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India: Product placement

India is investing heavily in refining capacity to meet rising local demand and boost fuel exports

Undeterred by a surprise dip in gasoline demand earlier this year, Indian prime minister Narendra Modi is pushing on with the grand plan of turning the nation into a regional refining hub.

The recently-announced centrepiece of the vision will be the $26bn-32bn plant in western Maharashtra state with a capacity of 60m tonnes a year that will closely match that of India's biggest existing refinery, the Reliance Industries-owned facility in neighbouring Gujarat state.

Construction of the complex, which will produce gasoline, diesel, liquefied petroleum gas, aviation turbine fuel, and feedstock for petrochemical plants in the plastic, chemical and textile industries, should start later this year. Indian Oil Corporation will own half of the plant but, according to minister of petroleum and natural gas Dharmendra Pradhan, Saudi Aramco is interested in a stake.

The first five-to-six-year phase of the project will set up 40m t/y (about 0.8m barrels a day) of capacity with an aromatic complex, naphtha cracker and a polymer complex and a 20m-t/y (400,000 b/d) refinery. Already the second-largest refiner in Asia after China, India's capacity is expected to grow by nearly 7% this year to a total of 230.066m t/y, according to the Ministry of Petroleum and Natural Gas. And although crude throughput is forecast to increase by over 8%, that still leaves nearly 70m t/y of spare capacity.

Domestic demand won't take up the slack, so exporting is the solution. "India is currently surplus in refining capacity and exports more than 50m t/y of refined products," notes Deloitte Touche Tohmatsu India partner Debasish Mishra. "Coastal refinery projects help in importing crude and exporting products and
this planned refinery [in Maharashtra] would strengthen India's position as a refinery hub."

According to official figures, between April and November last year India exported 43.7m tonnes of petroleum products worth $18.6bn.

Right on cue, in April India Oil signed another export deal. Boosting long-standing arrangements, it will supply Nepal with all major refined products from gasoline to LPG between now and 2022.

This and other long-term supply arrangements mean India will pump more crude through its refineries in 2017. Although the final figures aren't in, total production from India's 23 refineries, including 18 government-owned facilities, is expected to rise by 0.39%, reaching 37.085m tonnes.

Capacity ramp up

With 31% of the nation's total refining capacity, India Oil is spearheading the development of the hub. The opening of its eleventh refinery at Paradip in the eastern state of Odisha in February will increase the state-owned company's capacity to 80m t/y, from the current 65.7m t/y. And in April, India Oil announced plans to triple the output of its Numaligarh plant in Assam to 9m t/y.

Further capacity is in the pipeline. After nearly five years of planning delays, construction will begin this year on a $6.5bn, 9m-t/y refinery at Barmer in Rajasthan state after funding was finally agreed. The government is working on a simple financial formula for boosting output. "The thumb rule is that setting up 1m t/y of capacity costs 25bn rupees ($390m)," estimates oil minister Pradhan.

As part of the grand plan, Modi is courting deep-pocketed outsiders. Last year India booked its single biggest-ever foreign investment in the refining sector when a consortium of Russian companies committed to a $13bn upgrade of the Vadinar facility in Essar. Modi is in a hurry to cultivate energy links with Russia and create what he calls "an energy bridge" between the two countries. Last year Indian public-sector companies paid $5.46bn for a nearly 30% stake in Russia's Tass-yurakh oilfield and a nearly 50% holding in Vankorneft, giving India equity oil of 15.18m tonnes. The construction of a gas pipeline from Russia to India is also on the table.

All this is happening despite the biggest slump in demand for oil products in ten years. According to energy consultancy FGE, in January total sales of gasoline and diesel fell by 2.5% year-on-year, a decline which it attributes mainly to the lingering after-effects of demonetisation that hit sales of two wheelers, particularly in rural areas, as well as to a temporary slowing in construction projects.

Still, FGE notes that "the effect of demonetisation should ease off in February in the road sector, leading to a rebound in gasoline consumption from March onwards".

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