Pipeline trouble for IOC at new Paradip refinery

Written by Pranav Nambiar | New Delhi | Updated: Dec 17 2013, 10:39am hrs
Indian Oil Corporations Rs 30,000-crore Paradip refinery will be deprived of a pipeline to transport products to consumers in eastern parts of the country for well over a year after its scheduled commissioning in March 2014, jacking up its costs and hitting its already strained finances.

A frustrating four-year delay in securing the forest clearance for the 1,100-km pipeline has now necessitated the issue of fresh tenders for laying long segments of the pipeline. Until this crucial infrastructure is in place, the state-run company will have to rely on the more expensive railway network and roads to transport fuels from the sophisticated refinery to consumers and sales outlets.

Compared to the operating costs of using ones own pipeline, the rail tariffs would be at least 3-4 times more expensive, said company sources. The railway freight rates for diesel stands at R1041.80 per ton for an average lead distance of 645 km.

According to sources, IOC will also have to incur cost escalations above the earlier estimated R1,800 crore investments on account of re-tendering as contractors are facing a cash squeeze due to project delays. The PSU posted a steep 82.5% annual drop in net profit for the July-September quarter to R1,684 crore following forex losses and receipt of incomplete compensation from government for under-recoveries on sale of subsidised petroleum products.

The proposed Paradip-Ranchi-Raipur pipeline, which was earlier expected to be ready by September 2012, is designed to extend across the states of Orissa, Chhattisgarh and Jharkhand and transport petroleum products such as LPG, naphtha, petrol kerosene and diesel in the eastern parts of the country.

The Paradip to Raipur pipeline was authorised by the Petroleum & Natural Gas Regulatory Board in 2009 and was expected to be completed by September 2012. Around 300 km of the pipeline stretching across Chhattisgarh is almost complete, but only small portions of the 650 km in Orissa and 100 km in Jharkhand have seen the light of day so far. We received forest clearances for Orissa only in September 2013 and Jharkhand in October 2013. Our contractors are also facing resistance from farmers in these two states, said an IOC official.

IOC officials hope the pipeline would be completed by the end of 2015, but this is subject to no further hurdles escalating in the area. The pipeline will originate from the Paradip refinery in Orissa and pass through Jatni, New Sambalpur and Jharsuguda in Odisha, Bundu (near Ranchi) in Jharkhand, and Korba and Raipur in Chhattisgarh.

The oil retailer has now begun re-tendering portions of contracts as delays in project implementation have led to contractors coming under financial constraints.

Pipeline suppliers have also failed to deliver some pipelines leading to fresh orders at higher costs. The work schedule was drawn by contractors based on the assumptions that clearances will come in time. They have been lying idle for 1-2 years and costs have escalated since when we entered into a contract with them. As IOCs contract with them does not have a cost escalation clause, they are facing financial problems, said the IOC official.

The 15 million tonnes per annum (mtpa) Paradip refinery is equipped to process tough grades like that from Latin America but in the initial year of operation IOC will use only low sulphur oil from Middle East and West Africa. The refinery is expected to operate at full capacity within six months of commissioning.

The company had an under-recovery of Rs.18,291 crore on selling diesel, domestic LPG and kerosene during the second quarter of this fiscal . It got Rs.8,634 crore from upstream firms such as ONGC, and another Rs.9,243 crore in cash subsidy from the government. Even after these, it had an unmet revenue loss of Rs.413 crore. IOC is expected to end the fiscal with an under-recovery of Rs.71,200 crore.