State oil companies have told the government they will have to shut down a few refineries if the nationwide lockdown is extended beyond April 14, people familiar with the matter said.
A deep demand destruction due to lockdown has left most refineries with run rates of barely 50-60 per cent and little tank space to store their refined products or crude oil. An extended lockdown would keep demand low and require refiners to respond with supply cut.
“Indian refiners are accustomed to running their units at more than hundred per cent capacity utilisation. But today we are doing much less. If the demand doesn’t improve, some refineries will have to be shut,” said an executive at a state refiner. “It’s going to be a hard decision. Nobody wants to shut a unit because restarting has its own technical challenges.”
It’s unsafe to operate refineries at abysmally-low capacity, said BK Namdeo, a former chief of refineries at HPCL. In many cases, running refineries below 30 per cent utilisation can damage the equipment, he added.
Private refiners in a spot, too
Before shutting down a unit, refiners usually try out the so-called circulation mode in which crude is circulated in the system but not cracked.
“You place crude in the crude distillation unit and hot steam in other parts of the system. The same crude keeps circulating without producing any refined product,” said Namdeo. The system stays in running condition although there is energy wastage.
How many units will eventually shut will depend on the length of the lockdown and the consequent demand level. State oil companies, not big fuel exporters ordinarily, are also exploring overseas market that’s already facing a supply deluge and awful margins.
Private refiners such as Reliance Industries and Nayara Energy too are in a spot as state fuel retailers have sharply cut fuel purchase from them and the export market has turned rocky.
India’s oil demand fell 18 per cent in March and April is expected to be worse.
Refineries have also been tweaking their configuration to supply more of LPG for which the demand is strong. “To deal with the situation of lockdown and lower demand for transportation fuel, and meet higher demand for LPG, refineries are using all technical options, like regulating throughput, using judicious mix of crude and regulating operating conditions,” said HPCL chairman MK Surana.
Cash inflow is constrained at refiners as they now have to pay for crude they purchased before the oil crashed early March while their sales revenue sank, forcing them to raise a lot of shortterm debt.
