Mumbai: Last month, Reliance Industries Ltd (RIL) surprised the street by posting a $5.5 a barrel premium to the benchmark Singapore refining margin, the highest beat for the company so far.
RIL’s gross refining margin (GRM)—what the company earns from turning every barrel of crude oil into fuel— came in higher than expected at $11.9 per barrel, against analysts’ expectation of $11 per barrel. Over the past few quarters, RIL has been reporting a premium of $4-5 per barrel to the Singapore benchmark.
RIL’s peers Indian Oil Corp. Ltd (IOC), Hindustan Petroleum Corp. Ltd (HPCL), and Essar Oil Ltd have gross refining margins of $10 per barrel or even lower.
IOC’s GRM for this fiscal was $4.32 per barrel during the first quarter, as compared to $9.98 per barrel a year ago. HPCL’s was $5.86 per barrel against $6.83. Essar Oil’s GRM was around $10 a barrel. Analysts say three key factors help RIL’s GRMs. One, the complexity of its twin refineries at Jamnagar, Gujarat. Two, the company’s smart crude sourcing strategy, and three, the freedom to alter its product mix according to market demand (and supply).
“The complexity of RIL’s refineries allows it to process even the worst possible crude. Besides, its crude sourcing ability gives it an edge over other refiners. Last year, RIL processed 65 different grades of crude including five new grades," said an analyst with a domestic brokerage on the condition of anonymity.
In its annual report for 2016-17, RIL said it “achieved superior refining margins due to firm cracks, proactive risk and yield management, favourable crude sourcing and lower freight of crude. Better performance against benchmarks was underpinned by RIL’s ability to shift to higher value product yields, using a wider selection of crudes and focus on operational efficiencies."
A complex refinery is one with an ability to process heavy/low quality crude that can be sourced cheaper than light or good quality crude.
Refiners such as RIL and Essar fare better on the refining margin front as they buy crude at a lower rate (bulk buying for big refineries allows discounts) and sell the refined products at international benchmark prices. A refinery’s complexity is measured in terms of Nelson Complexity Index (NCI). Refineries with a Nelson complexity of 10 or above are considered complex, which allows them to process crude that is cheaper. RIL, which runs the world’s biggest single-location refinery, currently has an average complexity of 12.6. BPCL’s Bina refinery has close to 10 and HPCL’s Bathinda unit has a complexity of 12. Essar Oil’s refinery’s complexity is 11.8.
IOC’s latest refinery at Paradip has a complexity factor of 12.2, making it capable of processing cheaper, higher sulphur and heavy crude.
Also, refineries of RIL and Essar are located on the coast, while those of others are land-locked, forcing them to transfer crude to different locations from the coast, thus pushing up costs. It could also be that private refiners are calculating GRM differently, sometimes not booking inventory losses, a senior executive at a state-owned refiner said on condition of anonymity. Still, executives at the state-owned refiners admit that most of their refineries (most put the proportion at around 90%) are old and less energy-efficient, affecting their performance, and, in turn, GRMs. Then there’s the way state-owned refiners work, said an analyst at a brokerage.
“If you see, even on the sourcing front, though the government last year allowed the state-owned refiners to source crude, the levels of approval have gone down but the entire process still involves a lot of tendering and paper work. RIL is far ahead on its crude sourcing strategies," added this person on condition of anonymity. Last April, the government empowered boards of IOC, HPCL, BPCL and Mangalore Refineries and Petrochemicals Ltd to make quick spot purchases of crude to take advantage of temporary discounts in the market, instead of issuing tenders.