Why state-run oil companies are spending billions on petchem capacity

Why state-run oil companies are spending billions on petchem capacity, amid oversupply and weak margins

In the boardrooms of Indian state refiners and in the halls of the oil ministry, there is a buzz surrounding an esoteric term: The Petrochemical Intensity Index (PII). Indian oil companies plan to produce more of value-added chemicals from processing crude oil while reducing the volume of fuels, whose demand is expected to eventually extinguish as the world shifts to cleaner energy.
 

Until now, many of these chemicals, the building blocks of plastics and paint used in homes, hospitals, and industries came from China. India depends on imports to meet 19 per cent and 30 per cent of polypropylene and polyethylene, respectively, the basic commoditised chemicals, and 67 per cent and 81 per cent on PVC and Toluene, which are value-added substances, shows CareEdge data.
 

But Indian refiners plan to catch up. By 2030, these chemicals may be shipped from Panipat, Paradip, Kochi, Barmer, Dahej, or Nagapattinam. Hindustan Petroleum’s new 180,000 barrels per day Barmer refinery has a PII of above 20 per cent, the highest among state refiners, former company chairman M K Surana has said.

 

Fears of attrition in the fuels business and robust demand for chemicals have prompted refiners to add petchem units as a form of insurance, state-run refining officials tell Business Standard, despite concerns about oversupply.
 

The energy transition will reduce demand for oil products, but increase opportunities to capture the growing demand for petchem, McKinsey says. Refiners will need to find ways to make much less gasoline, marginally less diesel, and more jet fuel and petchem feedstocks, the US-based management consultant has said. Petchem is expected to be the most important driver of global oil demand growth over the medium term, says Paris-based International Energy Agency. 
 

No wonder, India’s state-owned oil companies are spending Rs 10,851 crore on petchem projects this financial year, twice what they first budgeted in 2022-23 (FY23), according to the latest budget documents. Actual spends may be higher, if one goes by FY23’s actual petchem capex by these companies, which doubled from the budgeted estimates to Rs 10,500 crore.
 

Taken together, refiners led by Indian Oil are scheduled to spend Rs 30,000 crore in the three years to March 2025.
 

Queries sent to state oil marketing companies were not answered by the time of going to press.

 

Oversupply
 

S M Vaidya, Chairman of Indian Oil, the country's biggest refiner, aims to more than double the PII of its refineries to 15 per cent by 2030 with the focus on petrochemicals. Indian Oil plans to invest Rs 61,000 crore to build a petrochemicals complex in Paradip, Odisha.
 

The average PII for Indian state refiners is around 5 per cent. By comparison, China’s recently commissioned Hengli petchem refinery can generate more than 40 per cent feedstock. Saudi Aramco is working on a strategy to achieve 70 to 80 per cent chemicals for each barrel of crude.
 

India’s petchem demand is expected to grow at a compound rate of about 5 per cent till 2040, with per capita consumption at 10-12 kg, compared to the global average of 30-35 kg, leaving headroom for growth.
 

However, all these projects are coming up in a market facing oversupply.
 

“There has been oversupply in the global market, mainly because of significant capacity additions by China in the last few years, whereby China’s domestic demand is not improving,’’ said Hardik Shah, director, CareEdge Ratings.
 

State-run Petronet LNG’s Chairman, A K Singh, who has proposed to build a Rs 21,000 crore petchem plant, says chemicals are a cyclical business and it is prudent to invest in them when the margins are poor. By the time these projects are ready, the margins would surge, he said in reply to this reporter’s question during an earnings call.
 

But profitability depends not just on cycles, but also on the cost structure and price of feedstocks such as ethane and propane, which are cheap in West Asia and the United States, two of the world’s largest petroleum producers.
 

“The upcoming petchem projects in India are based on natural gas or ethane or propane, which are all imported. However, since the landed costs are much higher than in the US or in the Middle East, our ROCE (return on capital employed) would be in low single digits,’’ said Swarnendu Bhushan, co-head of research, Prabhudas Lilladher.

 

Advantage US, West Asia
 

Ethane is the preferred feedstock for ethylene projects, something available in plenty in the US and Saudi Arabia, at $1 per metric million British thermal unit (MMBtu) or lower, industry officials say. When you bring it to India, the cost goes up 10-fold, because you need to ship it, refrigerate, vaporise, and finally pump it to reach the refinery.
 

So, Saudi Arabia and the US have an advantage of virtually free gas, says R Ramachandran, an oil industry consultant and former director, refineries, at Bharat Petroleum. Complex petrochemicals like polyols, PVC and toluene are better bets, but their volumes are smaller and they need to be marketed well.

While private companies such as Reliance and Adani are venturing into higher value-added chemicals, state-run refiners are focusing on polypropylene (PP) and polyethylene (PE) facilities, which are commoditised chemicals.
 

State-owned oil refiners including Indian Oil, Bharat Petroleum, Hindustan Petroleum and Numaligarh Refinery are putting up a combined 3 million tonnes a year of polypropylene facilities to make use of the propylene produced in their refineries, according to data provided by CareEdge Ratings.
 

There are major capacity additions planned for polypropylene, with capacities being set-up or enhanced expected to come on stream from FY26 to FY29, says Shah.
 

“Refineries are better off manufacturing polypropylene, which adds more to the gross refining margins compared to fuels or LPG,’’ says Prashant Vasisht, Senior Vice President and Co-group Head, Corporate Ratings, at ICRA, a Moody’s affiliate.

Private sector players have built scale and ordered supersized ethane carriers years ago to ship the fuel from the US, optimising on scale and transport costs. Export earnings and incentives have helped balance the cost differentials with overseas producers.
 

Petronet’s Singh says the government will need to protect the interests of domestic petchem makers. For instance, Manali Petrochemicals says dumping of imported materials coupled with rising raw materials prices affected its margins in the April-June quarter.
 

Eventually, it all boils down to New Delhi.