A rapid increase in refining capacities across Asia is threatening to dull the magic of Reliance Industries' 1.3 million barrels per day (bpd) complex refining capacity in Jamnagar, Gujarat.
If that weren't enough, even state-owned refiners such as Bharat Petroleum and Hindustan Petroleum have commissioned complex refineries recently.
A complex refinery is one that has the ability to process very low quality, or 'heavy', crude that's cheaper than light or good quality crude - into fuel.
Refiners who can do this rake in better margins as they buy low and sell the refined products at international benchmark prices.
The complexity of refineries is measured in terms of Nelson Complexity Index. Any refinery with a Nelson complexity of 10 or above is considered a complex refinery.
RIL, which runs the world's biggest single-location refinery, currently has an average complexity of 12.6, while BPCL's newest Bina refinery has close to 10 and HPCL's recently commissioned Bathinda unit 12.
Even Essar Oil, which completed the optimisation of its refinery on Tuesday and took its capacity up to 20 million tonnes per annum (mtpa), has achieved a complexity of 11.8 after expansion.
The new complex refiners are not only nibbling at RIL's market gradually, they are also causing excess capacity.
"RIL's complex refineries were well suited to benefit from the tightness in the refining system from 2006-08 and delivered strong growth in margins. Upgrading of regional refining capacities means refining complexity is more common and RIL may not be in a position to deliver large sustained premiums to the benchmark," said Sanjay Mookim and Badrinath Srinivasan, analysts with Credit Suisse, in a note on Tuesday.
The benchmark is usually the Singapore gross refining margins which are the average gross refining margin (GRM) of major Asian refiners.
GRM is the difference between buying of crude and average selling price of refined products.
"In the last half of last fiscal, RILhad clocked negative to Singapore GRM and this trend is not likely to reverse soon as the difference between heavy and light crude shrinks further," said an analyst with a domestic brokerage.
He said traditionally, Reliance enjoyed $3-4 per barrel premium over Singapore GRMs but those days are gone due to fresh complex capacities.
Refining contributes almost 40% to RIL's operating profit and more than 70% to revenues.
The International Energy Agency (IEA) estimates global refining capacity addition at 2.4 million barrels per day (mbpd) in 2012 (highest since 1999) and at 1.6 mbpd in 2013. Meaning, 4 mbpd of capacity is expected to be added over the next two years.
Also, with BPCL's Bina adding 120,000 bpd, HPCL's Bhatinda adding 180,000 bpd and additions from Essar, IOC and Nagarjuna, the domestic refining market too will reach a state of glut.
"Reliance has always been export-oriented but with the export market in Europe and US cringing, domestic will be the way out for the company. But the domestic market too does not offer to much hope," said analyst Gagan Dixit from brokerage Quant.
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