Higher quality standards for shipping fuel seen boosting Reliance’s refining margins

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Tougher quality standards for fuel oil powering ships are expected to boost the refining margins of Reliance Industries Ltd, which has already upgraded to these standards as part of its massive refinery expansion.

Under regulations issued in October 2016 by the International Maritime Organization (IMO), ships must shift to fuel oil with sulphur content below 0.5% January 2020, against the present 3.5%.

“As a result of our robust and flexible configuration, we are also uniquely positioned to take advantage of emerging opportunities in view of IMO 2020,” Mukesh Ambani, chairman and managing director of RIL, had said at the company’s 41st annual general meeting on 5 July.

Fuel oil, also called furnace oil, is a byproduct of crude oil distillation. It is used in ships, and for steam boilers in power plants and in industrial plants.

With the impending shift to low-sulphur fuel oil, demand for the same is expected to rise. According to a Macquarie Research report, RIL’s gross refining margin (GRM) can hit $20 a barrel by the financial year 2020-21 against the estimated $12 as RIL stands to gain from expansion in middle distillate cracks.

GRM is realization from turning every barrel of crude oil into finished products.

“RIL is a prime beneficiary of IMO 2020 regulations. Unsurprisingly, on an absolute basis, RIL ranks at the top with refining margins expanding to $20 per barrel in FY3 from $12 today,” said Macquarie Research in its report dated 9 July.

RIL is not the sole winner though. Indian Oil Corp. Ltd., Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd too will benefit as they have already begun producing low-sulphur fuel.

Macquarie added that by virtue of operating one of the highest complexity refineries in the world, RIL should benefit from the material expansion in middle distillate cracks which it expects to expand from $15 a barrel today to $30 due to a substantial demand from the shipping industry. Middle distillates refers to a range of refined products including jet fuel, heating kerosene, and gas and diesel oils like marine bunker fuels.

Higher demand will double the product’s crack spread (difference between the price of crude oil and petroleum products extracted from it).

This January, RIL commissioned its refinery off-gas cracker (ROGC) complex of 1.5 million tonnes per annum (mtpa) capacity along with downstream plants and utilities. This marks the end of the $16 billion refining and petrochemicals expansion plan that RIL embarked on in 2014. The plant will help RIL double ethylene capacity in addition to lowering its fuel cost and boosting profits.

Source: Livemint