Essar Oil is likely to report a robust increase in the gross refining margin for the second quarter. For this, the company is betting on the Vadinar refinery’s capability to process heavy to ultra-heavy crude oil. In the first quarter, the company reported a gross refining margin (GRM) of $4.69 a barrel, while in the year-ago quarter it was $4.20.

Over the last two years, the Gujarat-based refinery has been undergoing expansion. Currently, it has a refining capacity of 20 million tonnes per annum.

Before the refinery expansion, Vadinar used to refine crude oil with an average API (American Petroleum Institute) gravity of 33. After the expansion, it can now refine crude oil with an average API of 28, the official said.

The higher the API, lighter the crude oil, fetching a better price. A lower API means heavier crude oil, which gets a lower price. A technically more sophisticated facility that can process heavier, and lower cost, crude oil can help bring down refining costs as the company can procure cheaper varieties of crude oil. This adds to the GRM. Going forward, the company plans to refine still heavier crude oil with API of 25.

“Due to the refinery’s capability, the company is procuring crude oil $3-4 cheaper than Dubai benchmark prices. The lower cost of crude oil will get directly reflected in the current GRM,” the official said.

Inventory loss

For the first quarter, the company reported inventory loss of about Rs 700 crore. However, the official pointed out that because of the increase in crude oil prices, Essar would benefit from the carry-forward inventory.

The company has a nine-million barrel inventory, which consists of crude oil, petroleum products in process, and finished products. However, given the current rise in crude oil prices, the inventory would be shown as a profit on the books in the September quarter, the official said.

(This article was published on August 16, 2012)
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