Govts plan of setting up refinery for Cairn crude may flush Rs 20,000 cr

New Delhi, May 30 | Updated: May 31 2007, 05:30am hrs
The government is toying with an idea of setting up a refinery in Rajasthan to process crude oil found by Cairn, a proposal that may result in a three-year delay in starting production and cause a loss of nearly $5 billion (over Rs 20,000 crore) to the exchequer.

Cairn India, which made the nations biggest oil find in more than two decades, was set to produce 7.5 million tonne from early-2009. But the petroleum ministry now wants output cutto half and ONGC/MRPLthe official buyers of the crudeto build a 4 million tonnes a year refinery, a top official said.

Even though the Rs 8,000 crore refinery will take at least four years to build, the ministry has withheld approval to build a pipeline to take the crude to refiners in Gujarat.

The ministry has asked oil regulator DGH to look at prolonging the 150,000 barrels per day output for 8 years to at least 15 years by reducing it to 80,000 barrels per day.

The new proposal, if accepted, will not only slash crude oil output but also result in decline in the governments share in revenues from the field to $3.9 billion from $6.88 billion previously estimated.

Corporate tax will dwindle to $1.054 billion from $1.913 billion and royalty will dip to $1.316 billion from $2.372 billion previously estimated.

In all, total revenue to the government is projected to decline to $6.27 billion from $11.16 billion earlier a loss of nearly $5 billion.

The official said a refinery cannot be viable unless the state government gives a host of fiscal incentives, including free of cost land and value added tax (VAT), sales tax and entry tax exemption.

Interestingly, ONGC/MRPL, which had originally mooted the idea of setting up a 7.5 million tonnes refinery in the state, had backed off citing the project uneconomical. A similar capacity project in Kakinada in Andhra Pradesh is also being upgraded to 15 million tonne to make it economically viable.

The official said products from the proposed refinery would have to be necessarily sold within the state to get exemption from VAT/sales tax, to make the facility viable.

The problem is that Rajasthan only has a demand for 2.5 million tonne of products. And if the balance products aremoved out of states, the sale would become unviable as noVAT/sales tax exemption will be available, he said.

Besides, Rajasthan does not have vast water resources needed to support a refinery. Its a question if the scarce water resources should be used for drinking or in a refinery.

The official said government may be forced to pay heavy penalties as it faulters on the deadline to create offtake arrangements for crude oil that Cairn India will start pumping from its Rajasthan fields from 2009.

The refinery will take a minimum of 48 months to come up from the date of all approvals and in absence of a buyer of crude oil that starts coming out in first half of 2009, the government will have to pay heavy penalties to Cairn India, he added.