HUGE investments made in recent years have seen India's refining sector record phenomenal growth. The country's 20-odd refineries, mostly owned by three state-owned majors, have a capacity of almost 190 million tonnes per annum, as against a yearly domestic demand of 140 million tonnes for petroleum products.

Continued investments into the sector will enhance India's refining capacities to 240 million tonnes per annum (MTPA) by next March – following the commissioning of at least three more refineries – resulting in a glut in supplies of petroleum products. While India currently exports a part of its excess production of refined petroleum products mainly to the US and Europe, it is seeking new markets in its neighbourhood.

Last week, a delegation led by commerce secretary Rahul Khullar went to Pakistan and discussed the prospects of exporting petroleum products. Pakistan, which has 13 million tonnes of refining capacity, imports a significant part of its finished petroleum products. With signs of an improvement in ties between the two south Asian neighbours, there is every likelihood that Indian refineries operating plants in the northern and western states would export products like diesel to Pakistan.

Petroleum products in India are hugely subsidised by the government, so there is a significant price differential between prices in the two countries. If the proposal is finally cleared, Indian refineries in cities such as Bhatnida and Panipat in the north and Jamnagar in the west (where India's leading private sector major, Reliance Industries, has a 40 million-tonne refining capacity) would be able to supply petroleum products to Pakistan. There could be significant savings in transportation costs as well.

Of course, Pakistan would expect India to open up its cement market, enabling the export of the commodity; different regions in India experience a shortage of cement at certain times of the year and the northern markets could be well-served by suppliers in Pakistan.

State-owned refining and petroleum marketing major Indian Oil Corporation, is eager that Pakistan opens up the sector, enabling Indian refiners to sell their products. B.N. Bankapur, director, refineries, Indian Oil, says the company could even think of expanding capacities at its Panipat refinery, if Pakistan starts buying petroleum products from India.

Another state-owned refiner, Hindustan Petroleum Corporation Ltd, is also promoting a refinery in the joint venture together with UK-based, Indian-origin steel baron, L.N. Mittal, in Bhatinda, bordering Pakistan. The nine million-tonne refinery is expected to be commissioned later this year.

India's petroleum products exports have surged in recent years, especially after the Reliance refinery at Jamnagar became operational. Exports shot up from around 750,000 tonnes in 1999-20 to 50 million tonnes a decade later.

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ANOTHER window of opportunity for India lies on its east coast, where it sees prospects of exporting petroleum products to Bangladesh. At present, highly-subsidised products such as kerosene are smuggled across the eastern borders by a petroleum mafia that has close links with politicians and police officials.

Numaligarh Refinery Ltd (NRL), which operates in Assam, plans to build a 100-km-long pipeline to Bangladesh for the export of high-speed diesel. The pipeline is expected to connect Siliguri at the foothills of the Himalayas in West Bengal to Parbatipur in Bangladesh. An existing pipeline links Numaligarh to Siliguri.

A team from NRL, which is owned by state-owned Bharat Petroleum Corporation Ltd and the government of Assam, among others, was in Bangladesh recently seeking a nod for the proposal.

The pipeline will cost about Rs1500 million and will be in addition to the export of petroleum products through waterways.

NRL had last year exported a small quantity of diesel to Bangladesh through the water route, but is keen to enhance exports. Demand in the north-east is limited and the excess supply is routed to other parts of India. Bangladesh faces a shortage of about 1.5 million tonnes of petroleum products annually.

But unlike Bangladesh, India sees huge potential for exports to Pakistan. In fact, India has been seeking to export petroleum products to Pakistan for the last five years, but strained ties between the two nations, especially after the November 2008 attacks on Mumbai, resulted in the plans being cold-storaged.

Despite the over-capacities, Indian refiners continue to invest huge amounts in new refineries or upgrading capacities in existing ones. Indian Oil, for instance, plans to invest Rs400 billion in a greenfield refinery along the west coast, which could have a capacity of 20 million tonnes.

“We plan to set up a coastal refinery to capture the export market, as also to strengthen our foothold in the domestic market,” says R.C. Butola, chairman and managing director, Indian Oil. The refinery, expected to go on stream by 2018, will come up near a port that receives imported crude. Indian Oil at present has a 66 million tonne refining capacity.

S. Sundareshan, secretary, ministry of petroleum and natural gas, notes that the country's refining capacity is being expanded with investments of nearly Rs.600 billion being made in the sector. Besides three refineries being developed by the three state-owned firms (in Bhatinda, Beena and Paradip), private sector major Nagarjuan is also pushing ahead with its Cuddalore refinery in the southern state of Andhra Pradesh.

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BUT despite the aggressive expansion and export plans, India's refiners are facing insurmountable problems caused by under recoveries. Traditionally, petroleum products in India have been closely monitored by governments, to prevent a sharp escalation in prices. But as part of its economic reforms programme, the government had a few years earlier dismantled the administered pricing mechanism (wherein bureaucrats directed oil marketing companies to sell products including petrol, diesel, kerosene, liquefied petroleum gas and even jet fuel at specified prices).

The pricing mechanism was dismantled a few years ago and the refiners and marketers were expected to set the price of the products based on crude price. However, with various elections – including general, state and for local bodies – cropping up frequently, the government reluctant to give a free rein to the petroleum marketing companies.

The result: private sector marketers, including Reliance and Essar, have virtually shut down their petroleum product retail outlets, as they cannot compete with the state-owned firms who get subsidies from the government.

And petroleum products continue to be sold at hugely distorted prices. Sundareshan, the petroleum secretary, estimates under-recoveries of state-owned companies will soar to Rs2 trillion in the current fiscal, if global crude prices continue to stay at high levels.

Their burden has risen sharply in recent years; from about Rs50,000 crore in 2006-07, it shot up to Rs70,000 crore the following year.

Last fiscal, the state-owned firms reported under-recoveries (the difference in the sale price and the cost of crude plus refining charges) of Rs.78,000 crore. The government did allow them to tweak petrol prices, though diesel and kerosene – allegedly consumed by the poor – are still controlled products for all practical purposes.

With the recent electoral process in five states almost complete, analysts expect petrol and diesel prices to be hiked.

Of course, there is a thriving black market in the subsidised products. A few months ago, a junior government official was burnt alive in Maharashtra after he threatened to expose a mafia that was looting kerosene from the depots of the state-owned firms.

Diesel is one of the most popular fuels for owners of expensive cars – including Mercedes Benz – and sports utility vehicles. And all the luxury coaches, manufactured by European major Volvo, run on diesel. So the government's claims of protecting the poor by preventing a hike in the price of diesel and kerosene is more of political posturing than a reflection of reality.