Offering a fresh lease of life to Andhra Pradesh’s petroleum, chemicals and petrochemical investment region (PCPIR) project, ONGC Ltd has appointed Engineers India Ltd (EIL) to prepare a detailed project report for its refinery with doubled capacity. The report is expected by September-end.

ONGC had proposed a refinery unit in the Kakinada SEZ, which is a part of the PCPIR project to come up in over 355 sq. 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 Andhra government, led by chief minister Y.S. Rajasekhara Reddy, has acquired 7,200 acres of land for the SEZ and is currently in the process of acquiring another 3,000 acres.

“As an overall concept, PCPIR projects can be very beneficial, given India’s geographical position and the current business circumstances," said Ravi Mahajan, senior analyst with the consultancy major Ernst & Young.

The Andhra government had earlier signed memoranda of understanding with the Hindustan Petroleum Corp. Ltd (HPCL) and ONGC in 2005 to act as anchor clients in the proposed PCPIR project. HPCL had proposed to set up a new naphtha cracker and expand its refining capacity by investing Rs30,000 crore. And ONGC had proposed to set up a refinery with 7.5 million tonnes per annum (mtpa) capacity involving an investment of RS22,000 crore. HPCL already operates an eight million tonnes (mt) a year refinery at Visakhapatnam, while ONGC has a small refinery at Tatipaka near Kakinada.

ONGC proposed to develop the project through a separate SPV, Kakinada Refinery & Petrochemicals (KRPL) and Infrastructure Leasing & Financial Services Ltd (IL&FS) picked up a stake of 26% in the SPV.

The refinery complex was meant to cater to the demand for high-grade fuel in the European and other Western markets. Adopting a business model akin to that of Reliance Petroleum’s Jamnagar refinery, ONGC planned to use imported crude and produce high-margin Euro-III and Euro-IV petroleum products at the Kakinada refinery. Following ONGC’s proposal to set up its refinery in Kakinada SEZ, the Andhra government has acquired around 7,200 acres of land for the SEZ and is currently in the process of acquiring another 3,000 acres for the SEZ. Further, the state government has spent over Rs500 crore towards creating the necessary infrastructure involving a dedicated port in the Visakhapatnam region.

The Andhra government has also initiated talks with multinationals such as DuPont and Bayer to set up their manufacturing facilities in the PCPIR, while showing the MoUs with ONGC and HPCL. But, under the new leadership, ONGC management found the project unviable. A preliminary study suggested that the project is commercial unviable at the proposed capacity of 7.5mtpa. Based on this, ONGC had indicated to the Andhra government its intentions of pulling out. Finding that ONGC’s decision might hamper the entire PCPIR project, which is estimated to attract investments to the tune of around Rs1,00,000 crore, the state government convinced the Union government to impress upon ONGC to reconsider its decision. Andhra Pradesh is also led by a Congress government, much like the Centre.

“Following this, ONGC has appointed Engineers India to take up a feasibility study and prepare a detailed project report for the proposed refinery project at the Kakinada SEZ with a revised capacity of 15mtpa. Engineers India is expected to submit its DPR in a month’s time and its outcome is highly crucial for the success of PCPIR project in Andhra Pradesh," said B. Sam Bob, principal secretary, industries and commerce department of Andhra Pradesh.

A senior ONGC executive said, “The report is still being prepared by EIL. The earlier capacity of 7.5mtpa was found unviable. The report now aims to find out whether the 15mtpa refinery is commercially viable or not."

India plans to add over 92mt capacity during the 11th Plan taking the cumulative capacity to 240mtpa and further to 302mtpa by 2017, an analyst said. Although the Kakinada project is not a part of the 11th Plan, the ONGC refinery would add to the Indian refining capacity. Probably with the bureaucratic sanctioning process (if accepted), this refinery would be operational in the same Plan period, said Rohit Nagraj, senior analyst with Angel Broking.

“However, there would be a hanging sword over the funding for this project as the new project with enhanced capacity would call for larger amount of funds. Although, ONGC has planned over Rs75,000 crore investments during the 11th Plan, a major portion is reserved for E&P initiatives. In the wake of rising crude oil prices and mounting under-recoveries in the R&M companies, the future of this refinery is uncertain," Nagraj said.