Indian firms are among those filling the hoped-for global gap.
Indian petroleum refiners are set to add 70 millon tonnes (mt) of capacity in another two years, taking the surplus over domestic demand to 100 mt. The not-so-good news is that they will have to export aggressively in a scenario where developed countries have forecast a lower growth in demand.
The International Energy Agency has projected a 0.8 per cent growth in US fuel consumption in 2010 and 0.7 per cent growth in 2011. This is a reversal from a falling consumption between 2006 and 2009. However, the growth in the US is being offset by contraction in the European Union. The Organisation of Petroelum Exporting Countries forecasts a 2.41 per cent contraction in Western Europe's oil demand in 2010.
It has not deterred Indian refining companies from expanding capacity like never before. "The current demand for petroleum products is 140 mt and we have a refinery capacity of 185 mt. The refinery capacity is set to move up to 255 mt by 2012. Even if demand increases to 155 mt by 2012, there will be a surplus of 100 mt," said a government official.
Experts, however, say there is a method behind this apparent madness. They say the huge surplus will be an advantage for India. "Western countries have not expanded their refining capacity for many years and that is an opportunity being tapped by developing countries such as India. Such export demand will only expand, since the refineries have a lifecycle of 30-35 years. Moreover, demand will also increase both in domestic and export markets,' says Dilip Khanna, partner, oil and gas practice, at Ernst & Young.
Chinese competition
China, too, is not only rapidly expanding its refining capacity but it well ahead. "China has a refining capacity of 475 mt against a consumption of 425 mt. It is expected that this capacity will go up to 750 mt by 2015," says Khanna. However, Chinese consumption is projected to grow to 530 mt, leaving a huge surplus of 220 mt.
While China and India may not necessarily compete in all markets, India has an advantageous position vis-a-vis China in export. "China is more land-locked compared to India. Chinese companies may have to look at transporting through CIS nations, while India can comfortably access markets in West Asia, US and Europe through the sea route," says Khanna.
B M Bansal, chairman and managing director, Indian Oil, says coastal refineries, which now cater mainly to the domestic market, will have to focus more on export. "As of now, we only export naphtha and furnace oil but with the capacity additions, we may also have to export diesel," Bansal says. The company has three existing refineries — Koyali, Haldia and Chennai — in coastal areas. Besides, the upcoming Paradip refinery in Orissa is also at a coastal location.
The country is already exporting nearly 51 mt of petroleum products annually, with around two-thirds of it accounted by private sector companies such as Reliance Industries and Essar Oil. The primary export products are diesel, petrol and naphtha. At present, petroleum products from India are exported to Africa, Europe, the US, Latin America, Southeast Asia and West Asia. In 2009-10, the value of petroleum product exports was Rs 144,000 crore. These products account for 17 per cent of the country's total exports of Rs 835,000 crore.
Though RIL is the biggest petroleum exporter in the country, with 62 mt capacity, it has not announced any capacity addition plan since 2009. The economic slowdown had seen its business being impacted. With Hindustan Petroleum Corporation (HPC) adding nine mt at Bhatinda through a joint venture with Mittal Energy, its dependence on RIL and Essar for products in the northern region would get reduced, leaving private refiners with about five mt of products which they would have to either push themselves in the domestic market or export.
Besides HPC, Bharat Petroleum Corporation (BPC) and Oman Oil are putting up 6-mt refinery at Bina in Madhya Pradesh. Like HPC, BPC will cut its current annual purchase of nearly three million tonnes from private refiners once Bina gets commissioned. Indian Oil, which has the country's biggest refining capacity at nearly 63 mt, will increase this to 80.7 mt by 2012 with expansions at Haldia and Panipat and commissioning of the Paradip refinery.
