Ethane import could save RIL Rs 2,000 crore a year

Reliance Industries Limited (RIL's) decision to source 1.5 million tonnes of ethane a year from the US to feed its crackers in India could save the company a whopping Rs 2,000 crore annually.

The cost of feedstock is the largest that petrochemical companies bear. Currently, there are three naphtha-based, three gas-based and one mixed feed cracker complex in the country. Feedstock accounts for 40-60 per cent of total costs. While naphtha for petrochemical units is easily available, propane and butane are not easy options considering the pricing and domestic availability. Liquified natural gas imports have therefore been increasingly resorted to.

"We estimate that this could save RIL in excess of $5 per million metric British thermal unit (mmBtu), Rs 2,000 crore. Essentially, domestic ethane price in the US is less than $4 per mmBtu and we estimate that landed cost of imports would work out to less than $12 per mmBtu. This will substitute propane or naphtha being consumed at a price ranging between $19-23 per mmBtu," said Jal Irani from Edelweiss Securities limited.

RIL is primarily a naphtha-based petrochemical player. "Ethane/propane-based US and West Asia crackers typically earn gross margins in excess of 50 per cent and projects have a short payback period of two-three years as their input cost is as low as $3-5 per mmBtu, while the Asian naphtha-based crackers struggle with input cost of as much as $23 per mmBtu. Shale boom in the US has led ethane prices to plunge by 70 per cent over past four years to less than $4 per mmBtu," Irani added.

Given the US' large shale reserves, its oil and gas production over the next decade might rise to exceed Saudi Arabia's production shortly and could reach twice that of Saudi's.

Irani explained that the US' ethane export infrastructure is unlikely to keep pace with local gas production sustaining low prices in the US. Hence, the large arbitrage between the US domestic and international prices shall sustain over a prolonged period.

RIL said it has executed storage and capacity agreements for liquefaction and export of ethane with a North American Terminal, expected to commence operations in the second half of 2016. For the purpose of transporting liquefied ethane to India in a safe and cost efficient manner, RIL has ordered six state-of-the-art very large ethane carriers which will be the largest vessels ever built in the world.

The ships are expected to be delivered starting the last quarter of 2016. Proposed capex of $1.5 billion (Rs 9,000 crore) for this includes $723 million (Rs 4,338 crore) for building six of the world's largest ethane carriers through Samsung Heavy Industries, South Korea. Imports will start from the second half of calendar year 2016.

Reliance is also building a receiving and storage facility in India for liquefied ethane and pipeline to deliver ethane to its crackers. Reliance will be upgrading its crackers to maximise cracking of Ethane.

"The project will improve the long-term competitiveness of our cracker portfolio through dedicated feedstock, enhanced margins, higher capacity and end-to-end integration," RIL said. RIL is nearly doubling its petrochem capacity by FY16. Over 60 per cent of RIL's $30 billion (Rs 1.8 lakh crore) plan over five years is towards core businesses.

Samuel Lee and Neil Gupte from JP Morgan said RIL is the first Asian company to announce plans to import US ethane.