In the near term, the country's refining capacity may seem to be in excess, but expect an upswing in domestic demand for petroleum products, especially diesel, says Mr L.K. Gupta, Managing Director and CEO, Essar Oil.
Besides the domestic market, the company is eyeing Australia, New Zealand, North-West Europe and the US for Euro IV/V petrol and diesel exports.
In an interaction with Business Line, Mr Gupta discusses the company's growth prospects and maintains that crude prices do not have a direct impact on refiners' profitability.
What are the crude oil varieties that your refinery can process?
Capacity expansion and complexity enhancement give Vadinar Refinery the flexibility to process a much heavier crude diet — light, medium, ultra heavy, as well as those with high sulphur content. The share of ultra heavy, which currently constitutes 20 per cent of the crude basket, will go up to 60 per cent. Such versatility allows the refinery to source crude oil from competitive sources across diverse geographies.
What is the crude oil rate at which refiners can say they are comfortable?
Crude oil price is a function of fundamental and technical factors in the global markets. But the high price levels in recent months can be attributed mainly to the US and the EU sanctions on Iran, rather than actual incremental demand for petroleum products.
How does higher crude price impact refineries?
Crude prices do not have a direct impact on refiners' profitability, which is determined largely by petroleum product cracks (difference between crude and product prices). Generally, product prices move in tandem with crude prices in the medium and long run. Therefore, the refinery margins are not much impacted by the increase or decrease in crude prices.
How much should you invest to raise capacity? What is the impact on refinery margins?
We have invested Rs 8,300 crore for capacity expansion to 18 mtpa, along with complexity enhancement to 11.8, and are investing another Rs 1,700 crore in the optimisation project that will take capacity to 20 mtpa. The overall capex, therefore, stands at Rs 10,000 crore. Till date, we have invested about $5 billion in the Vadinar Refinery complex.
The increase in complexity will enable the refinery to process over 80 per cent of heavy / ultra heavy crude, which is available at lower prices and still produce high quality Euro IV/V products, resulting in substantial increase in the refinery margins going forward.
Is there a market for ultra-low sulphur fuels?
Euro IV and V grade petrol and diesel are the main low sulphur fuels. The equivalent of Euro IV in India is BS IV (Bharat Stage IV). All motor vehicles in the top 20 Indian cities (by population) are required to comply with BS IV norms. Further, 30 cities will be added to this gradually. Hence, there is robust domestic demand for these products.
EOL is targeting newer markets such as Australia, New Zealand and North-West Europe and the US for Euro IV/V petrol and diesel.
What is the quantum of exports from Vadinar? Are the export market needs being met through your refinery in the UK?
Exports account for about 35-40 per cent of our refinery's revenues. At present, our product exports comprising naphtha and gasoline, usually go into the Far East and South Asian countries. Fuel oil is exported to both Arab Gulf and Singapore markets.
Stanlow Refinery is mainly focussed on the domestic market in the UK. By virtue of Stanlow being a port-based facility, it gives us the option to make inroads into the UK and European markets.
Does India have excess refining capacity?
In the near term, Indian refining capacity will be in surplus because of several PSU refineries being commissioned — Bina by Bharat Petroleum, Guru Gobind refinery in Bhatinda by a joint venture between Hindustan Petroleum and Mittal Energy. However, we see a substantial upswing in domestic demand for petroleum products, especially diesel, which is expected to be in deficit by 2015-16.
Also, the market for petrol is growing at 11 per cent and 8 per cent for diesel. Transport fuel demand is expected to grow at similar rates for the next 4-5 years.
Is Essar Oil looking for more downstream opportunities overseas?
At this point, we are not specifically looking at any downstream opportunities overseas. The major capex programme is now on the verge of completion.
Has your refinery started selling jet fuel (ATF)?
We produce very little quantity of ATF and even that is largely for our Group's captive consumption. ATF has a negligible contribution to our revenues or product mix.
With the Government allowing airlines to import ATF directly, what are the implications for Indian refineries?
India produces almost twice the quantity of ATF it consumes. It exports the remaining quantity. Hence, it would be paradoxical that the country will need to import the very commodity it exports in large quantities only because the VAT / sales tax structure on the product is considered unaffordable by airlines.
However, in our view, this will be extremely difficult, considering the high level of complexities involved in the handling of ATF.