Press pause button on new refineries

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Our policymakers have just been unable to get a fix on fuel pricing.
Our policymakers have just been unable to get a fix on fuel pricing.

India’s oil refining industry today presents a puzzling picture. You have the likes of IndianOil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation bleeding badly but still announcing new refineries for the future.

When the country is already surplus in (refining) capacity, it is perfectly legitimate to ask if such hefty investments are needed.

This is not all. Nearly half of the private sector’s output of over 80 million tonnes is exported because opportunities in the domestic market are just not viable. This is thanks to a fuel pricing policy which has led to their retail network being grossly underutilised. Their public sector counterparts are, however, adding over 2,500 outlets each year.

Phew! Quite a story of contradictions, isn’t it? By the end of the day, nobody can really be blamed except our policymakers who have just been unable to get a fix on fuel pricing.

Nearly a decade ago, the stage was set for an era of market-determined pricing. This prompted the likes of Reliance and Essar to enter the retail business till they realised that nothing of the kind was actually happening.

There was no way they could sustain selling petrol and diesel at subsidised prices and still hope to stay afloat.

The better option was to scour for new markets overseas even if it meant downsizing operations back home.

One mammoth refinery?

Today, India’s refining capacity is over 210 million tonnes which is perhaps 50 mt more than the actual demand. Of this, nearly 40 mt are exported which means, in reality, there is not so much of a mismatch.

Going forward, IOC plans to put up a 15 mt refinery on the West Coast while BPCL has one planned in Uttar Pradesh. HPCL has earmarked new refineries in Rajasthan and the West Coast.

These four projects will entail investments of at least Rs 100,000 crore though they are still some years away.

To that extent, one may rightly argue that they are only meant to meet demand for the future except that Reliance and Essar’s existing capacities are adequate for that task.

The biggest obstacle, though, is that they cannot get fully started unless they are assured of fair pricing for their products. Simply put, it means knocking off subsidies (especially on diesel) except that the Government is unable to do so fearing a political backlash.

Does it then make sense to make the PSU oil companies the fall guys? Do they really need to add capacity when they are already neck-deep in debt?

According to a senior oil industry official, it makes more sense at this point to focus on consolidation and modernisation of existing facilities rather than get into this pointless expansion.

Hopefully, by then, the private sector will have got back into the domestic market if a fair and transparent pricing system is in place.

Experts also believe that it perhaps makes sense for IOC, BPCL and HPCL to pool in their resources for the future and commission a refinery jointly.

The argument is that it hardly makes a difference anyway since they have a common owner in the Government. “Why replicate investments when the more logical alternative is to build one mammoth refinery? And it can be on the West Coast since that is everyone’s favourite destination today,” they quip.

Yet, the downside to this is that it is still against the very spirit of competition and could spawn an unhealthy monopolistic regime.

Fuel pricing decisions

In the early 1990s, Arthur D Little carried out an exhaustive study of India’s downstream oil sector and concluded that it was heavily weighed in favour of a few players. The international consultant also expressed concern on the state of (then) standalone refineries which needed strong marketing support to survive.

The first round of restructuring kicked off in the turn of this century when Kochi Refineries went to BPCL and IOC took charge of BRPL (Bongaigaon Refinery & Petrochemicals) and Chennai Petroleum Corporation. Greater refining parity was achieved more recently when HPCL and BPCL commissioned new projects in Bhatinda and Bina.

“The same questions on overcapacity vis-à-vis actual demand were then asked of these two projects. Can you imagine what it would have been like without Bina and Bhatinda for BPCL and HPCL?” an oil industry veteran asks.

It was imperative for both companies to get a foothold in the northern region which is today seeing brisk growth for petro-products.

Bhatinda may even offer HPCL a new market in the form of Pakistan in the near future since all it takes is laying a pipeline from the refinery to Lahore.

It is also, perhaps, relevant to add that the Bina refinery was first conceived over two decades ago before it became a reality recently.

The same holds true for IOC’s Paradip refinery which has been progressing at snail’s pace and is due for commissioning only towards end-2013.

Going by this track record, it is more than likely that none of the new refineries will see the light of day for the next 5-7 years which means there is no risk of supply outstripping demand.

Yet, there are no two ways about the fact that time in the coming years should be well spent to take some hard decisions on fuel pricing.

The Government can ill-afford to procrastinate further, especially when its own oil companies are struggling for survival.

It does not make any sense for the refiners to invest further and go through the rigmarole of getting delayed compensation for losses incurred. Their money will be better spent on modernisation and working towards cleaner fuel alternatives.

Crude prices are also not going to crash in a hurry and the days of $70/barrel are long gone.

The time has come to get the private sector back into the domestic arena and give IOC, HPCL and BPCL a level playing field.

It is the only way to ensure their survival and growth in the long term.

(This article was published on November 29, 2012)
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