Reliance Petro plans mega refining contracts

Deals planned with Chevron, Shell, Exxon to supply ultra-clean fuels for US and Europe.

This will be the mother of all outsourcing activities in India. Reliance Petroleum Ltd (RPL), which is building the world's only fully export-oriented refinery in Gujarat, plans to enter into contracts with global exploration and productions giants like Chevron, Shell and Exxon for supplying ultra-clean fuels for the major markets of the world "" gasoline for the US and gasoil for Europe.

The contracts may eventually extend to an equity tie-up with one of these giants, though no firm decision has yet been taken.

The arrangements will work out to be a win-win for both the parties. While RPL will have a huge, committed client base, the global majors will have a cheaper source of refining crude in one of the world's most complex refineries, which will be able to process crude that are high in sulphur and fuel oil.

The addition to refining capacity in the world is expected to lag requirements or demand by a huge margin because of the environmental restrictions for such greenfield projects in Europe and the US.

Analysts said it does not make sense for RPL to set up gas retail outlets in the developed countries as this will involve huge costs. So, the best option is to refine crude locally and export them to high-end markets.

After the refinery at jamnagar is commissioned in 2008, oil analysts expect RPL to rake in a minimum revenue of $12 billion (assuming the crude price at $60 a barrel) in its first full year of operation. This refinery, being set up next to Reliance's existing 6,60,000-barrels per day refinery, will process 5,80,000 bpd.

The capital cost of RPL, analysts said, is expected to be 50 per cent lower than the industry average, the feedstock cost will have a $3-3.5 per bbl advantage over Singapore, and the operating cost advantage will be about $1 per bbl over Singapore.

RPL will also have a $5.5 per bbl margin advantage over Singapore Refinery, compared with around $3 per bbl advantage enjoyed by the existing Jamnagar refinery, analysts said.

The reasons why RPL will have lower feedstock costs are many. Reliance has the expertise to process heavy crude and has processed 55 different crude grades in the existing refinery. RPL is being designed to process heavier and cheaper crude.

RPL's earnings, analysts said, are expected to be more robust than that of the existing Jamnagar refinery, which was commissioned in 1999 when industry returns were much lower.

The uptick in refining margins is a recent phenomenon and RPL's fast-track commissioning by December 2008 would capture the upside.

Though 100 new refining projects have been announced with a total capacity of 22 million bpd, the new projects face several hurdles.

The high levels of construction expenditure have increased the cost of offsites/utilities and other facilities to nearly $15,000 a barrel, and greenfield refineries will require a construction lead time of 48-60 months.