Pipeline To The Market

By 2002, Hindustan Petroleum Corporation Limited (HPCL) and Aramco of Saudi Arabia expect to commission their nine million tonne refinery at Bhatinda in Punjab. Both HPCL and Aramco have a 26 per cent stake each in the Rs 12,200-crore project, which includes a 800 MW power plant, an 1,100 km crude pipeline, a crude oil terminal and a single point mooring.

Yet another six million tonne refinery will also be ready in the same year. This is Bharat Petroluem Corporation Limited (BPCL) and Oman Oil's Rs 5,270-crore project coming up at Bina in Madhya Pradesh.

Besides, after a two-year-long search, last week, Anglo-Dutch major Royal Dutch/Shell announced its plans to set up a seven million tonne refinery at Lohagara near Allahabad in Uttar Pradesh. The Rs 7,070 crore refinery will be set up in a joint venture with BPCL with both partners holding a 26 per cent stake.

Then, of course, there are the much-talked-about private sector refinery projects of Reliance and Essar. Together, they will add over 25 million tonne capacity. Reliance's Rs 9,700 crore, 15 million tonne refinery at Jamnagar, Gujarat, is scheduled to be ready by end-1999. And Essar's Rs 5,815 crore, 10.5 million tonne refinery, also in Jamnagar, is expected to be commissioned by next April.

Apart from these greenfield projects, existing refineries have also planned capacity expansions. HPCL will add another three million tonne to its 4.5 million tonne refinery at Vishakhapatnam at a cost of Rs 1000 crore. Also, the HPCL and A V Birla joint-venture, Mangalore Refinery and Petrochemicals Limited (MRPL), is increasing its refinery capacity from the current three million tonne to nine million tonne.

Things, then, seem to be finally looking up in the refining sector. After all, the eighth plan (1992-1997) had targeted a 21.2 million tonne addition in capacity but only 9.7 million tonne was actually added. Will the picture change though by the end of the ninth five year plan in 2002, which is when the capacity addition is expected?

Consider this: in fiscal 1995, petroleum products demand stood at 65.3 million tonne, of which 56.4 million tonne was met by domestic production. But with demand outstripping supply, the gap had widened from 8.9 million tonne in 1995 to 13.5 million tonne in 1996. That is from 14 per cent to 19 per cent of total demand.

In 1997, five million tonne of refining capacity (three million tonne by MRPL and one million tonne each by Indian Oil Corporation Limited (IOCL) at Haldia and by Bongaigaon Refinery & Petrochemicals Ltd) was added. This met incremental needs, allowing domestic producers to meet four-fifths of the total demand.

Now, an additional 52.5 million tonne capacity can be expected to come up by fiscal 2002 with some degree of certainty (based on refinery construction already in progress). That will take total capacity in 2002 to 114 million tonne against an expected demand of 119 million tonne in 2001.

So the demand-supply gap will come down significantly at least in the medium term, which analysts feel will act as a deterrent to fresh projects. But demand is expected to cross 157 million tonne by 2011, once again sharpening the gap.

Besides, even for existing projects, one critical issue remains. They may have been envisaged to encash on the demand-supply mismatch. But their success will hinge on their being allowed direct access to the market.

People will only invest in refineries if they can market their products, says R K Sukhdevsinhji, managing director, Essar Oil Limited.

Or as Vikram Singh Mehta, chairman of the Royal Dutch/Shell group of companies in India., points out, A stand-alone refinery is difficult to justify. To be economically viable, the development of a refinery must be able to support a profitable market. So in effect, the private companies are looking at building a refinery that will support a marketing venture.

So far, under the administered price mechanism (APM), the marketing of petroleum products is strictly controlled by four PSUs: BPCL, HPCL, Indian Oil Corporation Ltd (IOCL) and Indo-Burma Petroleum (IBP). There is no scramble for market share even among these four as this is centrally decided through the Sales Plan Entitlement. So companies have no bargaining power. For instance, pure refining companies like Cochin Refineries or the joint-sector MRPL haven't been able to take advantage of growing demand by stepping up production as this doesnt assure higher market share or profits.

But now the government seems to have awakened to the distortion in the reform process. After all, it allowed exploration and refining to be opened up without initiating any market reforms. So last September, the coalition United Front government began the process of dismantling the APM.

Besides, from April 1998, private companies investing a minimum of Rs 2,000 crore in a refinery or private upstream oil producing companies with an annual production of over three million tonne will be allowed to market motor spirit, high speed diesel and aviation turbine fuel.

The move is an attempt to reduce the country's growing import dependence and to develop infrastructure. If we had not put the Rs 2,000-crore limit, it would have encouraged trading. Besides, setting up a refinery has so many other benefits to the economy like employment generation and investment in capital goods. This will also ensure that only serious players enter the market, says B Bhattacharya, economic advisor, Oil & Natural Gas Corporation.

But analyst Suresh Iyer of the Mumbai-based broking house P R Subramanyam and Sons feels that if the Rs 2,000-crore limit is removed, there may be far more investment in the refinery sector as it has generated enough interest.

He points out that over the next ten years, there won't be much competition from imported finished products. For one, handling large crude volumes is easier than handling smaller quantities of different products. Two, the prevailing port and transportation infrastructure will not be able to bear the burden of these imports.

Of course, theoretically, there is the threat from imports since the import duty on crude oil is 35 per cent compared to 30 per cent for refined products. In actual practice, experts believe infrastructure will put a limit on imports. So there could be some protection for local refineries.

The choice for private players is between setting up a refinery, which is capital-intensive, and importing crude and investing instead in pipeline and other infrastructure, which requires relatively lower capital. Mehta says Royal Dutch/Shell is evaluating the economics of both options".

Yet another issue is whether the existing refineries can continue to be profitable once the APM is removed. Under the APM, refineries are assured a 12 per cent post tax return on net worth. Once dismantled, margins will come under pressure.

Some experts believe profitability will hinge on the refinerys location. India is huge. The refinery should be built close to the market and to support that market, says Mehta.

For instance, the north and the east are the main deficit zones. But demand in the east can be partially met through imports since the region has port facilities. In contrast, imports would be too costly to meet the demand of the northern hinterland as it will have to be transported over long distances.

Again, pipelines can radically reduce the cost of transportation. But this requires a huge investment. So players with pipelines will have an edge in the market place. Now, oil companies have found a way out by pooling resources to set up a common pipeline infrastructure. After all, the deregulation of the oil sector in countries like Argentina, Spain and Peru has seen the establishment of common distribution facilities by competing companies.

So last May, the public sector oil companies came together to form a pipeline company, Petronet. IOCL, HPCL and BPCL have a 16 per cent stake each while IBP holds two per cent and Infrastructure Leasing & Financial Services, 10 per cent.

Detailed feasibility studies are currently underway for five pipeline projects. These are Vadinar-Kandla, Kochi-Karur, Bangalore-Mangalore, Chennai-Trichy-Madurai and Bina-Jhansi-Kanpur. Now, Essar and Reliance have picked up a 13 per cent stake each in the Kandla-Vadinar pipeline project.

Both the private and public sector then seem ready to take on the challenges thrown up by deregulation. Under regulation, if we sell more, our profits will go to the oil pool account. But our strengths will show once we are given a free hand," says Arun Balakrishnan, general manager, corporate planning, HPCL.

(With inputs by Vinay Pandey)

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Turning on the gas

Against a current availability of 7,300 thousand metric tonne (tmt) of liquefied petroleum gas (LPG), five-year plan projections see LPG supplies by both the public and private sector touching 9,500 tmt by 2001-02 and 13,000 tmt by 2006-07.

In contrast, today, only 3,000 tmt of the cooking fuel is indigenously available and the balance 4,300 tmt is imported. By 2001-02, around 6,800 tmt will be available domestically, going up to 8,800 tmt by 2006-07. Even so, import dependence will be high.

With the market grossly underserviced, demand for LPG is anybodys guess. The three public sector (PSU) refining majors Indian Oil Corporation (IOC), Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL) have a combined waiting list of 30 lakh domestic users and many more industrial users.

So far they have cleared the waiting list upto January 1, 1991 only. In 1997-98, around 40 lakh new connections were given. And in fiscal 1999, they plan to clear the demand upto 1993.

No wonder then this potential has attracted private players. Yet, in the last four years, they have not made much headway. Of the 150 companies that came in after the government opened up distribution and marketing of LPG in 1993, barely 10 to 12 are around. There are a few strong players like Shri Shakti LPG in Hyderabad and Spic in Chennai. But the latter recently announced plans to sell its LPG business. This includes a 6,000 tonne per annum (tpa) LPG terminal at Tuticorin and two bottling plants with a combined capacity of 80,000 tpa.

It has been an upward struggle for private players as LPG remains among the most subsidised fuels in India. Of the total Rs 18,440 crore subsidy on petroleum products in 1996-97, subsidy for domestic LPG, which accounts for 90 per cent of consumption, was Rs 1,950 crore. Even after the cylinder price was raised by Rs 15 last September, the subsidy per cyclinder is still around Rs 60. This is likely to be withdrawn in a phased manner by 2002, when the administered price mechanism (APM) is dismantled.

Another stumbling block is the inadequate import infrastructure. So, only players who have access to port storage and handling facilities have been able to survive.

Take Shri Shakti, with a reported customer base of over 2.5 lakh. It has a dedicated 1.1 lakh tpa storage facility at Kakinada and is planning a five lakh tpa terminal at Mangalore port. And Bharat Shell, the joint-venture between UK-based Royal Dutch/Shell group and BPCL, has leased storage facilities at Ratnagiri from Finolex.

In fact, import facilities are improving. Till early 1996, the country had only around 700 tmt terminal capacity. In the last two years, capacity has more than doubled. In September 1996, HPCL commissioned its 600 tmt terminal at Mangalore while BPCL opened its 600 tmt terminal at Kandla in 1997. Petroleum Infrastructure Ltd, the joint-venture between BPCL and Gujarat Gas, also set up a 150 tmt terminal at Okhla in Gujarat.

As of today, the import handling problem has been resolved to a great extent, says N K Puri, general manager, LPG, HPCL.

And it is set to augment further. In the ninth plan, around 1400 tmt terminal capacity will be set up. IOC, with a 50 per cent market share, has a joint-venture with Petronas of Malaysia to set up an LPG import facility at Haldia. The six lakh tpa, Rs 200-crore project will be ready in four years. HPCL too is talking of a joint-venture with Total of France, which will set up a 30,000 tpa underground storage facility. And it is increasing capacity at Vishakhapatnam from 400 tmt to 600 tmt.

Players are also coming into the parallel LPG distribution business. Elf Gas is working out plans for its operations in Bangalore. Wimco Petrogass Rs 127-crore project to import and market LPG was recently cleared by the Foreign Investment Promotion Board. Reliances Assam Gas Cracker Co is reportedly talking to Gas Authority of India to buy its Rs 240-crore LPG plant.

Even as the domestic scene is a struggle, private players have grabbed market share in the industrial LPG segment, which is 10 per cent of total sales. Thats because they have an around Rs 3,000 per tonne price advantage over PSUs. The segment is slated to grow since worldwide, industrial consumers account for 60 per cent of sales.

The PSUs too are gearing up. Says Puri, Once there is a level playing field, service will make the difference. If we have to compete in the open market, we must have an identity of our own. So HPCL has restructured its LPG operations as a separate business unit and is strengthening dealer network. It will add 35 bottling plants to its existing 30 in the ninth plan. It is also strengthening brand equity. This includes standardising delivery systems plus mass media communication.

IOC, with 39 bottling plants, has plans to add 53 plants over the next seven years.

The PSUs are also developing rural markets. Last year, IOC launched the first rural mobile LPG marketing vehicle in Tanjavore in Tamil Nadu. Next is Gujarat where HPCL has identified Banaskantha district for a test project. It will set up a micro-bottling facility and booths in the satellite villages to provide refills on pre-determined days in a week. The initial target is to supply 500 cylinders a day.

So with players gearing up, the LPG market is bound to see a lot of action.