Singapore: When Reliance Industries Ltd opens a second huge refinery in India this summer, world oil consumers may heave a sigh of relief at the injection of extra fuel into a market that has been short of capacity for years.
But the issue for physical oil traders is less about global fundamentals than regional arbitrage, as the surge in petrol, diesel and jet fuel exports—the biggest one-off rise in world supply since Reliance launched its first plant in 1999—will open up new trading opportunities while closing some old ones.
The 580,000 barrels per day, or bpd, export-oriented refinery, now 90% complete and expected to be inaugurated in July, nine years after the first plant was finished, will have the edge over its peers as it can process cheap, low-grade crude into petrol and diesel that meets strict Western standards.
A low-cost base and high complexity will offer unrivalled global reach for its fuel, allowing it to shift exports to the highest priced market when full production starts in January.
It will play a swing supply role that will redraw traditional trade flows, and has already embarked on a robust marketing campaign in Europe, Mexico and East Africa, capitalizing on the delays and cost overruns faced by other big refinery projects.
“Reliance is being extremely aggressive in its marketing strategy...They are all over Europe marketing what will come up this year,” says Fereidun Fesharaki, head of FACTS Global Energy, which advises companies on refining and marketing strategies.
The plant, in Gujarat’s Jamnagar district, will take Reliance’s total capacity to 1.24 million bpd, making it the largest facility in the world and going some way to alleviate a global shortage of capacity that has aided four years of above-average profit margins for refiners worldwide.
Even if global margins deteriorate, as many analysts expect, Reliance is likely to prosper as it has invested in a plant that can use the world’s cheapest crudes—those with high sulphur, acid and metal content—to make the best products.
“The refinery was designed to produce optimum quality products that can be exported anywhere in the world, using the worst possible crudes out there,” says Al Troner, head of Asia Pacific Energy Consulting, or Apec. For physical traders for whom arbitrage is a cash cow, supplies coming from Jamnagar could be a threat.
With India’s retail fuel prices fixed at below market rates and state refiners expanding quickly to meet domestic demand, almost all of the plant’s production is expected to be exported. Fesharaki expects Reliance to ship at least 100,000 bpd of petrol to the US via Chevron Corp., which owns 5% of the $6 billion plant, equivalent to about a tenth of US imports, most of which comes from European plants.
It will also likely look to sell more product there directly, on top of the 4-5 million tonnes of petrol and jet fuel it already exports to US shores annually, a trade source said.
Reliance’s petrol supply of up to 230,000 bpd—if all its output goes West—could replace almost a third of Europe’s exports to the US, which uses 43% of the world’s petrol, and where refining shortages have been partly blamed for oil’s four-year rally to records near $120 a barrel.
“It makes sense for them to open up more trading offices around the world and try to market their products on their own,” the India-based trader said. That’s a strategy already in play in Africa, where Reliance bought half of Tanzania-based retailer and storage firm Gulf Africa Petroleum Corp., which has 300 pump stations.
East African fuel demand is surging, led by Kenya and Tanzania. South Africa, which has seen a rise in diesel demand due to power outages that may last years, has turnedfrequently to Asia for diesel, as regular West Asian suppliers have cut exports due to domestic demand amid booming economies.
“Geographically speaking, it makes sense to send products to East Africa,” said PFC Energy analyst Stan Drochon. “(But) there could be a spec issue as Indian refineries will produce high quality spec and East Africa is looking for cheap product.” REUTERS
Nidhi Verma in New Delhi, Chua Baizhen in Singapore, Simon Webb in Dubai and Margaret Orgill in London contributed to this story.