Indian Oil to Begin Construction of 15 Million Ton Paradip Refinery by December

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Researched by Industrial Info Resources (Sugar Land, Texas)--Indian Oil Corporation Limited (BSE:530965) (IOCL) (New Delhi), the leading Indian oil major, has announced plans to commence civil construction activities of its proposed 15-million tons per year Paradip refinery complex in Orissa by December. Detailed engineering, project planning and materials procurement have begun. Construction of the refinery is expected to be completed by March 2012. The naphtha cracker, diesel hydro-treating unit, crude distillation facility, and sulfur-recovery system will begin operations by March 2012. The refinery will be fully commissioned by June 2012.

Senior project officials have indicated that issues have been addressed relating to forestland allocation and acquisition, area required for construction of a water well at Jobra near Cuttack, and construction of pipeline from the well. The project will require about 3,344 acres of land. The state government of Orissa has assured IOCL that it will clear all operational and bureaucratic bottlenecks. Officials said that the forestland approval is in its final phase, while allocation of land for the well in Jobra is also expected soon. IOCL plans to draw water from the Mahanadi River and transport it to the Paradip refinery through the pipeline network.

The project also has received the "right of way" from Paradip Port Trust (Paradip, Orissa) to help in expediting project construction and completion. A roll on/off jetty, built with assistance from Paradip Port Trust, is expected to be ready in the next one month to speed up completion of the project. The jetty will assist in the movement of construction machinery and refinery equipment, which will be delivered to the site by sea. A 7-kilometer coastal road has also been proposed. When operational by the end of this year, the road will assist in heavy equipment transport to the project complex. The southern dock of the port also will consist of an oil jetty to handle crude imports. Preliminary engineering for the oil jetty has been completed.

In February 2004, IOCL signed a memorandum of understanding with Orissa to construct a 9-million-ton-per-year refinery complex at Paradip with an investment of about $9.95 billion. The capacity of the refinery was later revised to 15 million tons per year. Because of the economic slowdown, the project outlay was later reduced and the present cost of the project is estimated to be about $7 billion. IOCL has invested $335 million to date. The completion date was recently advanced from November 2012 to March 2012. The project, which earlier was slated to begin operations in 2010, has been delayed due to land allocation, environmental clearances and other issues.

The Paradip refinery, which is expected to process the heaviest and toughest of crude, will have a Nelson Complexity Index of 15. The refinery will produce naphtha, aviation turbine fuel, liquefied petroleum gas (LPG), sulfur, motor spirit, high-speed diesel, kerosene oil, propylene and coke. Crude imports are expected to come from West Asia, while 50% of products from the refinery will be exported to the Asia Pacific region. Earlier, there were plans to build a petrochemical complex, but they have been deferred to the next phase.

Recently, Toyo Engineering Corporation (TYO:6330) (Chiba, Japan) and Toyo Engineering India Limited (Toyo-India) (Mumbai) were awarded offshore and onshore consultant contracts, respectively, by IOCL. The scope of the agreement includes project management, engineering, design, construction, supervision, testing and commissioning of the 4.17-million tons per year fluidized catalytic cracker (FCC) facility and a 1.9-million tons per year propylene recovery system. The duration of the contract is 38 months. The FCC unit is based on INDMAX technology, which has been jointly developed by IOCL and Lummus Technology Incorporated (Bloomfield, New Jersey), formerly known as ABB Lummus Global Incorporated.

Jacobs Engineering Group Incorporated (NYSE:JEC) (Pasadena, California) has secured the contract to provide project management consultancy services for the delayed coker unit (DCU). The cost of the DCU is estimated to be $350 million. The scope of the contract includes front-end engineering and design for the 4.1-million tons per year DCU and allied infrastructure. Jacobs Engineering also will undertake supervision of contractors involved in the construction and erection of the DCU. Foster Wheeler (NASDAQ:FWLT) (Clinton, New Jersey) has signed for a wide range of unit EPC contracts for the main complex installation.

In May, a consortium of 21 banks and financial institutions sanctioned a 14-year term loan of $3.03 billion for the Paradip refinery project. The lead arranger was SBI Capital Markets (Mumbai), a fully owned subsidiary of State Bank Of India (BSE:500112) (Mumbai). The consortium consists of two financial institutions, Life Insurance Corporation of India (BSE:500253) (LIC) (Mumbai) and Housing and Urban Development Corporation (HUDCO) (New Delhi), and 19 public-sector banks. IOCL is expected to seek further financing from international markets. The $3.03 billion term loan is considered to be the largest loan syndicated in the Indian rupee debt market for a single project.

The Paradip refinery project is also expected to receive tax incentives from Orissa. The project reportedly has received waivers from work contract tax and entry tax, value added tax (VAT) rebates, and royalty on minerals. According to the agreement between IOCL and Orissa, there will be no electricity duty imposed on the project for a period of five years from the date of operations commencement. The work contract tax will not be applicable until the refinery begins production. The project also will be exempted from the central sales tax for a period of 30 years. VAT payment on materials procurement, equipment and machinery purchase, and sale of products has been deferred for a period of 11 years from the date of production commencement.

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