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Refineries: The way forward… - Views on News from Equitymaster
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  • May 20, 2003

    Refineries: The way forward…

    Refining companies are planning to either expand their refining capacity either through upgradation of their existing plants or by developing new grass root refineries. In this article, we take a look at the existing refining capacity of Indian oil industry and the likely addition in the next five years.

    In FY02, the domestic refining capacity of the country was about 116 MMTPA with IOC being the largest refinery having a total refining capacity of about 38 MMTPA. On the other hand, the consumption of petroleum products was about 99 MMTPA. This shows that there is an oversupply in the petroleum products production in the country. Despite this, a lot of capacity additions will be seen in the next five years, which is expected to be to the tune of about 40 MMTPA.

    Refinery sector: Set to explode
    (MMTPA) Existing
    addition planned
    Location Planned
    IOC 38.0 6.0 Panipat grass root refinery FY06
    HPCL 13.0 9.0 Punjab grass root refinery FY07
    BPCL 8.5 11.0 Bina grass root expansion (6) and
    expansion of existing capacity (5)
    FY07 and
    FY05 respectively
    Kochi Refinery
    (Subsidiary BPCL)
    7.5 -    
    Numaligarh Refinery
    (Subsidiary BPCL)
    3.0 -    
    RIL 27.8 -    
    (Subsidairy HPCL and ONGC)
    9.0 -    
    Essar oil   10.5 Grassroot refinery FY05
    Bongaigaon Refinery 2.5      
    Chennai Petroleum 6.5 3.0 Expansion of existing plant FY04

    The major input for the refinery is crude oil. Considering the growth of crude oil production in the country, we find that the domestic production of crude oil has stagnated at about 32 MMTPA levels. With the total reserves of crude in place, the production of crude oil is likely to remain stable at the same levels for about next five years. This deficit of the crude oil requirement is being met through imports. The crude oil import dependency of the country in FY02 was about 70%. With the addition of further capacity by existing and new refineries, the import dependency of the country is likely to increase to about 75% by FY07.

    The government is focusing on increasing its domestic crude assets through NELP (NELP: will the dream materialize?). Though it is seeing some signs of success, we have still a long way to go. Also, the efforts by ONGC to procure crude from its stake in foreign oil fields will enhance India's capacity indirectly. With de-canalisation, the oil companies are free to choose their own source of crude supply to meet crude oil requirement. This will also help them to meet the crude requirement at lower prices.

    Due to the capacity additions the country has now reduced its dependency for petroleum products. The country has become net exporter of petroleum products and exports will increase with new capacity additions taking place. Also, companies are likely to become more competitive on the domestic front.

    On the demand side, demand of motor spirit (MS), LPG and high-speed diesel (HSD) is likely to increase in the next few years. While the deficit of LPG is likely to increase as the customer shifts from kerosene oil to LPG, kerosene oil will see surplus capacity. While the surplus in motor spirit is likely to decline, that in the diesel is expected to increase. Major drivers for growth in the demand are economic growth, better agricultural output, higher infrastructure spending, and increased demand from key consuming industries like power, fertilizer and automobiles.

    The government's thrust on infrastructure improvement bodes well for the refining sector. Also with the increasing competition on the marketing front, with the dismantling of APM (APM: where have we come), the companies have started becoming more self sufficient in terms of their product requirements. Also given that the number of retail outlets is going to increase by about 50% in the next few years, this increase in refining capacity will help the companies to meet the additional demand from retail outlets. We see more competition and sophistication in the petroleum product market, which is good for the consumers. For companies, the future will be a time aggressiveness and innovation in the product mix and services.



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