India’s Essar $2 Billion Refinery Steps into Breach of Iranian Fuel Shortage

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Researched by Industrial Info Resources (Sugar Land, Texas). Essar (Bombay, India), the Indian industrial conglomerate is in talks with NIORDC, Iran’s state-owned oil refining and distribution company, to construct a new $2 billion oil refinery in southern Iran. The 300,000-barrel per day (bpd) refinery would process Iran’s heavy crude oil and assist in meeting the country’s soaring domestic demand for fuel.

The discussions on the refinery project take place at a time when Essar is looking to form a joint venture with local companies to build a 1.5 million tons per annum steel plant in Iran as part of its overall plan to build three steel plants in the Middle East. Essar is also talking to the Iranians about buying a stake in some exploration and production blocks in order to secure a gas feed for the proposed steel plant.

Iran is the world’s fourth largest oil producer and is the second largest importer of gasoline. The government has put $18 billion behind a drive to increase refining capacity to meet demand that is being driven by an increasingly young population and the world’s second cheapest pump prices. Plans to ration gasoline were abandoned in the face of a fierce public backlash over what Iranians believe is their natural right to fuel.

Two new refineries are planned in addition to the proposed Essar project and in December the NIOC (National Iranian Oil Company), with a consortium of local firms and ABB Lummus (NYSE:ABB ) (Zurich, Switzerland), contracted for a $512 million expansion plan for the existing 350,000 bpd Bandar Abbas refinery. A new 360,000 bpd condensate refinery will start construction at Bandar Abbas later this year and the selection of an engineering contractor is currently taking place. This is being built by an Indonesian group with local associates. A $1.2 billion expansion is planned to double the capacity of the 110,000 bpd Tabriz refinery.

Problems have surrounded Iranian oil projects in the past where interventions have caused proposed projects to collapse at the last minute. But the new projects are driven by the cost of importing an estimated 170,000 bpd of gasoline, which is hitting the national budget even though petro-dollar revenues are high. The expansion and refinery construction plans are aimed to add one million bpd by 2010 to bring the total national capacity to 2.3 million bpd.

Investments have been harder to identify as the ongoing stand-off concerning the country’s nuclear program causes concern among major contractors. China and India are currently the most willing and active investors.

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