Change in Petroleum FDI policy : Impact assessment - Mr. Sanjay Kaul
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Change in Petroleum FDI policy : Impact assessment - Mr. Sanjay Kaul

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'Changes in Petroleum FDI Policy: Impact assessment' Article authored by Mr. Sanjay Kaul

'Changes in Petroleum FDI Policy: Impact assessment' Article authored by Mr. Sanjay Kaul

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Change in Petroleum FDI policy : Impact assessment - Mr. Sanjay Kaul Change in Petroleum FDI policy : Impact assessment - Mr. Sanjay Kaul Document Transcript

  • Sanjay Kaul Change in Petroleum FDI Policy-Impact Assessment  Introduction: Latest reform in Petroleum FDI Policy  Similar Precedents & their impact: E&P, LNG terminals, Pipeline Infrastructure  Impact assessment PSU refining FDI reform: opportunities created  Swifter expansion of current capacities & establishment of integrated refinery- petrochemical complex: IOCL: Panipat, Gujarat & Paradip Refineries; BPCL: Kochi refinery; HPCL: Vishikapatnam  Renovating current technology processes in order to be more flexible both in terms of input & output: IOCL: Panipat, Gujarat, Barauni, Guwahati, Digboi & Haldia Refineries; BPCL: Mumbai & Kochi refinery; HPCL: Mumbai & Vishakapatnam; MRPL, CPCL, Numaligarh  Confidence in existing & prospective JV partner because of greater liberty (option) to alter exposure in a project: HPCL-Mittal refinery  Indian Offshore FDI retraction: Videocon exposure in Mozambique  Embedded Strategic Opportunity  PSU refiners can lead the Refining global trend  Balance India’s Energy imports dependency with creation of Regional refining Hub in India catering to the Subcontinent & South East Asia  Example of Reliance Industries, Jamnagar complex  Supporting information & references Mr. Sanjay Kaul is the Founder President of the University of Petroleum & Energy Studies & Member - Executive Council, CPIES For more about the author please click here.
  • pg. 2 For any query please write to mksaini@upes.ac.in © 2013 Centre of Policy Initiatives & Energy Studies (CPIES) Executive Summary: Historically two trends are salient; FDI reforms in Petroleum Sector have shown little or no impact & Refinery sector has attracted 40% of all FDI in the sector over 2001-10. India also has a successful precedent that if a complex (flexible) Indian refinery is integrated with petrochemical plant and has enough scale, then it can be extremely competitive in the world market. As consumption shifts to Asia and Indian product pricing become market determined, this reform would be a good opportunity for International Oil Companies (IOCs) and Indian PSU refiners (having majority of capacity) to work together. While the former can share technology in exchange for access to Indian market, the latter can expand and cater to South Asian & South East Asian markets. This reform may induce confidence in current JV partner of projects like that in Bina & Bathinda by giving them ability to manage their exposure in the project. It would give an opportunity for Indian FDI abroad, especially in Petroleum assets like Mozambique to be brought back.
  • pg. 3 For any query please write to mksaini@upes.ac.in © 2013 Centre of Policy Initiatives & Energy Studies (CPIES) Latest reform in Petroleum FDI Policy All the activities in the O&G Sector enjoyed 100% FDI via Automatic route except Refining in Public Sector where 49% FDI was allowed subjected to approval from the Foreign Investment Promotion Board. Leaving the cap unchanged, last week, GOI decided that FDI in refining sector could be via automatic route. Similar Precedents & their impact: E&P, LNG terminals, Pipeline Infrastructure Policy reforms including FDI limit & route are not new to the Indian Petroleum Sector; however the similar precedents in E&P, LNG terminals, Pipeline Infrastructure have shown limited improvements. Bottle necks in clearances, price policy, PSU monopoly, non- implementation of current provisions like open access have been the primary reasons. The upstream sector, opened via NELP, has seen considerable traction in terms, however pricing policy and inordinate time for clearances (especially development plans, environmental & defense approvals) have led to IOCs such as Australia’s Santos, Italy’s ENI, UK’s BG, Norwegian Statoil and Brazil’s Petro bras relinquishing their respective blocks. In a country where 70 approvals from different agencies are needed just to drill a well, developing a field, where discovery is declared as commercial, can itself be a real challenge leave aside pricing issues. PMOs intervention of granting special sanction for 46 blocks was a case of just too late, too little. Of the 248 PSCs over the last decade, 70 Gas discoveries were made of which 50 discoveries remain undeveloped. This is alarming for a country which spends close to 60 percent of its hard cash reserve in importing Oil/Gas every year and gives away another INR 1,50,000 crores ($ 27.27 billion) as petroleum subsidies. More than enough to support the > 49% FDI in PSU refining now allowed via automatic route >Earlier similar FDI reforms have limited or no impact due to other issues like clearances, pricing, PSU monopoly et al. >LY Australia’s Santos, Italy’s ENI, UK’s BG, Norwegian Statoil & Brazil’s Petro bras relinquishing their respective blocks
  • pg. 4 For any query please write to mksaini@upes.ac.in © 2013 Centre of Policy Initiatives & Energy Studies (CPIES) entire GOI public health expenditure for the last five year plan! In addition to the upstream constraints, Gas downstream sector, including Pipeline Infrastructure & LNG Regasification Terminals, have seen limited interest from the global O&G fraternity. Shell is the only IOC which operates INR 3000 Cr ($ 545 million) 2.5 mmtpa terminal at Hariza and is coming up with a 5 mmtpa FSRU at Kakinada in the east coast. Since 2006, PNGRB issued licenses for 31,000 KM pipeline but none was a foreign concessionaire. India’s current gas demand is double the present supply (160 mmscmd) and would be in excess of 470 mmscmd by 2020, amidst a forecast that ample Gas is available in the world market. In all, over the period 2000-2010 Indian Petroleum Sector attracted $3.2 billion, a mere 2.46 per cent of total FDI inflows in the country. Of this $1.17 billion was in refining alone. How will reform in FDI in refining impact the Indian downstream sector remains to be seen. Impact assessment PSU refining FDI reform: opportunities created: The approval for FDI (49%) via automatic route in PSU refineries is a forward looking step which has the potential of fast tracking the competitiveness curve of Indian refineries and in turn has embedded strategic opportunities for India, PSU refiners and IOCs. Swifter expansion of current capacities & establishment of integrated refinery-petrochemical complexes: PSU refiners like IOCL, BPCL, HPCL are either planning or adding integrated petrochemical processing in their current refineries. The new FDI norm allows them to swiftly collaborate with foreign entities having latest technology. IOCL is implementing SBR unit at Panipat (utilizing the Butadiene available from the Naphtha Cracker). > Pipeline infrastructure, Regasification terminals projects have seen little interest from global fraternity >Out of $3.2 billion FDI in petroleum sector in last 10 yrs $ 1.17 billion have been in refining >IOCL, BPCL, HPCL are all have plans to build intergrated petrochemical complees
  • pg. 5 For any query please write to mksaini@upes.ac.in © 2013 Centre of Policy Initiatives & Energy Studies (CPIES) >> Plans to implement PX/PTA complex (capacity 370/570 KTA respectively). >> Expanding Lab unit capacity by 35% >> Plans Poly Propylene unit (680 KTA) >> Implementing SBR unit - 120 KTA (Utilizing the Butadiene available from Panipat Naphtha Cracker) >> Plans to diversify into Petrochemicals (in two phases) >> Proposal: To set up a 1.5 MMTPA Naphtha Cracker and its integration with the refinery off gas streams (under Phase-II) to produce 80,0000 TPA of Ethylene and 250000 TPA of Propylene >> Plans to setup an integrated 15 MMTPA capacity joint venture Refinery cum Aromatics with Petrochemicals (1 MMTPA Ethylene) >>Plans to produce POL Products conforming to EURO V specifications by 2017-18 (Production capacity) complex. Panipat Gujarat Kochi Vishakapatnam Haldia Refinery Petrochemical integration Projects – Planned (except Panipat )
  • pg. 6 For any query please write to mksaini@upes.ac.in © 2013 Centre of Policy Initiatives & Energy Studies (CPIES) It plans to implement PX/ PTA complex, Pet coke gasification, Acetic Acid unit, a Cumene/ Phenol unit & Oxo-Alcohols/Acrylic Acid/ Acrylates (utilizing the propylene available from FCC units) in its Gujarat refinery and Poly Propylene unit at Paradip refinery. BPCL have plans to diversify into Petrochemicals at its Kochi Refinery unit in two Phases. (Phase 1- comprising of Propylene based derivatives based on Propylene obtained from FCC unit being installed as a part of Integrated Refinery Expansion Project & Phase 2 - comprising of Ethylene and Propylene based derivatives through a Naphtha cracker route). Production of Butadiene, Aromatics and CBFS is also proposed from the Naphtha Cracker. HPCL intends setting up of an integrated 15 MMTPA capacity joint venture Refinery cum Aromatics with Petrochemicals complex at Visakhapatnam PCPIR in association with GAIL. It has also announced setup up another Refinery in Rajasthan. Renovating current technology processes in order to be more flexible both in terms of input & output: Though, India more than tripled its refining capacity to 184 MMTPA over the last 13 years, major up gradation and modernization plans are in place for 12 refineries. PSUs plan to invest INR 88,211 crores ($ 16.03 billion) during the 12th Five Year Plan. Considerable part of this investment is for modernization. The latest FDI reform can assist in this process by hastening up the involvement of international players possessing latest technologies. The three major refining PSUs along with MRPL, CPCL, NRL have up gradation projects like residue up gradation, MS/HSD quality improvement, improving distillation yield (Hydrocracker revamp), Diesel Hydo Treatment, Lube Oil Base Stock improvement, revamp of NHT/CRU at Gujarat Refinery, Haldia, Panipat, Barauni, Guwahati, Digboi, > 22 of 27 refineries in India have plans for capacity of expansion & up-gradation for making themselves flexible in terms of input & output
  • pg. 7 For any query please write to mksaini@upes.ac.in © 2013 Centre of Policy Initiatives & Energy Studies (CPIES) Bongaigaon, Mumbai, Kochi, Vishakapatnam, Chennai & Numaligarh Refineries. Gujarat Refinery >> MS & HSD Quality - BS- IV >> Distillate yield - from 68% to 75% >> High Sulphur Crude - 26% to > HSD Quality - BS-III/IV > Distillate Yield - from 64% to 67.3% > Capacity expansion - from 6 to 7.5 MMTPA >> Low cost expansion - from 12 to 15 MMTPA >> HSD Quality - BS-III/IV9 MS Quality - BS-III MS/HCD Quality - BS-III/IV >> Naphtha - to Euro-III/Euro- IV MS >> Hydrocracker Unit capacity - from 1.75 to 2.0 MMTPA >>HSD Quality - Euro-IV >> LOBS Qualities - From >> Group-I to Group-H/Group- III >> New FCC - 1.45 MMTPA HSD Quality - To Euro-III HSD - To Euro-III >> HSD QUality - Euro-III/IV (Diesel Hydro Treater Project) Capacity – from 9.6 to 15 MMTPA >> MS/HSD Quality - Euro-IV >> Refining capacity - from 9.5 to 11.1 MMTPA HSD Quality - Euro- III/Euro-IV Panipat Gujarat Mumbai Mangalore Kochi Chennai Vishakapatnam Haldia Barauni Bongaigaon Numaligarh Digboi Guwahati Refinery Expansion & up-gradation Projects (planned)
  • pg. 8 For any query please write to mksaini@upes.ac.in © 2013 Centre of Policy Initiatives & Energy Studies (CPIES) Confidence in existing & prospective JV partner because of greater liberty (option) to alter exposure in a project like in the case of Bina (BPCL-Oman Refineries) & Bathinda (HPCL-Mittal Energy). Indian Offshore FDI retraction: The FDI relaxation can help divert the Indian FDI in foreign petroleum assets back to India. For instance, sale of Videocon’s equity stake in Videocon Mozambique Rovuma 1 Ltd. to OIL-OVL would generate proceeds in tune of $2.47 billion. A portion of this could be invested in India. Embedded Strategic Opportunities PSU refiners can lead the Refining global trend: Closure of US & EU refineries under capacity & margin pressure due to hefty environmental regulations and deceleration of captive demand. The shift of demand to Asia may be an opportunity for Indian Refiners to enhance scale & technology (to effectively handle variety of crude and produce most desired product mix) through acquisition of these refineries. Unfortunately, there is addition in refinery capacity across Asia despite global oversupply. In last 12 months China alone has added 500,000 bpd while is building another 1.6 million bpd to be commissioned on or before 2015 apart from 2.6 million bpd which are at early stage of planning. 5 million bpd refining capacity will be built in Middle East countries 2010-18, representing more than 20% of global expansion during the period and boosting regional capacity by nearly 60%. Saudi Arabia and Iran plan to raise refining capacity by 1.2 million bpd each through 2018. As Indian refiners would try to juggle rising competition, oversupply, low average margins, shifting cyclicality and continuous effort towards operational excellence, capacity correction may be inevitable. Oil Marketing PSUs would benefit from collaboration with IOCs and move down the learning curve faster. ROCE for Exxon –Mobile refineries has been consistently higher and stood at 15% in 2010. > FDI reform may enhance confidence in current & prospective JV partners Videocon can invest its $2.47 billion proceed from Mozambique sale in refinery sector in India >Global over supply & capacity expansion in Asia. 20% of global refining expansion in Middle East >At 89 mbpd Current supply is in excess of oil demand
  • pg. 9 For any query please write to mksaini@upes.ac.in © 2013 Centre of Policy Initiatives & Energy Studies (CPIES) This FDI reform would help Indian national oil marketing companies to optimize their operations and strategically align them for the future challenges. Balance India’s Energy imports dependency with creation Regional refining Hub in India catering to the Subcontinent & South East Asia: Developing on improving refinery efficiency & complexity and using location advantage, India could export its petroleum products to the surrounding high growth high potential markets like Myanmar, Thailand, Vietnam, Lao PDR, Pakistan, Sri Lanka, Bangladesh et al. Example of Reliance Industries, Jamnagar complex: Reliance’s (which exports majority of its products) model of high degree of integration at the Jamnagar complex (a petroleum refinery, petrochemical complex, power generation) is another example. It allows for feedstock and product linkages that continue to lead to higher efficiencies and enhanced value addition. Use of technologies like Hydrodesulphurization, Catalytic reforming, Fluid Catalytic Cracking, sulphur recovery, hydrogen regeneration et al lead to features like zero ‘black oil’ production and high proportion of high value products. Prospective scale & flexibility of its refineries India may be developed as refining Hub for South Asia & South East Asia. Reliance is an apt example which exports majority of its petroleum products
  • pg. 10 For any query please write to mksaini@upes.ac.in © 2013 Centre of Policy Initiatives & Energy Studies (CPIES) Conclusion: FDI reforms in Petroleum Sector have shown little or no impact due to absence of other critical reforms (pricing, monopoly) & clearance delays. Refinery sector which has attracted 40% of all FDI in the sector over 2001-10 can benefit from the latest reform because this would be applicable in ongoing profitable projects with minimum or above mentioned bottle necks. India also has a successful precedent that if a complex (flexible) Indian refinery is integrated with petrochemical plant and has enough scale can be extremely competitive in the world market. As consumption shifts to Asia and Indian product pricing become market determined this would a good opportunity for IOCs and Indian PSU refiners (having majority of capacity) to work together. While the former can share technology in for access to Indian market the latter can expand and cater to South Asian & South East Asian markets. Moreover, it is imperative that some capacity correction is inevitable and only setups would be able to survive which have significant advantage in terms of scale & flexibility.
  • pg. 11 For any query please write to mksaini@upes.ac.in © 2013 Centre of Policy Initiatives & Energy Studies (CPIES) Supporting information & References The Petroleum FDI policy latest shape Activity FDI Cap/Equity Entry route Others condition E&P 100% Automatic Subject to the Sectorial regulations of the MoPNG Subject to sectorial policy Refining >>49% for public sector undertakings (PSUs) without involving any divestment or dilution of domestic equity in existing PSUs; >>100% for private companies >>Foreign Investment Promotion Board (FIPB) for PSUs has been changed to Automatic Route >>automatic route for private companies >>Infrastructure related to marketing of petroleum products & NG, >>marketing of NG & petroleum products, >>petroleum product & NG pipelines, >>LNG regasification infrastructure, market study and formulation, 100% Automatic
  • pg. 12 For any query please write to mksaini@upes.ac.in © 2013 Centre of Policy Initiatives & Energy Studies (CPIES) Trend of FDI in Indian O&G Sector http://petroleum.nic.in/refinery.pdf http://www.bain.com/Images/BAIN_BRIEF_Global_refining.pdf http://www.ril.com/downloads/pdf/about_jamnagar.pdf http://www.atkearney.com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/refining-2021-who-will- be-in-the-game-/10192 MoPNG http://www.business-standard.com/article/companies/royal-dutch-shell-india-unit-to-invest-1-bn-for- lng-terminal-113021201055_1.html http://profit.ndtv.com/news/industries/article-hpcl-board-okays-joint-venture-with-shapoorji-pallonji- for-lng-terminal-319100