IOC plans to hike processing of cheaper crude to 30% by FY '18

Sees optimisation of operations as a strategy for margin protection

Indian Oil Corp (IOC), plans to raise processing of cheaper crude oil varieties to 30 per cent by 2017-18 as part of its efforts to improve margins.

In 2013-14, IOC, which owns 30 per cent of the nation's oil refining capacity, turned 54.65 million tons of crude oil into fuel. Of the crude oil processed, 16.1 per cent was heavy and high TAN (total acid number) crude.

Heavy crudes, like the one produced in Latin America, are cheaper than most of the varieties available from the Middle-East as they have high concentration of sulphur and several metals, particularly nickel and vanadium, which require higher grade refineries for processing.

"The Corporation sees optimisation of refinery operations as a major strategy for margin protection and enhancement. Since crude oil cost constitutes as high as 95 per cent of the input cost, reducing cost of crude oil has been a priority area," IOC said in its latest annual report. In pursuit of this plan, IOC has been enhancing capabilities of its refineries to process cheaper crude varieties as well as initiated action to provide optimum crude mix to refineries.

"During 2013-14, the Corporation's refineries processed 16.1 per cent heavy and high TAN crudes vis-a-vis 11.5 per cent in 2012-13. Plans are afoot to raise this proportion to 20 per cent by 2015-16, and 30 percent by 2017-18," it said.

To leverage the capability of processing tougher crudes, high sulphur crude has also increased from 44.3 per cent in 2009-10 to 53.7 per cent (including Mangla crude from Cairn's Rajasthan fields) in the year 2013-14.

With its 15 million tonnes a year Paradip refinery being commissioned this fiscal, the same will increase to 67 per cent.

IOC Chairman B Ashok said improving gross refining margins (GRM) as a means to improve profitability has been one of the biggest challenges for the company.
"For this, we have been enhancing the capabilities of our group refineries to process cheaper grades of crude oil and also maintaining an optimum mix between term and non-term contracts for crude oil purchases for cost benefit," he said.

In April-June quarter of current fiscal, IOC earned $2.25 on turning every barrel of crude oil into fuel. This is compared to Essar Oil's Vadinar refinery reporting a GRM of $9.04 and Reliance Industries earning $8.70 per barrel GRM.

IOC and its subsidiary company, Chennai Petroleum Corp Ltd, together own and operate 10 of India's 22 refineries with a total refining capacity of 65.7 million tonnes per annum accounting for 30.54 per cent of country's refining capacity.

"Total dependence on term contracts though meeting the objective of secured supplies, may not yield the best GRMs as it provides less elbow room to take advantage of aligning crude supplies with product price fluctuations.

Expansion of LPG projects

"At the same time, crudes that can yield high GRMs may not be available in right quantities when desired. A right balance, therefore, has to be exercised between term and non-term crude oil supplies," IOC said. The firm said Paradip refinery is inching closer towards commissioning. "Once commissioned, this refinery will improve Corporation's competitiveness in the market and provide enhanced operational flexibility."

IOC has proposed to invest about Rs 1,200 crore during the current financial year for expanding its Liquefied Petroleum Gas (LPG) pipeline projects. “The Corporation has renewed focus on LPG pipelines so as to leverage the economics and safety aspects of LPG transport via pipelines. ,” it said in its annual report.