India’s Reliance Fast Tracks $6.1 Billion Refinery to Edge High Margin Competition

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Researched by Industrial Info Resources (Sugar Land, Texas). The race to fill the oil refining supply gap now seems to be joined with companies in Asia, the Middle East and the Americas, all announcing large-scale projects in the course of 2006. This imminent plant building boom is partly in response to accepted industry wisdom that there is no fuel shortage, but only a refining bottleneck in the fuel supply chain and partly to the massive absolute growth in fuel and energy demand projected for Asia, with China and India leading the way, and the U.S. seeking fuel feedstock worldwide. In Asia, the most lucrative market for refiners is the regional and U.S. export market, even for companies in those countries that are dependent on imports of crude to feed the refineries for their own domestic markets.

With oil prices expected to hit record highs through 2011, the circle of demand sustaining the pressure and producing higher refining profits can be seen as virtuous or vicious, depending on which side of the pump you are on. Reliance Petroleum, a subsidiary of Reliance Industries (NYSE:RELIANCE ) (RIL) (Bombay, India), is leading the race for increased refinery capacity with plans to accelerate the construction of a 580,000 bpd (barrels per day) refinery on the same site as its existing 660,000 bpd plant at Jamnagar, Gujarat state, in the west of India. The total site production capacity of 1.24 million bpd will make it the largest single site refining facility in the world, capping the 935,000 bpd of PDVSA’s (Caracas, Venezuela) Paraguana refinery and the 817,000 bpd of SK Corporation’s (NYSE:SK ) (Seoul) South Korean plant. The new project includes a 900,000-ton per annum polypropylene production unit adjacent to the existing refinery.

Reliance is now pushing contractors and workers at Jamnagar to advance the scheduled December 2008 commissioning date for the new plant by three to six months, in order to reap the best margins for gasoline and diesel product ahead of their rivals. In the U.S., the National Petrochemical & Refiners Association reports that domestic U.S. refiners, at current estimates, could be investing $18 billion in expanding refinery production by about 1.9 million bpd over the next five years, which is equivalent to around 11% of current output.

The Jamnagar advantage is that cheaper manpower and the short three-day tanker trip from the Persian Gulf to India for crude supplies balances the freight cost factor when the refined fuel is shipped to the U.S., whose refineries ship in much of their own crude supplies from the Middle East. Taking all the elements into consideration, the cost of constructing the new refinery is estimated to be about 40% less than similar plants elsewhere in the world. The Jamnagar refinery will be in the 5% of all refineries globally that are able to process extra heavy oil, which is about $6 per barrel cheaper than light crude. The use of light crude can give a 10% plus profit margin per barrel according to Reliance. Reliance will undertake the plant construction with Bechtel contracted to handle the engineering and equipment supplies for the project.

The company currently has 10,000 workers on the project site and another 10,000 working on the project at various contractors and vendors offices worldwide. At peak employment, by February 2007, there will be about 100,000 workers employed on site.

Reliance Petroleum has arranged a $1.5 billion syndicated term loan facility with fourteen offshore lenders, which is India’s largest ever offshore loan. It has a $950 million 7.5-year tranche and a $550 million 10-year tranche. The latter is the longest maturity of any corporate debt issuance out of India and is expected to open a new window for Indian corporates seeking longer term loan arrangements. Reliance is funding the balance of the project from internal funds generated by existing refining and petrochemical plants.

Earlier this year, Chevron (NYSE:CVX ) (San Ramon, California) took a $280 million, 5% interest in Reliance Petroleum, which can be taken to 29% in the future. Chevron brings refining interests in seven Asia –Pacific countries with supporting supply chains into the mix. It is also able to offer technological expertise for the exploitation of new reserves and optimize the supply of crude to refineries. With global refinery capacity utilization estimated to run in the range 87% to 94% in the period 2008 – 2015, the association with Chevron should give Reliance an edge in the ability to run refineries at maximum capacity.

In the last financial year, RIL made a net profit of $1.73 billion, an increase of 46% over the previous year. Turnover was up 30% to $16.7 billion and exports rose 71% to $5.83 billion. In the first quarter of the 2005-2006, exports have grown 40% to $1.6 billion, net profits by 61% to $531 million and turnover 26% to $4.56 million.

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