Change in Petroleum FDI policy : Impact assessment - Mr. Sanjay Kaul

Sanjay Kaul

Change in Petroleum FDI Policy-Impact Assessment

Introduction: Latest reform in Petroleum FDI Policy

Similar Precedents & their impact: E&P, LNG terminals, Pipeline Infrastructure

Impact assessment PSU refining FDI reform: opportunities created

Swifter expansion of current capacities & establishment of integrated refinery-

petrochemical complex: IOCL: Panipat, Gujarat & Paradip Refineries; BPCL: Kochi

refinery; HPCL: Vishikapatnam

Renovating current technology processes in order to be more flexible both in

terms of input & output: IOCL: Panipat, Gujarat, Barauni, Guwahati, Digboi &

Haldia Refineries; BPCL: Mumbai & Kochi refinery; HPCL: Mumbai & Vishakapatnam;

MRPL, CPCL, Numaligarh

Confidence in existing & prospective JV partner because of greater liberty (option)

to alter exposure in a project: HPCL-Mittal refinery

Indian Offshore FDI retraction: Videocon exposure in Mozambique

Embedded Strategic Opportunity

PSU refiners can lead the Refining global trend

Balance India’s Energy imports dependency with creation of Regional refining

Hub in India catering to the Subcontinent & South East Asia

Example of Reliance Industries, Jamnagar complex

Supporting information & references

Mr. Sanjay Kaul is the Founder President of the

University of Petroleum & Energy Studies &

Member - Executive Council, CPIES

For more about the author please click here.

pg. 2 For any query please write to [email protected] © 2013 Centre of Policy Initiatives & Energy Studies (CPIES)

Executive Summary:

Historically two trends are salient; FDI reforms in Petroleum Sector have shown

little or no impact & Refinery sector has attracted 40% of all FDI in the sector over

2001-10. India also has a successful precedent that if a complex (flexible) Indian

refinery is integrated with petrochemical plant and has enough scale, then it can

be extremely competitive in the world market.

As consumption shifts to Asia and Indian product pricing become market

determined, this reform would be a good opportunity for International Oil

Companies (IOCs) and Indian PSU refiners (having majority of capacity) to work

together. While the former can share technology in exchange for access to Indian

market, the latter can expand and cater to South Asian & South East Asian

markets.

This reform may induce confidence in current JV partner of projects like that in

Bina & Bathinda by giving them ability to manage their exposure in the project. It

would give an opportunity for Indian FDI abroad, especially in Petroleum assets

like Mozambique to be brought back.


Latest reform in Petroleum FDI Policy

All the activities in the O&G Sector enjoyed 100% FDI via

Automatic route except Refining in Public Sector where

49% FDI was allowed subjected to approval from the

Foreign Investment Promotion Board. Leaving the cap

unchanged, last week, GOI decided that FDI in refining

sector could be via automatic route.

Similar Precedents & their impact: E&P, LNG

terminals, Pipeline Infrastructure

Policy reforms including FDI limit & route are not new to

the Indian Petroleum Sector; however the similar

precedents in E&P, LNG terminals, Pipeline Infrastructure

have shown limited improvements. Bottle necks in

clearances, price policy, PSU monopoly, non-

implementation of current provisions like open access

have been the primary reasons.

The upstream sector, opened via NELP, has seen

considerable traction in terms, however pricing policy and

inordinate time for clearances (especially development

plans, environmental & defense approvals) have led to

IOCs such as Australia’s Santos, Italy’s ENI, UK’s BG,

Norwegian Statoil and Brazil’s Petro bras relinquishing

their respective blocks. In a country where 70 approvals

from different agencies are needed just to drill a well,

developing a field, where discovery is declared as

commercial, can itself be a real challenge leave aside

pricing issues.

PMOs intervention of granting special sanction for 46

blocks was a case of just too late, too little. Of the 248

PSCs over the last decade, 70 Gas discoveries were made

of which 50 discoveries remain undeveloped. This is

alarming for a country which spends close to 60 percent of

its hard cash reserve in importing Oil/Gas every year and

gives away another INR 1,50,000 crores ($ 27.27 billion) as

petroleum subsidies. More than enough to support the

> 49% FDI in PSU refining now

allowed via automatic route

>Earlier similar FDI reforms have

limited or no impact due to other issues

like clearances, pricing, PSU monopoly et

al.

>LY Australia’s Santos, Italy’s ENI,

UK’s BG, Norwegian Statoil &

Brazil’s Petro bras relinquishing their

respective blocks


entire GOI public health expenditure for the last five year

plan!

In addition to the upstream constraints, Gas downstream

sector, including Pipeline Infrastructure & LNG

Regasification Terminals, have seen limited interest from

the global O&G fraternity. Shell is the only IOC which

operates INR 3000 Cr ($ 545 million) 2.5 mmtpa terminal

at Hariza and is coming up with a 5 mmtpa FSRU at

Kakinada in the east coast. Since 2006, PNGRB issued

licenses for 31,000 KM pipeline but none was a foreign

concessionaire. India’s current gas demand is double the

present supply (160 mmscmd) and would be in excess of

470 mmscmd by 2020, amidst a forecast that ample Gas is

available in the world market.

In all, over the period 2000-2010 Indian Petroleum Sector

attracted $3.2 billion, a mere 2.46 per cent of total FDI

inflows in the country. Of this $1.17 billion was in refining

alone. How will reform in FDI in refining impact the Indian

downstream sector remains to be seen.

Impact assessment PSU refining FDI reform:

opportunities created: The approval for FDI (49%) via

automatic route in PSU refineries is a forward looking step

which has the potential of fast tracking the

competitiveness curve of Indian refineries and in turn has

embedded strategic opportunities for India, PSU refiners

and IOCs.

Swifter expansion of current capacities & establishment

of integrated refinery-petrochemical complexes: PSU

refiners like IOCL, BPCL, HPCL are either planning or adding

integrated petrochemical processing in their current

refineries. The new FDI norm allows them to swiftly

collaborate with foreign entities having latest technology.

IOCL is implementing SBR unit at Panipat (utilizing the

Butadiene available from the Naphtha Cracker).

> Pipeline infrastructure, Regasification

terminals projects have seen little interest

from global fraternity

>Out of $3.2 billion FDI in petroleum

sector in last 10 yrs $ 1.17 billion have

been in refining

>IOCL, BPCL, HPCL are all have

plans to build intergrated petrochemical

complees


>> Plans to implement

PX/PTA complex (capacity

370/570 KTA respectively).

>> Expanding Lab unit

capacity by 35%

>> Plans Poly Propylene unit (680 KTA)

>> Implementing SBR unit -

120 KTA (Utilizing the

Butadiene available from

Panipat Naphtha Cracker)

>> Plans to diversify into

Petrochemicals (in two

phases)

>> Proposal: To set up a 1.5

MMTPA Naphtha Cracker

and its integration with the

refinery off gas streams

(under Phase-II) to produce

80,0000 TPA of Ethylene and

250000 TPA of Propylene

>> Plans to setup an integrated 15

MMTPA capacity joint venture Refinery

cum Aromatics with Petrochemicals (1

MMTPA Ethylene)

>>Plans to produce POL Products

conforming to EURO V specifications by

2017-18 (Production capacity)

complex.

Panipat

Gujarat

Kochi

Vishakapatnam

Haldia

Refinery Petrochemical integration Projects – Planned (except Panipat )


It plans to implement PX/ PTA complex, Pet coke

gasification, Acetic Acid unit, a Cumene/ Phenol unit &

Oxo-Alcohols/Acrylic Acid/ Acrylates (utilizing the

propylene available from FCC units) in its Gujarat refinery

and Poly Propylene unit at Paradip refinery.

BPCL have plans to diversify into Petrochemicals at its

Kochi Refinery unit in two Phases. (Phase 1- comprising of

Propylene based derivatives based on Propylene obtained

from FCC unit being installed as a part of Integrated

Refinery Expansion Project & Phase 2 - comprising of

Ethylene and Propylene based derivatives through a

Naphtha cracker route). Production of Butadiene,

Aromatics and CBFS is also proposed from the Naphtha

Cracker.

HPCL intends setting up of an integrated 15 MMTPA

capacity joint venture Refinery cum Aromatics with

Petrochemicals complex at Visakhapatnam PCPIR in

association with GAIL. It has also announced setup up

another Refinery in Rajasthan.

Renovating current technology processes in order to be

more flexible both in terms of input & output: Though,

India more than tripled its refining capacity to 184 MMTPA

over the last 13 years, major up gradation and

modernization plans are in place for 12 refineries. PSUs

plan to invest INR 88,211 crores ($ 16.03 billion) during the

12th Five Year Plan. Considerable part of this investment is

for modernization. The latest FDI reform can assist in this

process by hastening up the involvement of international

players possessing latest technologies. The three major

refining PSUs along with MRPL, CPCL, NRL have up

gradation projects like residue up gradation, MS/HSD

quality improvement, improving distillation yield

(Hydrocracker revamp), Diesel Hydo Treatment, Lube Oil

Base Stock improvement, revamp of NHT/CRU at Gujarat

Refinery, Haldia, Panipat, Barauni, Guwahati, Digboi,

> 22 of 27 refineries in India

have plans for capacity of

expansion & up-gradation for

making themselves flexible in

terms of input & output


Bongaigaon, Mumbai, Kochi, Vishakapatnam, Chennai &

Numaligarh Refineries.

Gujarat Refinery

>> MS & HSD Quality - BS- IV

>> Distillate yield - from 68% to

75%

>> High Sulphur Crude - 26% to

> HSD Quality - BS-III/IV

> Distillate Yield - from 64% to 67.3%

> Capacity expansion - from 6 to 7.5

MMTPA

>> Low cost expansion - from 12

to 15 MMTPA

>> HSD Quality - BS-III/IV9

MS Quality - BS-III

MS/HCD Quality -

BS-III/IV

>> Naphtha - to Euro-III/Euro-

IV MS

>> Hydrocracker Unit capacity -

from 1.75 to 2.0 MMTPA

>>HSD Quality - Euro-IV

>> LOBS Qualities - From >>

Group-I to Group-H/Group-

III

>> New FCC - 1.45 MMTPA

HSD Quality - To Euro-III

HSD - To Euro-III

>> HSD QUality - Euro-III/IV (Diesel

Hydro Treater Project)

Capacity – from 9.6 to 15

MMTPA

>> MS/HSD Quality - Euro-IV

>> Refining capacity - from 9.5 to 11.1

MMTPA

HSD Quality - Euro-

III/Euro-IV

Panipat

Gujarat

Mumbai

Mangalore

Kochi

Chennai

Vishakapatnam

Haldia

Barauni Bongaigaon

Numaligarh

Digboi

Guwahati

Refinery Expansion & up-gradation

Projects (planned)


Confidence in existing & prospective JV partner because

of greater liberty (option) to alter exposure in a project

like in the case of Bina (BPCL-Oman Refineries) & Bathinda

(HPCL-Mittal Energy).

Indian Offshore FDI retraction: The FDI relaxation can help

divert the Indian FDI in foreign petroleum assets back to

India. For instance, sale of Videocon’s equity stake in

Videocon Mozambique Rovuma 1 Ltd. to OIL-OVL would

generate proceeds in tune of $2.47 billion. A portion of

this could be invested in India.

Embedded Strategic Opportunities

PSU refiners can lead the Refining global trend: Closure of

US & EU refineries under capacity & margin pressure due

to hefty environmental regulations and deceleration of

captive demand. The shift of demand to Asia may be an

opportunity for Indian Refiners to enhance scale &

technology (to effectively handle variety of crude and

produce most desired product mix) through acquisition of

these refineries. Unfortunately, there is addition in

refinery capacity across Asia despite global oversupply.

In last 12 months China alone has added 500,000 bpd

while is building another 1.6 million bpd to be

commissioned on or before 2015 apart from 2.6 million

bpd which are at early stage of planning. 5 million bpd

refining capacity will be built in Middle East countries

2010-18, representing more than 20% of global expansion

during the period and boosting regional capacity by nearly

60%. Saudi Arabia and Iran plan to raise refining capacity

by 1.2 million bpd each through 2018.

As Indian refiners would try to juggle rising competition,

oversupply, low average margins, shifting cyclicality and

continuous effort towards operational excellence, capacity

correction may be inevitable. Oil Marketing PSUs would

benefit from collaboration with IOCs and move down the

learning curve faster. ROCE for Exxon –Mobile refineries

has been consistently higher and stood at 15% in 2010.

> FDI reform may enhance confidence

in current & prospective JV partners

Videocon can invest its $2.47 billion

proceed from Mozambique sale in

refinery sector in India

>Global over supply & capacity

expansion in Asia. 20% of global

refining expansion in Middle East

>At 89 mbpd Current supply is in

excess of oil demand


This FDI reform would help Indian national oil marketing

companies to optimize their operations and strategically

align them for the future challenges.

Balance India’s Energy imports dependency with

creation Regional refining Hub in India catering to the

Subcontinent & South East Asia: Developing on

improving refinery efficiency & complexity and using

location advantage, India could export its petroleum

products to the surrounding high growth high potential

markets like Myanmar, Thailand, Vietnam, Lao PDR,

Pakistan, Sri Lanka, Bangladesh et al.

Example of Reliance Industries, Jamnagar complex:

Reliance’s (which exports majority of its products) model

of high degree of integration at the Jamnagar complex (a

petroleum refinery, petrochemical complex, power

generation) is another example. It allows for feedstock

and product linkages that continue to lead to higher

efficiencies and enhanced value addition. Use of

technologies like Hydrodesulphurization, Catalytic

reforming, Fluid Catalytic Cracking, sulphur recovery,

hydrogen regeneration et al lead to features like zero

‘black oil’ production and high proportion of high value

products.

Prospective scale & flexibility of its

refineries India may be developed as

refining Hub for South Asia & South

East Asia.

Reliance is an apt example which exports

majority of its petroleum products


Conclusion: FDI reforms in Petroleum Sector have shown little or no impact due to absence of

other critical reforms (pricing, monopoly) & clearance delays. Refinery sector

which has attracted 40% of all FDI in the sector over 2001-10 can benefit from the

latest reform because this would be applicable in ongoing profitable projects with

minimum or above mentioned bottle necks.

India also has a successful precedent that if a complex (flexible) Indian refinery is

integrated with petrochemical plant and has enough scale can be extremely

competitive in the world market.

As consumption shifts to Asia and Indian product pricing become market

determined this would a good opportunity for IOCs and Indian PSU refiners

(having majority of capacity) to work together. While the former can share

technology in for access to Indian market the latter can expand and cater to South

Asian & South East Asian markets.

Moreover, it is imperative that some capacity correction is inevitable and only

setups would be able to survive which have significant advantage in terms of scale

& flexibility.


Supporting information & References

The Petroleum FDI policy latest shape

Activity FDI Cap/Equity Entry route Others condition

E&P 100% Automatic Subject to the Sectorial regulations of the MoPNG Subject to sectorial policy

Refining >>49% for public sector undertakings (PSUs) without involving any divestment or dilution of domestic equity in existing PSUs; >>100% for private companies

>>Foreign Investment Promotion Board (FIPB) for PSUs has been changed to Automatic Route >>automatic route for private companies

>>Infrastructure related to marketing of petroleum products & NG, >>marketing of NG & petroleum products, >>petroleum product & NG pipelines, >>LNG regasification infrastructure, market study and formulation,

100% Automatic


Trend of FDI in Indian O&G Sector

http://petroleum.nic.in/refinery.pdf

http://www.bain.com/Images/BAIN_BRIEF_Global_refining.pdf

http://www.ril.com/downloads/pdf/about_jamnagar.pdf

http://www.atkearney.com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/refining-2021-who-will-

be-in-the-game-/10192

MoPNG

http://www.business-standard.com/article/companies/royal-dutch-shell-india-unit-to-invest-1-bn-for-

lng-terminal-113021201055_1.html

http://profit.ndtv.com/news/industries/article-hpcl-board-okays-joint-venture-with-shapoorji-pallonji-

for-lng-terminal-319100

http://petroleum.nic.in/refinery.pdf

http://www.bain.com/Images/BAIN_BRIEF_Global_refining.pdf

http://www.ril.com/downloads/pdf/about_jamnagar.pdf

http://www.atkearney.com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/refining-2021-who-will-be-in-the-game-/10192

http://www.atkearney.com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/refining-2021-who-will-be-in-the-game-/10192

http://www.business-standard.com/article/companies/royal-dutch-shell-india-unit-to-invest-1-bn-for-lng-terminal-113021201055_1.html

http://www.business-standard.com/article/companies/royal-dutch-shell-india-unit-to-invest-1-bn-for-lng-terminal-113021201055_1.html

http://profit.ndtv.com/news/industries/article-hpcl-board-okays-joint-venture-with-shapoorji-pallonji-for-lng-terminal-319100

http://profit.ndtv.com/news/industries/article-hpcl-board-okays-joint-venture-with-shapoorji-pallonji-for-lng-terminal-319100

Change in Petroleum FDI policy : Impact assessment - Mr. Sanjay Kaul

Education

indian fdi

indian petroleum sector

impact refinery sector

refining sector

fdi limit route

salient fdi reforms

indian market

indian psu refiners