Analysts upbeat on RIL outlook

Refining major optimistic on planned investment of $16 bn for expansion and new technology to post healthy margins

Reliance Industries (RIL), which surprised the Street with a $4.3 a barrel premium on gross refining margin (GRM) in the September quarter results, might continue to spring such surprises.

The company, say insiders, is making its refining "more and more challenging" by adopting new technologies. "Refineries are now having lower and lower margins and each would attempt to look at technology which will give additional value. New processing routes lower the cost of production, lowers energy consumption and environmental regulations are going to be stricter by the day and, therefore, lower environmental footprint," said a senior RIL executive. Mukesh Ambani's RIL operates the world's biggest refining complex in Gujarat, where two adjacent plants can process about 1.4 million barrels a day of oil.

The GRM surged to $10.6 a barrel, a seven-year high as compared to the $8.3 a barrel in the same quarter a year before. The GRM premium over the Singapore benchmark widened to a six-year high of $4.3 a barrel.

"RIL’s strong GRM was testimony to its grade switching and flexibility of product placement, as the company processed highest ever quarterly gasoline + alky production to take advantage of strong gasoline cracks, with higher alkylates sales to the US," said Edelweiss Securities in a report.

Higher sourcing of heavier crude oil, especially Iraqi Basra, which is at a $2 a barrel discount to Dubai oil,  added to the margin rise.

The official added with RIL planning to commission its $5 billion petcoke gasification facility by early 2016, it will help with healthier GRMs.

RIL is investing $16 bn in expanding petrochemical production capacity and lower feed and fuel costs. Of this sum, $4.6 bn is being invested in an integrated gasification combined cycle (IGCC) project to convert captive petcoke to synthetic gas (syngas), to be used to generate power, steam and hydrogen, currently produced with expensive and imported liquefied natural gas (LNG).

Another $4.5 bn is being invested in a refinery off-gas cracker (ROGC), to be used to extract petrochemical compounds like ethane, ethylene, propylene, butanes and propanes. Another $5 bn is being spent on expanding polyester production capacity, with another $1.5 bn to import ethane from the US to replace higher cost propane imports and naphtha.

"We believe that the ongoing expansion projects, viz petcoke gasifier and refinery off-gas cracker will be operational in FY17, with FY18 being the first full operational year. Note that the company is constructing the world’s largest petcoke gasifier and off-gas cracker. We continue to believe both refining and polymer margins will remain robust over the next two years," said HSBC in a report after the results were announced.

The refineries are expected to report lower margins. RIL has said it will look for technology to give it additional value. "Thus, we have gone for petcoke gasification. We want to completely eliminate our petcoke production of 6.5 million tonnes a year, generated from two of our cokers. The technology for petcoke gasification, which will help us produce 23 mscmd (million standard cubic metres a day) of syngas, will aid in reducing R-LNG intake for our refineries."

RIL currently takes around 10 million cubic centimetres a day (mcmd) of R-LNG from the Shell and Hazira LNG terminal. Syngas is a fuel gas mixture of primarily hydrogen, carbon monoxide and, very often, some carbon dioxide.

"What we want is to be independent of any LNG or fuel for that matter, for the refinery. Refiners consume a lot of fuel and should be self-sufficient in their fuel need. You will see us posting handsome GRMs, going forward," the RIL official added.

"Not many companies in the world have so far ventured into petcoke gasification but we have gone for it and we are seeing that it is a foolproof mechanism, helping us meet our entire fuel requirement at the refineries," he said. RIL will have 10 gasifiers. The executive said they also wanted to eliminate use of furnace oil, a high sulphur material, to reduce environment emissions.