High margins to keep refining story going

Refining capacity set to rise 75% as Indian refineries develop technology to process low-grade crude.

The refining capacity in the country is set to rise by 75 per cent over the next five years "" from 149 million tonnes per annum (mtpa) to about 260 mtpa. This reason: The prospect of high refinery margins.

"The average margins of refineries in the country are expected to remain high at $6-7 per barrel over the next five years. This will be at least around $2 per barrel higher than the benchmark Singapore refinery margins over the period," said a Delhi-based analyst with a global advisory firm.

Average refinery margins in the country are $7-8 per barrel. Reliance Industries, however, recorded margins of over $13 per barrel in the quarter ended September 2007 from its 33-mtpa refinery in Jamnagar.

Indian Oil Corporation, which has a refining capacity of around 60 mtpa, has recorded a margin of around $9 per barrel in the current quarter so far, according to a senior company executive.

The high margins are primarily due to Indian refineries tuning their technology to process very low grade crude, which is almost $20 per barrel cheaper than the Brent crude, the global high-grade benchmark.

The largest refinery under construction is Reliance Petroleum's 27 million tonne per annum (mtpa) facility in Jamnagar. Essar Oil is more than tripling the capacity of its Vadinar refinery to 34 mtpa from 10.5 mtpa. State-owned refiners, Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum, are also expanding.

The investment in capacity expansion of existing refineries is estimated to be over Rs 60,000 crore.

"The new refineries will have the capability to process 75-89 per cent of very low grade sour crude oil. Coupled with both domestic demand and strong export potential, it makes sense to set up refineries over the next 4-5 years," said another Mumbai-based analyst.

The private sector refiners, as also the government-owned ones, have built strong trading arms, which scout the world for cheap crude oil. "The cheaper the crude oil they buy, the higher are their margins," the analyst said.

The local refining capacity has not kept pace with the increase in demand, which is expected to remain robust. No new refineries came up in the US and Europe in the last 20 years, the analyst added.

Existing European and US refineries have reached their peak and expansion through debottlenecking has hit a threshhold. The demand for petroleum products in the US has grown by about 17 per cent since 1995, but its ability to distill crude oil has increased by only 10 per cent.

"That is the reason so many refineries are coming up in China, West Asia and India," the analyst said.

China has a refinery capacity of around 300 mtpa, which is likely to be go up to around 450-500 mtpa over the next 2-3 years. "This will mostly cater to its local demand," the analyst said.

He added the new, technologically advanced refineries in India and West Asia would keep maintain the high margins.

Indian refineries currently sell petroleum products from their refineries at import parity price, except for petrol and diesel, which is sold at a trade parity price. Trade parity price is a mix of import parity and export parity prices in the 80:20 ratio.

"At import parity pricing, many notional costs, such as Customs, freight and docking charges are built into the product costs. This enables refiners to sell at higher prices," said one analyst.

Since India has become a net exporter of petroleum products, the government is in the process of shifting to the export parity price mechanism. "This will reduce prices substantially and put margins under strain in the long term," the analyst said.

He added the refinery margins in India would continue to remain higher than global benchmarks "simply because we are strategically located to service export markets."

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MARGIN PUSH

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BPCL, in JV with Oman Oil, setting up 6 mtpa refinery at Bina

IOC setting up a 15 mtpa refinery at Paradip

Total, Mittal Investments to jointly study feasibility of new15 mtpa Vizag refinery with HPCL, GAIL and OIL