ONGC seeks Rs16,000cr sops for Kakinada

Oil and Natural Gas Corporation (ONGC), the country's largest oil and gas company, has sought up to Rs 16,000 crore worth of incentives from the Andhra Pradesh government for making the proposed 15 million tonne per annum (mtpa) refinery-cum-mega petrochemical complex at Kakinada viable.

The incentives sought are for over a period of eight years. This means the incentives in the form of tax holidays and free land work out to Rs 2,000 crore per month.

"Taking everything else into consideration, the state government has to give various incentives to make the project viable," said ONGC's director for business development AK Balyan.

It is the state government, in fact, that has been lobbying for the refinery, but ONGC is not keen to invest without the incentives which include almost 950 hectares of free land for the project. ONGC also wants exemption from sales tax on sale of petroleum and petrochemical products, free power and water supply during construction phase and road and rail connectivity.

"We will only go ahead if the state government offers us the incentives we have asked for," said another senior ONGC official.

ONGC's subsidiary Mangalore Refinery holds 26 per cent stake in Kakinada Refinery Petrochemicals Ltd (KRPL), the company set up to implement the refinery project. IL&FS holds 51 per cent stake and the balance is with the Andhra Pradesh government.

The UK-based Hinduja group is also expected to pick up a stake in the refinery. Former ONGC chairman Subir Raha, who had conceptualised the Kakinada refinery, is now the executive vice-chairman of the Hinduja group.

UPSIDE FROM PETROCHEM

Balyan said that with the incentives, and the petrochemical complex, the Kakinada refinery would be feasible. The petrochemical complex, planned to be of a capacity of 1 mtpa, would be the driving force behind the project. "The margins from petrochemicals are good and that should make the project financially feasible," Balyan said.

The petrochemical industry, which is cyclical in nature, is expected to go through a downturn from 2009 to 2013. Balyan said that even during the downturn the margins from the proposed plant would be positive.

Investment in the proposed petrochemical plant would be in addition to the Rs 25,600 crore that is expected to be spent on building the refinery.

"Products from the refinery can be exported to the east Asian countries. There is a market there," Balyan said.

Analysts tracking the sector, however, feel that a refinery in the country's east coast is not very well suited to export petroleum products. "The countries there are already well fed by the Singapore refineries," an analyst with a global advisory firm said.

Earlier this week, ONGC Chairman and Managing Director RS Sharma said that at a capacity of 15 mtpa, rate of return on investment would be 10.27 per cent, which would become negative in case of a 10 per cent rise in capital cost.