Total Withdraws from Proposed $10 Billion Vizag Refinery Project

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Researched by Industrial Info Resources (Sugar Land, Texas)--The 14 million-ton-per-year Vizag refinery project proposed by a consortium led by Hindustan Petroleum Company Limited (BSE:500104) (HPCL) (Mumbai), is facing uncertainty, as consortium partner Total S.A. (NYSE:TOT) (Paris, France) has opted out of the project. Project officials have said that Total, in its communication to HPCL, indicated that it would like to put participation in the proposed $10 billion refinery on hold.

Total is the second partner to withdraw from the project. In November last year, Mittal Energy Investment Private Limited (Singapore), promoted by steel baron L N Mittal, decided to put investment in the proposed refinery project on hold.

Energy experts have indicated that the moves by Mittal Energy and Total reflect the adverse impact of the global financial meltdown on the refining sector. Globally, refining companies have been forced to cut production and reduce margins as fuel demand plummeted across Asia, Europe and the United States. Most companies have deferred capital expenditure and expansion plans.

The Vizag refinery was to be developed by HPCL, Total, GAIL India Limited (BSE:532155) (New Delhi), Mittal Energy, and Oil India Limited (Noida, Uttar Pradesh). In October 2007, HPCL signed a memorandum of understanding with the other four members to study the feasibility of the Vizag refinery project. The project also was expected to consist of a 1 million-ton-per-year petrochemical complex. The refinery was proposed to be a 100% export-oriented unit, targeting the Middle East and Southeast Asia. Total was identified to undertake project viability and demand studies, while GAIL was appointed to undertake the feasibility study for the petrochemical complex. About 2,500 acres of land has been acquired near HPCL's existing 7.5 million-ton-per-year refinery at Vizag. Feedstock for the refinery will be heavy and sour crude, and naphtha from the refinery will be used as feed for the petrochemical plant.

During the feasibility study period, the prospects of the project looked very promising, as fuel demand in the export markets was forecasted to grow by 5 million barrels per day in 10 years. But the economic slowdown has severely impacted the consumption and demand of fuel. A decision on investment funding for the project was expected to be made during the second half of this fiscal year. Project officials are now concerned that the decision by two partners to leave will put the project in limbo.

Mittal Energy holds a 49% stake in the 9 million-ton-per-year Bhatinda refinery project, which is being developed as a joint venture with HPCL. Officials have indicated that Mittal Energy's decision to move out of the Vizag project will not impact the Bhatinda venture in Punjab. Construction activity for the Bhatinda refinery has started, and mechanical work is expected to be completed by December 2010. The refinery is expected to begin operations by 2012. The refinery, which will process heavy Arab crude, also will have the flexibility to handle sour, acidic and heavy crude. According to recent reports, the project cost of the Bhatinda refinery, which was earlier pegged at about $4 billion, has declined by about $103 million. This has been attributed to the slump in equipment and machinery prices due to the economic slowdown. The current project cost is estimated to be about $3.89 billion.

The Bhatinda refinery also will consist of a 1,101-kilometer pipeline connecting Bhatinda with Mundra in Gujarat and a downstream $1.03 billion polypropylene facility. The refinery is expected to help in the development of about 200 allied industries in the area, which is likely to create about 10,000 jobs.

In 2008-09, HPCL, a Fortune 500 company, recorded a turnover of $24.19 billion. The company operates two refineries--a 7.5 million-ton-per-year facility at Vizag and a 5.5 million-ton-per-year refinery at Mumbai. HPCL also holds a stake of 16.95% in Mangalore Refinery and Petrochemicals Limited (BSE:500109) (Mangalore, Karnataka), which operates a 9 million-ton-per-year refinery. Recently, HPCL acquired a 2.5% stake in Oil India Limited for $116.7 million.

For the first time since 2007, the global demand for oil is expected to increase in 2010, according to IHS Cambridge Energy Research Association (IHS CERA) (Cambridge, Massachusetts). The study also indicates that by 2012, oil demand will reach pre-recession levels. Growth in demand is expected to increase by 900,000 barrels per day by 2010 and touch 86.5 million barrels per day by 2012. Emerging economies are expected to spur the global demand for oil, with China leading the list of top consumers.

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