Mumbai: Reliance Industries Ltd (RIL), India’s second biggest oil refiner and largest petrochemicals maker, may delay start of commercial operations at its new refinery in Jamnagar, Gujarat, to early 2009 as the firm finishes final testing of the facility, company executives close to the development said.
Reliance Petroleum Ltd (RPL), a publicly traded RIL entity which was created to set up Jamnagar refinery, had targeted starting operations at the 580,000 barrels of crude per day refinery in second half of 2008.
Analysts said the private oil refiner could actually benefit from a delay as refining margins are severely strained and the company would be able to maximize tax benefits if it starts operations from the beginning of fiscal 2009-10.
The refinery is located in a so-called special economic zone (SEZ)—areas where the government provides fiscal incentives and complete tax breaks for the first five years to promote investments, manufacturing, exports and creation of jobs in specific regions.
A senior RIL executive, on condition of anonymity, said the new refinery would start operations in January or later.
“The company is not consciously pushing anything back,” said another RIL executive. “If there is a refinery of this scale and size, it is not possible to give a date of launch. Few weeks or months don’t matter.” He said the refinery is in “pre-commissioning stage where each and every refinery component is tested”. This is followed by trial runs to ensure the “quality of production is at par” with what’s required and the “refinery has stabilized”. The process may take more than a couple of months, he said.
These two executives declined to be named as they are not authorized to speak for the company.
However, RIL spokesman Paresh Choudhary maintained that plans for the refinery were “as per schedule” and that the firm had maintained it would begin operations in second half of 2008.
Gross refining margins (GRMs) at RIL, traditionally a few dollars higher per barrel than the Singapore Complex GRM, rose from $8.9 per barrel in fiscal 2005 to $15 per barrel in fiscal 2008, but have since fallen. It is expected to dip to $13.5 per barrel in fiscal 2009, $9 in 2010 and to $8.5 in 2011, according to a report this week by ABN Amro Bank NV in India.
“The Jamnagar refinery could be delayed up to April next year as that will help the company get a full five-year tax holiday benefit,” said a sector analyst with a domestic equity brokerage who didn’t want to be named. “Moreover, gross refining margins are so low anyway, what’s the point of adding capacity at this time?”
Another analyst, also with a domestic brokerage and also reluctant to be named, said that with huge refining capacity additions globally and slackening demand in the next few quarters, the delay in Jamnagar refinery may impact sentiments but will be a better business proposition.
RPL’s greenfield petroleum refinery and polypropylene plant, ranked the world’s sixth largest, has the ability to process the sourest of crudes. It was commissioned in 2006 and will be adjacent to RIL’s existing 660,000 barrels per day refinery.
RIL, which is India’s biggest company by market value, owns 70.4% of RPL. Chevron India Holdings Pte Ltd holds another 5% equity with an option to raise its stake to 29%.
A 21 October statement by RPL had said construction of the refinery was nearing completion with “97% overall progress” and “pre-commissioning and commissioning trials...(were) under way”.
It did not mention when operations would start, in contrast to announcements between October 2007 and July this year, when it said it would operationalize the refinery ahead of December 2008.
If the deadline rolls over, it would go against RIL’s proven record of finishing projects ahead of target.
Shares of Reliance Petroleum fell about 2% on Thursday to close at Rs83.05 a share on the Bombay Stock Exchange, while the bellwether Sensex fell 3.81%. RIL closed nearly 8% lower at Rs1,171.55 a share.
Sector analysts are becoming increasingly sceptical of RIL’s prospects, with two brokerages recently either downgrading the stock or reducing the target price, on fears of shrinking refining and chemical margins.
Domestic brokerage Kotak Securities Ltd on 6 November downgraded the stock to “Reduce” from “Add” due to “increasing risk to earnings with cyclical downturn in chemical and refining turning out to be worse than expected”.