Vadinar plant expansion to help Essar process variety of crude

Essar Oil's expansion of its Vadinar refinery in Gujarat to 18 million tonne this year will help the firm turn wider variety of crudes into fuel, lifting its margins, JP Morgan said in a research note on the company.

Essar is expected to complete the first phase of its refinery expansion project in Q2 of 2011-12 fiscal, with capacity rising from about 14 million tonne currently to 18 million tonne.

Post the expansion to 18 million tonne (and then to 20 million tonne in FY13-14), Essar Oil's refinery Nelson Complexity Index will rise to 11.8 (from 6.1) with addition of significant secondary processing capacity - enabling it to capitalise on structurally strong diesel spreads.

"More importantly, the complexity of the refinery will rise from 6.1 to 11.8, significantly boosting Essar Oil's ability to process tougher crudes, and achieve a more desirable product slate," it said.

Widening light-heavy crude differentials would benefit the firm going forward, aiding it to earn a greater premium over benchmark regional gross refinery margins (GRMs).

"We expect Essar Oil GRMs to average $8.5 over FY12-13, as the company benefits from added high value product sales and takes advantage of light-heavy crude differentials," it said.

An increase in Nelson complexity allows a refinery to process a wider variety of crudes, and allows the refiner the opportunity to optimise its product slate, increasing production of higher value light and middle distillates.

"With an increase in complexity from 6.1 to 11.8, Essar Oil will optimize production of diesel and gasoline - leading to an increase in GRMs from the average of $5-6 per barrel in the past to about $8.5 a barrel post the expansion," JPMorgan said.

Essar's Vadinar refinery currently processes about 30,000 barrels per day of crude from Cairn India's Mangala field in Rajasthan. "Post the refinery expansion, the refinery would be able to process 60,000 bpd of Mangala crude. This would allow the company to save on transportation costs and taxes adding about $0.5-1 per barrel to GRMs."

The company expects to commence commercial sales of coal bed methane (CBM) gas from the Raniganj field in West Bengal this month. "At a plateau production of 3.5 million standard cubic meters per day for 12 years, we estimate an NPV of $270 million for this asset," JP Morgan said.

"We upgrade Essar Oil to Overweight, with a March 2012 price target of Rs 160," it added.