Indian oil cos in no hurry to set up EoUs

Indian oil companies seem to be in no immediate rush to set up export-oriented units (EoUs). Other than the private sector player, Reliance Industries Limited, no other refiner has submitted an application to turn their units in India into an EoU.

There are several reasons why the Indian dream of being a refiner to the world has not taken off.

The capacity of most refineries in India is small and they are low on complexity, as measured by the Nelson index. This index is an indicator of not only the investment intensity or cost index of the refinery but also the value addition potential of a refinery. This is also the reason smaller refineries all over the world have been closing down.

"There is little scope of converting any existing refinery into a full fledged EoU. It has to be a grassroot refinery, set up in coastal region for it to be able to compete on operating and logistics cost. This means any oil company who plans to set up an EoU refinery would apply for such a status for obtaining the tax benefits," says Guha Thakurta.of KPMG.

However, Indian refineries do have significantly lower cash operating costs including labour cost, as well as 25 to 50 per cent lower capital costs over other Asian countries. At present India does not seem to be a fertile ground for proliferation of EoUs, the average refining capacity among the public sector units being approximately five million metric tonnes per annum, says Guha.

Public sector units (PSU) do not seem interested in increasing exports. Their share of petroleum product sales in the domestic market has been on the rise, as opposed to private sector players who have suffered a loss in market share.

In March 2006-07 the private sector's sale of petroleum products fell 13.6 per cent while that of the public sector grew 14.9 per cent over the same period last year. For the full financial year, the private sector's sales dipped 7.8 per cent over the previous year, while that of the public sector grew 6.7 per cent.

According to B N Bankapur, director of refineries, Indian Oil Corporation Limited (IOCL), the largest PSU refiner in the country, the demand in the domestic market is growing at a rate higher than the world average of three per cent. Even if the demand in the domestic market decreased over the years, PSUs would still be obliged to serve the domestic market.

"It does not make sense for us to apply for an EoU status because that would mean blocking 75 per cent of our products for the export market. However, even if we consider exporting 50 per cent of our products from the Panipat refinery, with the increase in demand in the domestic market, we will finally have to bring down the volume of exports. Therefore, it doesn't make sense for us to apply for the EoU status," says Bankapur.

Part of the under recoveries made by oil PSUs is also offset by oil bonds issued by the government. Private sector players like Shell, RIL and Cairn do not share this advantage and therefore, incur greater losses on sales in the domestic market. Therefore, it is more viable for these companies to supply major portions of their output to markets abroad where they can sell products at market rates, feels Arun Unni of KPMG.