‘Vadinar refinery's capacity will touch 20 mtpa by 2012'

Essar Energy expects to complete several of its growth projects this year and this will contribute significantly to its bottom-line. In a conversation with Business Line , Mr Naresh Nayyar, CEO and Managing Director, Essar Oil, and CEO of Essar Energy, shares his views on improved gross refining margins, gas production from the coal bed methane (CBM) block, and taking Vadinar refinery's capacity to 20 million tonnes per annum (mtpa) by 2012.

Excerpts from the interview:

Going by your financial numbers and the crude pricing scenario, what kind of outlook do you see on gross refining margins (GRMs)?

Ever since the third quarter (Q3) of FY 2009-10, which was not a very good year for refining industry globally, we have seen the refining margins improve every quarter. Our refining margins, for instance, have improved steadily from $5.37/bbl in Q4 of FY 2009-10 to $8.15/bbl in Q4 of FY 2010-11 — an increase of over 50 per cent.

Recent developments in West Asia, Libya and Japan have led to tightening of product availability in Asia and strengthening of the margins in the global refinery industry. Global demand was bullish in 2010 when it grew by 2.9 million barrels per day year-on-year. It is expected that growth in global oil demand will continue in 2011. Most industry experts and international agencies have projected an increase in demand between 1.3 and 1.5 million barrels a day in 2011.

What is the status on refinery expansion from the current 14 mtpa (million tonne per annum) to 18 mtpa? Have you tied up funds for the expansion?

The Phase 1 expansion of the Vadinar refinery is scheduled to reach mechanical completion in a phased manner over the second and third quarters of calendar year (CY) 2011. Much of the increased production from the new units will commence in Q4 of CY 2011. The overall completion of the project now stands at 86 per cent. The refinery will take a 35-day shutdown in September-October 2011 to allow for the tie-up of new units and routine maintenance. The cost of the expansion is Rs 7,600 crore. Funding for the Phase I expansion has been tied up.

By when will you reach 20 mtpa?

In November 2010, we announced plans for undertaking an optimisation project in the refinery to take the capacity to 20 mtpa or 405,000 barrels per day (bpd). This will be achieved through optimisation of some of the refinery units at an estimated cost of Rs 1,700 crore. The project will be completed by September 2012.

There were expectations that like Reliance, Essar will also go for another greenfield refinery in India? Are you looking at acquiring more refineries?

Our stated aim is to achieve a global refining capacity of one million bpd. Post the expansion of the Vadinar refinery (Gujarat) and completion of the acquisition of the Stanlow refinery (UK) we would have a total refining capacity of over 780,000 bpd. Further, depending on market demand, we might also consider doubling the Vadinar refinery's capacity. Therefore, we have no plans to acquire a refining asset outside India in the near future.

Last fiscal Essar's petroleum products' exports went up. Which were the products that boosted exports and the main reasons for this? Also, which were the countries you exported to?

Exports from the Vadinar refinery increased to 32 per cent in 2010-11 compared with 25 per cent in 2009-10. This export growth was primarily because of a surge in export sales of fuel oil, which is increasingly being displaced by natural gas in the domestic industry. We sell our products to traders, hence it is difficult to ascertain the destination of our finished products.

Which are the countries from where you source crude oil?

Our portfolio of crude oil imports is diversified across a wide range of geographies, including Africa, West Asia and South America. The basket of crude that we use in the refinery is determined through a continuous optimisation process.

Do you propose to increase your off-take from Iran from the current 3 million barrels per month? Has the payment issue been resolved?

Currently there is no disruption in the supplies that we receive from Iran. We are hopeful that the payment crisis will be resolved soon. As of now, we have no plans to increase our off-take from Iran.

Where do you think diesel pricing in India is headed?

The pricing of auto fuels is a matter of Government policy, so I would not like to comment on this. However, all the players in the marketplace must be provided a level-playing field.

Do you need Government approval for CBM gas pricing? Have you tied up customers for your Raniganj Block in West Bengal?

Yes, we do need Government approval for CBM gas pricing. We have received the Gas Sale Price approval from the Ministry of Petroleum and Natural Gas. The provisional price set by the Government is $ 6.25/mBtu.

We have tied up with a number of customers in the Raniganj industrial belt. The pricing varies with each customer and there are different bases at which these prices have been fixed. But as mentioned, this pricing is provisional as of now, and subject to Government approval. We are producing about 35,000 standard cubic metre per day of gas from Raniganj Block. Commercial sales from the block are scheduled to begin in a few months post some statutory approvals.

What is the Essar's outlook in exploration and production business?

Essar's exploration and production business owns a portfolio of highly prospective hydrocarbon blocks both in India and internationally, with 2.1 billion barrels of oil equivalent of reserve and resource base. Of this, 150 million barrels of oil equivalent are 2P (proven plus probable) and 2C resources (contingent resources).

For a majority of the blocks in our E&P portfolio, except the Raniganj CBM block, we are yet to enter the development phase. The Mehsana block is producing currently, while in some of our other blocks we have initiated preliminary exploration activities.

We have been awarded four CBM blocks under the CBM-IV bid round. The four blocks comprise 2,233 sq.km of exploration acreage with in-place prospective resources of over 7.6 tcf of CBM gas. These blocks, together with existing CBM block at Raniganj, West Bengal, make Essar Oil the company with the largest CBM acreage in India and over 10 tcf of reserves and resources.