Saudi Aramco's Investment in Ratnagiri Refinery - a Most Welcome Development

The announcement from Saudi Aramco, amongst the leading oil companies of the world, that it will partner with the three Indian public sector units (PSUs) to set up a world-scale refinery-cum-petrochemicals complex in India, is a welcome measure that could herald a new dimension for both these vital sectors. What is also of great significance is that the project is to have a very substantial petrochemical focus – an aspect that refineries in India, barring that operated by Reliance Industries Ltd. at Jamnagar, have largely ignored till very recently.

Equal stake

As per the Memorandum of Understanding (MoU) signed in the sidelines of an energy conference in New Delhi, the three Indian refiners – Indian Oil Corporation, Hindustan Petroleum Corporation Ltd. and Bharat Petroleum Corporation Ltd. – will together have a 50% stake in the new company, Ratnagiri Refinery & Petrochemicals Ltd. (RRPL), while Saudi Aramco will hold the balance 50% for now, but with the option to offload some of its equity to a partner at a subsequent stage.

Second-largest at a single location

The new refinery will be capable of processing 1.2-mbpd (million barrels per day) of crude oil, which translates to about 60-mtpa. This will make it the second largest in India at a single location – just behind RIL’s massive refinery complex at Jamnagar, which has a capacity of about 65-mtpa over two trains. The investment in the new project is currently estimated at $44-bn, but a clearer number will emerge once the complete configuration is nailed down, which should happen in the detailed feasibility report that will soon be prepared. The project cost includes investments in associated facilities such as for crude handling terminal and storage, raw water supply (possibly a desalination plant), as well as other centralised and shared utilities.

Serial investor

For Saudi Aramco, this is the third in a series of important projects it has announced in recent months. These are part of ambitious plans to lessen dependence on crude oil exports and offload some equity in global markets.

Just a few days prior to the announcement in New Delhi, it announced an agreement to build a giant petrochemical complex at the SATORP refinery in Jubail, eastern Saudi Arabia, at a cost of $5-bn. The refinery, which has a capacity to process 0.44-mbpd of crude oil, is a joint venture between Aramco (62.5%) and France’s Total (37.5%). The petrochemical complex will centre around a mixed-feed steam cracker, which will use ethane and refinery off-gas as feedstock, and will have a capacity of 1.5-mtpa of ethylene, with matching downstream units.

Earlier, in March this year, Saudi Aramco and Malaysia’s Petronas formed two joint ventures to further the two national oil companies’ equal ownership and participation in operations of the Refinery And Petrochemical Integrated Development (RAPID) project under construction in Johor (Malaysia). As part the agreement, Aramco will hold a 50% ownership in RAPID ventures and assets, and serve as the primary crude oil supplier for the 0.3-mbpd refinery, which will also be integrated to a 3.3-mtpa petrochemical complex.

Each of these projects – and a couple announced earlier – will further Saudi Aramco’s plans for geographical diversion, especially in the growing markets of Asia, and take its global crude oil refining capacity closer to its target of 10-mbpd. When completed, the Ratnagiri refinery will be its second largest, only behind the Port Arthur (Texas) refinery at its US subsidiary, Motiva.

Crude to chemicals - directly

Each of these investments is linked to crude oil offtake agreements – an arrangement that seems a win-win for buyer and the seller. The petrochemical investment strategy is a play in value-addition that the company had relegated for a long time to the other large Saudi player, SABIC, but is now eager to correct.

In November 2017, the two announced they were joining hands to build a crude-to-chemicals project at an investment of $20-bn, mimicking the only other such project operated by ExxonMobil in Singapore. As part of the plans, in January this year, Saudi Aramco signed a deal with two US firms – CB&I and Chevron Lummus – for pilot use of a technology to enable direct conversion of crude oil directly to chemicals, bypassing the classical approach to build a refinery and then a petrochemicals complex. The aim is to convert about 45% of light crude oil to petrochemicals, at 30% lower capital costs compared to the traditional refinery approach.

Growing fuel demand in India

The Ratnagiri project is not to take this route as there is still growing demand for refined products in India. According to estimates by Wood Mackenzie, a consultancy, India’s oil demand is expected to rise by 120-kbpd annually over the next five years, outpacing the average 45-kbpd per annum capacity expansion planned by the PSUs within the same period. Assuming no further increase in supply from the private refiners (such as RIL and Essar Oil) to the domestic market, it estimates that Indian PSUs would need to add between 150-kbpd to 200-kbpd of new refining capacity every year to maintain self-sufficiency in transport fuels between 2025 and 2035 even with this new refinery. Adding a prominent crude producer as a partner not only will provide long-term crude supply security, but also help with financing such a large-scale project, which is not without risks.

Opportunity to expand chemical slate

The plan to allocate 18-mtpa of crude oil for petrochemicals production is very significant. It will open the possibility of significantly expanding India’s domestic capacity for a whole range of plastics, synthetic rubbers, synthetic fibres and chemicals. The scale of operations will make valorisation of smaller streams – starting from the C5 onwards – very much practical and can usher in manufacture of a whole range of feedstock and raw materials that could be value-added by investors in co-located manufacturing plants.

Competitiveness of petrochemical production through the deep integration with refining will be assured, as has been proven in the case of the Reliance Jamnagar complex, and at several other sites in the world. While the details of the petrochemical plants have not yet been made public, there have been indications that ethylene capacity could be of the order of 3-mtpa. While a large chunk of this (and propylene) is likely to be converted into polyolefins, which India is expected to be short of, it is hoped that the product slate will include several other key petrochemical such as oxo-alcohols, phenol/acetone, acrylic acid/acrylates, propylene oxide & glycols, ethylene oxide & its derivatives etc. Some of these investments could come from third party investors and the government should mandate that a portion of olefins and aromatics produced by RRPL be set aside for merchant sale right now when the project scope is being given shape.

No delays – hopefully!

In any case, this is the best news that has come in the industry for a long time. It will be a pity if the project is delayed due opposition over its proposed location. The Shiv Sena, which has had a love-hate relationship with the BJP, as well as other opposition parties, are keen to stir the pot for political mileage, and the State government has responded that while it will not trample over public sentiment, it will work to an amicable settlement of the issue. With elections round the corner, these issues could rise to the boil, but just as well settle down as part of political alliances that are still fluid, but could take shape in the months leading to the election. One hopes for the sake of the country that the latter will happen!