Indian Oil Corporation's Long Delayed Paradip Refinery Project on Route to Completion

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Researched by Industrial Info Resources (Sugar Land, Texas)--Indian Oil Corporation Limited (BSE:530965) (IOC) (New Delhi), India's flagship national oil company, is setting up a 15 million-ton-per-year grassroot refinery in Paradip in the eastern state of Orissa. The facility is expected to be India's most modern refinery with zero residue and all of the products meeting very exacting specifications. The refinery will have a vacuum distillation unit, a crude distillation unit, a hydrocracking unit, a delayed coking unit and other secondary processing units. The project will be spread over an area of 3,344 acres of land and is scheduled to be completed by March 2012. According to Laxmi Narayan Gupta, Joint Secretary of the Ministry of Petroleum and Natural Gas, the plant will be completely finished by November 2012.

The project cost has been estimated at more than $6.2 billion. IOC plans to fund the project by equity raised through internal accruals as well as domestic and foreign loans. The domestic loan component has been arranged by way of a $3 billion loan that was obtained from a consortium of two financial institutions and 19 public sector banks in May 2009. The consortium was led by State Bank of India (BSE:500112) (Mumbai) and includes the financial institutions Housing And Urban Development Corporation Limited (New Delhi) and Life Insurance Corporation of India (Mumbai). The loan is the largest syndicated rupee term-loan sanctioned in the Indian debt market for a single project. The loan has a door-to-door tenor of 14 years. IOC has already committed an investment of $972 million toward the project. So far, approximately $332 million has been spent on the project.

In an effort to meet the challenging deadline, the engineering, procurement and construction (EPC) contract has been awarded, and procedures for detailed engineering and procurement of long-delivery items have been initiated. In March 2009, a subsidiary of global engineering and construction contractor Foster Wheeler AG (NASDAQ:FWLT) (Clinton, New Jersey) was awarded the EPC contract for 15 key refinery process units, while another subsidiary was retained as the project management consultant. Foster Wheeler Energy Limited (Reading, United Kingdom) is the project management consultant, while Foster Wheeler (GB) Limited has been engaged to handle the front-end engineering design (FEED) stage of the project. Foster Wheeler's offices in Reading, Chennai, Delhi, Kolkata and the Paradip site will execute the contracts. Civil construction of the project is scheduled to begin in the first quarter of the 2010-11 year.

The project is currently progressing at a good pace. A huge pipeline for transportation of products is being laid from Paradip to Ranchi in Jharkhand via Sambalpur in Orissa, and Raipur in Chhattisgarh at an estimated cost of about $219 million. To speed up the construction schedule, IOC and the Paradip Port Trust are jointly constructing a roll on/roll off jetty that will be used to unload oversized equipment transported by the sea route. The jetty is expected to be completed by August 2009. A new oil jetty is likely to be constructed for the purpose of importing crude through the sea route. Basic engineering activities have been completed, and IOC is now waiting for approval of the proposal from the Union Ministry of Surface Transport. A 15-meter-wide, 7-kilometer-long coastal road is being constructed to the refinery site and is scheduled to be completed by December 2009.

IOC had originally obtained approval from the Government of India to set up a 9 million-ton-per-year grassroot refinery in Paradip in 1998 at an estimated cost of about $1.7 billion. In 1998, the state government of Orissa granted the refinery's finished products a sales-tax exemption for a period of 11 years. The tax incentive was later withdrawn, and this proved to be a major factor in the delay of the project. The project capacity was increased to 15 million tons per year after prolonged discussions between IOC and the state government. Kuwait Petroleum Corporation (Safat, Kuwait) had initially agreed to participate in the project but later withdrew from the venture. The original project plans included the development of a Petrochemical and Petroleum Investment Region with the refinery as the anchor.

After completion of FEED activities, the project's cost estimates shot up to more than $9 billion. Since funding such a project promised to be a huge burden on IOC, the plans were reconfigured, and the establishment of the petrochemical complex has been deferred. The IOC Board of Directors finally gave its approval for the refinery project in February 2009.

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