IOC to go ahead with Rs 55,000-cr expansion
New Delhi   30-Dec-2010

The country’s largest refiner, IndianOil (IOC), has decided to go ahead with its massive Rs 55,000 crore refining capacity expansion programme irrespective of the current adverse business conditions where the company’s under recovery from sale of fuel below cost has risen sharply on a rising global crude oil price and uncertainty persists over deregulation of diesel prices.

Although the investment to increase refining capacity in a controlled market may lead to increased losses for the company on higher sales, the refinery capacity expansion would fetch better refining margins to the company which is preparing for a follow on public offer, sources said.

Company officials sought to de-link the under-recovery—the losses arising from selling fuel below their cost—and the proposed expansion of refinery output. “Under-recovery is a function of sales. Sometimes, we buy fuel from other companies and sell. In such cases, the refining margin goes to them. It is in our interest to expand refining capacity so that the refining margin will come to us,” said a company official, who asked not to be named.

Under-recovery is, anyway, shared between retailers, upstream companies like ONGC, Gail India, Oil India and the government. So long as companies do not have pricing freedom, under-recovery is bound to continue. Refinery-cum-retailers cannot defer their expansion projects for that reason, said the person.

IOC now has a gross refining margin of $4.5-4.6 a barrel, which is expected to go up after its Rs 55,000 crore capacity expansion project. “While new refinery units will yield decisively better margins, those undergoing upgradation will have slightly better margins,” said another person privy to the company's thinking. IOC's prpopsed Rs 55,000 crore capacity expansion projects include a 15 million tonne per year (mtpa) grassroots refinery at Paradip in Orissa, a naphtha cracker and polymer complex at Panipat and a refinery expansion from 12 mmtpa to 15 mmtpa at Panipat. Last Saturday, the company dedicated to the nation a once-through hydrocracker project and an expanded refinery at Haldea in West Bengal with 7.5 mmtpa capacity.

Proposals to increase diesel price are before a ministerial panel chaired by finance minister Pranab Mukherjee but there is no official view on when it may happen. A complete pricing freedom for retailers is unlikely now as it would burden the common man with the high global crude oil price that has crossed $91 a barrel. IOC is now awaiting a permanent framework for subsidy sharing in place of the current ad hoc mechanism so that its proposed share sale may have better investor participation. But government officials believe that investors would appreciate the government's intention to decontrol diesel price when global crude oil price eases.

In the first half of this fiscal, IOC, BPCL and HPCL incurred under-recoveries of Rs 31,367 crore, of which Rs 10,456 crore has been compensated by upstream companies. The finance ministry has committed Rs 13,000 crore so far and is likely to bear up to a third of the total under-recovery in the fiscal.

In the forthcoming follow on public offer, IOC will issue 10% fresh equity and the government will sell 10% of its stake.