Amid a controversy over its decision to relocate a proposed Rs 37,229 crore oil refinery, the Rajasthan Government now faces the daunting task of meeting the 9 million tonne unit’s huge water requirements.

Rajasthan, which agreed to give an interest-free loan of Rs 3,736 crore per annum for 15 years to the unit after commercial production starts, has to guarantee five to six million gallons of water a day for the refinery, sources said.

Processing of crude oil requires large volumes of water, most of which is recycled, while the rest is contaminated, requiring further treatment. For a desert state, providing such a large quantity of water from the Indira Gandhi canal will be a challenge.

The Rajasthan Government and Hindustan Petroleum Corporation Ltd (HPCL) signed an agreement in March to set up the refinery, which will process oil from Cairn India’s fields in the state and other crudes.

While almost all new refineries have come up on the coast for the ease of importing crude oil, the Rajasthan refinery will need a cross-country pipeline to be built to carry oil from the west coast, which will shrink margins, sources said.

The project will also compete with HPCL’s Bhatinda refinery for a slice of the market in a country that already has a surplus refining capacity. India has a refining capacity of 215 million tonnes, while fuel consumption was under 139 mt. The surplus capacity is mostly used for exports, for which a coastal location is ideal.

Indian Oil Corp, the nation’s largest oil company, is building a refinery in the port city of Paradip in Odisha and exploring the possibility of a unit on the west coast, while HPCL itself is mulling a refinery on the Maharasthra or Gujarat coast for the very same reasons.

The Rajasthan refinery was initially to be set up at Leelala in Barmer. With farmers there seeking more compensation, the state government recently changed the location to Pachpadara, evoking sharp protests and the resignation of state Revenue Minister Hemaram Chaudhary.

The new site will require a longer pipeline to bring in crude oil from Cairn India’s Mangala oilfields in Barmer.

The refinery, which is planned to go on stream in four years, will source half its crude oil from Cairn’s Barmer oilfields, while the remainder will be imported.

The Rajasthan government will have a 26 per cent stake in the project.

HPCL has two coastal refineries — a 6.5 million tonne plant in Mumbai and an 8.3 million tonne unit in Vishakapatnam. It also operates the 9 million tonne Bhatinda refinery in Punjab.