Refining Outlook
&
Risk Management
by U.K. Basu, MD, MRPL
Mangalore Refinery and Petrochemicals Ltd.
Forecast on Energy Demand by type
Energy Consumption by Type
20000
18000
Liquids
Natural Gas
Coal
Nuclear
Renewables
16000
14000
mtoe
12000
10000
8000
6000
4000
2000
0
2000
2005
2010
2015
2020
2025
2030
Source: EIA. DOE
Refining Outlook and Risk Management - U.K. Basu
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Petroleum Products:
Supply & Demand Scenario
Region wise Consumption ot Petroleum Products
(million barrels per day)
Africa
Non-OECD Europe & Eurasia
Middle East
Central & South America
OECD Asia
OECD Europe
Non-OECD Asia
North America
0
5
10
15
2004
20
25
30
35
2030
Source : International Energy Outlook , EIA 2007
Refining Outlook and Risk Management - U.K. Basu
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Primary Energy-Forecast on India
• By 2030 India’s energy demand will increase by
204% of the current levels*
• With high real GDP growth rate of 8+% , the
industrial demand for feedstock will grow
considerably
• Growth in consumption driven by economic
growth and the increasing transportation demand
* Source: IEA statistics 2007 & EIA forecast
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Global Refining
• Global refining capacity ~87.9 million barrels per
day in 2007, utilization rate ~85.9%
• USD 2,540 bn revenue generated by oil & gas
sector in 2007
• 63% revenues generated by refining & marketing
sector
• Europe & US together accounted for ~55% of the
refining and marketing revenues
Source : BP - 2008
Refining Outlook and Risk Management - U.K. Basu
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Global Refinery capacity
N.America
S&C. America
Europe
Middle East
Asia Pacific
Africa
164
165
165
166
163
160
166
151
1077
1087
1093
1084
1127
1143
1192
1225
314
329
336
344
354
355
360
375
1237
1235
1244
1247
1253
1253
1254
1246
325
322
326
329
330
331
333
324
993
1005
1003
1012
1021
1032
1040
1044
2000
2001
2002
2003
2004
2005
2006
2007
Capacity in MMTPA
• Newer capacity additions are in Asia Pacific and Africa while other regions are almost
stagnant
• Global capacity additions in 2007-12: 600 MMTPA with surplus production of 250-300
MMTPA (~50%)
• Asia’s share of global refining capacity to increase from 27% to 34% from 2006 to 2015
Refining Outlook and Risk Management - U.K. Basu
Source : BP - 2008
6
Refining Capacity in India
Installed Refining Capacity by end of plan terms, MMTPA
302.26
240.96
148.97
104
54
54
VII (1992)
VIII (1997)
IX (2002)
X (2007)
XI (2012)
XII (2017)
Source : MoP&NG
India to contribute significantly to capacity additions – to add ~87
MMTAP between 2006 to 2012
Refining Outlook and Risk Management - U.K. Basu
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Petroleum Products:
Supply & Demand in India
supply
demand
Supply & Demand, MMTPA
267
218.6
143.6
160
132
114
X plan(2007)
XI plan(2012)
XII plan(2017)
Source : MoP&NG
• India became a net exporter of products in 2001-02
• At the end of XII plan capacity utilization is about 60%
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Refinery Capacity Utilization
Refinery
2005-06
2006-07
2007-08
IOC
81.3%
92.9%
100.1%
HPCL
109.5%
129.2%
129.2%
BPCL
88.4%
101.4%
106.7%
CPCL
98.7%
99.0%
97.7%
MRPL
124.9%
129.4%
129.5%
BRPL
100.0%
87.7%
86.0%
NRL
71.1%
83.3%
85.7%
RPL
100.5%
116.3%
132.0%
Essar
0.0%
16.8%
63.1%
Wtd. Avg - India
87.4%
99.5%
109.2%
Source : MoP&NG
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Expansion Plans in India
Total Capacity , MMTPA
Refinery
X plan
(2007)
XI plan
(2012)
XII plan
(2017)
IOC
60.2
81.4
94.7
HPC
13
32.9
32.9
BPC
22.8
30.8
30.8
MRPL
9.69
15
45
33
62
62
10.5
14
32
6
6
240.9
302.2
RPL
Essar
Nagarjuna
Total
148.9
As surplus products increases Coastal refineries will be forced to export more
Source : MoP&NG
Refining Outlook and Risk Management - U.K. Basu
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Present approach of Indian Refiners
•
Indian refiners are adding complex units like HCU, DCU, High
Severity FCC , Alkylation, Isomerization units in order to increase
value addition and product grades
•
All new projects typically have Nelson Complexity index ranging
from 10-14.
•
The switch to cleaner fuels due to newer fuel specifications led to
addition of huge hydrotreating capacities
•
Many refiners are adding units to meet BS III/BS IV grade auto
fuels from April 2010.
•
The Auto Fuel Policy is driving investment in clean fuel
technology.
•
Current export of higher sulfur HSD to ME/SEA may undergo
corresponding shift to low sulfur exports
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Environment Regulations
Requires to meet the new
emission standards as per
Environment (Protection) Act
Amendments Rules-08.
National Ambient Air quality
Standards (NAAQS) –Industrial area
Treated Effluent Norms
Parameter
pH
Conc, in mg/l
6-8.5
Oil and grease
5.0
BOD
15
COD
125
Suspended solids
20
Parameter
Standard
Phenols
0.35
SO2
120µg/m3
Sulphides
0.5
NOx
120µg/m3
CN-
0.2
Suspended Particulate
Matter (SPM)
500µg/m3
Ammonia as N
15
TKN
40
FO/LSHS users shifting to NG to meet emission control norms,
needing additional investment for disposal of above products.
Refining Outlook and Risk Management - U.K. Basu
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Global Refining Margins
16
US GC Cracking
NWE Cracking
Singapore Cracking
13.5
14
12
11.4
12
India Avg.
$/bbl
10
8
7.2
6
4.8
4.3
4
2.9
2
1.1
0
2004
•
•
2005
2006
2007
High refining margins in the last 3yrs due to
–
Tight balance of refining capacity & demand for refined products
–
High demand for light & middle distillates and limited availability
complex refining capacity
of
Margins expected to remain high in the medium term (3-5years) with
supply growth in Asia & Middle east being absorbed by demand growth in
Asia and North America
Source : BP - 2008
Refining Outlook and Risk Management - U.K. Basu
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Improve GRM - Strategies
• Move towards cheaper, heavy and sour crudes, and High TAN crudes
• Increase distillate yield
• Usage of LP tools for optimization, and GRM maximization ,Low inventory
• Value added products like MX, Propylene, Petrochemicals
• Switch to Natural gas for Captive power generation, Process heating and Hydrogen
production
• Energy, depreciation, spares, manpower and maintenance costs can be reduced
by installing bigger capacities
• High capacity utilization . Depreciated old plants of smaller capacity can be
converted/de-bottlenecked to reduce Energy, spares, manpower and maintenance
costs
• Reduction of fuel and loss, proper steam and power management, constant drive
towards energy conservation etc.
• Effective maintenance leading to reduction in down time, higher run length
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GRM of Indian Refineries
Refinery
2005-06
2006-07
2007-08
HPCL-Mumbai
3.2
4.8
6.0
HPCL-Vizag
2.6
3.5
7.0
BPCL
1.6
3.6
4.0
KRL
3.2
3.5
-
IOC refineries
4.6
4.2
9.0
CPCL
4.4
5
8.5
BRPL
3.3
5.2
7.6
MRPL
3.7
4.8
6.9
RIL
10.3
11.7
15.0
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Expansion Options
• Bottoms upgrade
– DCU with hydrotreating facilities
– HCU once through with high severity
FCC(petrochemical)
– IGCC
– RFCC with feed pretreatment
• Other products
– Naphtha to petrochemicals
– Kerosene fractions to LAB
• Product quality upgrade
– Euro III & Euro IV
– Coastal refineries to match variety of specs abroad
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Configuration of New Refineries
LPG
ISOM
Propylene
NSU
CCR
MS pool
MX
MX
CDU
HYDROGEN
ATF/SKO
GOHDS
HSD pool
HCU
VDU
DCU
FCCU
Sulfur
Off gas
SRU
Coke
BBU
Bitumen
Present Economic Size of a Refinery is ~15 MMTPA
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Downstream Integration
LDPE
ETHYLENE
Poly Ethylene
LN
Naphtha
Cracker
HDPE
PDH
Poly Propylene
PROPYLENE
PP
HN
CCR
BENZENE
PX / PTA
MX
SR/Coke
PTA
Hydrogen
IGCC
Power
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Infrastructure back up
• Ports
– Currently all 11 major ports are fully utilized. Further expansion
plans have been taken up by some of the major ports
– Medium ports also planning to extent the facilities for
POL/Chemicals
– SBMs being planned
• Pipelines
–
–
–
–
Critical in the sustainability of inland refineries
Total crude pipeline capacity: 25.2 MMTPA
Product pipeline capacity: 18.25 MMTPA
Gas pipeline infrastructure being built by major players
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K-G Gas to Refineries
• Natural Gas reportedly available abundantly in
Krishna-Godavari basin
• Many refineries, fertilizer and petrochemical and
power plants are gearing up for the switchover to
gas
• Use in Hydrogen manufacturing reduces the cost
of production
• Higher yield of Hydrogen
• Freeing of Naphtha for Ethylene
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Foray into Petrochemicals
•
In order to improve profitability diversification into petrochemicals become
necessary
•
Petrochemicals markets depends on demand of polymer which is strong
and GDP dependent only
•
Fuel prices are seasonal and show strongly regional and volatile trends
beyond base margins
•
Two major routes of Integration : Olefin from C3/C4/Light Naphtha,
Aromatics from Heavy Naphtha
•
As per CMAI study the growth of key petrochemicals in 2004-2020 are as
follows:
–
Ethylene : from 100 MMTPA to 177 MMTPA ( CAGR: 3.6%)
–
Propylene: from 64 MMTPA to 116 MMTPA ( CAGR: 3.8%)
–
Benzene : from 37 MMTPA to 57 MMTPA ( CAGR: 2.8%)
–
MX : CAGR : 10%
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Integrated Refinery &
Petrochemicals Complex
• Olefins production
– Light Naphtha cracking
• Ethylene & propylene to High Capex
– Propane to Propylene
•
•
•
•
Value addition to C3/C4 fractions
High selectivity of process
Hydrogen by-product
Moderate capex
– LDPE, HDPE, PP production integration
• Aromatics production
– Heavy naphtha feed stock
• PX, PTA, Benzene
• Moderate Capex
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Advantages of Refinery Projects in India
• Domestic demand growth and trade parity pricing for
domestic sales (high margins)
• Export potential
• No significant expansion in Europe and US due to stringent
environmental regulations
• West cost refineries close to western markets
• High refining margins (eg RPL) will allow for competitive
exports to North America
• Most Asian/ SEA countries are expected to have deficit of
Petroleum products – export opportunity
• Integrated refining and petrochemical for value addition
• Tax exemptions to set up Export oriented units at SEZ.
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HR- Scenario
Sustained availability of Knowledge workers
• Attrition of trained manpower from state run oil companies
• Huge demand in the E&P and refining side
• No. of quality institutes are being increased for imparting
training/education – more IITs and NITs being set up by the Govt.
• Low industry awareness and attractiveness is still a concernFinishing School concept being adapted
• Industry participation in supporting quality education needs further
boost- more academic and industry tie-ups needed.
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Risk Management
• Five major types of risks
– market risk (unexpected changes in interest rates,
exchange rates, stock prices, or commodity prices)
– credit/default risk
– operational risk (equipment failure, major outage)
– liquidity risk (inability to pay bills, inability to buy or
sell commodities at quoted prices)
– political risk (new regulations, specifications,
restrictions)
Oil and Gas industries are particularly susceptible to market risk—or
more specifically, price risk—as a consequence of the extreme
volatility of energy commodity prices
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Project Risks
• Crude oil supply constraints
• High cost of cement & steel
• Skilled Manpower shortage
• Too many projects chasing too few licensors,
increasing the Engg cost
• EPC cost sky-rocketing due to over heated
construction projects in the Industry
• Many projects are shelved due to cost escalation
and resulting market dynamics
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Project Risks – Financing
Perspective
Risk profile of a large scale Oil & gas Project
– Combination of high capital costs and low operating costs
implies that financing costs are a very large proportion of the
total
– Long construction periods are most often combined with slow
build up of revenue
– Criticality of the project’s cash flow is the crucial element in the
return to equity investors and in the security of the lenders (in the
absence of public guarantees
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Risk Mitigation
• Crude price:
– Hedging Domestic crude purchases and sale
• In Annual statement for the year 08-09 RBI has permitted
hedging of domestic crude purchases and sale of
products to reduce the price risk.
• hedging on the basis of international prices based on
physical underlying contracts linked to international prices.
– Hedging of anticipated imports of crude oil
• Hedging allowed based on the basis of past performance
up to 50% vol of actual imports during last year or 50% of
average volume of imports during last 3 financial years
whichever is higher
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Risk Mitigation
• Product Prices
– Long term contracts to lock in margins over the
market, reduces the volatility of margins
– Niche products, and premium qualities
– Export is particularly attractive to coastal
refineries
– Govt. to Govt. ( G2G) deals are favorable for
PSU refineries ( e.g. MRPL’s supply contract
with STC Mauritius)
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Hedging of refining margins to protect
investments in new refinery
– Project GRM based derivatives based on indexed
crude and product prices for project financing.
• Reduce the uncertainties in the project returns
• Special contracts can be developed with the investment
banks
– A similar concept is being applied in utilities project
based on ‘weather derivatives’ – such as wind
derivatives, cooling day derivative etc.
– Crack Spread Contracts, Crack spread options,
Calendar Options- for stabilizing the revenue streams
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Summary
• To maintain high margins Indian Refiners are improving
distillate yields
• Diversification into Aromatics and Olefin products become
inevitable
• In 2010, excess product supply in India, by about 84
MMTPA, will have to be exported
• India has the potential to become a refining hub with
matching infrastructure and HR environment
• Financial engineering is a key element in Project risk
management
Refining Outlook and Risk Management - U.K. Basu
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THANK YOU
Refining Outlook and Risk Management - U.K. Basu
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