Hyderabad/ New Delhi: State-run exploration and production company Oil and Natural Gas Corp. Ltd (ONGC) has revived its plans to set up an oil refinery at a cost of Rs25,000 crore at Kakinada in Andhra Pradesh in the wake of what some officials in the petroleum ministry see as lobbying by the local government.
Andhra Pradesh is ruled by a Congress government and a Congress-led United Progressive Alliance government rules at the Centre.
“We expect the (refinery) project to go through,” said R.S. Sharma, chairman and managing director, ONGC. He declined further comment.
U-turn: A file picture of R.S.Sharma, chairman, ONGC.
ONGC, which had decided in 2006 that the project was unviable, has now appointed investment bank SBI Capital Markets Ltd to conduct a financial analysis of the refinery’s viability and asked for its report by January-end.
“This exercise is expected to give a fresh lease of life to our petroleum, chemicals and petrochemical investment region (PCPIR) project,” said B. Sam Bob, principal secretary at the industries and commerce department of the Andhra Pradesh government.
In 2005, the state government had signed an agreement with ONGC and Hindustan Petroleum Corp. Ltd, another state-owned oil production and marketing firm, to serve as so-called anchor clients in its PCPIR project.
HPCL announced that it would invest Rs30,000 crore to set up a new naphtha cracker (refinery) in the PCPIR and expand its refining capacity.
And ONGC had announced that it would set up a refinery, through a special purpose vehicle (SPV) or a company formed for the purpose, Kakinada Refinery and Petrochemicals Ltd (KRPL). Infrastructure finance firm Infrastructure Leasing and Financial Services Ltd (IL&FS) picked up a 51% stake in the SPV.
In 2006, on the basis of an internal study, ONGC decided that the refinery was unviable at the proposed capacity of 7.5mtpa and indicated its decision to pull out from the PCPIR project to the Andhra Pradesh government. Fearing that ONGC’s decision could hurt the PCPIR project, which was expected to attract investments to the tune of around Rs1 trillion, the Andhra Pradesh government convinced the Centre to ask ONGC to reconsider its decision, according to state government officials who did not wish to be identified.
ONGC then decided to explore the viability of the project with an enhanced refining capacity of 15mtpa, requiring an investment of Rs22,000 crore that was later revised to Rs25,000 crore. Engineers India Ltd (EIL), a state-owned engineering consulting firm that studied this project, did not think it was viable.
“ONGC had appointed EIL to take up a sensitivity study, which found the project unattractive at the (expected) investment (level) of Rs25,000 crore and internal rate of return of a little over 10%,” said Sam Bob.
He added that ONGC has decided to go ahead with the project and appointed SBI Capital Markets to assess its viability.
A Delhi-based oil and gas industry expert, who did not wish to be identified, said that while it looked like the political pressure exerted by the state government on the Centre has worked, the project could still be viable in theory. “There are no high-volume refineries located on the east coast which are export-oriented. If ONGC brings in an overseas partner, it will also assure it an offtake of the refined product,” the expert added.
According to Bob, ONGC has sought some incentives that include right of way to lay pipelines from the landfall point to the PCPIR and tax exemptions. “We are currently examining the financial burden of these incentives sought by ONGC,” Bob added.
The PCPIR, where the refinery is to be located, will occupy over 355sq. km in the Visakhapatnam-Kakinada-Rajahmundry corridor.
The proposed PCPIR is close to the oil and gas-rich Krishna-Godavari basin of Bay of Bengal. The corridor, situated in the country’s east coast, is the landfall point for various oil and gas finds in the KG basin that include discoveries of Reliance Industries Ltd, Gujarat State Petroleum Corp., Cairn India Ltd and ONGC.
The Andhra Pradesh government was recently involved in the controversy surrounding the pricing of gas from Reliance’s KG basin find. The state government, like other buyers, said Reliance’s indicated price of around $4.33 per million British thermal unit (mBtu) was much too high. A group of ministers resolved this issue and set a base price of $4.20 per mBtu.
“This (refinery) project should be seen in the context of India’s geographical location. While there is a market for the petroleum products in the East, the crude supplies are in the West. India is located between the two. ONGC will use this as a leverage to cater to energy starved markets of Japan and South Korea,” said Ravi Mahajan, a partner at audit and consulting firm Ernst and Young.
India plans to add more than 92mtpa in refining capacity during the 11th Plan period (2007-12), taking its cumulative capacity to 240mtpa, and further to 302mtpa by 2017.