Feature

Market Analysis of Indian Refining Sector

Posted on 21 January, 2010 | Tags: Panorama

Oil is the world's most important source of energy. The demand for petroleum products is linked directly to the country's economic activity, which is measured by its GDP. The largest demand for petroleum products is from Asia and Asia Pacific region with strong growth in consumption shown by countries like China and India.

In 2007, oil met 38 percent of global traded energy demand, while its nearest rivals, coal and natural gas, met only 28 percent and 24 percent of global traded energy demand, respectively.
The total oil consumption has increased from approximately 46 million barrels per day in 1970 to about 84.4 million barrels per day till September 2009. The high volatility in crude oil prices has been a serious concern for the economies like India who mainly import crude oil. The volatility in process can be seen from the graph below
The largest demand for petroleum products is from Asia and Asia Pacific region with strong growth in consumption shown by countries like China and India. In the past, higher population of India and China proved to be a stumbling block for its development. Today the same population with higher per capita income is proving to be a major growth catalyst. In case China and India, which together account for approx 35 percent of world's population, were to consume on per capita basis, at the same level of oil as that of Brazil, (only 4.2 percent of world population), global oil consumption shall reach a whopping 102 million barrels a day, a net increase ~ 20 percent from now. The table below shows the immense hidden potential that lies in both of these economies together

India Refining Capacity Overview
India has witnessed spectacular growth in the refining sector over the years. In the time of Independence in 1947, only one refinery was located in Digboi (Assam) with installed capacity of 0.25 MMTPA, while today India has 178 MMTPA of refining capacity with additional capacity ranging anywhere from 60 - 75 MMTPA under various stage of planning / implementation between now and 2015. India is fast becoming a refining hub with huge potential to cater to its rising local and regional demand due to various advantages it enjoys like

• Large population base with very low per capita per annum oil consumption
• Rising personal wealth leading to increased demand for consumer goods  
• High reserve of trained & highly skilled manpower at a relatively much lower cost
• Generally various fiscal benefits being awarded from central / state governments as refinery projects are mega investment projects generating huge employment and regional well-being.
  In Chapter V, page 53, of the 23rd report (December 2008) by Standing Committee on Petroleum and Natural Gas (2008-09), 14th Lok Sabha, 'Oil Refineries A Critique' have quoted the following: "Since additional capacities would give more and more opportunity to companies to increase their export quantum and improve their bottom-lines, the Committee would like the Public Sector oil companies to go in for further expansions in their existing Refineries and also set up new ones at strategic locations, having export advantages."
  The table below provides details about various Indian refineries, their capacity, and geographic location and as well as planned additions over next 5 years

Data quoted in table above is collected from public domain websites / printed literature / industry contacts. In the above, proposed additions namely MRPL (Mangalore - 15; Kakinada 7.5; Rajasthan 7.5), IOCL (Koyali - 4.3; Mathura - 3; Panipat - 6) are not considered as these projects are either at initial stage of planning or are yet not confirmed or have been put on hold as per media clippings. MMTPA is Million Metric Tonne Per Annum

Indian Petroleum Products Market Overview
Refinery Main Products: In this section market insight into various petro-products namely Motor Spirit (MS), High Sulphur Diesel (HSD), Superior Kerosene Oil (SKO), Liquefied Petroleum Gas (LPG), Fuel Oil (FO), Low Sulphur Heavy Stock (LSHS), Aviation Turbine Fuel (ATF), and Naphtha is presented. The total consumption of these petroleum products from 1994-95 to 2005-06 in India is shown in the figure below

• Due to gradual increase in ownership of cars by Indian urban population, MS has consistently been showing higher consumption. 
• Similarly, demand for HSD has been robust due to improvements in infrastructure thereby leading to better transportation / logistics movement.
• Indian lifestyle and earning pattern has shown marked improvements since the policy of liberalization thereby leading to changing patterns of travel by air leading to higher demand of ATF. 
• Naphtha demand too has been rising as it served key feedstock to petrochemicals, power and fertilizer sectors which were in turn showing healthy year to year consumption growth rates. 
  A cursory review of literature reveals that USA, Europe, China and Japan are net importers of petroleum products. South and Central America, Russia and Middle East regions mostly service these regions.
  Demand of superior quality fuels has been growing due to stringent vehicle emission norms. Older and smaller refineries of these regions cannot upgrade to high quality fuels, as it is not economically feasible for them. Further no new refining capacity has been built in Western Europe and USA in the last 20 years due to various environmental concerns.
  The new refineries coming up in India with state of art technologies and appropriate product slate will have opportunities to tap export markets in the future. Further due to improvement and changes in Indian style of living, the burgeoning middle class and creation of infrastructure facilities, consumption of petro-products is bound to catapult the domestic demand too much higher numbers in next decade.
  The table below as per internal company study shows the estimate for the growth rates for various petroleum products based on historic growth and the overall petro-products demand

It can easily be inferred that India is today net surplus of refining capacity and is fast becoming a preferred choice of 'mega refining hub'. In addition export of petroleum products by new age high complexity coastal refineries in India works out to be lucrative for servicing export market mainly due to the following factors

•  Ability to produce high quality products which fetches additional premium in developed world
• Coastal refineries incur less transportation cost for movement of products to export markets
• There are various entry barriers in different states like Octroi, Entry tax and other state levies
• Low cost of creating infrastructure for export of petroleum products.

Refinery Downstream Products - KEY Feedstock's 
This section takes a macro view of demand/supply of Petcoke, Propylene and Benzene which are important downstream feedstocks/chemicals.

• Petroleum Coke
  Petroleum coke (pet coke) is essentially a by-product, derived from the refining of crude. Currently, in India, the cement industry is the largest end user segment of pet coke. The cement industry is able to use high volumes of pet coke as the presence of high sulphur content in pet coke is neutralized by the use of limestone in the clinkerisation process. Petcoke is also used in boilers though on a limited scale. Typically coal meets approximately 80 percent of the total energy requirement of cement industries, other fuels fill the remaining 20 percent being. The majority of pet coke demand in the cement industry is from the northern region of the country, which is estimated to be about 75 percent. The demand for pet coke from the cement industry is estimated to grow at a rate of 24 percent. The following figures provide the demand and supply outlook for pet coke till 2011-12.
  It is evident from the above, that petcoke has the potential to be absorbed in the domestic market alone.
• Benzene
  Benzene is an important aromatic chemical and feedstock for various petrochemicals. In 2005-06, the demand for benzene was around 530,000 tonnes. During 2006-07 to 2011-12, demand for benzene is expected to increase marginally at a CAGR of around 1.5 percent.
  There are three categories of benzene producers in India
  i. Cracker operators [RIL, IPCL (Baroda), HPL], who accounted for 39 percent of the domestic benzene production in 2006-07
  ii. Refineries (RIL, IOC, BPCL, and KRL), who accounted for 54 percent of the domestic benzene production in 2006-07
  iii. Steel producers (SAIL, which produces benzene as a by-product from coke oven gas), accounts for around 6 percent of domestic benzene production in 2006-07.
  The surplus in the market is expected to increase to 519,895 tonnes in 2011-12
• Propylene
  The following table provides projections of demand supply balance of propylene till 2012:
  As transporting propylene has its own pitfalls and is a costly option, specific arrangements for installing propylene consumers who can consume propylene on long term basis is an ideal scenario. Propylene typically fetches a better netback when used to as a feedstock in a downstream petrochemical unit, be it Polypropylene, Oxo-alcohols, Acrylates, Isopropanol and any other product.
  
  Propylene Usage: On an average, 70 percent of propylene produced is consumed in the manufacture of Polypropylene (PP) - a thermoplastic resin.  PP market has been growing at a CAGR of about 10 percent, led largely by BOPP films, TQPP films, injection moulded articles and the raffia segment. Though at this point of time India is net surplus in PP capacity, the market has behaved typically in such scenarios only following 'surplus capacity- deficit supply' and 'deficit capacity - surplus demand' situations as long gestation time is required to construct PP plants. Indian presents a good case study for evaluating 'Oxo alcohols' project. It is seen to fetch healthy netback on Propylene. India imports huge quantities of Oxo alcohols that are used in the PVC and Paint industry due to high activity in its construction sector. Similarly Acrylates offers equally good case study for an Indian refiner as propylene consumer. As the end application of acrylates is in long lasting emulsion paints and as well as adult incontinence / child diaper products, the changing lifestyle of an average Indian with couples taking to jobs, provides an up-thrust to Acrylates consumption.

Refinery Products Pricing
The products in Indian market are sold on Import Parity Pricing (IPP) though Indian industry is now inching towards Trade Parity Pricing, which shall be the weighted average of IPP and EPP.
In the past Indian market had controlled pricing of Petroleum products as per Administered Price Mechanism (APM). However, APM was dismantled long time back but in real essence of free market pricing dynamics linked to global benchmarked crude oil price, Indian market still has scope to catch up with world to make its pricing mechanism on par with international practises. Indian Refiners Gross Refining Margin (GRM) for last 3 financial years is summarized below
Indian refiners profitability margins have been robust due to the various factors including crack spreads, foreign currency fluctuations, incentives from Indian government, better configured product slate of refineries with subsequent efforts to better its Nelson Complexity factor, etc.
 
Conclusion
India is poised to be 'Asian Refining Hub' due to inherent advantages in its economy, geographic location, changing demographics, vicinity to high demand centre of South East Asia and various other factors.
India has been forward looking in its thinking and the entire growth of Indian Refining Sector can be summed up in four distinct phases, namely  

• Early phase     (1947 - 1969),
• Development Phase   (1970 - 1990),
• Economic Liberalisation Phase (1991 - 2005)
• Mega Refining Hub Phase   (2006 onwards)
  A look at the graph below clearly summarizes the 'inflection' sentiment for Indian consumer.

The domestic demand is bound to follow the exponential curve thereby auguring well for Indian Refining Sector. India is keenly poised in terms of installed capacity and requisite manpower to support the growth story.

- Sandeep Gupta is General Manager, Business Development CALS Refineries. He has over 14 years of experience in entire gamut of business cycle. E-mail: sandeep.gupta@calsrefineries.com