Jun 20, 2000|
FDI in Oil Refining Will MNCs jump at it?
The Government has recently announced 100% foreign direct investment (FDI) in the refining sector. Will this announcement see international majors entering the refining sector and changing the existing competitive landscape?
Although, it maybe to early to predict the course of action these majors adopt, their decisions will be guiding by some of the following factors.
- The refining margins worldwide continue to shrink as crude oil prices soar. Further, the output are commodities and are of low value-added nature.
- India currently has a refining capacity of 113 m tonnes, which is expected to increase within five years to 164 m tonnes, growing at a rate of 8% p.a. The consumption of petroleum products on the other hand has grown at a rate of 6%. There is expected to be over-capacity in the sector and this should further dent the margins.
This averseness to the Indian refining sector is reflected in the recent joint venture fall outs between the Indian and foreign partners. To name a few Bharat Petroleum (BPCL) and Oman Oil, Hindustan Petroleum (HPCL) and Saudi Armaco and Indian Oil (IOC) and Kuwait Petroleum.
Most international majors are eyeing the lucrative marketing segment. Currently, as per Government policy, only those that have invested at least Rs 20 bn in refining capacity or have a 3 m metric tonne production capacity would be given marketing rights. However, the majors are of the opinion that the restrictions would be relaxed with the impending over-capacity in the sector.
As India imports a large percentage of the crude consumed, players wanting to enter the marketing of petroleum products should first be required to set up exploration & production activity. This will build Indias domestic production capacity and give the players a piece of the high margin marketing pie.
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