by R. Sasankan
It is turning into a battle of egos – and there can be no winners at the end of the looming slugfest.
When the country’s energy pundits cobbled a plan to establish a 60
million ton petroleum refinery on the west coast, somewhere in the state
of Maharashtra – to be owned and financed jointly by the state-owned
Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL)
and Hindustan Petroleum Corporation Ltd (HPCL) – everyone wondered what
economic logic underpinned this grandiose project. Being a man of
action, petroleum minister Dharmendra Pradhan promptly endorsed the
proposal.
India already has 20-25 per cent surplus refining capacity. The country
is also the largest exporter of petroleum products in Asia. The west
coast already has a 60 million ton refining capacity that has been
created by Mukesh Ambani-controlled RIL. Essar Oil built another
refinery with a 20 million ton capacity, which has now been taken over
by Rosneft of Russia. Cash-rich Rosneft has already proposed to double
capacity.
Forecasts
can go horribly wrong – as they often have in the past. A few years
ago, an expert group appointed by the previous United Progressive
Alliance (UPA) government, projected the country’s natural gas demand at
473 mmscmd (million metric standard cubic metres per day) in FY
2016-17. Almost simultaneously, an industry group put out what it called
a more “realistic” assessment by projecting gas demand in 2016-17 at
378.08 MMSCMD.
Here is the reality check: when India’s financial year for 2016-17 ended
in March 2017, official data came out with a more sombre estimate of
actual gas consumption: 152 MMSCMD, which shows how completely out of
whack projections can be. It would be risky to build project plans on
dodgy forecasts.
A
little over a year ago, the renowned International Energy Agency (IEA)
projected India’s oil demand to peak at 10 million barrels of oil per
day by 2040, up from the existing level of 3.8 million barrels per day.
The reason cited was the strong economic growth boosted by rising income
and population as well as increased urbanisation and industrial
activities.
It isn’t easy to make projections about India and IEA cannot have been
unaware of the risks it was making. India, after all, is not like
Singapore or a European country. Like in the case of China, a reasonably
accurate prediction about India’s problems and prospects is perceived
to be beyond the capacity of any agency, however, competent it might
otherwise be.
The National Democratic Alliance (NDA) government led by Narendra Modi
is not known to be anti-Reliance. Petroleum minister Dharmendra Pradhan
enjoys a good equation with all industry players. So, why was the idea
of setting up a 60 million ton refinery floated? Could it have been
mooted by the PSU chiefs to undermine the pre-eminence that RIL enjoyed
by virtue of being the owner of the single biggest refinery in the
world? The Indian PSUs, which have been in the refining business for
many years, may have felt rattled by RIL’s mega refinery projects. They
were dwarfed by RIL and that is why they picked a figure of 60 million
tons out of thin air – with their plan born out of a sense of resentment
and a sweet revenge. So goes the speculation among informed circles in
the petroleum industry.
We
decided to investigate this point and found that the speculation was
not without some substance. IOC will have a 50 per cent stake in the
proposed refinery with the remaining shared equally between BPCL and
HPCL. IOC was until recently headed by B. Ashok, who by no stretch of
imagination could be considered capable of such a strategy. The
Mumbai-based BPCL and HPCL are rated to be more professional in their
thinking than IOC. So, whose brainwave was it?
The project plan has been conceived out of some prejudice against RIL
and Mukesh Ambani has thrown down the gauntlet by quietly disclosing his
plan last week to raise RIL’s refining capacity to 100 million tons.
Implicit in this announcement is the message that Ambani will not allow
anyone to undermine RIL’s dominant position in the world of refining.
Even as the psychological war plays out, we interacted with experts in
the field to find out what the economic logic for the new refining
capacity was. Several experts said that there was no point in building
fresh refining capacity in India. The world demand, they say, is
expected to peak in the mid-2020s. Though the Indian market is expected
to keep growing, at least till 2040 and possibly till 2050, the global
surplus would easily feed India’s need far more economically than by
building new refining capacity that will likely come on stream only in
the mid-twenties.
“It
would be an inappropriate use of our limited financial, land, water,
environmental, infrastructural, human and technical resources to expand
refining capacity in the current global scenario for crude and petroleum
products,” said a renowned energy expert.
India, they say, will continue to remain dependent on crude imports as
long as it uses petroleum products. The option of simply importing
petroleum products from existing refineries worldwide would be far more
economical in an oil surplus world compared with creating new refining
capacity in India and importing crude oil to feed these refineries. The
value addition is minimal and likely negative when one takes into
account the huge incentives needed to make these Indian refineries
financially viable. India could derive far more benefits by deploying
financial and other resources in other sectors of the economy.
The argument against surplus refining capacity springs mainly from the
fact that the Indian government has essentially subsidised the export of
refined products based on imported crude through a host of incentives
that ensured the viability of such greenfield investments. The refining
margins cannot even absorb the cost of double handling without the
incentives. And in the current global scenario, creating new refinery
capacity to even fully meet domestic demand is highly debatable. Given
the global surplus, it would be more economical to simply import refined
petroleum products from competing sources in a buyers’ market, say
these experts.
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