India has opened its refining sector to full private investment for the first time in more than 2 decades.
The government again gave a green light to construction of three 120,000 b/d grassroots refineries in East, West, and Central India. The projects had won various government approvals in the past few years but never moved off high center for a variety of economic and regulatory reasons.
The difference this time is that the government is offering interests in the projects to private foreign and domestic investors. It's part of India's push to boost overall refining capacity by more than 80% this century.
NEW POLICY
Grappling with soaring refined products demand and refining capacity constraints, India has for a number of years sought to get several major grassroots refinery projects on track but without success. The new policy is seen as sparking a surge of participation by private domestic and foreign interests, notably foreign multinational oil companies, in the refinery projects.
lndia's Finance Minister Manmohan Singh last February announced the government's intent to allow private domestic and foreign investment in the petroleum sector, including exploration and production, refining, and marketing. But there were doubts about the plan's implementation because the Petroleum Ministry has insisted upon private-state joint venture projects.
Those doubts mounted when India's Public Investment Board gave its approval to state owned Indian Oil Corp. Ltd. (IOC) to implement the 120,000 b/d Karnal refinery on its own. That project was proposed earlier as a joint venture project with the private sector Tatas Group, which collapsed.
The government's intent to further privatize the industry gained momentum recently when it unveiled a 75 point program to sharply increase hydrocarbon exploration, processing, and marketing.
THE PRECEDENT
The government's approval of a proposed joint venture by Japan's C. Itoh & Co. and India's privately held Reliance Industries, Bombay, in June was the first clear indication the government is moving to privatize India's downstream sector. The project involves building a 120,000 b/d grass-roots refinery at Salaya Gujarat, north of Bombay, at a cost of $1.5-2 billion.
The approval came on the eve of a visit to Japan by Indian Prime Minister P.Y. Narasimha Rao to Japan. C. Itoh is expected to commit $800 million to the project. Plans call for C. Itoh and Reliance to complete a feasibility study this year and set up a joint venture capitalized at about $300 million.
It would be the first refinery owned and operated by private sector companies in India since the administration of Indira Gandhi nationalized India's oil industry during the early 1970s. Plans call for start-up in 1996. Press reports have placed ultimate capacity at 180,000 b/d.
Petroleum Ministry officials now point to the C. Itoh-Reliance project approval as paving the way for other foreign multinationals to participate. Ministry sources said Royal Dutch/Shell Group is studying the feasibility of taking part in a joint venture refinery project with IOC, as are three other undisclosed multinationals.
Caltex Petroleum and Exxon Corp. are among other companies reportedly considering such ventures.
REFINING SHORTFALL
The growing shortfall in India's refining capacity (Table 1) in tandem with soaring products demand has caused India's total petroleum imports bill to skyrocket.
After expansions at the Gujarat, Madras, Cochin, and Vishakapatnam refineries in the early 1980s, there have been no significant increases in India's refining capacity. Cochin has increased its throughput significantly-recently surpassing nameplate capacity-since the mid-1980s, and the Madras refinery is in the midst of a debottlenecking to boost capacity by 15,000 b/d.
Refined products imports for the 1991-92 full fiscal year are estimated at 196,800 b/d. That compares with about 170,000 b/d in fiscal 1990-91 and 130,000 b/d in fiscal 1989-90.
The government estimates oil demand will rise by 60,000 b/d in fiscal 1992-93 while domestic crude production continues to fall.
As the rupee continues to depreciate, India's net oil import bill will continue to climb this year even if world oil prices don't rise significantly. For the first three quarters of fiscal 1991-92, that tab is estimated at almost $3 billion at current rupee exchange rates, compared with less than $3.5 billion for all of the previous fiscal year (Table 2).
The government pegs India's oil import bill for fiscal 1992-93 at $5.8 billion.
Prospects for a turnaround in crude production aren't in sight, either. Earlier this year, the government projected crude production in fiscal 1992-93 will fall to 610,000 b/d from 630,000 b/d estimated for fiscal 1991-92. The original target for fiscal 1991-92 was 670,000 b/d.
The shortfall stems largely from shut-in production at Bombay High required by an extensive workover and rehabilitation program.
The crude production target for fiscal 1992-93 is India's lowest in 7 years and puts the country's level of oil selfsufficiency at 60%, compared with 70% in 1984-85. India's oil demand is expected to climb to 2 million b/d by 1996-97.
JOINT VENTURE REFINERIES
India's government wants private domestic or foreign investors to participate in joint venture refinery projects with IOC in eastern India, Bharat Petroleum Corp. Ltd. in Central India, and Hindustan Petroleum Corp. in western India.
In each project, the state company and the joint venture partner each would hold a 26% equity interest, with the remaining 48% would be offered to the public.
The three state companies have performed a considerable amount of preliminary work on the projects, including site selection, identification of processing technology, and draft feasibility studies. Each project typically would have a debt to equity ratio of 3:1.
Private joint venture partners would be responsible for meeting their own foreign exchange and rupee costs of the project by raising funds on capital markets without relying on domestic financial institutions or the state partner. The government would not provide loan guarantees for private investment in the projects.
Although intended mainly for meeting domestic demand, the refineries may be allowed to export certain surplus products.
The joint venture refineries also would be subject to the "retained price" cost recovery mechanism for marketing products that applies to state companies. The government increased recoverable cost margins on gasoline, diesel, kerosine, and liquefied petroleum gas last January, adding about $200 million to Indian refiners' profits in the fiscal fourth quarter ended Mar. 31.
That followed a government decision to halt the practice of the national Oil Coordination Committee of reimbursing refiners for payment of certain state government taxes. However, if the government implements new policies for products pricing at the state owned plants, those new policies also will apply to joint venture refineries.
CURRENT PROJECTS
Separately, India's current plans call for building a 120,000 b/d refinery at Karnal, a 60,000 b/d refinery each at Mangalore and Numaligarh, and a 10,000 b/d plant near Madras in the Cauvery basin.
The Mangalore project set off the biggest fund raising effort ever on Indian capital markets for 11.47 billion rupees for the proposed 60,000 b/d refinery. Helping promote the effort are state owned Hindustan Petroleum Corp. Ltd. and the privately held Adiyva Brila Group companies Grasim, Hindalco, Indo-Gulf Fertilizers, and Indian Rayon.
The plant will be designed for maximum yield of middle distillates, producing 1,540 b/d of LPG, 4,600 b/d of naphtha, 5,560 b/d of gasoline, 2,080 b/d of kerosine and jet fuel, 16,000 b/d of auto diesel, 4,760 b/d of fuel oil, 2,000 b/d of resid, and 36 metric tons/day of sulfur.
Mangalore Refineries Ltd. has signed contracts or technical collaboration agreements for processes or work related to the refinery with Universal Products and Kinetics Technology of the U.S., Shell International, and Engineers India Ltd.
Approved earlier this year, the refiner,y is to go on stream 4 years from start of construction. Delays in government approvals and the rupee's devaluation in 1991 jumped cost estimates for the Mangalore project by $200 million from a June 1990 estimate of $775 million.
Indo-Burma Petroleum Ltd. recently let contact for design and other work on the Numaligarh refinery (OGJ, June 29, p. 46). India's government gave final approval in June for the refinery, a $1.22 billion project that is a joint venture of Indo-Burma and Assam state.
It is to be the fourth refinery in Assam state, where crude production is expected to climb to about 200,000 b/d by 1997 from today's 100,000 b/d.
Madras Refineries Ltd. recently broke ground for the Cauvery basin refinery (OGJ, July 6, p. 36). The small refinery, at Panangundy near Nagapattinam, will mainly process crudes from state owned Oil & Natural Gas Commission wells in the Narasimham area. It is to start up in July 1993.
In addition, Indian refiners tentatively plan to increase capacity at existing plants by a combined 176,000 b/d. Among those projects is an expansion at Cochin that would enable that refinery to process another 50,000 b/d of Bombay High crude and 60,000 b/d of Persian Gulf crudes. The Cochin expansion is to be complete by March 1995.
Taken into account the three proposed 120,000 b/d joint venture refineries, India's refining capacity would increase to about 1.878 million b/d from the current 1.037 million b/d.
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