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Getting Future Ready
HPCL has rolled out investment plans worth over 30,000 crores over the next couple of years to upgrade and modernise Vizag & Mumbai refineries. The company is also a part of highly ambitious mega refinery & petrochemicals complex planned under the aegis of Ministry of Petroleum & Natural Gas, Government of India.
B K Namdeo, Director - Refineries, HPCL,speaks about ongoing projects and investment plans of the company, in an exclusive interview with Mittravinda Ranjan.

What does the fall in crude prices mean for the refiners in the short term and long term?
Refinery profitability depends on Gross Refinery Margins (GRM) and Refining cost of crude per barrel. GRM is market driven based on supply-demand of products in international market. Therefore, there is no direct correlation of crude prices with profitability of Refinery. However, indirectly, impact of crude prices is on GRM as 8-10 per cent of product from crude is typically used in refining of the crude oil as fuel which in turn reduces the gross product worth (GPW) value of the crude in the GRM calculation. Hence, decrease/increase in crude prices impact GRM to the extent of the crude used as fuel in refinery; in other words keeping same cracks (product prices - crude price) GRM will be higher in lower crude price and vice versa. In 2015-16, we have seen the crude prices were significantly lower in comparison to previous years and cracks were also relatively low, yet the refineries have posted better GRMs & profitability.

Another major factor is reduction in working capital requirement while crude prices are low. This will result in lower interest burden which enhances profitability.

The steady long term low crude prices give sustainable high profitability which will facilitate higher investment in Oil & Gas sector.

India is planning its first Greenfield mega refinery project being planned by consortium of HPCL, BPCL & IOCL under the aegis of Ministry of Petroleum & Natural Gas (MoPNG). How viable is the project in Indian context?
Let us take a look at the consumption pattern of petroleum products in the country which is one of the fastest growing sectors in India, projected to grow at 10-11 per cent per year. And if you look at, say, diesel/MS, they are growing at impressive rate of 8-15 per cent respectively on average. Total petroleum products consumption in India stood at about 183 MMT during 2015-16 while the overall refining capacity stood at 230 MMTPA which includes PSUs as well as private refiners.

So far, Indian refiners have carried out value addition and undertaken brownfield expansions of existing capacities and some of the grassroot refineries such as HMEL, BORL and Paradip refineries have come up in the recent past.

Assuming that the growth momentum remains the same over the next couple of years, by 2023-24 the refining capacity will get saturated and post that the demand will outstrip indigenous supplies. This will create a situation of import dependency to meet the demand of MS and diesel.

The proposed project is India’s first Greenfield mega refinery and integrated petrochemical project with 60 MMTPA capacity by HPCL, IOCL & BPCL planned under the aegis of Ministry of Petroleum & Natural Gas, Government of India. Engineers India Ltd (EIL) has been roped in as the consultant for this forthcoming project and is working on the configuration of the refinery after understanding the demand supply of petrochemicals. Once the Front end engineering and design (FEED) is complete, we may look at having synergistic partner(s) who would bring significant value in terms of investment, raw materials or experience/expertise.

At present the project is in preliminary stage where we are scouting for the land of almost 15,000 acres on the west coast as one-third of the land will go into green belt. If you talk about the viability, the industry realises the value and economic benefits of such integrated projects of sizable capacities and looks at around 15 per cent ROI as the minimum threshold for refining projects. Suitable incentives are required from the Government as viability gap funding.

Carrying out such projects is a herculean task which usually takes 6-8 years to commission.

What is the current status of integrated refinery & petrochemical project announced by HPCL in Rajasthan?
Integrated refinery and petrochemical projects bring significant value to the economics of business and the project cost is estimated to be 37,250 crores that would be spread over 5,000 acres of land in Rajasthan. There has been a delay in project due to unforeseen circumstances and currently we are in discussion with the Rajasthan Government to kick off the project but as of now there is no substantial information that we may be able to share.

Please share HPCL's plans on modernization & scaling up Mumbai and Vizag refineries.
If you take a look at the last year's numbers, our total sales volume was more than total combined capacity of HPCL and HMEL which stood at 27 MMTPA. We sold around 34 MMT of petroleum products out of which 7 MMT was procured from MRPL and private refiners RIL and Essar. Owing to the strong product demand, HPCL has decided for modernisation and scaling up of the existing capacities at both Mumbai and Vizag facilities and earmarked around ` 25,000 crores for investment over the next 4-5 years. These projects will also take care of the compliance to produce BS VI compliant fuels as mandated by the Government.

Current capacity of Mumbai refinery stands at 6.5 MMTPA which will be scaled up to 9.5 MMTPA with the investment of ` 4,100 crore in the first phase which will include upgradation to comply with BS VI standards targeted to be completed before 2020. Second phase of project will include bottom upgradation using slurry hydrocracking with investment of around ` 5,000 crores during the period 2018-2021, which will help us improve the GRMs.

The Vizag refinery project is one of the prestigious projects for HPCL and is one of the cornerstones of company's growth strategy. Current capacity of Vizag refinery stands at 8.3 MMTPA. We plan to expand the refinery from current 8.3 MMTPA to 15 MMTPA, which will include replacing one old CDU with modern energy efficient 9 MMTPA unit along with upgradation to BS VI and bottom upgradation facility. Additionally we are setting up hydrocracker to maximise the gains.

We have earmarked around 20,000 crores for Vizag refinery and targeting completion of this project in next four years. HPCL has already invested 2,000 crore to complete pre-project activity of setting up deep sea SPM terminal which will allow the very large crude carriers (VLCCs) to anchor to ensure crude supplies and also relocated storage terminals for black and white oil to ensure smooth execution of project.

Please talk about opting for slurry hydrocracking unit for bottom upgradation instead of setting up coker at Vizag.
Yes, HPCL is not taking the conventional route of setting up coker unit for bottom upgradation and opted to set up Hydrogen based resid upgradation. This is one of the advanced technologies for the refining industry and we are the first in India to adopt this trend which is giving a new direction to the bottom upgradation technology. Since Vizag refinery is very close to the airport, there is a restriction to install tall structures within certain air space. The height of coker unit is a major constraint for us because of the location.

Choosing hydrogen based resid upgradation such as SHCU has been a win-win situation for HPCL as this is the state-of-the-art technology which will enable us convert > 90 per cent resid as compared to 75 per cent in Coker unit plus completely eliminate production of heavy oils. There is a small amount of pitch that will be produced which can be used by the cement plants.

Moreover now there is greater awareness across the stakeholders and government has also become very particular about the environmental parameters compliance and we need to be prepared well to address such future challenges and move from conventional technologies to advanced ones.

What are the future challenges that you feel the refiners need to gear up for?
The first and the foremost is the environmental challenge as the government is becoming stricter towards compliance, take for example the decision to mandate implementing BS VI from BS IV by 2020. Hence, Refiners will have to be very selective about technologies which yield the desired margins as well as comply with the environmental norms.

Emission control is another critical area that the refiners have been addressing. Almost every refiner is using flue gas Desulphurisation and Sulfur recovery technologies to control sulphur emissions but over the period of time the authorities may introduce new parameters to control various other emissions. In my opinion, refiners need to be environmentally conscious and extremely selective regarding new technologies to sustain in the long run.

In years to come, refiners will have to move from standalone models to highly complex integrated refinery and petrochemicals facilities to ensure profitability and requires massive capital investments and careful evaluation of integration opportunities.

Alternative fuels like biodiesels, ethanol blending, etc are now gaining significant attention because of lesser environment footprint and this is another area which refiners need to pay attention and be more assertive towards improving the fuel quality.

Talking about the fuel quality, vehicular pollution due to diesel has been under discussion for some time and there is a gradual advent of electric cars that is now catching the fancy in developed countries. How do you see these two trends impacting the refiners?
Typically in a refining set up, diesel forms around 40-50 per cent of processed crude oil quantity, approximately 15 per cent of processed crude is MS and rest is other petroleum products. Any situation which demands more than 15 per cent of MS would require the refiner to process very light crude oil which may not be a very profitable proposition. Shortfall in MS demand may be supplemented through LNG/CNG based fuels if the availability increases for automobile sector. In spite of all the efforts, diesel demand is going to remain stronger in heavy vehicles for goods transportation.

As far as demand of diesel is concerned, I think that is going to increase in the years to come, however the only area that I see which needs to be addressed is improving the quality of diesel which can be done through R&D by the refiners.

Coming to electric cars, though the numbers are expected to increase, dependence on diesel vehicles is expected to continue in future. There are very many challenges like electric cars inability to go over long distances due to the constant need of recharging batteries and lack of infrastructure etc which need to be addressed to make a dent in the automotive market.