IOC Shelves Paradip Petrochemicals Complex; ONGC Withdraws from Kakinada Refinery Project

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Researched by Industrial Info Resources (Sugar Land, Texas)--Indian Oil Corporation Limited (BOM:530965) (IOC) (New Delhi) has shelved its plans of building a petrochemicals complex in Paradip in the eastern state of Orissa because of a 73% escalation in project costs over the past few years. IOC had earlier planned to construct an integrated refinery and petrochemicals complex at an estimated cost of $6.5 billion. However, rising costs of equipment, labor, land development, raw material and other factors related to production have propelled the cost of the project to more than $11.25 billion. IOC must now be content with constructing only the refinery at a revised cost of $7.5 billion. Work on the Paradip project has already commenced and IOC will risk losing all the money invested up to this point if construction is stopped.

The company has appointed SBI Capital Markets Limited (Mumbai) to secure finances for the project within the next two weeks. It will then await final approval from the board on project expenditure, which is expected to further delay the project that was originally slated for commissioning in 2011 or 2012. Anticipating preliminary approval, IOC plans to float a tender early next month for the appointment of a project management contractor.

IOC is grappling with under-production of diesel, kerosene, liquefied petroleum gas and gasoline amounting to $60 million per day. The company posted a net loss of $103.5 million for the fourth quarter of the 2007-2008 fiscal year against a net profit of $402.5 million from the same period of the previous fiscal year. With current borrowings amounting to nearly $10.25 billion, government subsidies have given the company little help in offsetting losses.

The Paradip project is critical to IOC, which wants to increase its refining capacity to cater to the burgeoning demands of the domestic market. It would be unviable for the company to adopt the alternate route of increasing imports of finished products and selling them in the Indian market under the constraint of retail price caps imposed by the Indian government as a measure to check inflation. India's annual rate of inflation peaked at a 13-year high of 11.42% for the week ending June 14.

In another recent development, Oil & Natural Gas Corporation Limited (BOM:500312) (ONGC) (New Delhi) has exited from the proposed $6.25 billion integrated refinery and petroleum complex project at Kakinada in the state of Andhra Pradesh, providing the opportunity for infrastructure and power major GMR Infrastructure Limited (BOM:532754) (Bangalore, Karnataka) to pick up a 51% stake in the refinery. ONGC had sought several concessions from the State Government including exemption from sales tax, fiscal concessions commensurate with a special economic zone (SEZ) and allocation of 950 acres of land free of cost for the project, all of which would have cost the state government nearly $4 billion over a period of eight years. The government, however, turned down the company's demands and ONGC withdrew from the project, considering it an economically infeasible undertaking.

ONGC, through its subsidiary Mangalore Refinery and Petrochemicals Limited (BOM:500109), was expected to own a 26% stake in the SEZ and a 46% stake in Kakinada Refinery and Petrochemicals Limited (KRPL), the special purpose vehicle set up to implement the 15-million-ton-per-year project. GMR, the new entrant, will now hold 51% in KRPL. Infrastructure Leasing & Financial Services Limited (Mumbai) and Kakinada Seaports Limited will hold 46%, and the Andhra Pradesh Industrial Infrastructure Corporation (Hyderabad, Andhra Pradesh) will hold the remaining 3%.

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