When it comes to watching the global refining and petrochem business, Rajeev Gautam has vantage point anyone would envy. As head of the company whose technology is used to produce 60% of the world’s total petrol, UOP chief Gautam has his finger right on the pulse of the global refining industry. Around 90% of Reliance Industries’ Jamnagar refining complex is based on UOP technology.
In India to announce the setting up of the 95-year-old company’s first research centre outside the US at Gurgaon, Gautam spoke to DNA Sreejiraj Eluvangal on the latest in the global oil & gas industry. Excerpts from the interview:
There is huge oversupply of refining capacity in the world. We have seen refining margins of biggies like Reliance more than halve since the downturn began. Where do you see things going from here?
There’s no question that there is oversupply of refining capacity in the world today. And refineries are shutting down as well. But the important thing is to see where they are shutting down. They are shutting down in the US and Europe while new capacity continues to be built in countries like India.
Why is that so, given that a large part of the refinery output from refiners such as Reliance Industries and Essar Oil are sold in overseas market, including the US?
Indeed, it is a global market in petroleum products. Refineries anywhere can sell their products in any part of the world. The reason why refineries in Europe and America are shutting down is because they do not have enough upgradation. They are not complex refineries. Therefore they cannot upgrade a large part of the crude to usable and commercially viable products such as gasoline (petrol), like a complex refinery can.
A simple refinery, like the ones that are shutting down, can only upgrade part of the crude to such products. So once the refining margins come down, as they have now, these refineries simply cannot survive due to their product mix.
Where are we, for the world as a whole, in the demand and investment cycle in the refining and the broader oil & gas market?
In terms of demand, we have bottomed out. There used to be a peak demand of 86.5 million barrels per day just before the downturn. After the crash, it came down to 84 million. It’s not sliding any further and therefore forecast is for demand to hit 86 million during the second or third quarter of 2010. A lot of cancelled projects in the Middle East, for example, have been restarted.
Where is the demand coming from, the US or from emerging markets?
The US demand for gasoline dropped abruptly as people stopped driving as they used to. It will take a while before it comes back. On the other hand, even during the worst of times, demand from countries like India and China never declined. They grew slightly slowly compared to earlier. The estimate is that it will grow at a CAGR (annual average) of 5% over the coming years. However, it is difficult to predict how much will be the demand from these places. For example, the Chinese have sold a lot of cars as part of their stimulus package and the impact of this on gasoline demand is yet to be seen.
Where do you see high levels of investments in this sector in future?
A lot of the new capacity is being built in the Middle-East simply because the crude is there and a lot of capacity is being built in India and China because the growing markets are there.
Tell us about your new research centre in Gurgaon.
Honeywell, our parent company, is putting up a 400,000 square feet technology centre at a cost of $34 million (Rs 155 crore). It will employ 100 people.It is mainly intended for UOP, but it will also do work for some other units in Honeywell’s speciality materials business. This will be the third Honeywell research facility in India.
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