Indian Oil Corporation's most ambitious refinery at Paradip in Odisha is ready for commissioning after a 14-year delay that led to cost overruns and stretched the payback period for the Rs 345.55 billion project. The time required for the amount invested in the refinery to be repaid by the net cash outflow generated is now pegged at 14 years as against eight set earlier after costs increased and crude prices declined.
"The internal rate of return (IRR) for the project is not very lucrative at 7.7% now. It should ideally not have been less than 13-14% as we must look at all recoveries within eight years," said Ramjee Ram, executive director in charge of the Paradip refinery project. IRR is a widely used measure to calculate the return on investment.
The Paradip refinery, which has taken 14 years to complete since former Prime Minister Atal Bihari Vajpayee laid its foundation stone and 24 years since PV Narasimha Rao's government decided to set up the project, has overshot the budget by Rs 35 billion. Prime Minister Narendra Modi will dedicate the refinery to the nation on February 7.
The project faced one roadblock after another, including the exit of foreign partner Kuwait Petroleum. The state government then withdrew incentives for the project, setting it back by four years. It faced resistance from local residents and delays in approvals.
Work was disrupted by two cyclones that hit the east coast in 2013 and 2014. The high-complexity refinery can process various types of crude oil, giving Indian Oil the flexibility to import oil from the Gulf countries, Africa and South America. It will pump in products into Andhra Pradesh, Odisha, Jharkhand, Madhya Pradesh and Chhattisgarh. It will also look at exports to South East Asian countries.
The refinery has the capacity to process 15 million tonnes of oil a year into products such as petrol, diesel, cooking gas, kerosene and aviation fuel. With this, Indian Oil will operate 11 refineries. "The fall in crude prices is a concern, but we have refinanced loans for the project that allows us some comfort. Without the refinancing, the IRR would have been even lower," said Sukumar Banik, deputy general manager (finance).
IndianOil estimates the plant's gross refining margin, which is the difference between the total value of petroleum products and the price of crude, at about $15 a barrel in 2016-17 at current prices. S Bhattacharya, general manager at IOC, is one of the few members remaining from the first group of executives posted on the project. "This project took 24 years but the real work has happened only in the last five years. We were determined to execute it despite challenges as it will benefit the eastern India," he said.
IOC executives said learnings from the Paradip refinery would help the company in setting up projects faster in the future. India plans to set up its biggest oil refinery in Maharashtra with a capacity of 18 million tonnes per annum. The government has mandated state-run oil marketing companies, including IOC, to work on the project together.