Refinery rejig: Why is India steadily raising petrochemicals capacity

Estimates for the sector are bullish for a decade but it is not an easy business to run, say experts

An international game is afoot and India is in the middle of it: oil refineries producing petrochemicals. Investments look bullish for a decade at least, seemingly unfazed by the Russia-Ukraine war.

Not everyone will stay around despite the bullish refrain unless they capture the full range of the value chain, including petrochemicals, said Daniel Evans, vice president, global head of refining and marketing at S&P global commodity insights, in Delhi recently.

India-based refining companies are on course to invest heavily in new capacity that will increase the total to more than 300 million tonnes per annum from the current 249.22 mmtpa. Petrochemicals are a significant part of such investments though their short-term prospects, excluding India, are clouded by the spectre of global oversupply, said Vanessa Ronsisvalle, editorial director of Petrochemicals Asia (Platts).

Indian Oil Corporation (IndianOil) plans to invest around Rs 1 trillion to refurbish its old refineries, as it prepares to set up a petrochemical complex in Paradeep, Odisha, for about Rs 61,077 crore. The Paradeep project will be the state-owned company’s largest-ever investment in a single location.

Refinery, a changing business

Petroleum ministry data shows that about 80 per cent of India's petrochemicals capacity is integrated with refineries. The Indian chemical sector is expected to grow 1.2-1.5 times more than the country’s GDP, giving refineries an advantageous position. (Is there a period for this growth figure?)

The industry’s growth in India is the reason that the annual Asian Petrochemical Industry Conference in Delhi last week returned to the country after a gap of ten years and drew experts like Evans and Ronsisvalle

The refinery business is changing rapidly, partly due to abrupt oil shortages and in response to climate change. Refineries in key economies usually don’t get public attention, as they monotonously convert crude oil into a wide range of products: from petrol and diesel to even compounds for medicine. But the disruption caused by the Russia-Ukraine war and the rise of renewables have made refineries the stuff of international diplomacy.

Josep Borrell, the European Union’s foreign policy chief, recently said that Russian oil refined in India is finding its way into the bloc’s market. Europe needs more petroleum and derivatives than its ageing refineries—several are being shuttered—can produce. The demand has begun to push up the level of Asian cracks—the term for the margin refineries make—compared to the cost refineries pay for crude.

While additional refining capacity will come online in the next couple of years, “we think the ramp up is going to be fairly slow. That's going to contribute to the industry still having fairly good cracks in 2023 and 2024. One of the reasons for the slowness is the real trends that are driving contraction of European refining capacity,” Evans told 'Business Standard'.

Refineries in the US, India and West Asia have begun creating bigger and more complex platforms, with petrochemicals a big part of their value chain. S M Vaidya, chairman of IndianOil, has said, “currently, petrochemical production accounts for nearly 14 and 8 percent of the global demand for oil and gas, respectively. With the evolution of new technologies, especially in crude to chemicals, petrochemical production share is expected to increase to about 30 percent shortly”.

India’s petrochemical market is worth $178 billion but per capita consumption of petrochemical products is lower than in developed economies. The petroleum ministry estimates the market will be worth $300 billion within a decade, a cumulative growth rate of 10 percent. “…this gap offers substantial space for demand growth and investment opportunities,” it said.

Demand and supply

Petrochemical is not an easy business, said Evans. “Not everybody can play this--play this integration game and I would say, as we're seeing now, chemicals are very, very cyclical. You have to decide how far down the chain that you want to go? There's not really not much space for everybody to play that game”.

“China has begun to export a whole lot of chemical products. Beijing wants to be self-sufficient and so it is still building capacity but they have built up so much over capacity,” according to Ronsisvalle.

As most petrochemical products have to be absorbed by various sectors, it is necessary for the overall growth rate of the economy to remain intact.

“As of now, nobody's buying--everybody's kind of, you know, sitting back. The situation is coming to the point where production lines for downstream products are actually stopping altogether. There's just no demand. So this is all a knock-on effect that we're seeing,” said Ronsisvalle.

Even though refineries in the USA are running at 95 per cent of their capacity and so are those in India and in West Asia, yet that makes up for the shutdowns during Covid-19.

“If I was to sort of contrast where we are now versus where we were at the start of the year, there has not been a big change in the fundamentals. But I think what has changed is the sentiment from where people were very optimistic to now,” she said.

“We are expecting demand growth to persist through most of this decade but sort of very little investment into refining after this next wave. To survive, the refineries will have to think of petrochemical integration as the big theme,” said Evans.

ONGC, India’s upstream oil company, thinks on the same lines and will invest Rs 1 trillion by 2030 to expand its petrochemicals manufacturing capacity. The company’s subsidiary, Mangalore Refinery and Petrochemicals Ltd, and joint venture, ONGC Petro Additions Ltd (OPaL), will implement the plan to set up two mega projects on India’s east and west coasts to develop new facilities that will produce chemicals directly from crude.

Ronsisvalle says, “You know, if India can get this right, and it seems as though you are there this could be a really great kind of follow through of the petrochemical investment story. So I think that's really interesting”.

Investing in fossil fuels becoming 'much more difficult': Daniel Evans

Petrochemical integration will be a "big theme" for the refining industry as uncertainties loom for the oil market, says Daniel Evans, vice-president, global head of refining and marketing, S&P Global Commodity Insights. "Not everybody can play this integration game,” he told Subhomoy Bhattacharjee in an interview in Delhi.

Here are edited excerpts from the interview.

Why are refineries outside Europe doing well but those there are unable to keep pace?

There are a number of factors. One is that a substantial amount of capacity was closed in 2020 during the pandemic. So capacity has been significantly reduced and that’s particularly true in some parts of the US. I think the other factor that contributes to those refiners being able to keep up the high run rates is their structural advantages versus other parts of the world. So scale, complexity and energy cost advantages have come together—the Gulf Coast system is pretty well placed.

Also, if I was to sort of contrast where we are now versus where we were at the start of the year, we've not seen a big change in the fundamentals. What has changed is the sentiment. People were very optimistic about where the oil market was going at the start of the year when China reopened. They were thinking demand was going to go to surge. Since then, we've had bank failures in the US; the concerns about the debt ceiling, and that's resulted in a lot of the sentiment turning negative.

How do you paint the demand from now?

So, I guess the overall narrative on where we see the oil market going is that there shall be a big stock drawdown in the third quarter, which will support the current prices, then a moderate build-up in the fourth quarter, and then potentially sort of stronger builds in the first part of next year. This means there are big uncertainties in the market.

In terms of refinery capacity, do you think there's a risk of stranded assets?

Maybe, but not in India. I think our view on refining capacity is that it's still tight. So basically what we've seen is that about 14 million barrels a day of capacity was closed in the past few years. While the demand is now back beyond pre-pandemic levels but capacity expansion isn't seen in the product markets. It is very tight and we've seen the impact in the cracks and margins. Asian cracks have been down a little bit recently, but we're expecting them to bounce back.

In terms of capacity, there is a lot coming on line in the next couple of years and it's not just in India but in other parts of the world, but we still think the ramp-up is going to be fairly slow. And that's going to contribute to still having fairly good cracks in 2023 and 2024. Also, I think there's a question about whether there will be another period of time like this when capacity will expand.

 What is happening in Asia?

…what we're seeing is that the energy transition doesn't necessarily mean low oil prices. Because we're seeing a picture where it's becoming much more difficult to invest in fossil fuels; which means that companies are looking for shorter payback periods and higher returns. What does it mean? We’re seeing the fuel landscape become much more complex. We need people who can make sense of complexity. I think petrochemical integration is obviously a big theme for the refining industry, but not everybody can play this integration game and I would say, as we're seeing now, chemicals are very, very cyclical. You have to decide how far down the chain that you want to go. There's not really space for everybody to play that game.

 How do you see the refinery market play out in Europe?

 I think there are real trends that are driving the contraction of European refining capacity. We expected them all to decline quite significantly as part of the Ukraine war, but that is only a part of the story of accelerating energy transition where countries are adopting less carbon-intensive fuels and technologies. So there's a lot of downward pressure on demand. So you've got those two things that are hurting European refiners who are now competing with bigger, more complex, more modern plants abroad like the USA and Asia. And also their cost burden is increasing as they're more exposed to carbon pricing. So, the challenge that they really face is 'do I invest my way out of this'? By making investments in RE etc . Or do they decide that it makes sense to slow down business.