Why the Bhatinda refinery project will succeed

I read with interest that steel king Mittal has decided to buy 49 per cent stake in Guru Gobind Singh Refineries as an equal partner with state-owned Hindustan Petroleum Corporation Ltd to revive the Rs 16,000-crore (Rs 160 billion) refinery-cum-petrochemical project at Bhatinda in Punjab.

The news is that the steel magnate will invest over Rs 3,000 crore (Rs 30 billion) as foreign direct investment in the Bhatinda refinery. He will also be a partner in the 1,100-km pipeline being laid by HPCL to transport crude from Mundra port in Gujarat to the refinery.

My association with Bhatinda refinery is very emotional since it was because of this refinery project that I left my beloved Indian Oil Corporation after more than a decade of service to join Exxon's proposed downstream venture in India in 1998.

Exxon hadn't acquired Mobil then and was keen to enter India's fuel retail market and was seriously studying the option of taking a stake in HPCL's proposed refinery.

Exxon decided not to join the venture and since then the venture has largely remained on the drawing board. When I left Indian Oil, I had not even an iota of doubt in my mind about the viability of this project. India's refining capacity was much less then as the Reliance refinery had not yet been commissioned and the Panipat refinery was still not on full steam.

The Bhatinda refinery project has been in a state of limbo for far too long, for more than nine years now and has been fraught with uncertainties. It was only in August 2006 that the Punjab government signed a Deed of Assurance with HPCL. The present Punjab government virtually reneged on all previous tax exemptions granted by the Badal-led Akali-BJP government. Now with Badal back in the saddle in Punjab, things look bright for the refinery.

Big projects require active government support in terms of tax concessions and if any uncertainty exists or there is a wavering of the stand taken by the government(s) on these issues, these projects may never see the light of day.

The refinery project seemed to have evoked the interest of all oil majors but eventually none partnered the project. Exxon, Saudi Aramco, BP and even Oil India were wooed by HPCL, but none found the venture viable. There was a time when HPCL even announced that it would do the project alone, but soon realised that it was not up to it.

So is there is an eerie feeling that the Mittals have rushed in where the Exxons and the BPs feared to tread? Let us analyse the demand-supply scenario and try and arrive at the result.

The location and demand-supply analysis

India's petroleum consumption is growing at a steady pace.

The refineries have also kept pace with the petroleum consumption as the table shows.

The total installed capacity of all refineries put together as at April 1, 2006 was 132.46 MMT per annum.

There exists spare refining capacity of 11.46 MMTPA at April 1, 2006 over sales of petroleum products. The scenario has changed with the commissioning of 10.5 MMT Vadinar refinery of Essar.

Once the Essar refinery gathers full steam, the total refining capacity of the country would become 142.96 MMT per annum. This would mean that if the petroleum product sales at the end of financial year 2006-07 would be 126.08 MMT (at 4.2% -- highest since 2000-1 -- projected growth over 2005-06 sale of 121 MMT), there still would be spare refining  capacity of 142.96-126.08 = 16 MMT.

So is the Punjab refinery project not necessary? Do I hear people saying that what would happen when Reliance builds its new 30 MMTPA refinery in Jamnagar's SEZ?

The answer is that Reliance's proposed refinery would be primarily for export purposes and hence doesn't count in the current number game.

Critics still would point out that even 16 MMTPA spare refining capacity is quite large. It may look large now but if we take into account that India exported 21 MMT of petroleum products in 2005-06, the surplus refining capacity theory vanishes like a puff of smoke!

From a surplus scenario, the refining capacity would actually become deficit by 5 MMT in the year 2006-07!

Refinery business is all about scale and efficiency and location. Let me illustrate by taking a very simple example.

A refinery at the west coast of India is ideal as it is the first reach-point for any crude arriving into India from any of the crude exporting hubs, be it Middle East, West Africa or even Venezuela. If I am able to set up a refinery in Gujarat, I am able to supply petroleum products anywhere in India, through rail, road or pipeline.

But since India is a vast country, I will have to look beyond just the west coast-centric refinery plan. I can also build a refinery in Madhya Pradesh, which is centrally located. Having a refinery in MP would even be same as having a refinery at the west coast. All that I need to do is to spend on transporting crude from the west coast to the MP refinery.

But then I would have spent the same money on transporting the finished product from the west coast refinery to the MP markets too. So there is no loss in setting up a refinery in MP too.

The only disadvantage is that I will not be able to export petroleum products out of this MP refinery since the logistics cost would just double up. Similarly, I will not be able to service the markets near the west coast from MP as this would also means 'back-freighting' -- first getting crude from the west coast to MP and then again sending it back to the markets near the west coast for consumption.

But then the Bhatinda refinery doesn't need to look at exports at all, given the large market that exists in North.

(My American colleague suggests that Indo-Pak ties can improve so much that the Bhatinda refinery may even export fuel to parts of Pakistan's Punjab province.)

The refinery will first need a massive crude pipeline from the west coast to Punjab and since it would produce about 9 million tonnes of products, HPCL will have to tie up its output with other industry players.

The petrol and diesel demand of entire North India stands at 15.8 MMT (see table below).

As we know that petrol and diesel constitute nearly 40% sales of all petroleum products, we can extrapolate our figures to say that the sale of petroleum product in North India is at least 40 MMTPA.

If we compare this with total installed capacity in North (Mathura 8+Panipat 12 = 18 MMTPA), we will find that there is huge gap of 40-18= 22 MMTPA in the refining sector (in North India).

There is thus a fit case for a refinery in North. There are, of course, differing views of experts. Some say that the capacities of current refineries should be augmented rather than setting up a green-field refinery. This may look reasonable also given the fact that refineries need to be high-scale ones to have greater efficiencies, but then the Panipat refinery has already been expanded from 6 MMTPA to 12.

The Mathura refinery has also been expanded from 6 to 8 MMTPA. Where then is there a scope for enhancing the capacity of existing North India refineries?

Some experts are of the view that a new product pipeline connected to North India from western or eastern refineries is a better solution to meet the North's demand.

The reality is that even the Kandla-Bhatinda Product pipeline has been converted into a crude pipeline to feed the Panipat refinery. Crude pipelines are easier to handle than are product pipelines. They don't require many tap-off points to feed various terminals and since the crude pipelines handle only the crude, they are less susceptible to vandalism and pilferage.

There are only two product pipelines, which don't originate from either of the two existing refineries of North (Mathura and Panipat). These are the Baruni-Kanpur-Lucknow pipeline with 3.5 MMTPA capacity, and the Koyali-Sanganer pipeline with 4.1 MMTPA capacity. Even if we were to assume that the total throughput (7.6 MMTPA) of these two pipelines would be dedicated to eastern and central Uttar Pradesh and parts of Rajasthan, there still would remain a gap of 22-7.6 = 14.4 MMTPA in North India.

The choice thus is between laying new product pipelines to North India or building new refinery in one of the states that is far from the east and west coasts and yet has big enough market for petroleum products.

The Punjab refinery fits the bill to a T. So the right choice is to set up the Bhatinda refinery, connect it to a crude pipeline and then use the refinery to feed the markets as efficiently as possible. This is what HPCL plans too.

The joint venture: Poised for success

The irony is that oil companies in India have not been famous for joint ventures. Shell's joint venture, Bharat-Shell, is more or less a Shell-alone venture now. IBP-Caltex and Indian Oil-Mobil ventures were over before they could achieve any degree of success. So what is the guarantee that HPCL-Mittal partnership would succeed?

The answer lies in the fact that Mittals are Indians, while the rest of the want-to-be partners were foreigners. And Mittals understand the oil sector professionals now.

In Nigeria too, the Mittals want to partner HPCL for buying out the controlling stake in the Port-Harcourt refinery. Mittals also have been working well with ONGC's OVL in the upstream activities by forming ONGC-Mittal Energy Limited.

Mittals can bring to the joint venture their vast expertise in project execution and their unparalleled skills in managing the governments of all hues. A big project like this would also require tonnes and tonnes of steel. And who can help HPCL procure the requisite steel at lowest price? Who needs to worry when the Steel King himself is your partner!

I trust Mittal to manage things efficiently. He has, after all, managed his business well in countries and terrain as difficult as Romania, Bosnia-Herzegovina, Poland, South Africa and the Czech Republic.

The Churu-born, fifth-richest man in the world would surely want to make his mark in his own country. He needs to succeed in India and HPCL knows that if Mittal runs away they might never find another partner. The tenacity, patience and the need-to-succeed of the two partners would help the project be a success.

But what perhaps makes me most emotional is the fact that HPCL today is headed by a man called Arun Balakrishnan. He is the same man who in 1998 used to interact with the Exxon's team which had based itself in Mumbai to study the  Bhatinda refinery project.

I too was one of the few Indians in the team. It was then that our Team Leader had once said that, "This gentleman Arooon is a very, very nice man to know. He would one day be the head of HPCL."

The prediction has come true and the general manager of 1998 will take over as the chairman and managing director of HPCL on April 1, this year. On All Fools Day, I would cheer the loudest for "this man Arooon," as he deserves all his success. Just as the refinery too deserves to succeed.

Nine years is a very long time, but its not over as yet!

Sudhir Bisht is a management consultant and a freelance writer. Reach him at sudhir_bisht@rediffmail.com