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Sunday, October 9, 2011

Essar Oil set to complete Vadinar Phase I spread by December

This story first appeared in DNA Money edition on Wednesday, October 5, 2011.

Essar Oil is all set to be the second-most complex refiner in India after Mukesh Ambani’s Reliance Industries.

Growing at a compounded annual growth rate of 27%, Essar Oil is targeting to build overall capacity of 711,000 barrels per day (bpd) by March 2012 and will enhance it to 7,41,000 bpd by March 2013.

Reliance currently boasts of 1.24 million barrels per day (bpd) of crude processing capacity, the largest at any single location in the world.

Naresh Nayyar, chief executive - Essar Energy and managing director - Essar Oil, was not available for comments.

However, responding to DNA queries on capacity addition, a company spokesperson said that new capacity in the current fiscal will come from completion of Phase I at Vadinar Refinery in Gujarat (75,000 bpd) and Stanlow refinery (296,000 bpd).
The Vadinar optimisation exercise will give it an additional 30,000 bpd to be achieved by March 2013.

The company’s Phase I expansion plans at the Vadinar Refinery in Gujarat is on track and is expected to be completed by December. According to the company spokesperson, this capacity addition is being made at an overall cost of `8,600 crore funded through a mix of debt and equity.

“Vadinar refinery Phase 1 expansion project will increase production to 375,000 barrels per stream day (bpsd) from 3,00,000 bpsd and, more importantly, increase complexity significantly. The increased complexity means that the refinery can increase the proportion of heavy and ultra-heavy crude that it processes, and produce a higher proportion of middle and light distillates,” the spokesperson said.

Analysts tracking the sector said the new capacity will make Essar Oil the second-most complex refiner in India.

Saurabh Handa and Garima Mishra, analysts with Citi Investment, Research and Analysis, in a recent company report, said, “Besides an approximately 30% increase in capacity, the expansion would also increase Essar’s complexity to 11.8 from 6.1 currently, making it the second-most complex refiner in India after RIL.”

Industry experts also believe that completion of the Phase I project expansion will be a key driver of superior gross refinery margin (GRM) and profitability going forward.

Dikshit Mittal, analyst - oil and gas, SBICap Securities, said that refining margins have been on an uptrend and current refining margins ($9/bbl) are close to three year high.

“Strength in refining margins has been higher, mainly owing to increased gasoline margins. However, going forward the margins are likely to witness some pressure as the market situation in the west especially the US is not looking very good. In case US slips into recession, refining margins may come off substantially next year,” said Mittal.

Another Citi analyst, Oscar Yee, sees a slight pullback in 2012 as refining demand and supply delta is likely to turn slightly negative next year, based on Citi’s revised global oil demand forecasts (+1mm b/d p.a. in 2011-12E).

The concerns over a global slowdown, according to Yee, would hurt Europe / US refiners more as industry utilisation in Asia would remain relatively stable at 83-84% in 2012-13.

“We expect the next cyclical downturn to arrive only in 2014-15 with Middle East and China greenfield projects starting up. Overall, we forecast regional GRMs to drop slightly by $0.5-1.0 in 2012,” said the Citi analysts.

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