The Hindu Business Line : Essar Oil may go cautious on Vadinar unit expansion

Mumbai, June 5 Essar Oil may turn cautious in its implementation of the $6 billion expansion that it has proposed to take up at its 10.5 million tonne oil refinery in Vadinar in the wake of the Finance Ministry striking out refinery units under construction by private sector companies from the tax holiday benefit.

Sources said if the Ministry did not roll back this amendment, there may be a slowdown in investment in refineries by these private sector companies, such as Nagarjuna Oil at Cuddalore and the Haldia refinery project.

All refineries, including those in the private sector, have been enjoying 100 per cent income-tax exemption on refinery profits for seven years after commissioning under Section 81-1B. The cardinal intention behind this measure was to spur investments, both from the public as well as private sector companies, in refinery projects to strengthen India’s energy security position.

However, a few days ago, the Finance Ministry notified eight projects, all in the public sector, for extending the seven-year holiday, barring the private units that are coming up. The notified projects include IOL’s Paradip refinery, HPCL-Mittal’s Bhatinda unit and BPCL’s Bina plant.

Thus, refineries like Essar’s Vadinar unit will not be able to get relief from the tax exemption, as they do not even have a PSU holding of 49 per cent, sources said. They admitted that the private refineries may slowdown investments if there was no roll-back of the amendment.

Private sector refineries, including Essar Oil, have dashed off a memorandum to the Finance Ministry and the Prime Minister’s Office, claiming that this amendment would affect the viability of their projects and deny them a level playing field vis-À-vis the PSU refiners.

“The exemption also helped private refiners to ease the cash flow pressures that are usually involved in setting up refinery projects. Now that will be gone, unless there is a roll back,” a senior official of a major private sector refiner said.

He was however hopeful that the Government would roll-back the Finance Ministry’s amendment. There was a similar move by the Finance Ministry some years ago when a major private sector refinery was coming up, but it was subsequently rolled-back, he claimed.

For Essar Oil, the amendment could not have come at a more inopportune time, as it was only from May 1 that it commenced commercial production at its 10.5 million tonne refinery in Vadinar. In fact, the company claims that the refinery is currently operating at 12.5 million tonnes per annum capacity.

The company has drawn up plans to increase the refinery capacity from 10.5 million tonnes to 34 million tonnes in the next three to four years. It had planned to raise a fresh debt of up to $ 5 billion through ECB and rupee loans, having already received in-principal commitment from lenders to the extent of $ 4.3 billion.

The company’s rationale for the expansion was that the global outlook for returns in refining was positive, with global refining capacities stretched. In fact, about 90 per cent of the current global refining capacity is stated to be above 25 years of age.

Apart from the IT exemption benefit the company was receiving, it has estimated to get Sale Tax Deferral benefit of about $ 2 billion through a recent Gujarat High Court order.

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