New India refinery could squeeze margins globally

June 3, 2008 · Filed Under Reliance Petroleum 
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Reliance Petroleum’s new refinery in India may lead to lower margins on gasoline and diesel for refiners in Europe and the U.S. when it starts production this year, a report said.

The 580,000-barrel-a-day Jamnagar refinery, a unit of Reliance Industries, India’s most valuable company, will increase global output of both gasoline and diesel by about 1 percent while adding 0.7 percent to global refining capacity, Bernstein Research said in a report today.

”Its massive scale and high complexity will mean it is likely to have a significant impact on global product markets,” said Neil McMahon, an analyst, in the report e-mailed today. ”It will be a harbinger of the changes to come in the refining industry over the next five years as other greenfield export refineries are constructed in the Middle East and Asia.”

The $6-billion refinery, which Bernstein called the world’s sixth-largest, is being built adjacent to a 660,000-barrel-a-day plant owned by Reliance Industries and is scheduled for completion by December this year. The combined facility will be the world’s biggest refinery, according to the parent.

Over the next five years, new, export-led refineries in Asia and the Middle East will add 4 percent in capacity annually, outpacing a 1.9 percent growth in demand a year for light products, including gasoline and diesel, the report said.

Refining margins are currently ”unsustainably low” and should rise in the short term into the peak of the driving season in summer, McMahon said, citing Valero Energy Corp., the largest U.S. refiner, as its ”top refining pick.”

Reliance’s refinery, in which Chevron owns 5 percent, benefits from capacity additions because of its scale, complexity and flexibility to supply any market that offers the highest price, the report said.

The refinery is able to process lower cost, high sulfur, heavy crude grades, turn them into premium, low sulfur fuels and ship them at lower transport costs because of its location close to the Arabian Peninsula, the report said. At $10,300 a barrel of capacity, the venture costs about half as much to build as other projects in the Middle East and elsewhere, according to the report.

Reliance may export gasoline and alkylate to the U.S. West Coast in summer and to Asia in the winter, while supplying low sulfur, less polluting diesel to Europe, the report said. The refinery has a complexity of 14 on the Nelson scale and technology that enables it to produce high quality fuels and shift production among products based on market prices.

Read more: http://www.chron.com/disp/story.mpl/headline/biz/5813720.html

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