“Traditionally, these types of crude are available at relatively lower prices, that’s the advantage,” Lalit Kumar Gupta, chief executive officer of the company, said in an interview in Mumbai yesterday. “We are able to extract more value out of each barrel in the refining process.”
The refiner may buy as much as 10 million tons of crude from countries including Venezuela, Colombia, Mexico, Brazil and Ecuador, Gupta said. The company last month completed the expansion of crude-processing capacity to 18 million tons a year from 14 million tons. It will raise that further to 20 million tons by September.
Essar is betting its investment to increase the complexity of its plant in western India will help lift margins because the company is now able to refine heavier crude that’s typically sold at cheaper rates than lighter oils. Colombia’s Vasconia crude cost $114.37 a barrel yesterday, while Ecuador’s Oriente was $111.37 a barrel, according to data compiled by Bloomberg.
That compares with $120.42 for London’s Dated Brent crude, a global benchmark price for light oil. “Our target is that we should process 80 percent of heavy and ultra-heavy crudes,” Gupta said. “Out of this 80 percent, 50 to 60 percent will be from Latin America.”
The profit from turning a barrel of Dubai oil into fuel priced in Singapore was at $4.11 on April 16, according to data compiled by Bloomberg. Before Essar’s expansion and increase in complexity of the plant, the company’s refining margin was $4.07 a barrel for the nine months ended Dec. 31, 2011, according to the company.
“We have increased the complexity of the refinery,” Gupta said. “What that means is that we are able to use more of the heavy crudes and still produce value-added products,” such as the so-called Euro 4 and Euro 5 gasoline grades and gasoil, he said.
Plants with similar complexity “normally have an edge of about $4 per barrel over the normal cracking refinery margins,” he said. “The higher margins should start being reflected in this quarter and by next quarter, they will start showing completely.”
The Mumbai-based refiner, a unit of London-listed Essar Energy Plc, will reduce its dependence on crude from the Middle East following the expansion, Gupta said. Saudi Arabia was selling Arab Heavy crude to Asian customers at $114.97 a barrel yesterday, Bloomberg data show. “We are trying all crudes that are available from Venezuela, Colombia, Mexico, Brazil and Ecuador,” he said.
The company has term contracts with “most of the Latin American countries for heavy crude,” he said, declining to provide details on how much or what types of oil it plans to purchase from each nation.
Essar’s oil imports from Latin America were about 1 million to 2 million tons in the year ended March 31, and that will increase to about 10 million tons in the 12 months that began on April 1 as it looks to source about half its total requirements from the region, he said.
“For transporting crude, the freight cost isn’t very relevant,” Gupta said. “We have the capability to transport and unload oil through very large crude carriers, and this gives us flexibility. This makes us quite competitive even if we are shipping crude from Latin America.”
Essar, which doesn’t export gasoil, may start overseas shipments of the fuel totaling 1.5 million to 2 million tons this year, Gupta said. Exports of gasoline, which are shipped to Indonesia, Northwest Europe and the Middle East, may increase to 2.4 million tons a year from about 1.6 million tons, he said. “It is not always necessary that the Euro 5 grade will give you the better margin,” he said. “What we have now is the flexibility. So if Euro 5 is giving us a good margin, we can start producing that and exporting it.”
The refiner, which sells about 2.5 million to 3 million tons a year of fuel oil overseas, may stop producing the residue from refining crude, which is typically sold at a loss.
“We have been exporting a sizable quantity of fuel oil, and now, we may be out of the market,” he said. “There are times when fuel oil can give you money, so in those times, we can produce it. We are not losing that flexibility.”