Refinery centre

It is a well-known fact that global capacities for refining crude oil have not kept pace with the increase in consumption. While refining capacity has increased by less than 2 million barrels per day, consumption has increased by almost 4 million barrels per day in the last couple of years. With demand showing no signs of slackening, there is a clear case for adding to refining capacity. Older refineries also need to be upgraded or replaced by modern refineries which are capable of processing heavier oil to a level which is compliant with the advanced environmental norms being put in place across the globe. According to the Petroleum Economist's annual refinery construction survey, an additional 9 million barrels per day of new or expanded capacity is in the pipeline, almost twice what was recorded a year before. India seems to account for a good chunk out of that.

There are three reasons why fresh refinery investment should head to India. First, it pays to be located at the centre of a consumption hub, and so close to the world's oil reservoirs in West Asia. Secondly, the cost of constructing and operating a refinery in India would typically be lower than that in most other parts of the world. Thirdly, there is a "proof-of-concept" available in terms of what is possible, in the form of the Reliance refinery, the third-largest in the world with the capacity to process 660,000 barrels of oil per day. The company also offers proof-of-returns""it managed to squeeze out an astonishing $11 from each barrel of oil that it refined in the last quarter, which is more than twice what other large domestic refiners manage. It is also the highest ever out-performance over the benchmark Singapore complex margin of $3.90 per barrel. Given the advantages of location and cost, Reliance is competing with refiners in the US to supply fuel to local retailers. And in a move which would make it the largest crude oil facility at one site, Reliance through a group company is expanding capacity by 580,000 barrels per day. Following suit, the world's largest oil companies (like Saudia Arabia's Aramco, France's Total and Petroleos de Venezuela) are also looking at exposure to the Indian refining sector, as is steel magnate LN Mittal. Add on the increasing intensity of hydro-carbon prospecting in Indian basins, and the case for local refinery investments becomes stronger. Policy makers are already talking about India becoming a refiner for the world.

However, there are those who warn about the risks of global over-expansion in refining. After all, oil is a cyclical industry which will see dipping margins as additional capacities come on-stream. The sliding price of crude oil could also prove a dampener to margins. On the other hand, there may be a dip on the demand side if there is a global economic slowdown. Even taking these factors into account, however, there is little to worry for low-cost refiners located in India and the Asia-Pacific region, where the largest chunk of refinery additions are planned. They should easily be able to grab market-share from less cost-competitive rivals in other parts of the world. What's more, Indian companies are being sought for their superior refinery project management skills and are being "invited" to partner in refinery construction and upgrade efforts in other parts of the world. Reward and recognition""what more could Indian refiners ask for!