Growth
through Energy Products
Petroleum Refining and retailing
is the second link in RIL's drive for growth and
global leadership in the core energy and materials
value chain. RIL has 1.24 million barrels per
day (MBPD) of crude processing capacity, the largest
at any single location in the world
A Year of Two Halves
Refining margins during the year
witnessed extreme volatility globally. They remained
healthy for the first half of the financial year
due to booming middle distillate cracks. However,
margins dropped significantly thereafter and lower
demand resulting in weaker product cracks. Gasoline
crack margins remained weak throughout the year
due to low global demand, particularly in the
US.
The year also witnessed unprecedented
crude price volatility. Crude oil prices peaked
during the first half of the year, with WTI touching
$ 145.3 /bbl in July '08. The surge in demand
from China, Middle East, Australia and Latin America
and geopolitical events played a significant role
in driving prices higher. What followed was plunging
prices with WTI averaging at $51 /bbl in the second
half of the year. This reflected a fall of 58%
compared to the average for the first half of
the fiscal.
In times of turmoil, what set
RIL apart was the complexity and ability to maintain
high operating rates. RIL altered the petroleum
refining scenario in India by building the world's
largest greenfield refinery The two Jamnagar refineries
that the Company operates are not only among the
largest in the world, but also among the most
complex, with a combined average complexity of
more than 12.0 on the Nelson Complexity Index.
Following the merger, RIL is among the Top 10
private sector refining companies globally. It
owns 25% of the world's most complex refining
capacity. RIL has become the world's largest producer
of ultra-clean fuels at a single location reaffirming
the Company's ambition of enhancing lives of millions
of Indians and tilting the energy balance in India's
favour.
Global Industry Overview
The global petroleum market has
been significantly affected since the summer of
2008 by the impact of earlier high prices, an
economic slowdown and the credit crisis. As per
the IEA, global petroleum product demand for 2008
declined by 0.2 MBPD. This was earlier projected
to grow by approximately 2.0 MBPD.
The year 2008 witnessed unprecedented crude price
volatility with prices peaking in the second quarter
of FY 2008-09. The spurt in crude prices was due
to a sudden surge in demand from China (pre-Olympics),
Middle East (power generation), Australia and
Latin America (gas outages) and combination of
geopolitical events. In the third quarter of FY
2008-09, crude prices plunged to lower levels
with WTI, Brent and Dubai averaging $ 59.1, $
55.5 and $ 52.8 /bbl respectively, almost half
of that of the previous quarter prices of $ 118.1,
$ 115.1 and $ 113.6 / bbl respectively. The depressed
price outlook for crude continued in Q4 FY 2008-09
with WTI, Brent and Dubai averaging further down
to $ 43.2, $ 44.5 and $ 44.3 /bbl respectively.
Average Crude Oil Prices
($ / bbl)
FY
2008-09 |
FY
2007-08 |
|
High |
Low |
Average |
High |
Low |
Average |
WTI |
145.3 |
31.3 |
86.8 |
110.4 |
61.4 |
82.0 |
Brent |
144.2 |
33.7 |
84.5 |
109.1 |
62.5 |
82.1 |
Dubai |
140.8 |
36.4 |
82.8 |
101.1 |
62.4 |
77.1 |
(Source:
Platts) |
Demand for Petroleum
Products
For the first time since 1983,
according to IEA, global demand for petroleum
products contracted from 86.5 MBPD in 2007 to
86.3 MBPD in 2008, a decline of 0.3 %. Non-OECD
countries, driven primarily by China, India, Middle
East and Latin America, showed a demand growth
of 1.4 MBPD for the same period. In contrast,
demand in OECD countries shrunk by 1.6 MBPD.
Oil demand in 2009 is expected
to fall by 2.4 MBPD to 83.9 MBPD, a decline of
2.7% from 2008, as per IEA. This decline is in
addition to the reduction of 0.2 MBPD seen in
2008. Majority of the demand-decline is expected
to come from OECD countries, while demand in non-OECD
countries is expected to remain flat.
IEA forecasts global oil product
demand to grow by 1.4% per year and reach 87.9
MBPD by 2013 reflecting an increase of 4.7 MBPD
over 2009. Demand growth is expected mainly from
non-OECD countries, with a growth of 5.2 MBPD
during this period. Asia, Middle East and South
America are expected to account more than 80%
of growth in global demand during this period.
In contrast, demand in OECD countries is expected
to decline by 0.5 MBPD. Even with likely economic
recovery from 2010, demand fundamentals are expected
to remain modest in the medium term, as per the
IEA forecast.
Diesel Demand
Diesel margins have been impacted
by weak demand as a result of economic slowdown,
sluggish industrial activity, capacity additions
and growing distillate stocks. US distillate stocks
are at their highest level in two decades, while
the implied demand for distillates has declined
10% this year, which is much more severe than
the 0.8% decline in US vehicle miles travelled.
US vehicle miles travelled have been fairly resilient
despite US gasoline demand being down 1.8% year-on-year
and diesel demand also down. Many industrial companies
have stated that recent performance was impacted
by destocking among customers, as well as by weak
demand. This has effectively exaggerated the drop
in end-market demand, which should rebound once
industrial destocking stops.
A major factor weighing on global
diesel margins this year is the increased production
capacity in India and China. Though short term
economics weighs less on investment decisions
than long term economics, global demand has been
weak and margins have been below reinvestment
levels. Much of the global refining capacity additions
coming online in 2009 are located in Asia, with
a significant proportion already operational,
start-up dates for several refineries' have been
pushed back. China and India are the only countries
that are set to grow distillation capacity and
increase their global market share. In terms of
upgrading capacity too, China and India are expected
to see the most significant increase in global
market share.
Jet Fuel Demand
The sharp decline in international
trade had a severe impact on the demand for air
transport; jet fuel has been a drag on world oil
demand for several months now. The airline industry
consumes about 6.0% of the world's oil in the
form of jet fuel. Physical exports of goods by
major exporting countries around the world (Germany,
Japan, Korea and Taiwan) declined at extraordinary
rates last year resulting in a near-complete collapse
in road, sea and air freight traffic.
Broadly, demand for jet fuel
is linked to variables such as industrial production
and GDP. Upward revisions to GDP growth for 2010
by international agencies suggests that demand
could strengthen in the coming months.
In the medium term, structural
drivers of demand could continue to undergo considerable
change. Gasoil is expected to remain the growth
engine followed by naphtha and gasoline. Residual
fuel oil is expected to see the lowest growth
due to continued substitution by natural gas in
power generation and heavy industrial
applications.
Light products driving
the growth
Demand for gasoline, which currently
constitutes 25% of the world petroleum market,
could see a slowdown from current levels. Growth
in demand for gasoline is expected to primarily
come from non-OECD countries while OECD countries
are likely to show a reduction in demand. The
reduction is more likely in the US as the impact
of the US Energy Independence and Security Act
of 2007 comes into force in 2011. Higher proportion
of diesel cars is also likely to impact demand
for gasoline in Europe. Japan is also projected
to experience a reduction in gasoline demand as
vehicle efficiencies improve. Increase in demand
from non-OECD countries is expected to be underpinned
by rapidly growing vehicle population in China,
India, Brazil and other emerging markets.
Changing trends
High oil prices and unprecedented
price volatility led to two energy shocks - the
first for consumers and the second for producers.
Since the last quarter of 2008, OPEC was faced
with shrinking oil revenue after a fiveyear price
boom. By January 2009, OPEC reduced its output
target by 4.2 MBPD below the September 2008 level
in order to stabilise declining crude prices.
In December 2007, US introduced
the 'Energy Independence and Security Act' which
mandates CAFÉ (Corporate Average Fuel Economy)
to increase to 35.0 miles per gallon (MPG) by
2020 from existing 22.0 MPG for light trucks and
27.5 MPG for cars. The US administration recently
announced the acceleration of the U.S motor fuel
economy standards, increasing the CAFÉ
target from approximately 26.0 MPG to 35.5 MPG
by 2016. This advances the previous rule by four
years.
Meanwhile, product specifications
continue to become more stringent in several regions
of the world. In most of the major oil consuming
countries like EU, Japan and some Asian countries,
sulphur will be virtually eliminated from gasoline
and diesel by the year 2009 with mandated maximum
content of 10 ppm. In USA, this is now 15 ppm
for diesel and 30 ppm for gasoline whereas Canada
already has a 15 ppm limit for both. Gasoil is
also being targeted, with Europe reducing the
maximum limit on sulphur from 2000 ppm to 1000
ppm from January 2008 and further to 50 ppm from
January 2009. This continuing global trend of
tightening of product specifications across regions
may present new trade opportunities for global
complex refiners like RIL, who have ultra-clean
product capabilities.
Demand for Petroleum
Products in India
Domestic demand for petroleum
products increased during the year from 118.8
million tonnes to 124.1 million tonnes, reflecting
a growth of 4.5% in FY 2008-09. The demand for
transportation fuels like diesel and gasoline
continues to grow with higher automobile sales,
improved road network and overall economic activity.
Gross Refining Margins
Refining margins remained strong
during the first half of the year on the back
of stable volumes and rising middle distillate
cracks. Refining margins came under pressure during
the second half following a marked slowdown in
demand that resulted in weak product cracks.
Gasoline cracks remained weak
throughout the year due to low global demand.
Crack spreads touched new highs for distillates
whereas HSFO cracks touched new lows during first
half of the year. In sharp contrast, cracks for
distillates narrowed due to lower demand for products
like diesel and jet kero in the second half of
the year. For the year under review, RIL's gross
refining margin (GRM) was $ 12.2 /bbl, a premium
of $ 6.4 /bbl over the Singapore complex margin.
The medium term outlook for complex
refining margins remains positive, as modest demand
could potentially pressurise simple refiners to
lower utilisation rates further. Expectations
that many of the new projects are likely to be
delayed puts strain on petroleum product supply
thereby supporting margins. In the coming years,
besides the supply-demand dynamics, refining margins
could be significantly influenced by the cost
efficiency of sourcing crude oil, manufacturing
reliability, crude oil and product evacuation
infrastructure and the ability to produce high
quality transportation fuels. The complex configuration
of both refineries, experience in global crude
sourcing and product placement, technical capability
to process heavy and sour crude and skilled manpower
is likely to give RIL a unique advantage positioning
it for top quartile margins in the industry.
Complex refiners like RIL could
gain further from (i) higher premiums for ultra-clean
products in the Western markets, arising from
stringent product specifications and (ii) changing
crude dynamics, resulting in wider Light- Heavy
differentials.
Refinery Capacity and
Utilization Trends
Growth in crude distillation
capacity continued with refiners adding more capacity
than the past two years, according to Oil &
Gas Journal's world refinery survey. Refinery
capacity increased from 85.3 MBPD to 85.6 MBPD.
In the year 2008, the only new capacity to start
operation was Sinopec's Quingdao refinery with
a capacity of 0.2 MBPD. There was some creep capacity
addition by players like Valero's Quebec facility,
LG Caltex's Yosu and Nippon Oil's Oita.
Refiners all over the world are
reducing operating rates following a drop in demand
and lower margins. The average capacity utilisation
rates in 2008 for refineries in North America,
Europe and Asia were at 83.6%, 82.8% and 83.2%
respectively as compared to 86.9%, 83.8% and 85.9%
respectively for the year 2007.
Regional Operation
Rate % |
|
Source : ESAI |
Global refining capacity is expected to increase
by 1.8 MBPD in 2009, with Asia accounting for
80% of the increase, as per IEA. Forecasts for
investments in the industry are to add 6.9 MBPD
of crude distillation capacity between 2009 and
2013, which significantly outpaces expected demand
growth. However, projects beyond 2009-2010 face
the risk of getting cancelled or deferred due
to credit crunch and weak economic outlook.
The ensuing supply overhang is
likely to result in reduced refinery utilisation
rates across the globe leading to capacity shutdowns
at simple topping refineries.
Performance Review
The consolidation of RPL's refining
assets with RIL's existing refining business gives
RIL a capacity of 1.24 MBPD. What sets RIL apart
in the context of global refining is the complexity
of its refineries. RIL owns 25% of the world's
most complex refining capacity. RIL has also become
the world's largest producer of ultra-clean fuels
at a single location.
Since inception of its refining
business a decade ago, RIL has been able to outperform
the benchmark Singapore complex refining margin.
RIL has been able to consistently
outperform the Asian benchmark due to the complexity,
which allows it to process heavy and sour crudes.
RIL also has the proven ability to place products
in Europe, Asia and the U.S. which has helped
it capture the best net back.
RIL processed 32.0 million tonnes
of crude and clocked an average utilisation of
97%, which is significantly higher than the average
utilisation rates for refineries globally.
Exports of refined products were
at $14.0 billion. This accounted for 21.0 million
tonnes of product as compared to 22.1 million
tonnes in the previous year.
Production of petroleum
products (in KT)
Product |
FY 2008-09 |
FY 2007-08 |
Gases &
Distillates |
28,000 |
28,500 |
Fuel oils and
solids |
4,450 |
4,600 |
Total Production |
32,450 |
33,100 |
RIL is increasing the competitiveness
of the DTA refinery in order to improve crude
processing flexibility, meet more stringent fuel
specifications and improvement in yields and efficiencies.
The coker heavy naphtha hydrotreater (CNHT) being
set up will help produce downstream products like
gasoline, paraxylene and orthoxylene from heavy
naphtha. Additionally, the kerosene hydrotreater
will help meet the dual requirement of higher
ATF production and to produce ATF which can meet
the changing stringent quality requirements, This
will upgrade the quality of ATF and help realize
higher premium apart from increasing the production
capability.
Simultaneously, RIL also upgraded
some of the existing facilities like the light
naphtha unionfining unit (LNUU) and the fluidised
catalytic cracking unit (FCCU). LNUU was upgraded
to improve availability of captive feed stock
for petrochemical units and to update the light
naphtha. The FCCU was modernised to reduce the
consumption of low sulphur waxy residue (LSWR)
and to optimise the production of low-sulphur
gasoline. Domestic Petroleum Marketing.
Domestic Petroleum Marketing
RIL's EOU refinery was converted
to non-EOU status in April 2009 and sales of MS/HSD
to PSU oil companies commenced from May 2009.
To a limited extent, RIL has also restarted retail
operations in southern and western states of the
Country.
RIL forayed into petroleum retail
in the year 2004 and made significant success
achieving a market share of 14.3% in April 2006.
However, RIL decided to suspend the operations
due to rising crude prices and lack of a level
playing field in the domestic market. While there
has been no change in the pricing environment,
falling crude and product prices have provided
windows of profitable operations.
Aviation Turbine Fuel (ATF) demand
has seen a dramatic fall with negative growth
of 1.9% in FY 2008-09 as against ATF demand growth
of 14.4 % in FY 2007-08. During FY 2008-09, passenger
traffic reduced by 6.9% in India due to economic
slowdown. This reduction in traffic has affected
the demand for ATF in the Country. RIL entered
this segment a few years ago and may expand its
network with a view to addressing this growing
segment.
The demand of petcoke in India
is presently around 7 million tonnes per annum
with Gujarat and Rajasthan accounting for 75%
of domestic demand. Petcoke is used largely in
the cement industry as a feedstock. Current demand
in India exceeds overall production capacity despite
the start-up of the coker at the new refinery
at Jamnagar. During the year 2008-09, RIL sold
a total of 3.18 million tonnes of petcoke. With
the commissioning of new capacities in the cement
industry as well as the setting up of captive
power plants by various industrial units, the
demand for petcoke is expected to increase.
Gulf Africa Petroleum
Corporation (GAPCO)
RIL took majority control over
GAPCO in 2007. GAPCO owns and operates large storage
terminal facilities and a retail distribution
network in several East African countries. This
acquisition has enabled RIL to expand its footprint
in the petroleum downstream sector. GAPCO consolidated
its position in East Africa during the year. The
terminals in Dar Es Salaam (Tanzania), Mombasa
(Kenya) and depots in Uganda and Tanzania were
fully operationalised, including commissioning
of white oil facilities and rail/road loading
facilities in Mombasa.
GAPCO emerged as the market leader
in the retail segment in Tanzania and was also
successful in winning several contracts for gas
oil and jet kero in Kenya. Significant reductions
were achieved in supply chain cost and the operations
were integrated into the RIL system.
The new SEZ refinery
at Jamnagar
RIL's new refinery in the Special
Economic Zone at Jamnagar, is the world's sixth
largest and has a Nelson Complexity Index of 14.0,
making it the largest and most complex refinery
globally. The refinery has a capacity of processing
580,000 barrels of crude oil per stream day (BPSD).
In addition to size and complexity, the SEZ refinery
has several advantages:
- Ability to process challenged crude varieties
- Able to produce Euro V grades of gasoline
and diesel
- Highly competitive operating cost due to
advantages of scale, technology and operational
synergies
- Capability to produce alkylates - a premium
gasoline blend component. It will have the
flexibility to maximize production of alkylate
by converting butane to isobutene
All key processing units, including
the Fluidised Catalytic Cracking Unit (FCCU),
Vacuum Gas Oil (VGO), Hydrogen Manufacturing Unit
(HMU), Diesel Hydro De-Sulphurisation (DHDS),
Propylene Recovery Unit (PRU), Coker unit and
the Polypropylene complex are operating close
to their respective design capacities. All the
support units and utilities are fully operational
and presently the refinery is operating at its
design capacity.
The refinery has successfully
processed more than 20 types of crude oils, including
difficult crude oils within a few months of its
start-up, thus reflecting superior quality of
assets and capabilities. Exports have commenced
to 26 countries, including to the US and Europe.
This is a significant achievement
viewed in the context of current market conditions
and reflects RIL's ability to produce and place
high quality, value-added products in a challenging
market environment.
RIL's objective is to maximise
the advantages of its high quality complex assets
and realise the synergies of the combined operations
of both refineries towards overcoming the ongoing
challenges in the industry and
sustaining superior margins.
The Company's focus will be on
sustaining high operating rates, improving efficiency
and reducing operating costs. RIL can leverage
the benefits of combined refining operations that
can result in unprecedented level of product flexibility
and swing capabilities.
From a marketing perspective,
RIL aims to expand its global reach in order to
ensure efficient product placement, maximise net
backs and achieve premium for ultra-clean fuels.
The continuing growth in India also presents an
opportunity to enhance volumes.
|