Refinery economics is highly dependent on crude oil
sourcing. The cost involved in the crude oil sourcing forms the single largest
cost component in the refiner’s economics. Costs and payback periods for
refinery processing units must be weighed against anticipated crude oil costs
and the projected differential between light and heavy crude oil prices. Using
more expensive crude oil (lighter, sweeter) requires less refinery upgrading.
Using cheaper heavier crude oil means more investment in upgrading processes.
Thus, crude oil sourcing plays a very critical role in the refinery economics.
In order to optimize their cost, Indian refiners are now trying to diversify
their crude oil sources and trying to procure cheap and opportunity crude. Also
other factors like decreasing availability of sweet crude, US sanction on Iran,
up-gradation of existing facilities; are the reasons behind India re-thinking
its crude oil sourcing strategies.
Around 80 percent of the India’s crude oil needs
are met by imports. Recently, India has overtaken Japan as the world's
third-biggest crude oil importer in 2013. India imported 3.86 million bpd of
crude oil last year with Middle-east being the largest exporter of crude oil to
India. In 2012, over 64 percent of crude imports came from Middle East. In 2010,
US sanction on Iran, gave a jolt to India, forcing it to find replacement for
Iran crude. Iran was once the second-largest supplier of crude to India after
Saudi Arabia. So far, much of the switching by state refiners has been to other
Middle East sources, such as Saudi Arabia and Iraq, which are now the top two
suppliers as Iran has slipped to number six.
Many Indian refineries are now
being equipped with upgraded plants to handle the heavier grades of crude oil
currently being produced. With a Complexity Index of 11.3 (as defined by the
Nelson Complexity Index) RIL's refinery at Jamnagar is able to process heavy
and sour crude oils to produce high value products. BPCL`s INR. 14,225 crore
expansion project - Integrated Refinery Expansion Project (IREP) at Kochi, is
expected to be completed by May 2016. The refinery will be able to process
cheaper high sulphur crude oils once the project is implemented. IOCL’s 15
MMTPA refinery project at Paradip, Orissa, presently under construction is
expected to commission by 2014. It will also be a state of art refinery that
will be able to process high sulphur, heavy and high TAN crude oil to tap the
opportunities presented by cheaper crude varieties. With upgraded plants, Indian
refiners are trying to explore heavy crude options which are cheap to procure.
As can be seen from the graph, the percentage of imports from South and Central
America and Africa is increasing over the years. These crudes are mostly of heavy
grades. These crudes will provide an opportunity to Indian refiners to earn a
return on the billions of dollars spent in their plants upgrations, thus improving
their margins.
Graph: Relative Distribution of Region-Wise
Crude Oil Import in India
Source: BP statistics
Indian refiners are moving
towards Latin American oil, drawing the benefit of cheap crude that have lost
its market in the United States to shale oil. In 2005-06, Latin American oil
accounted for a scant 2.3 percent, or 46,200 bpd, of India's crude imports but
by 2012-13 that had jumped to about a fifth, or 672,400 bpd. The half of Latin
America crude (300,000 bpd) was under a long-term deal between Venezuela and
RIL’s Jamnagar refinery. MRPL has become the first Indian refiner to buy
Argentina's medium-sweet Escalante grade. MRPL is targeting as much as 40,000
bpd (about 15 percent of its overall needs) from Latin America in the FY
2014-15. IOCL, leading refiner in India, is planning to buy 10,000 bpd from
Colombia in 2014-15 and wants to buy oil from Venezuela. It has been buying
Mexican oil since 2012 and aims to get a trial cargo of Brazilian crude in the
coming months.
In the coming years, there might
be huge changes in the India’s crude oil sourcing strategies due to changing market
dynamics. To reduce its dependence on any particular region of the world, India
has been consciously trying to diversify its sources of crude oil imports. In
this diversification strategy, there might be a visible shift from light to
heavy crude, as India’s state-run refiners join private players Reliance and
Essar Oil in the race to improve their refining margins. Also, in more recent
years, the supply of light sweet crude has declined and newer sources of crude
oil tend to be heavier. More complex facilities are coming up in the country
that will further this trend.
Infraline Energy Upstream Knowledgebase Team
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