Work on Kakinada refinery to start in Jan

Work on the proposed Rs 24,000-crore crude oil refinery at Kakinada in Andhra Pradesh is set to begin in the next couple of months, according to Andhra chief minister YSR Reddy.

This is despite the builder of the refinery "" Oil and Natural Gas Corporation (ONGC) "" expressing concerns about the feasibility of the project.

"The oil refinery at Kakinada will be initiated in January. We have got an assurance from petroleum minister Murli Deora that all the studies on the refinery have been completed and it has been found feasible," Reddy told Business Standard.

The refinery, initially planned with a capacity of 7.5 million tonne per annum (mtpa), was found to be economically unviable, according to a pre-feasibility study conducted by government-owned Engineers India Ltd.

However, continued pressure from the Andhra Pradesh government has forced ONGC, which is to build the refinery along with its subsidiary Mangalore Refinery and Petrochemicals Ltd (MRPL), to take a re-look at the feasibility of a larger 15 mtpa refinery.

ONGC Chairman and Managing Director RS Sharma said that a final decision on the export-oriented refinery would be taken by the end of this month.

Reddy said that if the 15 mtpa capacity was also found unfeasible, then the refinery would be expanded to 30 mtpa. "The refinery is definitely coming," he added.

ONGC has already floated a special purpose vehicle, Kakinada Refinery and Petrochemical Ltd, for setting up the refinery. It is also in talks with the UK-based Hinduja group for selling part of the stake in the SPV.

ONGC officials, however, maintain that the Kakinada refinery is not a feasible project as a Hindustan Petroleum Corporation-operated 7.5 mtpa refinery already exists nearby in Vishakapatnam. "Moreover, another 15 mtpa refinery is being planned in Vishakapatnam. This could make the Kakinada refinery economically unfeasible," a senior ONGC official said.

Officials in the petroleum ministry also echoed a similar sentiment. "The Kakinada refinery can only come at the expense of the proposed new refinery at Vishakapatnam. However, the government is very keen on the Vishakapatnam refinery. Also, global majors such as the LN Mittal group and French company Total have signed an agreement for the refinery in Vishakapatnam," a senior official said.

One analyst, however, added that the refinery sector in the country was booming and it did make sense to set up a new refinery with refining margins expected to remain strong.

"Chennai Petroleum Corporation, in the half year ended September 2007, almost equalled the net profit it recorded in the entire last financial year. MRPL has also done extremely well. A strong rupee against the dollar is pushing up performance of standalone refineries," the Mumbai-based analyst said.