Mumbai: Reliance Industries Ltd (RIL) is internally suggesting that it will complete its much anticipated petroleum refinery in Gujarat by March, nine months ahead of the original completion date, putting itself in a position to take advantage of higher refining margins in the sector.
If it happens, it would mean that Reliance Petroleum Ltd (RPL) has finished the 27 million tonnes per annum (mtpa), export-oriented refinery in about 27 months, a rapid pace by global standards for such large projects.
Hital R. Meswani, executive director of RIL and in charge of the refinery project in Jamnagar, sent an internal email to senior RPL officials about the new timetable. The RPL board, set to meet on 25 April, is likely to be updated on the project.
An RIL spokesman declined to comment on the timetable or the email. An early completion date will allow Reliance to take advantage of the high gross refining margins currently prevalent in Asia.
Analysts say that by advancing the commencement date of operations, RPL would be able to earn revenues throughout 2008-09 as against only one quarter of scheduled operations in December 2008.
The company would also be able to enjoy record high refinery margins for two years (instead of 15 months) as the refining cycle is expected to peak in 2010, they add.
In the refining sector, expectations that capacity constraints will persist through the end of the decade are driving valuations for refining assets to historic levels, Standard & Poor’s analysts Jeffrey B Morrison wrote in a recent report. RPL’s shares too have risen by 28.66% since listing on the Bombay Stock Exchange on 11 May whereas the broader Sensex index has risen just 11% during the same period. On Friday, RPL shares closed at Rs77.2, up 0.98%, significantly below its high of Rs101.95.
Refining capacity is in short supply worldwide leading to high prices of petrol and diesel. This shortage is reflected in the Singapore gross refining margin, which was $2.41 (Rs101.22) per barrel of crude oil between 1999 and 03 but has risen to $5.76 per barrel in 2006. The gross refining margin is the operating profit earned by a refinery for converting a barrel of crude oil into refined products that can be used by consumers and industry. By 2011, several refineries currently under construction worldwide are expected to be commissioned leading to a rebalancing of demand and supply and an expected decline in gross refining margins.
RPL, formed primarily to set up a greenfield petroleum refinery and polypropylene plant to be located in a special economic zone (SEZ), is scheduled to almost double RIL’s refining capacity. What’s more, the new refinery has the ability to refine lower grades of crude oil, which are both viscous and acidic, into high quality petrol, diesel and aviation fuel, which typically sell at high prices.
The refinery’s Nelson Complexity Index of 14 allows it to use the lower grade, cheaper crude and yet minimize the share of low value-add products, such as fuel oil, thus allowing it to boost the margins. The differential between prices of high and low-grade crude oil, which stood at $1.16 per barrel on an average between 1999 and 03, have risen to $5.39 per barrel in 2006.
The refinery and 0.9mtpa polypropylene plant being set up by RPL are located adjacent to the existing RIL refinery. RPL, which will be India’s only export-oriented refinery, aims to supply most of the diesel produced to Europe and petrol to the US, according to a report by Mumbai-based brokerage, India Infoline Ltd.
RIL recently got government approval for converting its existing 33mtpa refinery in Jamnagar into an export-oriented unit, which will allow it to import crude oil without payment of any customs duty. The existing RIL refinery at Jamnagar exported 17.84 million tonnes (mt) of refined products worth $10.3 billion in 2006-07, as against 10.84mt products export for $5.5 billion in the previous year.
India has 18 refineries with a combined capacity of 133mtpa. At the end of 2007, the refining capacity is expected to reach 149mt while the domestic demand is expected to be around 144mt only. As per the draft 11th Plan report, the country is expecting a huge exportable surplus of all petroleum products, except liquefied petroleum gas. In 2007-08, the country will have 26.88mt of exportable surplus, rising to 86.54mt by 2011-12.
In April 2006, US-based Chevron Corp bought a 5% stake in RPL for around $300 million. RIL owns 75% of RPL, with the balance 20% held by the public, including foreign institutional investors such as Fidelity, Goldman Sachs and domestic institutions such as Life Insurance Corporation of India. Chevron also has an option to purchase upto 29% in RPL and is expected to supply crude from its African oilfields to RPL.
By 12 January itself, RPL had completed nearly two-thirds of all detailed engineering work for the refinery, with over 7,500 engineers working on the project. Over 80% of structural steel, rebars and tankage plates and over 70% of pipes and fittings were already delivered to the site as well.