Mega questions for a mega refinery

The audacity of conceiving and executing mega oil refineries, nay mega projects, has been the preserve of just one entity in India — Reliance Industries. The company built two massive refineries of 33 million tonnes and 27 million tonnes capacity each, neighbouring each other, in Jamnagar, last decade. Not to speak, of course, of its giant petrochemicals complexes in Hazira and Jamnagar which boast world-scale capacities and world-class technology.

That was until last month. The Centre may now, to cook up a phrase, just be “out-Reliancing” Reliance Industries with its rather bold plan to set up a 60 million tonnes refinery on the west coast.

To understand the true significance of the proposal, just consider these facts: This will be the largest single grassroots refinery ever built in India, surpassing even Reliance’s; in the public sector, the largest one ever built is Indian Oil’s recently commissioned Paradip refinery, which, at 15 million tonnes, is a fourth of the proposed new refinery’s size.

Import woes When commissioned and operating at full tilt, the refinery will increase India’s oil imports by over 40 per cent from current levels. Currently, the country imports about 2.8 million barrels of crude oil a day against a consumption of about 3.58 million barrels per day (mbpd).

Assuming that domestic output remains unchanged at the current level of about 0.75 mbpd, India would need to import 1.2 mbpd more of crude oil. This has implications not just for India’s import bill but also for the direction of global oil prices.

Petroleum products consumption has been growing at close to double digits in recent months. Petrol consumption, for instance, has grown at a runaway pace of 14.2 per cent in the April-December 2015 period.

Though refining capacity and consumption are now well balanced, the oil companies need to look at meeting the demands of an economy that is set to grow at close to double-digits over the next five years and more.

The idea of a mega refinery that would go on stream in the next five years is, therefore, a good one. But implementing the project will not be easy and that is putting it mildly.

The challenges range from funding, to product evacuation to land acquisition and handling environmental issues.

Costly affair The government would need to find about 15,000 acres of land to build the refinery, which is a very large parcel by any standards. Dharmendra Pradhan, Minister of State for Petroleum and Natural Gas, has said that the refinery would be built in Maharashtra, which means that the location has to be the Konkan coast.

The State is already dealing with a controversy over land acquisition for the proposed Jaitapur nuclear power plant, also in the same area.

Strategies for product evacuation are crucial given the size of the refinery. Trucking out petrol or diesel will not be a viable option. The problem is that the proposed location is not close to major product pipelines which are the best way to move products in large volumes.

The other option is to ship them out to other domestic ports but again, there is no port in the vicinity of the proposed refinery that can handle the volumes that this project will generate. The oil companies need to, therefore, build pipelines, especially to the South, which is under-served in terms of refining capacity today.

The proposed outlay could be of the order of ₹1,50,000 crore for the refinery alone. The investment would only increase if pipelines and terminals are taken into account.

How would this be funded? The borrowings of Indian Oil (₹56,633 crore), Bharat Petroleum (₹16,986 crore) and Hindustan Petroleum (₹22,094 crore) are so high that leveraging their balance-sheets further is not an option. These three companies will be joined by Engineers India in the consortium that will build the mega refinery.

Assuming that the investment is limited to ₹1,50,000 crore only and a conservative debt-equity ratio of 1:1, the four partners may have to commit ₹18,750 crore each as their share of equity in the project.

The assumption here is that the project will be implemented by an independent company floated for this purpose where the four partners have equal stake. The new company will then have to leverage this equity to raise borrowings.

But how will the oil companies fund their share of equity? They will have to do it out of their cash flows over the next five years which is not impossible if the Centre sticks to its plan for eliminating remaining subsidies on cooking gas and kerosene and importantly, resists the urge to dabble in pricing of petroleum products once again if oil prices rise in future. The ₹75,000-crore debt portion of the project would have to be raised through a mix of bank loans, convertible debentures, bonds and supplier credit.

Green concerns After funding, the biggest hurdle to cross would be environmental approvals. Meeting the requirement of clean water for the refinery and handling the effluent discharge will be massive tasks and it would be naïve to assume that securing environmental approvals would be easy given the proposed location in the Western Ghats region. Given the experience with the Jaitapur project, handling local villagers and addressing their concerns will be crucial to the project’s take-off.

To be sure though, these are addressable challenges. The important point is that the PSU refiners are handicapped as a major part of their refining capacity resides in refineries that are decades old.

These refineries are configured to handle only the superior varieties of crude and their product slates are not designed to meet current demand patterns. For example, despite boasting of a combined refining capacity of over 130 million tonnes between them, the country still imports about half of its LPG requirements.

Bharat Petroleum and Hindustan Petroleum are saddled with old refineries in Mumbai which can neither be modernised nor expanded as the city has now expanded beyond their doorsteps.

A state-of-the-art mega refinery can address such issues. It is therefore crucial that the oil companies plan the project meticulously and implement it within a reasonable time-frame. Will the PSUs rise to the challenge?