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Press Release [FREE Access]
Petro Intelligence » Darker Truths Behind Roadblocks To Mega Refinery

by R. Sasankan

The best laid plans of mice and men/Gang aft a-gley, wrote Scottish poet Robert Burns – meaning that the most-carefully crafted strategies can often go awry. Back in April, when Aramco of Saudi Arabia, the world’s biggest oil company, signed an agreement with India’s top state-owned oil marketing companies to pick up a 50 per cent state in a 60 million ton refinery on the west coast, it was thought that the ambitious project would finally get off the ground and things would move very quickly.

Sanjiv SinghAramco soon roped in ADNOC, the state-owned giant of United Arab Emirates, as an equity partner in the venture and it did seem that everything would move swimmingly well. The only sticking point was the location of the controversial project that would require 14,000 acres of land in the Ratnagiri district of Maharashtra that would entail large-scale displacement of people.

But it now seems that there are more roadblocks that the project will need to work around as concerns mount over the way that this mammoth investment could change the landscape in the petroleum sector, jeopardising the interests and ambitions of both the existing public and private players.

Saudi energy minister Khalid al-Falih, who was present at the ceremony where Aramco signed the accord, had given some indication of what the Gulf nation was really looking for.

“Large as this project may be, it does not by itself satisfy our desire to invest in India... We see India as a priority for investments and for our crude supplies,” al-Falih had said. “We’re very much interested in retail... We want to be consumer-facing. ”

Al-Falih’s statement rubbished the popular perception in India that big crude oil producers such as Saudi Arabia, UAE and Kuwait want to invest in Indian refinery sector just to ensure a market for their crude oil. That is just not true and India’s petroleum industry has started to quickly wisen up to the strategies and ambition of the high rollers from the Middle East and the West.

D. RajkumarThe oil giant, Exxon Mobil, is launching a $15 million ad campaign in the Indian media. It has no significant visible stake in the Indian market so far. Shell is reportedly in the race for a stake in the Bina refinery of BPCL in which Oman Oil Company is partner. What explains this sudden rush to get into the Indian market? Petroleum experts believe the only logical explanation is to gain a foothold in the world’s largest potential market. If India ever becomes a middle income country, petroleum consumption will need to rise 2.5 times, at the very least, from current levels. No other country offers such a potential today in the world.

The big players – all with deep pockets – are clearly not looking to make immediate profits. They want to position themselves as players in India’s vast market for which they need marketing rights. But it isn’t going to be an easy ride. The Indian government grants marketing rights to anyone who invests Rs 20 billion ($280 million) in the petroleum sector. That is peanuts for these oil majors. Shell got it more than a decade ago by virtue of its investment in Hazira LNG terminal but has been struggling to set up the retail outlets with a tally of just 100 against the licensed permission for 1500 outlets. BP, which got marketing rights for transportation fuels last year, is still undecided about what to do with it.

Petroleum marketing is an area where even a highly aggressive company like Reliance Industries Ltd (RIL) could not succeed. This is because the state-owned IOC, BPCL and HPCL enjoy a stranglehold over the marketing infrastructure. It is hard to build new marketing infrastructure from scratch. It took the state-owned giants more than five to six decades to create the sprawl they now have. The hard truth is that a private player must piggyback on the strengths of these state-owned giants. Moreover, the Mundra port is the only one with good terminal facilities for a private player.

The Indian PSUs do not want to be a pawn in the strategies that these overseas players intend to use to grab market share in India. They fear that these giants would flood the Indian markets with their products if they get a window of opportunity. Since their cost of crude is only $10 per barrel, these global behemoths can dump their products at absurdly low prices.

Is that why the mega refinery project has started to run into roadblocks? It’s hard to tell. There is a lot of hard bargaining that is going on behind the scenes. Aramco’s sudden interest in investing in the Bina refinery cannot be without significance. It could well be looking to hedge its bets if the west coast mega refinery is inordinately delayed.

M.K. SuranaIndian Oil Corporation (IOC) was the original leader of the state-owned consortium that proposed the mega refinery on the west coast. IOC, which has no refining capacity on the west coast, was to have a 50 per cent stake in the mega refinery with BPCL and HPCL sharing the rest in equal proportion. The fact is that IOC had not taken any initiative in inviting Aramco as an equity partner in the venture. That decision was foisted on the state-owned companies by the political leadership. IOC is not a lightweight and its concerns cannot be ignored easily by the government. Will IOC try to get rid of Aramco? The Saudi giant’s entry cannot be in the interest of Reliance Industries either since the mega project could threaten the fortunes of its Jamnagar facilities. Although Aramco has excellent relations with RIL and IOC, these equations can quickly change when it becomes a matter of survival.

Experts say that if the government is keen to bring foreign investment into the refinery sector, it will have to restructure the petroleum sector in such a way as to ensure a level playing field for all. India, they contend, should have no more than two strong integrated national oil companies and the barriers to the entry into the Indian market should be removed.

Indian consumers suffered when the price of Indian basket of crude oil was ruling at over $117 per barrel. They did not benefit when the prices crashed to $ 24 a barrel because the government soaked up the benefits through an excise duty on auto fuels even as the oil marketing companies ratcheted up their after-tax profits significantly.

It is clear that the hapless Indian consumer will stand to benefit if there is greater competition. What is wrong if someone is able to market LPG more cheaply? Strong regulation is the answer and not the creation of entry barriers. Public sector efficiency will also increase if there is healthy competition. It should be in the country’s long term interest to open up markets and level the playing field.



To download the latest issue 'Volume 25 Issue 13 - October 10, 2018', click here
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