A global glut in natural gas is threatening to undermine a $4 billion investment by Reliance Industries aimed at boosting profits at the worlds largest oil refining complex.

The project made all the sense in the world when energy magnate Mukesh Ambani’s conglomerate announced it in 2012: convert petroleum coke, or petcoke, one of the cheapest and dirtiest refinery by-products, into gas needed to power the massive Jamnagar complex on India’s west coast. Then it hit about three years of delays, and global gas markets crashed amid a growing supplies of liquefied cargoes from the US, Australia and Russia.

The 10 synthetic gasifiers that make up the project are now finally commissioned. But the imported LNG they are meant to displace has fallen from about $15 per million British thermal units in 2012 to less than $5. And that price slump has reduced the projects viability, according to a person with knowledge of the company’s finances.

Reliance predicted in 2014 that the project would boost Jamnagar’s refining margins by as much as $2 a barrel. Now, Mumbai-based Centrum Broking sees an uplift of about $1.30 to $1.50 a barrel by the 2021-2022 fiscal, according to a July 21 report by analysts Probal Sen and Akshay Mane.

It’s not the most conducive environment to bring the petcoke project on stream, said Somshankar Sinha, head of India equity research at Jefferies Financial Group. The LNG surplus has caused prices to fall much more than the usual decline in summer months, the Mumbai-based analyst added. Jefferies said it expects a full ramp-up of Reliance project in financial year 2021.

Project status

The gasifiers, originally scheduled to begin operations in 2016, are now in the final stages of being stabilised and integrated with other facilities, with an expected increase to full capacity in March, according to people with knowledge of operations, who asked not to be identified as information is not public.

Reliance has said the units are still profitable at current LNG prices and it will cut down on imports of the fuel when they come online. Whenever it comes, gasification will be cost-effective, Joint Chief Financial Officer V. Srikanth said in Mumbai last month.

With the plant still not fully operational, the company is still importing LNG, recently picking up several cargoes for delivery between July and October. Meanwhile, it has also been selling petcoke, according to a trader who distributes the product. Reliance spokesman Tushar Pania did not respond to an email seeking comment.

Refining returns

A recovery in LNG prices should aid economics for the gasifier, according to Centrum Broking, even as LNG prices are set to stay low due to surging supplies from US.

Based on the forward curve for Asia’s dominant LNG benchmark for supplies in Japan and South Korea, the super-chilled gas is priced at between $5.50 and $8 per million Btu from 2020 to 2023. Prompt LNG prices are pegged at around $4.70 per MMBtu.

Low LNG spot prices could encourage Reliance to take more spot volumes in the coming quarters, although the company wont shift its long-term strategy away from eliminating petcoke residue, said Senthil Kumaran, a Singapore-based analyst at industry consultant FGE.

The payoffs from Reliance investment in gasifiers, however, will not be as rich as it was originally thought, he added.

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