When Reliance Industries (RIL) opens its second huge refinery in Jamnagar this summer, world oil consumers may heave a sigh of relief at the injection of extra fuel into a market that has been short of capacity for years.
But the issue for physical oil traders is less about global fundamentals than regional arbitrage, as the surge in gasoline, diesel and jet fuel exports — the biggest one-off rise in world supply since Reliance launched its first plant in 1999 will open up new trading opportunities while closing some old ones.
The 5,80,000 barrels per day (bpd) export-oriented refinery, now 90% complete and expected to be inaugurated in July, nine years after the first plant was finished, will have the edge over its peers as it can process cheap, low-grade crude into gasoline and diesel that meets strict Western standards.
A low-cost base and high complexity will offer unrivalled global reach for its fuel, allowing it to shift exports to the highest-priced market when full production starts in January.
It will play a swing supply role that will redraw traditional trade flows, and has already embarked on a robust marketing campaign in Europe, Mexico and East Africa, capitalizing on delays and cost overruns faced by other big refinery projects.
Reliance is being extremely aggressive in its marketing strategy. They are all over Europe marketing what will come up this year according to Fereidun Fesharaki, head of FACTS Global Energy, which advises companies on refining and marketing strategies.
The Jamnagar plant will take Reliance’s total capacity to 1.24 million bpd, making it the largest facility in the world and going some way to alleviate a global shortage of capacity that has aided four years of above-average profit margins for refiners worldwide.
Even if global margins deteriorate, as many analysts expect, Reliance is likely to prosper, as it has invested in a plant that can use the world’s cheapest crude oils — having high sulphur, acid and metal content to make the best products.
The refinery was designed to produce optimum quality products that can be exported anywhere in the world, using the worst possible crudes out there.
For physical traders for whom arbitrage is a cash cow, supplies coming from Jamnagar could be a threat. With India’s retail fuel prices fixed at below market rates and state refiners expanding quickly to meet domestic demand, almost all of the plant’s production is expected to be exported.
Fesharaki expects Reliance to ship at least 100,000 bpd of gasoline to the US through Chevron, which owns 5% of the $6-billion plant, equivalent to about a 10th of US imports, most of which comes from European plants.
It would also likely look to sell more product there directly, on top of the 4-5 million metric tons of petrol and jet fuel it already exports to the US annually.
Reliance’s gasoline supply of up to 230,000 bpd — if all its output goes the West could replace almost a third of Europe’s exports to the US, which uses 43% of the world’s petrol, and where refining shortages have been partly blamed for oil’s four-year rally to records near $120 a barrel.
It makes sense for them to open up more trading offices around the world and try to market their products on their own.
That’s a strategy already in play in Africa, where Reliance bought half of Tanzania-based retailer and storage firm Gulf Africa Petroleum Corp, which has 300 pump stations. East African fuel demand is surging, led by Kenya and Tanzania.
South Africa, which has seen a rise in diesel demand due to power outages, has turned frequently to Asia for diesel, as regular Middle East suppliers have cut exports due to firm domestic demand amid booming economies.
Geographically speaking, it makes sense to send products to East Africa. But, there could be a spec issue, as Indian refineries will produce high quality spec and East Africa is looking for cheap product.
Mexico, which may be supplying Reliance with some of its 3.1 million bpd of heavy sour crude production, is also studying a proposal to import gasoline from Reliance. It imports about 300,000 bpd of gasoline, 40% from the US.
And Reliance is already exporting to Brazil $1.5 billion worth of diesel a year.
Meanwhile, hefty exports of diesel, especially the ultra-low sulphur variety that Reliance offered this week under its first one-year term deal, may stymie Asian flows to Europe. Reliance could easily ship 170,000 bpd, or 67% of its diesel output from the refinery, displacing as much as 40,000 bpd of arbitrage trade from North Asia and Singapore to the West.
Unlike gasoline, European demand for high-grade diesel is set to rise to 5.2 million bpd by the end of the decade, up 20% from ‘06, data from APEC show, and it is turning to the Middle East, the US and increasingly to Asia. Europe will be structurally short of high-quality automotive diesel, refinery investment is limited and the Middle East will not make a difference until around ’11.
While many trade flows may change almost overnight, there are spoils to be had for those who can anticipate the shifts.
The export volumes will be huge, so traders will still be involved to trade on more of their products according to a Singapore-based trader.