India's refiners embrace petrochemicals
A common theme amongst business development plans of India’s
state-run refiners today is downstream integration into petrochemicals. The
idea, though not novel, is a welcome development, and has come about due
several reasons, which have as much to do with the economic advantages that the
strategy offers as with a desire to escape the clutches of governmental
interference and controls. Almost every major refiner in the country is now
eyeing investments in petrochemicals, though most projects are still only on
paper.
Falling demand for refined products
Across the world, markets for refined products are no longer
expected to grow in the lines of the past. While global demand has grown at a
CAGR of 1.3% annually since 2000, the prognosis is that the pace of growth to
2030 will be at about half that rate. Beyond that analysts reckon a peaking of
demand and then a gradual decline. Admittedly, India’s growth numbers will be
faster, as there will be rising demand for fuels such as LPG and ATF, but the
country will not be immune from a downward correction in the overall pace of
growth for all petroleum products due several reasons.
Electrification of vehicles
Demand for an important range for petroleum products, viz.
automotive fuels (comprising diesel and petrol), are likely to see a
considerable shake-up with the advent of electric vehicles (EVs), including
hybrids. Experts agree that a wave is coming, and only differ in its timing. Infrastructure
for EVs is being created at breakneck speed in China, already the world’s
biggest market for these cars, and the stage is being set for an explosion in
demand that will considerably impact demand for conventional auto fuels.
India is far behind, but a few companies have made modest
beginnings. Plans by the government to mandate only sales of EVs by 2030 have
been put on the backburner, possibly due pressure from the domestic automotive
industry, which has a long way to go before bringing EVs to market in
substantial volumes. Several leading auto producers now see these vehicles as
an integral part of future growth and are likely to announce plans soon.
Improvement in fuel efficiency norms
Improvement in fuel efficiency norms – driven by government
mandates – will also have a significant role in curbing incremental demand for
fuels. The gains will be realised by several strategies including: improvements
in the performance of internal combustion (IC) engines, including by clever
electronics & controls; light-weighting of vehicles, in part by
substitution of heavy metals with lighter options such as advanced composites;
and improvements in the quality of the fuels.
The shared economy & alternate fuels
The shared economy will also have an impact; app-based
ride-sharing are limiting the number of trips taken, and the desire for
individual ownership is diminishing at least in some densely populated urban
pockets where availability of rides, 24x7, on demand, is virtually certain.
Fuels such as compressed natural gas (CNG), produced outside of
refineries, as well biofuels (bioethanol and biodiesel), are increasingly being
used for automotive purposes (as blends in the case of biofuels). The Indian
government, for instance, recently announced an ambitious biofuels policy that
calls for increased use of second-generation biofuels such as cellulosic
ethanol and biodiesel from waste vegetable oils.
Governmental actions to curb air pollution – an acute problem in
northern India, in particular – by levy of taxes, restrictions on driving cars
into inner cities, etc. could also dent automotive sales.
Petrochemicals markets – still on a growth mode
Petrochemical markets present a very different picture. Demand
for chemicals, plastics, synthetic rubbers and synthetic fibres is expected to
continue growing, at or around current growth rates, both due an expansion in
the consuming classes in emerging markets, as well as overall population
growth. Not withstanding legitimate concerns about the indiscriminate use and
disposal of single-use plastics, demand for petrochemicals will grow and the
refining industry is well placed to tap this opportunity.
Building adequate scale
For refiners the links to petrochemical production is normally
through the provision of feedstock such as propane, butane or naphtha, or
through increased production of propylene and aromatics.
But investment in integration schemes requires scale at the
refineries. For example, they need to have enough of naphtha available for
cracking to tap into smaller streams such as the C5s and beyond. A liquid
cracker complex capable of producing 1-mtpa of ethylene can co-produce around
120-ktpa of raw C5 stream, containing around 18% isoprene, 22% cyclopentadiene
and 15% of piperylene. These can be very gainfully employed – either by the
refiner or by third parties – to make several speciality products.
Scale is a constraint that several refineries in India face.
Aggregation of naphtha from several centres could be a way to circumvent this
issue, but is not ideal as it adds cost that can prove to be a burden in the
inevitable down-cycle. India’s refiners are therefore now looking to take their
refining capacities at one site to a minimum level of about 15-mtpa, and then
examine downstream opportunities.
Great synergies
Beyond the transfer of hydrocarbons for value-addition,
refinery-petrochemical integration can bring great value through utility stream
synergies for power, steam, process water and hydrogen. Almost all refineries
are large consumers of hydrogen – a requirement that will only increase with
the mandates to produce cleaner fuels – while naphtha crackers are as much
producers of hydrogen, as they are of olefins. Standalone crackers have, at
times, little option but to burn the hydrogen produced in their furnaces,
recovering only the energy value of this important resource.
Upfront or retrofit?
Integrated refinery-petrochemical plants are best built at a go
from the design stage, as this allows for tight integration of process streams.
But as the next best case petrochemical operations can be retrofitted into
existing refineries. The Ratnagiri refinery, now on the drawing board, is an
example of the first approach; it is being planned with 60-mtpa and16-mtpa of
refining and petrochemicals capacity respectively. The complex of Reliance
Industries Ltd. at Jamnagar is also an integrated one, but built in stages. It
continues to evolve even today by value-adding on low value petroleum coke by
producing higher value fuels and petrochemical feedstock through gasification.
Several smaller refineries are also ramping up, for example,
propylene production, by adding fluidised catalytic cracking (FCC) units to
their operations. Such capacities are upcoming at HMEL, the joint venture
between state-run HPCL and the Lakshmi Mittal Group, in Punjab; the Essar Oil
refinery (now owned by Russia’s Rosneft) at Vadinar; BPCL’s Mumbai & Kochi
refineries; the MRPL refinery at Mangalore; the CPCL refinery at Manali, in the
outskirts of Chennai; HPCL’s Vishakhapatnam refinery; and IOC’s Paradip
refinery. While a considerable chunk of the propylene will likely be converted
onsite to polypropylene, smaller plants will eye opportunities in chemicals
such as the acrylic, oxo-alcohols or phenol value chains, either on their own
or by offering propylene through contractual arrangements to third parties.
Case-by-case approach
Refinery-petrochemical integration strategies have to be built
on a case-to-case basis, taking into account the asset location, capacity,
technological profile and long-term strategic considerations. Investment
decisions need to be based on a sound assessment of market trends and
competitor analyses, amongst other factors. Companies must also reckon with the
fact that refining and petrochemicals are different businesses when it comes to
the marketplace. Refiners seeking to go downstream need to build skills in
areas such as marketing & sales, application development, technical support
etc., as these are not traditionally available in their operations-focussed
management structures.
But this is an exercise well worth the effort!
- Ravi Raghavan
CHWKLY5JUN18
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