Indian refining expansion plans hit impasse

India's state oil companies have hit an impasse on ambitious plans for expanding the country's refining infrastructure with a string of new grassroots refineries.

The state firms are voicing exasperation after their quest for foreign investment in joint venture refineries has netted them little other than a sheaf of memoranda of understanding (MOUs) as the foreign firms prove reluctant to proceed.

The oil companies' predicament has hobbled the government's plans to increase domestic refining capacity. The only bright prospect in this gloomy scenario is the reassurance that Reliance Petroleum Ltd.'s 360,000 b/d refinery will go on stream by mid-1999.

Marketing rights sought

Foreign oil companies have begun to cite low margins in refinery investment as the reason for their vacillation. The foreign firms now want marketing rights to make up for the slim margins in setting up refineries. Even Oil & Natural Gas Corp. (ONGC), courted tirelessly by the cash-starved Bharat Petroleum Corp. Ltd. (BPCL) and Hindustan Petroleum Corp. Ltd. (HPCL) for investment in their JV refineries, is insisting on marketing rights as a condition for participation.

Royal Dutch/Shell signed an MOU with BPCL for a 120,000 b/d refinery in Uttar Pradesh 3 years ago, but it is still debating whether it should proceed with the project. Its interest lies in marketing. But India's new petroleum policy does not permit marketing rights without investment in refineries. Shell tried to lobby the government for marketing rights, citing commitments to invest in marketing infrastructrure, but to no avail so far.

Saudi Aramco cites fiscal woes in Saudi Arabia for lack of progress on its proposed 120,000 b/d refinery with HPCL at Bhatinda, but it has not yet formally withdrawn.

Meanwhile, Shell has proposed a wider involvement in India with Saudi Aramco.

HPCL intends to proceed with the Bhatinda refinery even if Saudi Aramco backs out; however, parallel talks with Exxon Corp. have not made much headway. ONGC will not be able to bail out the Bhatinda project by becoming a co-sponsor. Even if it is willing, the Ministry of Petroleum and Natural Gas is unlikely to endorse such a diversification by the upstream giant.

IOC, on the other hand, is willing to step in and take up the Bhatinda refinery on its own, having staked a claim for the project earlier. The Petroleum Ministry opposes such an increase in IOC's refining capacity and market share in northern India, citing a danger that the company could grow into a monopoly in a deregulated market. This concern prompted the ministry to encourage BPCL and HPCL to set up refineries in northern India. But these companies lack the financial clout to go ahead with the massive investments on their own. IOC proposed a joint venture refinery at Paradeep with equity participation from Kuwait Petroleum Corp. (KPC).

KPC may have to resort to negotiating for a contract to supply the proposed refinery's crude requirements, as well as for retail marketing rights.