essay
Why not a refinery in Rajasthan?
2/3/2009  |  The Economic Times

Rajasthan and J&K are the only large states without a refinery. Rajasthan did not produce crude, and the market was relatively small till Cairn discovered crude. After commerciality was established, ONGC proposed in 2004 to build a refinery near Barmer.

Conversion facilities are usually set up near the source of the inputs or at the market for the output, as crude alone accounts for more than 90% of input cost.

Rajasthan's refinery project, however, was scrapped sometime in 2007. A few days ago, it was reported that the newly-elected Congress government there had approached the Centre to revive it. The petroleum secretary reportedly said that viability must first be established. This reasoning cannot be faulted.

The question is why did ONGC initiate this potentially unviable project? The simple reply is: ONGC did not create Rs 2 lakh crore value - the highest ever in India at the time - by pursuing unviable projects.

The case for this refinery is complex. Firstly, ONGC's interest was prompted more by the compulsion to cut losses rather than value addition through forward integration. While privatising exploration blocks, the private sector operator was given the 'right' to explore, but ONGC was made liable for 100% of royalty and cess. ONGC was allowed the consolation of a 'walk-in' option for 30% equity in case of commercial discovery. This policy to use public sector funds to subsidise the private sector still prevails.

In case of the Rajasthan discoveries, the impact on the ONGC balance-sheet was assessed to be a loss of $1 billion, over the field life-cycle. The management, with an eye to the interests of the company and shareholders (including GoI with 74%), decided to relinquish the licence. The 'parent' ministry pilloried ONGC for the anti-national act of discouraging FDI but had to assure ONGC that steps would be taken to mitigate the loss.

Based on this, ONGC retained the licence and exercised the option. It also opened talks to buy out Cairn. Had the ministry been honest with the assurance, the deal would have been closed. Given this context, ONGC decided to capture the margins for refining, product transportation and marketing to offset a fraction of the loss of paying Cairn's share of royalty and cess.

This continues to cost the people of India hundreds of crores of rupees every year. ONGC's under-recovery in case of the Rajasthan discoveries is high because cess does not consider inferior quality crude, compounded by high production costs because of reservoir characteristics. Transport cost is high too as pipelines and tankers have to be insulated and steam-traced to keep this crude in flowing condition.

The field development plan showed that peak production would be sustained for five years or so. A crude pipeline from Rajasthan to the coast would be fully utilised for five years, operate at declining rate for perhaps another 5-7 years and then be abandoned. In comparison, pipelines for crude, refined products and gas are running full capacity for over 40 years. Further, moving inland crude to the coast violates one of the cardinal principles of petroleum supply and distribution in India.

Cairn pointed out that under the contract, their responsibility ended with delivering crude to the wellhead. The option to process this crude at existing refineries was not available. The production profile in the field development plan did not justify a new refinery, so ONGC proposed the only viable option. It suggested building a 9 million tonne refinery to process a blend of sub-standard Rajasthan crude and 'champagne' quality Bombay High crude.

Then the crude pipeline between the coast and Barmer would be a low-cost one, bringing in Bombay High crude. As the local production declined, more crude from BH (or even imported) could flow in. For marketing, a product pipeline would go to the high-demand market in north-western Rajasthan / south-western Punjab, and another would connect this public sector refinery to the public sector pipeline network for Rajasthan, NCR and Haryana.

But the proposal was scrapped. The reason is obvious: this would cut into the markets of refineries to the south. In time-honoured style, the first step was to give the dog a bad name. Several wise guys emerged from the woodwork to proclaim that 9 million tonne is uneconomical and a 15 million tonne train must be considered.

What are the capacities for the inland refineries being built at Bina and Bathinda and the coastal refinery at Paradeep, pray? Nowhere near 15 million tonne. What were the design capacities for the last two refinery trains commissioned in the public sector? Six million tonne each. There was never a case for a 15 million tonne inland refinery, and public funds were wasted studying this option.

Another declaration: refining is not a profitable venture. In the last decade, the private sector has commissioned over 40 million tonne green-field refining capacity while the government controlled champions have notched up zero, except for the 0.2 million tonne by ONGC in 2001! Obviously, the Ambanis and the Ruias have been squandering money while public sector investment is safeguarded by ensuring no refinery project is anywhere near commissioning!

With the Barmer project slated to be studied anew, if the ministry again concludes that a 9 million tonne refinery for domestic crude there is not viable, it must withdraw immediately from the projects at Bina and Bathinda, designed on imported crude.

For Rajasthan, there is an excellent fallout of the 2007 decision to scrap the 2004 ONGC proposal. The Centre is to bear the capital investment and operating costs for the crude pipeline from Rajasthan to the coast.

Upfront, this is a commitment of more than $1 billion from the Consolidated Fund of India; and over half of this investment will have to be written off. The ministry can divert, say, only half to subsidise the refinery, and balance that with $500 million central funding.

Of course, no one would dream of casting aspersions on the petroleum minister's unquestioned innocence of the oil and gas business. For the new Rajasthan CM, this is a great chance to remedy Rajasthan's lack of refineries, and catalyse an industrial upsurge before the pre-poll code of conduct kicks in.

(The author, former Chairman, ONGC Group of Companies, is Chairman, Team Raha Ideation Ltd.)
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