Giant New Oil Refinery in India Shows Forces Roiling Industry [WSJ]
Fuel Lines
Shipping Gasoline to U.S. Pays, And Overseas Demand Is on a Sharp Upswing
One Project, 150,000 Workers
By STEVE LEVINE and PATRICK BARTA
August 29, 2006; Page A1
JAMNAGAR, India -- For one billionaire and 150,000 manual workers here on the Indian seacoast, America's gasoline-thirsty motorists mean opportunity.
The drivers want more gasoline. U.S. companies that refine it from crude oil are minting money. But they have turned away from building new refineries in the U.S. because the numbers work better abroad, where costs and red tape are reduced and where expected demand growth is even higher than the U.S.
Into that economic mix sailed Mukesh Ambani, the chairman of India's largest private-sector company, Reliance Industries Ltd., a man whose animated personality and estimated $7 billion fortune regularly land him on the front pages of Indian newspapers. On India's northwest coast near Pakistan, Mr. Ambani is building the world's largest refinery complex. When it's finished, he plans to load 40% of the fuel it turns out onto huge tankers for a 9,000-mile trip to America.
The potential for oil refineries abroad that can serve the U.S. is so strong that Chevron Corp., though based in the car-happy state of California, is investing in Mr. Ambani's project rather than try to build a new refinery at home.
Behind this is a shift in the economics of the refinery business. Distilling crude oil into gasoline, diesel, home-heating oil and jet fuel used to be a lower-margin business. These days it's a fat profit center. Steady growth in demand for fuel in developed countries, plus explosive growth in developing ones like China, have strained the globe's refining capacity. The limited capacity amid growing demand drives up prices of what the refineries turn out.
The U.S. market is especially lucrative, sometimes earning its refiners $20 or more on every barrel of crude oil they refine. Exxon Mobil Corp. earned $1.3 billion in its refining arm in the second quarter, up 11% from a year before. Independent refiner Valero Corp. earned $1.9 billion in the quarter, up about 124%, a jump partly due to its acquisition of another refiner.
While in the past, thinner profit margins required that refineries be close to consumers to save on shipping, today's margins are wide enough that it pays to haul gasoline and other refined products long distances. Locating refineries in a region such as Asia is an easy decision, given its less-onerous construction costs, environmental limits and red tape, plus its own rapidly growing fuel demand.
The hefty profits have spurred many new projects. Scottish oil consultancy Wood MacKenzie counts 500 plans to expand or build refineries world-wide, and figures that maybe half will actually get done. Few are in the U.S. Despite considerable expansion and upgrading of existing American refineries, oil companies haven't built a new refinery from scratch in the U.S. in 30 years.
The result is a growing dependence on foreign-produced fuel. Politicians of all stripes say the U.S. should rely less on foreign energy sources. Instead, it has twin addictions -- not only to imported crude to feed its refineries, but to imported gasoline to meet demand beyond what those refineries can make.
The U.S. is importing about 13% of its gasoline needs this year, up from around 11% in 2005 and less than 8% in 2000, according to the U.S. Energy Information Administration. In all, American drivers use almost half of the gasoline burned in the world each day.
For U.S. consumers, the prospect of getting more fuel from new refineries being built abroad isn't necessarily a negative. The new plants will make more fuel available during crunches, especially since they'll be able to handle heavy, higher-sulfur varieties of crude that some older refineries can't. After Hurricane Katrina, for example, Saudi Arabia said a lack of refineries able to handle such crude prevented it from being able to relieve the U.S. gasoline-supply pinch.
Saudi Arabia's national oil company, Saudi Aramco, currently envisions two giant new 400,000-barrel-a-day refineries. ConocoPhillips is in talks to build one, and France's Total SA the other. In addition, Saudi Aramco and Exxon Mobil are talking about being partners in a refinery expansion and petrochemical complex in China's Fujian province, near Taiwan.
Mr. Ambani's project in India is among the most ambitious. At $6 billion, it is in keeping with a tradition at Reliance Industries of proposing massive projects and getting them built.
While calling himself "media-shy," the 49-year-old Mr. Ambani isn't entirely modest in his claims for his business. He says just two companies in the world are comparable in building vast projects from scratch -- "only Microsoft and Reliance."
Mr. Ambani's father, Dhirubhai Ambani, founded Reliance in the 1970s as a textile producer. In the 1990s, the company plunged into oil refining after the younger Mr. Ambani noticed that India was importing millions of tons of oil products each year. Reliance soon built one of the world's largest refineries at the Jamnagar site, one that can process 660,000 barrels a day of crude oil.
The plant is also one of the most sophisticated, able to process heavy crude, an advantage not only because light, sweet crude is getting harder to come by but also because heavy crude is cheaper.
Reliance put up the refinery on time and within budget. When it was complete in 2000, it let India meet its fuel demands domestically and become a net exporter of refined products. Reliance pumps a little of the crude for the plant itself and buys much of what it needs from the Middle East.
The job of building at Jamnagar entailed another over-the-top project. To attract foreign experts to live and work at the arid site, the Ambanis built a residential complex that included villas for 2,500 families, a nine-hole golf course, a large swimming pool and an irrigated, 2,000-acre farm with 100,000 mango trees, guava and a flavorful fruit called chiku.
Mr. Ambani soon was mulling an expansion: a second big refinery alongside the first. But the death of his father, the founder, led to a bitter struggle between Mukesh and his younger brother, Anil, over the company's direction.
During this difficult period, 2003, Chevron happened to be installing a new head of its own refining arm. Chevron's refinery operation was lagging. Consultants told the company it was underperforming others. The new refinery chief, Jeet Bindra, a native of India, decided to go see an old acquaintance: Mr. Ambani.
After a visit by Mr. Bindra to Reliance's refinery in Jamnagar, the two companies agreed they would cooperate on some research projects. Chevron began to sell crude from its Asian oil fields to Reliance.
The Ambani brothers settled their differences in 2005, dividing Reliance into two parts, with one brother in charge of each. Mukesh, with the oil portfolio, resurrected his plan to expand Jamnagar.
Again, the vision was large: a 582,000-barrel-a-day refinery next to the one just built. It would have even greater ability to process heavy crude and make the most expensive types of fuel. Together, the plants would create the largest refinery complex in the world, able to process 1.2 million barrels of oil a day.
With refining profits currently high and many other projects under way, speed was of the essence. Oil analysts say that in five or so years, there is likely much new capacity, especially in Asia, while U.S. demand growth slows. Among the reasons analysts expect the growth in U.S. gasoline demand to slow are increased use of alternative fuels such as ethanol and wider adoption of gas/electric hybrid cars. The result may be that refining profit margins decline and the new plants will be fighting one another for sales to the U.S. "These projects will face tremendous competition," says Lawrence Goldstein, president of the Petroleum Industry Research Foundation.
Mr. Ambani is pushing to get the second refinery functioning while the profit window is open. He's speeding it along in part by using an extra-large work force. The goal is to have the plant on line by December 2008, two years ahead of many projects that others are planning.
Early this year, Mr. Ambani began hearing from Western and Mideast oil companies about becoming a partner in the project. He was interested, because Reliance had little marketing expertise and had to sell its output to traders, leaving some potential profits on the table. A partner could provide the missing piece.
That's where Chevron fit in. The U.S. company had planned small expansions of existing refineries in Mississippi and California but had identified no "grass-roots project in the U.S. that makes economic sense," Mr. Bindra says. By March 28, senior Chevron executives, including Chairman and Chief Executive David O'Reilly and Mr. Bindra, were meeting with Mr. Ambani at Chevron's offices in San Ramon, Calif. Over a lunch catered by a local Indian restaurant, they came close to a deal for Chevron to own part of the new refinery.
Mr. Ambani worried that Chevron couldn't act fast enough. To help with financing, he was planning an initial public offering of part of the new refinery, and this IPO was just two weeks away. To speed matters, Chevron suggested splitting its investment into parts. It would buy an initial 5% share for $300 million and have an option to buy a further 24% when the refinery is finished, for a total 29% interest.
Majority-owner Reliance would shoulder the risk of completing the project on time and on budget. Twenty percent would be sold to the public in the IPO, and Reliance would own the rest. The April 12 IPO drew bids for seven times as many shares as were available.
Twenty thousand workers are at the coastal site now, beginning the refinery's superstructure, despite the start of India's monsoon season. Their numbers will eventually reach about 150,000. The goal of fast construction is the reason for using so many, says crew chief Sridhar Vaidyanadhan. To avoid wasted time, he says, each welder will have a half-dozen helpers, "so he is always welding and the others bringing him what he needs."
Says Mr. Ambani: "We are building the refinery at half the cost and in half the time" possible in America. "I don't know that you could get 150,000 people together to build a refinery" there.
Skilled workers such as the welders will earn around $8 a day. The far-more-numerous laborers and helpers will get $3 a day or so, Mr. Vaidyanadhan says. The pay scale and certain economies, such as using the original engineering plans from the first refinery, are intended to keep the construction cost low. The project is supposed to cost just $10,300 per barrel of refining capacity, about a third lower than the estimated cost of building the two big refineries planned for Saudi Arabia.
About 80% of the gasoline and other products the refinery turns out will go to the U.S. and Europe. At today's rates, shipping to the U.S. will cost roughly $6 a barrel, a sum easily absorbed by the current high profit margins for refining.
And when those margins aren't high? To protect themselves for the predicted industry downturn by the middle of the coming decade, Reliance and Chevron already have a plan. They will start to sell the giant refinery's products in a market that they hope by then will be less regulated, and that in any case is growing ever thirstier for gasoline: India.
online.wsj.com |
