Over the past couple of years, the price of crude oil and oil products has risen significantly. Reasons and views cited for it range from 'peak oil theory' to deficient investment in upstream and downstream capacities globally (this is on the supply side), even as the appetite for oil continues to increase (this is on the demand side). Given this backdrop, we analyse the prospects of Indian refineries – opportunities and risks in the long-term.
Indian refining – Current state
Currently, India has 18 refineries out of which 17 are owned by the public sector undertakings. The only private refinery in the country is owned by Reliance (the world's biggest gross-root refineries). Currently, domestic refining capacity is in excess of domestic demand, which has resulted in export of products over the last few years. Petroleum product exports, in FY06, stood at US$ 6.8 bn, which is likely to touch US$ 10 bn by next year.
In the last five years, the downstream sector has witnessed significant capacity additions and the trend is expected to continue. By 2007, as per the planning commission estimates, the domestic refining capacity is expected to touch 141.7 MMTPA (million metric tonnes per annum) as compared to 133 MMTPA currently. Reliance Petroleum is establishing a refinery at Jamnagar with capacity of 29.4 MMTPA, which will commence operations by 2008. While Essar Oil's refinery will commission this year (capacity of 7 MMTPA), the company expects to raise capacity to 10.5 MMTPA by January 2007 (to 12 MMTPA later).
As far as the PSU's are concerned, IOC is building a refinery at Paradip with installed capacity of 15 MMTPA, along with expansion of its Panipat refinery by 6 MMTPA. BPCL is building a new refinery at Bina with a capacity of 6 MMTPA. HPCL is building a refinery at Bhatinda with installed capacity of 9 MMTPA (though in early stages). ONGC, in an effort to be wholly integrated, intends to increase refining capacity by 35 MMTPA (including MRPL). Even new players like Nagarjuna Oil are building a refinery with a capacity of 6 MMTPA.
| Particulars | (MMTPA) |
| Installed capacity (April 2005) | 127.4 |
| Brown-field expansion | 14.3 |
| Green-field expansion | 113.1 |
| Total capacity | 254.8 |
This signifies a CAGR in the range of 14% to 15% during FY06 and FY10. As a matter of fact, over the past 7 years, domestic refining capacity grew at a CAGR of 10.7%.
| (MMTPA) | FY00 | FY01 | FY02 | FY03 | FY04 | FY05 | CAGR |
| Crude | 86.0 | 103.4 | 107.3 | 112.6 | 121.8 | 127.1 | 8.1% |
| Petroleum | 97.1 | 100.1 | 100.4 | 104.1 | 107.8 | 111.6 | 2.8% |
The consumption for petroleum products in India grew at a CAGR of 2.8% (FY00 to FY05), which was far below the rate of capacity expansion. Extrapolating the growth rate for consumption of petroleum products, we can say that demand in 2010-2011 is likely to be in the range of 135 to 145 MMT. If one considers the capacity expansion plans by then, the country will have excess capacity of over 100 MT, which will be exported. Reliance Petroleum is leading from the front and is establishing a wholly exported-oriented refinery (to commence production in FY09).
Oil: Outsourcing wave…
The US, a major consumer of petroleum products (21% of world consumption), imported 173 MMTPA of petro-products in 2004 (1.3 times India's total refinery). Even as US refiners have expanded capacity in the last five years, demand has grown at a faster rate, which has resulted in the US replying heavily on imports to meet domestic demand.
| ('000 barrels per day) | 2000 | 2001 | 2002 | 2003 | 2004 |
| Capacity | 16,595 | 16,785 | 16,757 | 16,894 | 17,042 |
| % of world capacity | 20.2% | 20.3% | 20.1% | 20.1% | 20.1% |
| Consumption | 19,701 | 19,649 | 19,761 | 20,033 | 20,517 |
| Surplus/(deficit) | (3,106) | (2,864) | (3,004) | (3,139) | (3,475) |
| Deficit as % cons. | 15.8% | 14.6% | 15.2% | 15.7% | 16.9% |
Looking beyond the US, the demand for petro-products worldwide grew at a CAGR of 8% (1999 to 2004) while refining capacity expanded by 3% during this period. According to the IEA, even if demand continues to grow at 2% a year, by 2010, the total refining capacity in the world has to increase by at least 450 MMT. Global management consultancy, ICF Consulting, states, "In the past year and over the next roughly 5-year period, the ability to meet forecast demand for oil will be driven by refinery capacity issues, not crude availability." This, being the case, will benefit refineries in terms of higher margins. The excess global refining capacity, which was about 35% in early 1980s, now stands at less than 3% as the report. As per the BP Statistical Review (2005), the spare capacity in 1994 was 10%, which fell to 5% in 2004.
Though the Indian Petroleum Ministry is studying the prospects of India emerging as a regional refining hub for exports, this is a long shot. In our view, if this materializes, it can open up new growth avenues for Indian refineries. Firstly, Indian refineries will be able to diversify revenues, thereby insulating them from the risks perpetuating from domestic markets, albeit to an extent. Exports of petroleum products can alter the energy matrix for India as well. Export earnings from refining could end up paying part of the country's ballooning crude oil import bill. This in turn, will provide cushion to the country's BOP situation (balance of payment). All said and done, we need a government with a vision. If we continue to focus on the 'Aam Aadhmi' without adhering to the scruples of economics, investments will be hard to come by!