By R. Sasankan

I seem to have triggered a sharp, polarizing debate among petroleum experts in the country after questioning in my article Refinery Exports: A Bane Or A Burden On Indian Consumers - which appeared in our Free Access column, Petro Intelligence, on January 25, 2019 – the wisdom of India priding itself on being one of the biggest crude oil importers in the world, on the one hand, and yet trying to establish a beachhead in the volatile world of petroleum product exports.

I wrote: “But the question remains: does it make economic sense for a crude oil importer to be a petroleum product exporter? What advantage does an Indian oil refiner have to enable it to compete with, say, a refiner in the US, Russia or the Middle East and sell petroleum products competitively in the global markets? This may sound like heresy but it isn’t… India, as a net importer of crude oil, has no marginal advantage in the export of petroleum products for the automotive sector. Refining margins are rarely that attractive… Refineries are capital intensive projects and the cost of capital is high in India. India has no technology advantage either since it acquires technology and even outsources engineering and design services to external consultants. The principle of eminent domain – whereby the government acquires land for a public good – does not work well because the country does not have adequate land in desired locations to house large industrial projects, given the fact that it usually involves large-scale displacement of people.”

I pressed on with this argument to lob a provocative question: was the Indian taxpayer subsidizing petroleum product exports?

The question isn’t disingenuous – and expectedly it raised a hornet’s nest. But first a caveat: Let me make it clear that my article was not directed against Reliance Industries or the state-owned refiners. My question was more generic and an occasion to raise an uncomfortable question that people tend to gloss over. Most people tend not to see the elephant in the room.

The article triggered a virulent debate. There were a lot of people in the energy sector who shared my concerns. But there were others who believed RIL’s investment in its refinery complex was a great success story and, therefore, favoured more investment in the refinery sector. I thought it might be a good idea to present the arguments of both sides and let readers make an informed decision on what is surely a touchy subject. The reactions to the article had a quality of freshness but it was also a surprise to see that some of our experts were still living in Cloud Cuckoo Land.

www.indianoilandgas.com prefers to present some unpleasant truths in the petroleum sector. Prime Minister Narendra Modi talked about creating a refinery hub a week ago, immediately after my article appeared. UPA’s finance minister Palaniappan Chidambaram spoke in the same vein a decade ago. Let me also recall that our magazine was the only one in the Indian media to report that the netback from the US crude imported by Indian refiners was negative: a disagreeable truth that most people do not wish to confront.

But back to the article that sparked a firestorm of reactions.

“I always thought that India ‘boasting’ of export of petroleum products (I knew it was huge, but did not know it was the topmost export!) was a big joke. As you correctly surmised when India imports 83% of crude oil, what is the big deal in exporting it? Is it really economics?” asked Dr Bhamy Shenoy, a US-based oil expert who worked with multinational oil companies and overseas regulatory bodies.

But in the same breath he expressed his great admiration for RIL for its super sophisticated refinery which handles one of the worst crude oils in the world (Venezuelan extra heavy crude) and converts it into highly valued petrol and diesel.

Subab Viswanthan, who spent most of his career in the oil refining sector, sees the entire issue through the prism of RIL’s refining success.

“Refining is real economics. As long as it makes money, that is profits, it benefits the economy and hence India. If someone is making money the right way, there is nothing wrong. It should be appreciated… It is India's luck that Reliance came along and had built two large refineries. From what I have heard from experts in the industry, Reliance is doing a great job in terms of overall management including safety and environmental concerns. Modern refineries can handle bad crudes very well. I take my hat off for (its ability to use) heavy crudes as feed. They are cheaper and Reliance has also succeeded in using the larger pet coke production for synthesis gas production, and subsequent use in the synthesis of other hydrocarbons… Without Reliance and its exports, the balance of payments situation in India would be dismal.”

According E. Nandakumar, former head of BPCL Kochi, himself a refinery expert with international exposure, reckons India's refining capacity is growing at a much higher rate than consumption and will result in increased export. Singapore is a similar refining hub where crude is imported and products exported. “Our PSUs’ refining margins are very much in line with Singapore margins. One key factor that explains why the PSUs have sustained these high margins is the ‘import parity pricing’ for domestic market. If the government decides to go in for ‘export parity pricing’, the Indian refiners’ margins will crash. Since Reliance is not selling much in the domestic market, they will not be affected,” said Nandakumar.

Former petroleum secretary Madhav Godbole acknowledges that my article has raised a very pertinent issue. In his view, there can be no real answer to the question I have raised until there is greater transparency in decision-making in the state and central governments. “We must insist on all hidden subsidies being made public,” he said.

“I fully agree with you that that selling refined products overseas would mean misuse of subsidy given to Indian refineries. It looks difficult to believe that Indian refineries can have advantage in refining margins to justify such exports of refined products,” said known energy expert Ajit Kapadia.

I must once again admit that I did not consider this issue from the perspective of RIL’s refinery. In my article, I had made it absolutely clear that RIL managed its refinery complex brilliantly. It is true that RIL’s refinery received a lot of concessions from the government. But so did the PSU refineries from the concerned state governments. My submission is that this controversial issue should be looked at from a larger perspective.

Permit me to point out that Reliance is not the only one who buys sour and heavy crude from Venezuela. The US has been the biggest importer of such crude and US refineries refine that crude with far more stringent environmental norms. Converting pet coke to Syngas is part of the environmental requirement in the US – a rigorous condition that Indian PSUs do not have to grapple with. Reliance did what they saw the best in the industry and it deserves credit for that.

Reliance is not achieving a gross refining margin of 14% as suggested. Nobody does that. RIL could avoid double handling in earlier years by selling a large chunk of petroleum products to India itself. At that time, the country was importing petroleum products so Reliance got benefit of deemed exports without exporting anything.

Singapore lies right in the middle of crude oil destinations. So there is no double handling. Plus Singapore is the world's most efficient port. But even Singapore has not really expanded its refining capacity since 2000. It was about 1.4 million barrels a day in 2000 and, today, it is around 1.5 million barrels a day due to some rationalization. So in the last 18 years, the capacity has remained much the same. They must have a reason to do so. Also, there is a history to it -- Caltex, Chevron, Shell and more recently Exxon simply set up refineries for the Asia region in Singapore because they got completely free infrastructure right in the middle of the shipping lanes.

Product exports do not help balance of payments as one has to import crude first and pay for shipping twice. And even if there is a small net benefit, one must weigh-in the cost of scarce local capital and infrastructure such as land water and electricity (that is using imported coal and gas).

Finally, if there is a forecast of surplus refinery capacity worldwide, then why should we build more? It would be simple to import your requirements at the lowest competitive margin. All you need to create is only so much refinery capacity as will be sufficient to meet the so-called “security” considerations – and always remain conscious of the fact that even this is heavily dependent on crude imports. The eternal quest for that elusive goal of full self-sufficiency is really a mug’s game.