OREANDA-NEWS. March 23, 2011. Essar Energy sees a significant near-term hit on its product sharing contracts with Indian state-run oil marketing companies, which are seen lowering their fuel buy from the London-listed firm once their new refineries become operational and the existing ones are upgraded. “We supply close to seven million tonne of refined fuel products to IOC, HPCL and BPCL, but now we expect a 5-6% impact on these supply contracts in 2011-12,” said a senior Essar Energy official.

The three state-run oil marketing companies — Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) — are building new refineries in Paradip, Bina and Bhatinda, respectively. IOC is conducting upgradation at its existing refineries in Haldia and Panipat, while HPCL is also sprucing up its Vishakapatnam refinery. “Once our new refinery in Bina comes online, we will definitely reduce the volume of petrol, diesel and liquefied petroleum gas (LPG) that we buy from Essar and others,” said BPCL’s director (finance) SK Joshi. However, he said given the rising demand projections in the domestic market, BPCL will continue to source fuel from outside.

“Once the phase 1 of expansion at Vadinar (refinery in Gujarat) is complete, it will see a production of 18 mmtpa. Then BPCL’s Bina and HPCL’s Bhatinda are also slated to come online this year. So we could see a temporary fuel surplus in the near future,” Essar Energy CEO Naresh Nayyar said in a conference call from London, on Monday.

BPCL’s Bina refinery will have an initial capacity of 6 million tonne per annum (mtpa), while HPCL’s Bhatinda refinery will start with a production of nine mtpa and the company is also planning to double output from Vishakapatnam refinery to 15 mtpa. IOC has already upgraded its Haldia and Panipat refineries to 7.5 mtpa and 15 mtpa, respectively, while its new refinery at Paradip will have a production capacity of 15 mtpa.

On Essar’s retail plans, the official said, “We will be going slow on our plans to expand retail outlets given the uncertain regulatory environment.” He was echoing Mr Nayyar’s words that the spike in global crude oil prices and the government’s slow progress on deregulating diesel are major roadblocks to Essar’s plans to open 1,700 outlets by March 2011. “We have no choice but to pull the brakes on our retail plans for now as competition with PSU firms is becoming completely unviable,” Mr Nayyar had said. Discussing the impact of the fall in production at Japanese refineries due to the recent earthquake and tsunami, Mr Nayyar had said, “As a result of the crisis in Japan, we saw a sudden spurt in refining margins and we see this trend continuing in the latter part of the year.”