects, including expansion, integration and setting up of new refineries. Interestingly, Saudi Aramco has also announced plans to pick 20 per cent stake in the oil-to-chemical business of RIL, ensuring assured long-term product supply for the Ambani-led company.

Though RIL is the biggest player in the domestic petrochemical business with close competition from state-owned Indian Oil Corporation, focussing on petrochemical and higher value is also out of a necessity for it. Energy majors anticipate an electric vehicle-dominated future. 

Indian Oil Corporation (IOC), Hindustan Petroleum Corporation, GAIL India and Bharat Petroleum Corporation, too, are in fray to grab a share of booming the Indian petrochemical and export market. 

What are petrochemicals?  

Petrochemicals are chemical products derived from petroleum and natural gas based feedstocks, including naphtha,  liquefied petroleum gas and gas oil. These feedstocks are used to produce plastics, rubber,  fibre and other intermediates used in sectors such as packaging, textiles, electronics and automotive. The two major petrochemical classes include olefins and aromatics. RIL's oil-to-chemical strategy is to ensure conversion of over 70 per cent of crude refined in Jamnagar to olefins and aromatics.

Reason for petrochem push

An estimate by the International Energy Agency (IEA) cites that much of the demand growth in the sector is set to  come from India. At present, the per capita polymer consumption in India is just about eight kg,  one of the lowest globally. Compare this with 106.3 kg in Korea, 67.2 kg in Taiwan and 58.4 in by Malaysia. This would mean that the demand in the country should touch 48 million tonne from 14.6 million tonnes last year, to even match the world average of 32 kg per capita.

Going by this thumb rule, a petroleum ministry estimate pegs a requirement of a 1.5-million-tonne-per-annum capacity every year for an increase in one kg per capita consumption. This estimate itself is giving enormous growth potential to the country's refining sector, as an integration with petrochemicals in any new or expansion of existing refinery will ensure feed stock advantage and Infrastructure integration. 

Many industry experts cite that the growth in country's petrochemical sector is set to be in the range of eight per cent per annum till 2030. 

The IEA study states that demand for plastics – the most familiar of petrochemical products – has outpaced all other bulk materials (such as steel, aluminium or cement), nearly doubling since the start of the millennium. The United States, Europe, and other advanced economies currently use up to 20 times as much plastic and up to 10 times as much fertiliser as India, Indonesia, and other developing economies on a per capita basis. A reason why India is considered as the growth engine. 

At present, there are eleven crackers in operation with combined a ethylene capacity of about 7.05 million tonnes per annum. An oil industry source said that by 2030, the cracker capacity in India will triple.

The major investments include HPCL Rajasthan Refinery Ltd, the HPCL-GAIL joint venture in Kakinada,  Ratnagiri Refinery and Petrochemicals, Bharat Oman Refinery, and expansion plans by BPCL and MRPL. This will together add an ethylene capacity of 13,400 KTA (thousand tonnes per annum). 

With the demand for traditional fuel like petrol and diesel on a declining trend, companies are shifting towards integration of petrochemicals, as it hedges both refining and petrochemical segments against market volatility. Based on an industry estimate, the indicative internal rate of returns of a standalone refinery is about 11-12 per cent, compared with 16-17 per cent for integrated refinery and petrochemicals. 

This is a major reason why RIL and other majors are lining up their mega roadmaps in petrochemicals.