Stream sharing aids margins
New Delhi   20-Sep-2010


B N Bankapur
Director (Refineries)
IndianOil Corporation Ltd.

IndianOil’s (IOC) fuel retailing may still be a loss-making business because of the continuing under-recovery on diesel sales. However, margins in its refining operations remain robust despite adverse market conditions. This is because of the out-of-the-box approach adopted by the company to manage its operating costs.

IOC is running eight refineries in various states with an aggregated installed capacity of 60.5 million tonnes per annum (mmtpa). Thanks to innovation in its operational strategy for refineries, IOC has significantly cut down its operational costs in recent years, leading to improved refining margins.

The company is banking on measures like stream sharing, reduction in internal energy consumption and value addition to improve the gross refining margin (GRM) of its refineries.

IOC has made cost savings of close to Rs 500 crore in the last three years through sharing of stream (sharing of product processing) between its refineries, a mechanism which also allows it the flexibility to optimise refining throughput.

“We have saved Rs 480 crore through stream sharing alone”, BN Bankapur, IOC’s director for refineries, told FE. Besides, stream sharing has helped IOC optimise its throughput.

“Our throughput has been more than 100% during the last three years,” Bankapur said.

The refining major has brought down the average internal energy consumption of its refineries from 70 mBtu/bbl/energy factor to 60 mBtu/bbl/energy factor in the last three years.

“There is a lot of scope for improving GRM through reductions in the internal energy consumption of refineries,” the IOC director said.

External factors also weigh on GRM. IOC has to buy crude oil for its refineries from the international market. It is exposed to operational risks like inventory losses in times of high price volatility. Besides, it faces foreign exchange risks as crude oil is priced in the dollar. The company has no control over such factors.

However, refiners can improve their margins by sourcing heavy and sour crude oil, which usually sells at a discount in the market. This requires the right refinery configuration to process the cheaper crude oil. Otherwise, the refinery could end up with a higher share of the low-margin heavy distillates like furnace oil, nullifying the benefits of lower raw material costs.

As a trend, new refineries are being configured to process all kinds of crude oil. But most IOC refineries were set up long time back and they lack this operational flexibility.

To overcome this technological disadvantage, IOC is putting up secondary processing units like fluidised crude cracker, delayed coker and hydrocracker at its old refineries.

The company is setting up a coker unit at its Gujarat refinery, which would be commissioned next month. Meanwhile, it is also considering installing coker at its Haldia refinery. "Delayed coker for Haldia is under consideration," Bankapur said.

Diversifying into activities like petrochemical product manufacturing is another option for a refiner to improve its margins.

The company is already producing LAB at the Koyali refinery in Gujarat. It is also planning to produce paraxylene and PTA there. To expand its refining capacity, IOC is relying on debottle-necking as a more economical alternative to greenfield projects. It is implementing a debottle-necking project at the Panipat refinery to expand its capacity from 12 mmpta to 15 mmtpa. The expanded capacity would be commissioned next month.

IOC is also well prepared to comply with the September deadline for introducing Euro III-complaint petrol and diesel at its retail outlets across the country. "The company has already introduced Euro-III compliant auto fuels in most parts of the country. It expects to cover the remaining areas­ Jharkhand, East Uttar Pradesh, Bihar, North-East and Kerala-before the deadline," Bankapur said.