Sticky facts on oil refining

The recent commissioning of a 9-mtpa refinery at Bathinda is significant at least for two reasons. First, the maiden Indian venture of Mr L. N. Mittal, who is known as the world's largest producer of steel, is not in steel but in oil, and that too in partnership with a state-owned firm, and not all alone. Second, India becomes perhaps one of the largest refiners of the world, its total refining capacity at 215 million tonnes (mt) exceeding the country's domestic production of crude as well as the demand for petroleum products.

The second reason need not necessarily be the cause for unalloyed jubilation. To avoid probable idling of the capacity, the country has to depend more on both import of crude and export of final products at whatever prices. Such dependence has its pitfalls.

CLOSURES IN THE WEST

Let us turn to the global scenario. Hurt by high petrol prices and shrinking domestic demand, the refineries are closing across the developed world, from US to Europe. According to the International Energy Agency, more than three million barrels of daily refining capacity have closed in Western countries since the beginning of the economic crisis. Half the refining capacity in the US east coast is set to disappear.

The 126-year-old Sun Oil Company in the US has decided to quit refining. ConcorPhillips, also in the US, is trying to sell its refinery in Pennsylvania, lying idle since May last year. The same story is echoed throughout Europe which witnessed a contraction of 320,000 b/d capacity last year. Petroplus, Europe's largest independent refiner, filed for insolvency early this year and is looking for buyers for its five plants. The reason: weak demand.

US petrol demand has fallen steadily since 2007, even though the US petrol price by international standard remains among the world's cheapest. The weak demand has been caused by several factors such as emergence of fuel-efficient vehicles, blending of corn-based methanol in petrol and drop in highway travel due to high unemployment. Interestingly, the weak demand has been accompanied by excess supply.

No benefit for common man

US crude production is at its highest in eight years, and perhaps for the first time since 1949 the country has become a net exporter of petroleum products. The emerging economies have added 4.2 m b/d capacity, with another 1.8 m b/d due to come this year. For example, Motiva, a joint venture between Saudi Aramco and Royal Dutch Shell, will this year add 325,000 b/d of capacity. In other words, it may not be smooth sailing for the Indian refiners planning to push their surplus in the world market. Who knows this better than Reliance? Despite having a huge facility, half of which is in an export-processing zone, it could not protect itself entirely from the ups and downs in the global oil market. The company's more recent quarterly results may be a case in point.

Do ordinary people stand to benefit from the expanded refining capacity in the country? One wonders. Probably not. As long as international crude prices remain high, refining margins will be under pressure. State-owned refineries will mount pressure on the government to allow them to raise product prices. The government will in all probability succumb, at least partially, to the pressure, even if only to reduce the subsidy burden. Reports of a further rise in petroproducts are in the air, despite several rounds of increases in the past few months.

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