Reliance Industries to Invest $3 Billion in Petrochemical Unit at Jamnagar

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Researched by Industrial Info Resources (Sugar Land, Texas)--Reliance Industries Limited (BSE:500325) (RIL) (Mumbai), which is India's largest private-sector enterprise engaged in the oil and gas, refining and petrochemical businesses, plans to invest $3 billion in expanding the company's petrochemical unit at Jamnagar in Gujarat and in building a 2 million-ton-per-year petrochemical plant. The proposed plant will use gases from the refinery as primary feedstock to produce petrochemicals such as polyethylene, propylene and ethylene.

The proposed cracker plant will have the capacity to produce about 1.3 million to 1.6 million tons per year of ethylene and relatively small volumes of propylene. RIL already has acquired the technology required to use gas in polymer production. Construction of the chemical plant will begin this year and is expected to take about four years to complete.

The gas produced as a byproduct from RIL's Jamnagar refining complex is ideal, because it can be cracked to produce polymers, whereas the abundant reserves of natural gas from the company's D6 offshore block in the Krishna Godavari basin in Andhra Pradesh are not suitable for the project.

The most widely used feedstock in petrochemical plants is naphtha, which is a distillation product obtained from crude oil. A boost or slump in the global demand for crude affects naphtha prices. This leads to daily fluctuations in naphtha prices, which, in turn impacts the total cost of polymer production. By using cracked gas as feedstock for the new plant and insulating polymer production from naphtha, RIL's margins are likely to improve.

RIL has revived the petrochemical project that originally was scheduled to be operational by 2011. In February 2007, the company's board had approved plans to set up a $3 billion integrated cracker and petrochemical chemical plant by 2011. However, the plans were shelved in the wake of the 2008 global economic crisis.

RIL operates the world's largest refining complex at Jamnagar. The refinery, commissioned in 2009, is capable of processing 1.24 million barrels per day of crude. In the fiscal year ending March 2010, the petrochemical plant at the Jamnagar facility produced 4.1 million tons of polypropylene, polyethylene and polyvinyl chloride, and 1.8 million tons of ethylene.

Currently, RIL contributes to 60% of India's total polymer production. The petrochemical segment contributed to 15.5% of the company's margins in fiscal year 2009-10. The domestic demand for polymers grew by 19% in FY fiscal year 2009-10, against that of the previous year. According to the Chemical and Petrochemicals Manufacturers Association (New Delhi), the demand for polymer products in India is projected to grow to 8.2 million tons by the end of 2011, which is a 22% growth from 2009 consumption. Sriharsha Pappu, an analyst with HSBC Bank Middle East Limited (Dubai, United Arab Emirates), predicts that the petrochemical industry will have to add 20 plants worldwide in five years to keep up with global demand. Petrochemicals are used in manufacturing a wide range of everyday products, from plastics to tires.

Other petrochemical units being set up in India include a 1.1 million-ton-per-year ethylene cracker plant by the joint venture comprising Oil and Natural Gas Corporation Limited (BSE:500312) (New Delhi), Samsung Engineering Company Limited (SEO:028050) (Seoul, South Korea), and Linde AG (ETR:LIN) (Munich, Germany), and a $3.2 billion naphtha-cracker plant by Indian Oil Corporation Limited (BSE:530965) (IOC) (Mumbai). The IOC plant is designed to have an output of 650,000 tons of propylene and 857,000 tons of ethylene every year.

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