The six-year-old proposal to set up an oil refinery at Barmer in Rajasthan has got a fresh lease of life, with the state government which had earlier refused fiscal sops to ensure its viability agreeing to buy 26% stake in it. The refinery costing Rs 9,000 crore will be a JV.
ONGC and GAIL India could be among the public-sector partners. The state government is also open to allowing private sector participation in the project, senior government officials told FE. A refinery at Barmer would benefit Cairn India , which started production from the Mangala field last August and is currently producing about 20,000 barrels a day.
The Barmer refinery was originally proposed in 2004. The state needs a refinery to process the high-residue crude oil produced from the Mangala field operated by a consortium of Cairn India and ONGC. According to official estimates, the Mangala field produced 3.19 million barrels of oil as on March 31, 2010.
Based on a report submitted by former petroleum secretary SC Tripathi to the state government on April 14, the Centre and the state have tentatively taken the view that the total cost of putting up the refinery would be Rs 9,000 crore.
Of the total project cost, two-third would be financed through borrowings, while the balance would be equity, said an official privy to the development. This means the state government will have to pitch in with Rs 700-800 crore. The informal view within the central and the state governments is that a refinery project of this size is viable at this debt-equity ratio. The government had earlier said in Parliament that Indian Oil was reluctant to be an equity partner in the project due to financial difficulties.
Since prices of most of the products from the refinery ? petrol, diesel, domestic LPG and public distribution kerosene ? are set by the government, interest cost will have a significant bearing on the feasibility of the project. Revenue from the project, including from freely priced products like jet fuel, should justify the cost of borrowings. Infrastructure-intensive projects usually have a high level of borrowing.
According to official data, over the last three years, profit after tax of exploration and production companies like ONGC, OIL and GAIL have been increasing, while that of downstream refining-cum retailers was on a decline as they sell auto and cooking fuel at government-fixed price. Rajasthan is soon expected to give the central government its commitments regarding possible concessions to make the project viable. The state has been in informal contact with the Centre on the issue.
Two-third of Cairn?s Rs 290.96 crore net profit for the third quarter ending December 2009 came from Barmer oil. The December quarter was the first full quarter of Mangala field operation. The company subsequently raised its oil reserve estimate from the Rajasthan block to 240,000 barrels per day (bpd) at the peak of production to be reached by the end of 2011 from the peak output of 175,000 bpd projected earlier. The company intends to invest $2 billion over 2010-12 to develop the field.