Hindustan Petroleum Corporation Limited

ASSOCHAM11th Energy Summit – Indian Oil & Gas Sector

October 17, 2008

India’s Prospects for Developing as an

Export Refining Hub

CONTENTSIntroduction

Global Trends

Opportunities in Asia Pacific

Trend in Indian Petroleum Products Exports

Key Factors for Refining Hubs and India’s Position

Specific Opportunities and Issues

Way Forward

PETROLEUM REFINING - THE MOTHER INDUSTRY

TRANSPORT

PETROLEUM REFINING

ENERGY

CHEMICALS & FERTILIZERS

PETROCHEMICALS

Block Flow Diagram of a Modern Petroleum Refinery

Kero / ATF

GASOLINE SPECIFICATIONS- TRENDBS-II Euro-III Euro-IV WFC (*)

Year of Implementation 2000-2001 2005 2010

Sulfur, ppm 500 150 50 10RON, min. 88 91 91MON, min. - 81 81Benzene, max., vol% 5/3 1 1Aromatics, max., vol% - 42 35Olefins, max., vol% - 21 21 10RVP, KPa 35-60 60 max. 60 max.

* Proposed by World Fuel Charter

PRODUCT QUALITY UPGRADATION - TREND OF DIESEL SPECIFICATION

BS-II Euro-III Euro-IV WFC (*)Year of Implementation 2000-2001 2005 2010

Sulfur, ppm 500 350 50 10Cetane Number 48 51 51 55Density, kg/cm2 820-860 820-845 820-84595% recovery, oC 370 360 360 340PAH, wt% - 11 11 2

* Proposed by World Fuel Charter

Global Trend Suggests Steady Increase in Demand but Lower Capacity Additions

 

Demand Supply

% change % change

OECD    

North America -5 1

Europe -3 -23

Pacific -3 33

Total OECD -4 -4

 

Demand Supply

% change % change

NON-OECD    

FSU 13 12

Europe 14 -50

China 25 8

Other Asia 10 4

Latin America 20 0

Middle East 20 -17

Africa 10 -30

Total Non-Oecd 16 1

Incremental demand & Supply: 2005 - 09

-30

-20

-10

0

10

20

30

40

North America Europe Pacific Total OECD

Supply Demand

-60-50-40-30-20

-100

102030

FSU Europe China OtherAsia

LatinAmerica

MiddleEast

Africa Total Non-Oecd

Demand Supply

Economic and Regulatory Pressures likely to lead to Consolidation in the Refinery Sector

The expected increase in demand, coupled with capacity rationalization is expected to

lead to shortfall in refining capacity

A Combination of these Factors would Potentially Lead to Shortfall Particularly in High Demand Areas

Likely to be met by additional capacity from ..

North America: 33Africa: 20Middle East: 90East Europe: 175South Korea: 15Total: 333

Shortfall: 112

Expected supply deficit by 2010 (MTPA)

Source: EIA outlook, Analyst Reports

China likely to invest in indigenous refining capacityExisting refining hubs such as Singapore and Middle East most likely to add capacity to target the unmet demandNew players with export orientation would emerge e.g. Thailand is building a refining hub with associated infrastructure

Given the large demand supply imbalance in Asia pacific there is a significant potential for petroleum product exports out of India

However India would have to compete effectively with existing refining hubs as well as emerging hubs to make use of the opportunity

Forecast for SAARC Nations*

SAARC nations including Bangladesh, Pakistan,

Srilanka and Nepal – projected to have a fuels

deficit

17.05 million tons (by 2015)

20.85 million tons (by 2020)

* As per recent publication

India’s Petroleum Export on the Rise Since 2005

0

20000

40000

60000

80000

100000

120000

2005-06 2006-07 2007-08

Imports Exports

Driven By

Sustained IncreaseIn the refining capacity

Driven by cost advantages

over erstwhile importing countries.

Petrochemical Sales:Significant proportion of

exports driven by petrochemicals sale by

Reliance & in future by IOCL.

Surplus Refining CapacityCurrently India possesses surplus refining capacity

generating exportable products.

Sustaining this Trend & Developing a Refining Hub would require addressing Key Success Factors

Singapore:

Strategic location along major Asian routes. Focused product strategy – refineries focusing on both light& heavy distillates, in line with Prevailing requirements in the Asian markets. Cost competitiveness: Large refineries with scale benefits Large infrastructure support- ing trade

Middle East:

Strategic location proximity to crude supplies. Port and pipeline infrastruct- ure facilitating trade. Strategic shift in product mix from mainly diesel and naphtha to gasoline and otherlighter products to cater towider set of markets

Rotterdam & US Gulf Coast:

Strategic location: US Gulf coast is close to producing regions, while Rotterdam is close to Europe markets. Port and pipeline infrastructure facilitating trade Focus on cost Competitiveness. US gulf: refineries geared to process cheaper & heavy crude Rotterdam: Scale economies and cheaper labour costs

India: Cost competitiveness: Significant lower cash operating costs mainly on account of cheaper power and labour cost and lower capital costs by as much as 25 to 50 per cent over the Asian counterparts Location: India is strategically located en route of Middle East crude for ease Asian and Pacific rim markets. Key Concerns: Refinery complexity, product mix & quality as well as infrastructure.

The Key Thrust Areas for Developing as a Sustainable Exports Hub Include…

Indian product mix differ widely than product mix in target markets

Align product mix to demand in Asia

pacific

Source: ENI Oil & Gas outlook The pre-dominance of middle distillates in India’s production slate is a reflection of domestic demand conditions. This has also contributed to the low sophistication of Indian refineries

In Asia, however, the demand pattern indicate that expected shortfall is either for high valued lighter distillates or heavy distillate

Most of the Indian refineries are not geared to produce heavy and light distillates. Therefore an export oriented refinery with adequate complexity to address the right product mix would be a requirement

Contd…

There is no mandate to Indian refineries to enhance product quality while most other countries are aggressively shifting toward stringent norms

Besides distillate, significant portion of Asia Pacific demand to be driven by petrochemicals – chemical industry expected to grow at over 9.5 % annually **

Singapore and China are experiencing huge surge in petrochemical investments. However shortfall in capacity expected looking at demand growth

India is well poised to be a profitable petrochemical player in international markets primarily due to cost advantages.

Transition from Euro III to Euro IV would be an essential condition for Indian refineries to successfully cater to export markets

This would require additional capex and increase in production costs for most existing refineries

Improve product Quality to meet stringent norms

Develop refining

capabilities to target specific

segments

** Source: Economic Intelligence unit; Business China Chemical Brothers

The Key Thrust Areas for Developing as a Sustainable Exports Hub Include… Contd…

150

Key Issues and Addressability India will face competition in target markets from refining additions by existing hubs (Singapore and middle East) as well as aspirants such as Thailand. Need to focus on ensuring sustenance of existing cost advantages.Thrust on achieving greater operational efficiency. Invest in large and complex refineries leveraging economies of scaleand ensuring the right product mix and quality.

Managing crude supplies & price

Since India imports 70 percent of its requirements, it would be dependent on imported crude for its export oriented refineries. Managing crude prices effectively compared to its competitors Will Significantly determine competitiveness in export markets.

Need to develop greater capabilities in managing crude prices for refineries to maintain cost advantage.

Currently India does not have adequate infrastructure to handle exports, including ports to handle greater volumes, storage and pipelines.

Thrust in investment in ports to handle greater volumes outbound refined trade.Incentivize third party investments storage and pipelines.

Infrastructure

Competition