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Energy Sources – Refining margins may continue to disappoint - Views on News from Equitymaster
 
 
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  • Jun 3, 2000

    Energy Sources – Refining margins may continue to disappoint

    Over the last couple of years India has significantly increased its refining capacity largely due to the 27 m tonne refinery set up by Reliance Petroleum (RPL) in FY00. Subsequently, India’s import requirement of petro-products has been reduced.

    India’s consumption of petro-products has grown at a compounded rate of 6% over the last decade. From 59.6 m tonnes to 100 mn tonnes and it currently produces 113 m tonnes of refined products. There now exists an over supply position in a few products like naphtha and petrol.

    There are now plans to increase the refining capacity to 164 m tonnes over the next five years.

    Capacity Additions

    Company Capacity
    Additions (m tonnes)
    Hindustan Petroleum 9.0
    Bharat Petroleum 6.0
    Indian Oil 9.0
    Essar Oil 10.5
    Nagarjuna Oil 6.0

    This results in the capacity growing at a compounded rate of 8% over the next five years. Historically, the relation between growth in petro-products consumption and GDP is 1.2, should the economy grow at 7% over the next five years the demand for petro-products will grow at a compounded rate of 8.4%. This will see the demand for petro-products increase to 150 m tonnes by 2005. Hence, there still will exist over capacity in the sector.

    With deregulation in the offing (April 2002), the industry will witness increased competition from imports, having over capacity in the domestic industry will prove detrimental to the margins of the refineries which are already under squeeze due to high crude oil prices. Thus the future of the industry currently is not looking very attractive however a positive development maybe the consolidation expected in the industry.

     

     

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