“In the next three years, diesel demand and diesel capacity should even out in India,” Chief Executive Officer L.K. Gupta said in an interview in New Delhi. “By 2016, I feel diesel exports from domestic refineries won’t be there.”
Essar, based in Mumbai and controlled by billionaire brothers Shashi and Ravi Ruia, is betting on increasing diesel use in India, where Standard Chartered estimates that consumption of the fuel grew as much as 8 percent this year. Selling the fuel, known as gasoil, inside India will cut costs related to taxes and freight, Gupta said. The company operates a 400,000 barrel-a-day refinery in the western Indian state of Gujarat.
Indian oil-product exports climbed to 6.1 million metric tons, or about 1.5 million barrels a day, in October, data from the government’s Petroleum Planning and Analysis Cell show. That’s a record, the International Energy Agency said in a report on Dec. 12. Gasoil accounted for 39 percent of the shipments, according to the IEA.
“We see the country becoming just a sporadic exporter of oil products to destinations outside of Asia in the second half of this decade,” JBC Energy GmbH, an industry consultant, said in a note today. More than a million barrels a day of refining capacity is coming online by 2015 in the Middle East, while India cuts exports, JBC said.
Essar, a unit of London-listed Essar Energy Plc (ESSR), currently exports about 30 percent to 35 percent of the total production at its plant, Gupta said. The company has sold as much as 570,000 tons of fuels including gasoil, naphtha, gasoline and vacuum gasoil for loading in December, according to data compiled by Bloomberg.
It most recently sold as much as 45,000 tons of gasoil with sulfur content of 500 parts per million to Itochu Corp. (8001) for December, the data show.
Profits from making gasoil from crude may rise 5 percent in 2013 to $21 a barrel and to $23 by 2015, according to a Standard Chartered report on Nov. 9. The margin was at $19.21 a barrel today, according to data from PVM Oil Associates Ltd., a crude and products broker in London.
Nearly half of the new refining capacity in India will be used to produce diesel, said Gupta. Indian Oil Corp. (IOCL), the nation’s largest refiner, and Nagarjuna Oil Refinery Ltd. (NOFL) are scheduled to add 21 million tons of capacity, with 10 million of that geared toward gasoil output, he said. That will easily be absorbed by the country’s buyers, he said.
“Today we consume about 65 million tons of diesel a year,” said Gupta. “If you consider 6 percent to 8 percent growth, in the next four to five years you’ll consume everything.”
Gupta is more than happy to see Essar’s exports decline as it meets more demand from within India since the company will avoid paying a 2 percent central sales tax.
“Exports will decline over a period as the demand goes up here,” he said. “That definitely helps my bottom line.”
A $1.6 billion expansion of the Gujarat refinery that finished this year has improved profits at the plant after it added a coking unit, he said. A coker breaks down fuel oil into higher-value fuels such as gasoline and diesel.
The margin increases have followed a surge in imports of less expensive crude from Latin America, including Columbia, which produce oil that is more viscous, or heavy, and higher in sulfur, he said.
“After our complexity has gone up and the expansion, we have moved from a cracking refinery to a coking refinery,” said Gupta. “Latin American grades have increased substantially, from 5 to 10 percent it has increased to 40 percent.”
The company’s refining margins are now about $8 to $9 a barrel, compared with $4 to $5 before adding the new capacity, Gupta said.
Essar’s crude imports are about 17 million tons of crude a year, compared to its total requirement of 20 million tons a year, he said.