Vedanta may set up refinery for own crude

Written by MG Arun | Mumbai | Updated: Dec 19 2011, 08:26am hrs
Vedanta Resources, which completed its $8.67-billion acquisition of Cairn India on December 8, may set up a refinery to process its own crude and to benefit from a future demand for value-added petro products as older refineries in the US and Europe shut shop or refiners divest to enter upstream oil production, experts said. However, the Anil Agarwal-led company will need to closely look at the feasibility and funding of such a refinery project, as cash flows from refining come in slow, and the company will need to build an entirely new set of capabilities, they cautioned.

Downstream is a very different animal, said Dilip Khanna, partner, transaction advisory services at consultant Ernst & Young India. Vedanta might first look at returns from their investments on Cairns E&P (exploration and production) business before entering refining.

However, it could decide to value-add to the crude from Cairns Rajasthan fields, and sell globally, as European

and US refiners mothball their plants or divest them to move into upstream business, he added. This would present new opportunities for Indian refiners.

The $11.4-billion London-based Vedanta, whose interests were primarily aluminium, copper and zinc production till it bought Cairn India, maintained that its focus is on the countrys energy security. Our focus is energy security and we will concentrate on exploration, its spokesperson said. Cairn India has made the first gas discovery for Sri Lanka and this will be priority for us as well.

State-owned explorer and producer Oil and Natural Gas Corporation or ONGC, which last year said it would set up a refinery in Rajasthan, dropped the plan as it was not financially viable. Vedanta Resources has deeper pockets, said a consultant. A 10-million tonne per annum (mtpa) refinery would need an investment of R20,000 crore.

A refinery in Rajasthan can source crude from Cairn's fields in the state as well as import it through Gujarat on the west coast, he said. He cant be named as he is not allowed to speak on specific companies. But E&Ys Khanna said most of the output from the Rajasthan fields is used up domestically, and it is tougher to operate an inland refinery.

However, several major global players have integrated operations. Whether Vedanta wants to be into both downstream and upstream is a call the company needs to take, said E&Ys Khanna.

The refining business is under pressure globally, say analysts, but could change over the next few years as more companies in the US and Europe divest their refining business to fund upstream projects, or mothball older refineries.

Global refining capacity utilisation levels have weakened in the last few years, which may persist in the medium term with the completion of large upcoming refineries and conversion projects, said K Ravichandran, vice-president at ratings agency Icra. But opportunities will emerge as some of the older refineries get shut down in Europe.

Global refining capacity has increased steadily from 86.1 mbpd (million barrels per day) in calendar year 2005 to around 91.8 mbpd in 2010, he added.

Experts said greenfield refineries will benefit from their capacity to process a variety of crude that will cushion them from the vagaries of crude prices. But the products would need to be sold elsewhere, and not in India. High crude prices are good news for refineries, said E&Ys Khanna. However, India has surplus refining capacity already, and is a net exporter of petroleum products, as new capacities are being added in refining.

Indias oil refining capacity, at 194 million tonnes (mt) now, will rise by over 22% to 238 mt by 2013 after new refineries by public sector oil companies in Orissa and Punjab are commissioned, minister of state for petroleum and natural gas RPN Singh told newspersons in New Delhi on December 5.

Fuel demand, on the other hand, is pegged at 142 mt in 2010-11, and is expected to rise by 4-5% a year in the 12th Plan period ending 2017, he added.

State-owned Indian Oil Corporation is building a 15-mtpa refinery at Paradip, in Orissa, while Hindustan Petroleum is constructing a 9-mtpa unit at Bathinda, in Punjab.

In addition, Bharat Petroleum is planning to raise the capacity of its recently commissioned refinery at Bina, in Madhya Pradesh, to 9 mtpa from 6 mtpa at present.