X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Refining: Can India be global hub? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Mar 7, 2007

    Refining: Can India be global hub?

    The public sector oil refining and marketing major, BPCL has recently decided to establish a trading desk at Singapore to manage its exports of refined products. This once again signifies the intent of Indian refiners to target exports and make India one of the major refining hubs in the world. Now, is the dream of becoming a global refining hub realistic? Can India replicate the success of other major hubs like the US West Coast, Rotterdam, Singapore and Middle East? This is a million dollar question, the answer to which largely depends upon certain requirements before hand.

    Prerequisite for building export-oriented refineries
    Tax and fiscal concessions: In order to build an export-dedicated refinery, operating in international competitive scenario, the government needs to provide support in the form of tax breaks and other fiscal concessions. Tax and fiscal concessions will lead to lower operational cost, which is the basis of international trade. The government has recognised the fact and has offered 15-year tax incentives to refineries that are to be established in export oriented zones. Following this move, Reliance Industries, through its subsidiary Reliance Petroleum, is establishing an export-oriented refinery in the Jamnagar special economic zone (SEZ).

    We also believe that the government needs to ease investments to attract more investment in the sector (FDI investments are currently capped at 24%).

    Petrochemical facility: Detailed feasibility report prepared by Shell Global for studying the potential of India being a regional refining hub stated that an export-oriented refinery should inevitably be linked with a petrochemical facility. The need for the same exists due to enhancement of the value chain presence and diversification of the revenue base. With the current spike in the cost of establishing a refinery, the required gross refining margins (GRMs) to break-even has increased to US$ 10 per barrel for the refineries without petrochemical facilities. Thus, it is an imperative for Indian refineries to establish petrochemical facilities to benefit from the presence across the value chain.

    IOC is establishing a 15 million metric tonne (MMT) refinery cum petrochemical plant at Paradip. Also, the company has established a petrochemical unit at its inland refinery at Panipat to effectively utilise the refined output. Reliance has also recently announced its plan to establish a cracker in the Jamnagar SEZ to effectively utilize the refined by-products.

    Flexibility in handling various crude varieties: Cost differential between sour and sweet crude has increased off late to historically higher levels. The differential, which used to be in the range of US$ 1 to US$ 2 per barrel during 1994 to 2003, has reached to a level above US$ 5 per barrel in 2005. This signals that the world crude slate is getting heavy day by day. Generally, higher the complexity and more flexible the feedstock slate, the better positioned the refinery is to take advantage of more cost effective crude. We have elaborated more on the need on flexibility in handling various crude in our previous articles on refining.

    A classic example of this is Reliance (capable of handling various varieties of crude) as against Indian PSU refineries. Currently, the former is earning more than twice the refining margins made by PSU Indian refineries. Reliance Petroleum has also taken a note of the fact and is establishing its refinery, which can handle various grades of crude.

    Flexible downstream product mix: The flexibility in downstream product mix and capability to switch between various product mix is another dominant factor, which has a major say on the refining margins. Also, the refineries need to have secondary conversion facilities so as to tilt the output towards light and middle distillates, which currently due to greater demand earns better realisation. The composition of light distillates in terms of demand has grown from 35% in 1981 to 42% in 2003, while the demand for middle distillates has risen by 6% and the same for heavy distillates has fallen by 13% during the period.

    Value added products: Oil refining is primarily a margin-based business in which a refiner's goal is to optimise the refining processes and yields in relation to feedstocks used. Thus, refinery should have the capability of producing value added products (earn higher margins), which fulfill the environmental regulations. Complexity of Indian refineries needs to be inclined towards more value added products (likes high octane fuels). To offset the high cost associated with exports (specially for longer distance), the refineries need to have the flexibility in products and complexity to handle various grades of oil so as to earn above average refining margins.

    The Nelson's complexity of Reliance's proposed refinery is 14 - signifying that the refinery is 14 times more sophisticated that basic crude distillate refinery. Refining and marketing major, IOC has tied-up with the US-based UOP, for technical collaboration for quality improvement of its products like petrol and diesel. This tie-up is for upgradation of IOC's refinery in Koyali (Gujarat). It needs to be kept in mind that RPL and RIL are also using the services of UOP for its refineries.

    Debottlenecking of infrastructural issues: The cost mechanic primarily drives international trade of any product, with petroleum products being no exception. Thus, the cost associated with transportation of crude oil and petroleum products (shipping cost) need to be kept in check as it forms a significant part of the overall cost. Reduction in transportation cost inevitably calls for upgradation of the infrastructure. According to estimates by the Ministry of Shipping, the required port capacity to handle petroleum, oil and lubricants (POL) will be as follows:

    POL handling facility at major Indian port in FY05 and capacity required...
    Traffic at Major Ports
    (FY05) (In MMT)
    Capacity at Major Ports
    (FY05) (In MMT)
    Projected traffic by
    FY14 (In MMT)
    Capacity required by
    FY14 (In MMT)
    126.4 157.4 191.2 248.6

    This translates into the addition of more than 90 MMT (58% increase over the current level), which seems to be a tough ask given the current state of infrastructure.

    Conclusion
    In a nutshell, it can be said that higher internal efficiency of production coupled with favourable government policies will provide a good export potential for Indian refiners. However, with the poor state of infrastructure (ports and terminals), the dream of become a refining hub seems distant. While the private players will continue to fuel the export growth, the public participants are likely to go slow in their expansion spree. We have already seen rollback of refining capacity plans by ONGC and its plans to tap export market.

    Note: This article is an extension to the series over Indian refining industry. We have written following articles, prior to it for understand of the sector:-

  • Refining:A case for higher spreads!
  • Refining industry:A complete overview-I
  • Refining: Understanding GRMs...
  • Refineries: Some key factors...

     

     

    Equitymaster requests your view! Post a comment on "Refining: Can India be global hub?". Click here!

      
     

    More Views on News

    GAIL: A Good Show (Quarterly Results Update - Detailed)

    Mar 27, 2017

    GAIL (India) Ltd has announced results for the quarter ended December 2016. reported 9.4% year on year (YoY) decline in sales, while bottom-line grew 45.4% YoY.

    ONGC: Higher Realisations on Crude Support Performance (Quarterly Results Update - Detailed)

    Mar 17, 2017

    ONGC has announced results for the quarter ended December 2016. The company has reported 9.2 % year on year (YoY) growth in sales, while bottom-line grew 197% YoY.

    HPCL: A loss making quarter (Quarterly Results Update - Detailed)

    Dec 29, 2015

    HPCL has reported 18.6% YoY decline in the topline and losses worth Rs 3.2 bn at the bottomline level in the quarter ended June 2015.

    HPCL: Higher GRMs boost profit (Quarterly Results Update - Detailed)

    Sep 8, 2015

    HPCL has reported 12.6% YoY decline in the topline while bottomline grew by around 34.5 times (YoY) in the quarter ended June 2015.

    Mahanagar Gas Ltd (IPO)

    Jun 21, 2016

    Should one subscribe to Mahanagar Gas IPO?

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
  •  

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    HPCL SHARE PRICE


    Aug 22, 2017 03:36 PM

    TRACK HPCL

    HPCL - BP COMPARISON

    Compare Company With Charts

    COMPARE HPCL WITH

    MARKET STATS