Operations of Indian refiners were distinctly better than Singapore refiners for good reasons: a) Plants of Indian refiners are located closer to source of crude supplies; and b) they cater to the domestic market fetching better realisations as compared to Singapore refiners who mostly depend on export markets.

There is a third significant reason. Indian petroleum products are based on import parity pricing and so realisations include notional freight charges from Arab Gulf states to refineries besides taking into account things like wharfage, insurance etc. Refiners in India pay a mere 10 per cent duty on crude imported. But they realise 20-25 per cent duty on products sold giving them a differential edge of some 15 per cent.

A closer look at refining margins enjoyed by major Indian refiners shows that IOC's margin has gone up from $2 a barrel in the first quarter of 1999-2000 to $2.3 in the first quarter of 2000-2001. For the same period HPCL's margin went up from $1.7 to $2.0; BPCL from $2.5 to $3.0; KRL from $1.1 to $1.4; CPCL down from $2.7 to $2.1, MRPL from $0.3 to $1.09 and RPL $5.1 (nil last year)-(source HSBC-Oil & Gas India).

It is interesting to note that margins of Reliance Petroleum have been higher at $5.1 compared with other public sector refineries. Experts attribute this to the ability of private refiners to take quick decisions to import competitively priced crude. There is some truth to this argument. Public sector refiners are governed by established procedures which are not easily flouted. Advantages of competitive crude buying can be enjoyed by private sector refineries like RPL, Essar Oil Ltd. and joint sector refinery, MRPL. Projections indicate that margins on crude processing during 2000-2001 range from a low of $2 per barrel for IOC to a high of $6.1 per barrel for RPL. On a monthly basis, margins are projected to rise from $4.61 per barrel in January to as high as $9.3 in August, $8.88 in September and $8.52 in October. The increase in refining margins is primarily due to products prices rising faster than crude prices.

There are only two private sector refiners in the country. RPL is doing well. Essar's refinery project is yet to take off. With a $2 increase in margins RPL, for example, with a refining capacity of 5.4 lakh barrels a day stands to net in a cool additional cash accrual of Rs 1,500 crore a year.

Essar, with a capacity to handle 2.4 lakh bpd, can stand to gain an additional cash accrual of around Rs 700 crore per year.But Essar's refinery project is struggling. It achieved financial closure in September 2000 with a revised project cost of Rs 8,000 crore. For its refinery in Jamnagar, with a capacity of 10.6 million tonnes per annum, it is said to have got all clearances. It is trying hard to convince financial institutions that it is a viable project.

The company has roped in ABB Lummus as a strategic investor bringing in Rs 395 crore as bridge equity (and deferred credit) for the project which has a debt-equity ratio of 2.7:1. Financial institutions like ICICI, IDBI, LIC, GIC, UTI and IFCI share 71 per cent of debt of Rs 5,837.83 crore and the balance is funded by banks and a foreign currency loan.

Essar has already sunk in over Rs 5,000 crore in the project as of June this year. The Centre has recently given the CRZ (coastal regulation zone) clearance for the project and informed the Gujarat government accordingly.

Nearly 78 per cent work on the refinery is complete. What is needed is early completion of the project as would definitely go a long way in easing Gujarat's problems.