Mumbai: The world’s largest refining hub could just get even bigger. The second refinery, set up by Reliance Industries Ltd (RIL) at its Jamnagar complex in Gujarat, has already overtaken the older, adjacent refinery in production volumes and could go even further—exceeding its design capacity by at least 20%, according to four persons familiar with the development.
The second refinery, which was commissioned by RIL in end-December 2008 to process 580,000 barrels per day (bpd), started full-scale commercial production early this fiscal. It operated at 115% of its stated capacity in the October-December quarter, according to the firm’s 22 January statement.
At this rate, the refinery could refine 667,000 bpd, overtaking RIL’s older Jamnagar refinery, which can process 660,000 bpd. Put together, it’s the largest refining operation globally at a single location.
At least two firm officials familiar with the matter and two sector analysts confirmed that the new refinery had the “elbow room” to boost capacity up to 700,000 barrels of crude of oil a day or a fifth more than its nameplate capacity. Although this comes at a time when most sector analysts are forecasting a subdued outlook for the refining and petrochemical segments, they are less worried about the impact an extra dump of refined fuels could have on the oil-and-yarn conglomerate. Other refiners will lose out not RIL, they said.
Crude production: The old RIL refinery in Jamnagar. At the current rate, the new refinery can refine 667,000 barrels a day, overtaking RIL’s older Jamnagar refinery, which can process 660,000 barrels. AFP
“Right from the time the design plan for this refinery was announced, a section of the market believed that the capacity will eventually be higher than announced. It happened with the previous refinery too,” said Mumbai-based brokerage Angel Broking Ltd’s analyst Deepak Pareek. He estimates that RIL’s profit before tax could swell by as much as Rs750 crore if the new refinery operated at 120% of its stated capacity.
A questionnaire emailed to the RIL spokesperson on Friday remained unanswered till press time. A firm executive explained that when all the parameters in a refinery—such as the crude mix, pressure, heat catalysts and other operating conditions—are at optimum levels, then it can process more than its design capacity through “debottlenecking”, “especially if some elbow room is built into it”. The executive, who did not want to be identified, added that this happened in other places as well, such as fertilizer plants.
Apart from a possible increase in refining, RIL is also undertaking steps to boost storage. International news agency Reuters had reported on 28 January that RIL had leased capacities to store petrol at the Borco oil terminal in the Caribbean, as it eyes the US market and those to its south. The deal on the 500,000 barrels storage facility was secured sometime towards the end of last year, it had said.
“All refineries and plants when they are designed and contracted out, are supposed to run at a certain capacity. To keep it steady at that level, usually a 10-15% higher capacity is built into it as a buffer,” said a sector analyst with the Indian arm of a foreign brokerage who, along with his counterpart in another brokerage firm, confirmed that the Mukesh Ambani-owned firm had indicated successfully “stress testing” the new refinery up to 700,000-710,000 barrels of crude a day. The refinery seems to have stabilized faster and achieved higher performance sooner than the street expected. Stress testing helps to determine the stability of a given system and involves testing it beyond the normal operational capacity, often to a breaking point, in order to observe the results.
This analyst, who did not want to be named as he doesn’t officially speak to the media, said the previous refinery too had undertaken the same route and went from a stated capacity of 27 million tonnes to 33 million tonnes— an increase of about 22%.
“This higher capacity will be a very low cost expansion,” pointed out Pareek. Concurred the other analyst: “This will go straight to the profits since no capital expenditure is incurred. And this extra capacity is an option RIL can choose to exercise or not. It gives flexibility.” Analysts pointed out that additional supply might depress the product prices but refined fuels are ultimately a commodity with existing demand. This means, if RIL produces more, it may edge out less efficient suppliers.
RIL beat street estimates in the December quarter earnings, clocking higher refining margins—or earnings from turning crude oil into a number of fuels—of $5.9 (around Rs274) per barrel and much of it on account of the higher utilization of the new refinery. The firm doesn’t report margins for the two refineries separately and hence, one cannot delineate its efficiency from the overall performance. The firm had reported a $4 per barrel premium over Singapore gross refining margins, the Asian benchmark, marking a rebound after eight quarters in which RIL saw its lead over peers eroding.
RIL’s chief financial officer Alok Agarwal told reporters after the latest quarterly results that he was “confident” the refining margins will improve in 2010. The new refinery could be of help here.