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Press Release [FREE Access]
Petro Intelligence » Refinery Plan Masks Ego Battles

by R. Sasankan

Mukesh AmbaniIt is turning into a battle of egos – and there can be no winners at the end of the looming slugfest.

When the country’s energy pundits cobbled a plan to establish a 60 million ton petroleum refinery on the west coast, somewhere in the state of Maharashtra – to be owned and financed jointly by the state-owned Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) – everyone wondered what economic logic underpinned this grandiose project. Being a man of action, petroleum minister Dharmendra Pradhan promptly endorsed the proposal.

India already has 20-25 per cent surplus refining capacity. The country is also the largest exporter of petroleum products in Asia. The west coast already has a 60 million ton refining capacity that has been created by Mukesh Ambani-controlled RIL. Essar Oil built another refinery with a 20 million ton capacity, which has now been taken over by Rosneft of Russia. Cash-rich Rosneft has already proposed to double capacity.

Dharmendra PradhanForecasts can go horribly wrong – as they often have in the past. A few years ago, an expert group appointed by the previous United Progressive Alliance (UPA) government, projected the country’s natural gas demand at 473 mmscmd (million metric standard cubic metres per day) in FY 2016-17. Almost simultaneously, an industry group put out what it called a more “realistic” assessment by projecting gas demand in 2016-17 at 378.08 MMSCMD.

Here is the reality check: when India’s financial year for 2016-17 ended in March 2017, official data came out with a more sombre estimate of actual gas consumption: 152 MMSCMD, which shows how completely out of whack projections can be. It would be risky to build project plans on dodgy forecasts.

B. AshokA little over a year ago, the renowned International Energy Agency (IEA) projected India’s oil demand to peak at 10 million barrels of oil per day by 2040, up from the existing level of 3.8 million barrels per day. The reason cited was the strong economic growth boosted by rising income and population as well as increased urbanisation and industrial activities.

It isn’t easy to make projections about India and IEA cannot have been unaware of the risks it was making. India, after all, is not like Singapore or a European country. Like in the case of China, a reasonably accurate prediction about India’s problems and prospects is perceived to be beyond the capacity of any agency, however, competent it might otherwise be.

The National Democratic Alliance (NDA) government led by Narendra Modi is not known to be anti-Reliance. Petroleum minister Dharmendra Pradhan enjoys a good equation with all industry players. So, why was the idea of setting up a 60 million ton refinery floated? Could it have been mooted by the PSU chiefs to undermine the pre-eminence that RIL enjoyed by virtue of being the owner of the single biggest refinery in the world? The Indian PSUs, which have been in the refining business for many years, may have felt rattled by RIL’s mega refinery projects. They were dwarfed by RIL and that is why they picked a figure of 60 million tons out of thin air – with their plan born out of a sense of resentment and a sweet revenge. So goes the speculation among informed circles in the petroleum industry.

D. RajkumarWe decided to investigate this point and found that the speculation was not without some substance. IOC will have a 50 per cent stake in the proposed refinery with the remaining shared equally between BPCL and HPCL. IOC was until recently headed by B. Ashok, who by no stretch of imagination could be considered capable of such a strategy. The Mumbai-based BPCL and HPCL are rated to be more professional in their thinking than IOC. So, whose brainwave was it?

The project plan has been conceived out of some prejudice against RIL and Mukesh Ambani has thrown down the gauntlet by quietly disclosing his plan last week to raise RIL’s refining capacity to 100 million tons. Implicit in this announcement is the message that Ambani will not allow anyone to undermine RIL’s dominant position in the world of refining.

Even as the psychological war plays out, we interacted with experts in the field to find out what the economic logic for the new refining capacity was. Several experts said that there was no point in building fresh refining capacity in India. The world demand, they say, is expected to peak in the mid-2020s. Though the Indian market is expected to keep growing, at least till 2040 and possibly till 2050, the global surplus would easily feed India’s need far more economically than by building new refining capacity that will likely come on stream only in the mid-twenties.

M.K. Surana“It would be an inappropriate use of our limited financial, land, water, environmental, infrastructural, human and technical resources to expand refining capacity in the current global scenario for crude and petroleum products,” said a renowned energy expert.

India, they say, will continue to remain dependent on crude imports as long as it uses petroleum products. The option of simply importing petroleum products from existing refineries worldwide would be far more economical in an oil surplus world compared with creating new refining capacity in India and importing crude oil to feed these refineries. The value addition is minimal and likely negative when one takes into account the huge incentives needed to make these Indian refineries financially viable. India could derive far more benefits by deploying financial and other resources in other sectors of the economy.

The argument against surplus refining capacity springs mainly from the fact that the Indian government has essentially subsidised the export of refined products based on imported crude through a host of incentives that ensured the viability of such greenfield investments. The refining margins cannot even absorb the cost of double handling without the incentives. And in the current global scenario, creating new refinery capacity to even fully meet domestic demand is highly debatable. Given the global surplus, it would be more economical to simply import refined petroleum products from competing sources in a buyers’ market, say these experts.



To download the latest issue 'Volume 30 Issue 24 - March 25, 2024', click here
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