India’s bold plans for increments in refinery capacity to become a dominant exporter of fuels in Asia in the next five years is slowly catching the fancy of global oil majors. First Chevron picked up 5% stake in an export-oriented refinery Reliance Industries is building on west coast, then steel baron Lakshmi N. Mittal took 49% stake in a greefield refinery promoted by state refiner Hindustan Petroleum. This was followed by Mittal and Total agreeing to partner Hindustan Petroleum in another proposed export-oriented refinery on the east coast and now Kuwait Petroleum Corp. (KPC) is virtually knocking at the doors of Indian refiners for a new venture.

"India today probably is the best investment destination if you want to set up a refinery. We offer an open, stable and transparent policy regime allowing 100% foreign direct investment in the sector," Petroleum Minister Murli Deora said. Besides providing all-weather ports that can operate 365 days a year without a break, India holds the strategic locational advantage for exporters wanting to tap product deficit in the Middle-East or the rising fuel consumption in the South-East Asian economies. And so, KPC CEO Saad A. Al-Shuwaib, unmindful of walking out of a greenfield refinery of Indian Oil, courted top officials at both Reliance Industries and Indian Oil in search for a ‘new’ refinery project of the size of about 400,000 b/d refining unit and an accompanied petrochemical plant with an annual capacity of one million tonnes.

The country’s current installed refinery capacity is 149 million tonnes per annum (mtpa) which is set to increase to 241 mtpa by 2012. Other than 15 mtpa capacity from Hindustan Petroleum’s new refinery at Bathinda and Bharat Petroleum’s Bina refinery, the rest of the capacity would be export oriented. In fact, export of petroleum products is expected to keep growing at over 30 per cent in the near-term. Essar will start utilising its full refinery capacity in the beginning of January which will increase the volumes of export.

Reliance is also set to commission a new 29-mt refinery in Gujarat late next year. Besides other refineries in the public sector are being set up by Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL). Most of these refineries are in coastal areas in Orissa and Andhra Pradesh.

"Refineries coming up in Madhya Pradesh and Punjab will help cater to the growth in local demand. Exports will continue to be strong ," said a senior IOC official.

Indian refineries are feeding a growing domestic market, and a high-margin international market, by increasing capacity utilisation, as new refinery capacity is only slated to come up in 2008.

Domestic demand during the April-October period has gone up by 4 per cent while export of petroleum products during the period was up by 23.5 per cent. This growth in demand has ended the slack in refinery capacity utilisation, which is now touching 110 per cent in some cases.

"The growth in exports is primarily due to Reliance Industries getting export-oriented status for its 33-million tonne refinery in Gujarat. Also, Essar Oil’s refinery at Vadinar has started exporting 90 per cent of its products," said an analyst with a leading advisory firm.

Export of petroleum products is the largest foreign exchange earner for the country. It brought in more than $11 billion in the first six months (April-September) of the current financial year against the $9.1 billion foreign exchange earned during the entire last financial year.

"We expect export revenues from petroleum products to reach $20 billion this financial year," an oil ministry official said.

Bilateral investment between India and Russia in the hydrocarbon sector might see a big jump, with petroleum ministers of both countries agreeing to expand cooperation.Indian Petroleum Minister Murli Deora emphasised the fact that the growing refining sector in India offers immense opportunities for Russian companies to make use of.

Deora agreed with his Russian counterpart, Victor A. Zubkov, that national oil companies from both countries should ‘concretise mutually beneficial projects in areas like exploration, production, grassroots refineries, modernisation of refineries, gas-based petrochemical plants, gas-processing plants, participation in liquefied natural gas, and inform the progress to the leadership of the two countries’, according to an official statement.

Deora underlined that Indian exports of refined petroleum products to some of the world’s most sophisticated markets have touched $40 billion.The minister, accompanied by a high-level delegation, is currently on a visit to Russia.This meeting was a follow-up of the successful summit between Indian Prime Minister Manmohan Singh and Russian President Vladimir V. Putin earlier in Moscow.

‘The emphasis was on the mutually beneficial projects in upstream, midstream and downstream sectors in India, Russia and third countries between companies of the two countries in hydrocarbon sector. The discussions between the two countries will continue at the second Indo-Russian Forum on Trade and Investment scheduled in Feb 2008 at New Delhi.

Refining capacity set to rise 75% as Indian refineries develop technology to process low-grade crude. The refining capacity in the country is set to rise by 75 per cent over the next five years — from 149 million tonnes per annum (mtpa) to about 260 mtpa. This reason: The prospect of high refinery margins. "The average margins of refineries in the country are expected to remain high at $6-7 per barrel over the nextfive years. This will be at least around $2 per barrel higher than the benchmark Singapore refinery margins over the period," said a Delhi-based analyst with a global advisory firm.

Average refinery margins in the country are $7-8 per barrel. Reliance Industries, however, recorded margins of over $13 per barrel in the quarter ended September 2007 from its 33-mtpa refinery in Jamnagar.

Indian Oil Corporation, which has a refining capacity of around 60 mtpa, has recorded a margin of around $9 per barrel in the current quarter so far, according to a senior company executive. The high margins are primarily due to Indian refineries tuning their technology to process very low grade crude, which is almost $20 per barrel cheaper than the Brent crude, the global high-grade benchmark.

The largest refinery under construction is Reliance Petroleum’s 27 million tonne per annum (mtpa) facility in Jamnagar. Essar Oil is more than tripling the capacity of its Vadinar refinery to 34 mtpa from 10.5 mtpa. State-owned refiners, Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum, are also expanding. The investment in capacity expansion of existing refineries is estimated to be over Rs 60,000 crore.

"The new refineries will have the capability to process 75-89 per cent of very low grade sour crude oil. Coupled with both domestic demand and strong export potential, it makes sense to set up refineries over the next 4-5 years," said another Mumbai-based analyst. The private sector refiners, as also thegovernment -owned ones, have built strong trading arms, which scout the world for cheap crude oil. "The cheaper the crude oil they buy, the higher are their margins," the analystsaid.

The local refining capacity has not kept pace with the increase in demand, which is expected to remain robust. No new refineries came up in the US and Europe in the last 20 years, the analyst added. Existing European and US refineries have reached their peak and expansion through debottlenecking has hit a threshhold. The demand for petroleum products in the US has grown by about 17 per cent since 1995, but its ability to distill crude oil has increased by only 10 per cent.

"That is the reason so many refineries are coming up in China, West Asia and India," the analyst said. China has a refinery capacity of around 300 mtpa, which is likely to be go up to around 450-500 mtpa over the next 2-3 years. "This will mostly cater to its local demand," the analyst said. He added the new, technologically advanced refineries in India and West Asia would keep maintain the high margins.

Indian refineries currently sell petroleum products from their refineries at import parity price, except for petrol and diesel, which is sold at a trade parity price. Trade parity price is a mix of import parity and export parity prices in the 80:20 ratio.

"At import parity pricing, many notional costs, such as Customs, freight and docking charges are built into the product costs. This enables refiners to sell at higher prices," said one analyst.

Since India has become a net exporter of petroleum products, the government is in the process of shifting to the export parity price mechanism. "This will reduce prices substantially and put margins under strain in the long term," the analyst said.

He added the refinery margins in India would continue to remain higher than global benchmarks "simply because we are strategically located to service export markets."

In addition to this the bunker market is opening up in India. This along with development of Petro SEZs in the port will give price advantage to the ship owners to pick up their bunkers on the way to far east and beyond.