Market forces: The growth of the private sector in India’s downstream

The private sector has transformed India from an importer to an exporter of petroleum products. Around 15 percent of the country’s total exports are now petroleum products. Private refiners Essar and Reliance together account for the export of roughly between 80 percent and 90 percent of all petroleum products in the country.

The private sector has also set benchmarks for their public counterparts with regards to energy efficiency, power costs and usability of heavy crudes. For instance, Essar Oil uses coal-fired stations to power its refinery, while most other refineries use fuel oil, naphtha or diesel to fire their power stations. We have demonstrated that producing power from coal saves about 15 percent in power costs compared to using oil to power stations.

What drives the technological requirements of India’s refiners?

Improving fuel quality to comply with changing environmental rules and regulations has been one factor driving technological innovation. Environmental standards for the production of petroleum products, particularly diesel and petrol, have changed substantially following the introduction of the Euro 3 and Euro 4 specifications. These standards require removing sulphur content. In order to do this, most Indian refineries had to be upgraded.

Additional technological changes are required to further process heavy oils which are cheaper and can increase the refinery’s profit margins. Such developments require establishing coker units and improving the complexity of the refinery to enable them to process heavier crudes and to further refine additional products.

For instance, Essar’s refinery had a Nelson complexity index of 6.1 in 2008, which was increased to 11.8 after a four-year upgrade programme. Higher complexities allow refineries to process crudes with very low API, high sulphur and a high total acid number, which are cheaper than light and sweet crude, therefore increasing a refiner’s profit.

How will the deregulation of diesel affect India’s retail sector?

Private companies such as Essar were not able to sell petrol and diesel from their retail network because prices offered by the private sector were much higher than those offered by public retailers who were benefiting from subsidies.

Following the deregulation of petrol in 2012, and of diesel in October 2014, private retailers are able to sell their products through their own retail outlets. The deregulation brought about market-determined prices for both products, which helped private retailers compete with state-owned companies because prices became the same for everyone.

This will increase the choice for the consumer and will ultimately lead to better services and competitive pricing.

Why has Essar set up its refinery in west India?

The entirety of northwestern India has seven refineries so far, in Mumbai, Bathinda, Panipat, Mathura, Koyali, Jamnagar and Vadinar. The last three of them are coastal refineries located in the state of Gujarat, present on the maritime routes to the Middle East and Europe. This means that any refiner is located only four days away from the Middle East and can get crude oil tankers to feed their refineries at very economical rates.

India’s market for petroleum products is very strong in this part of the country. The high demand for petroleum products there makes any refinery economically attractive, because the products can be sold very quickly.

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