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Cheer on cheap gas prices

The big crash in the prices of crude oil and natural gas will bring humongous savings in India’s import bill. The country’s oil imports were estimated at 225 million tonnes (MT) in 2019-20 and import bill on petroleum products at $105 billion.

In the coming year FY21, there can be a substantial reduction in the import bills on petroleum products. This will lead to cost reduction in a wide range of petrochemicals, including fertilizers. There is also the prospect of a reduction in the price of petrol and diesel, benefiting the transport sector. With the shortfall in revenue receipts, the government has also hiked excise duty on petrol and diesel.

The depressed state of the economy, further accentuated by the impact of the coronavirus and a risk-averse investment climate are not conducive for great enthusiasm for making fresh investments. Yet India’s, unlike China’s and several other countries, is not an export-driven economy. India has a large domestic market with a high degree of self-sufficiency regarding a large number of products and services. This factor should be leveraged to seize opportunities that have unfolded in the oil and gas sectors.

Narendra Modi and his NDA government seem to be twice lucky: after they formed the government in 2014, there was a fortuitous advantage; crude oil prices: declined in the subsequent years. This comfort was threatened since last year when prices started increasing. Now comes the present crash not just in crude prices, but also in abundant availability of natural gas.

TN could grab this opportunity

More than the other states, TN could grab this opportunity with alacrity. The state with the second-largest GDP, has several advantages: a high degree of urbanisation with well-dispersed economic growth, a long coastline with four large ports and a few other minor ports, large educated workforce, four international airports, a stable political administration with the civil service reputed for its efficiency and a well-diversified industrial activity.

However, there has been a concentration of attention on the engineering industry, notably automobile and auto-components, IT and a range of traditional industries like textiles, sugar, cement, leather, etc. The growth in investments has been linear, with businesses recording modest growth, ploughing back profits and building size over decades. Except for a handful of large automobile tyre and glasses companies, petroleum and petrochemical units, public sector enterprises and the infrastructure sector, there have not been many big-ticket investments in the state.

Scope for large investments

The chemicals, petrochemicals and energy sectors offer the scope for such investments. TN’s share in these has been low, at just around 6 per cent of India’s. The state had an early start in heavy chemicals: the Mettur Chemical and Industrial Corporation was set up in 1936 to produce chlor-alkali chemicals based on the cheap power made available by the Mettur hydroelectric project. The strong leather industry and the advent of Madras Refineries at Manali in the late 1960s helped develop chemical clusters across the state.

There was the promise of a large petrochemical complex in Manali. Chemicals & Plastics India Limited (now Chemplast Sanmar) emerged as a sizeable producer of PVC. But the dreams of big growth did not fructify due to the huge spurt in the price of naphtha and other petroleum feedstock and the requirement of much larger capital needed by industrial units of this sector.

Lack of lobby for petrochemicals…

Unlike the automobile and the engineering sectors, the chemical and petrochemical sector of the state also lacked sound lobbying and public relations. Remember CII enjoying handsome support and participation by the automobile, engineering and IT companies? We also had passionate leaders like (ethanol) Krishnaswamy, who were constantly lobbying for the chemical sector. Like T V Antony (former TN Chief Secretary) propagating the virtues of a small family in every meeting, Krishnaswamy used to promote ethanol in every available forum. Sadly, such passion or drive is missing today.

The President of the Indian Chemical Council (ICC) and head of the Sanmar Group, Vijay Sankar, held a meeting with the Minister of Industry, Chief Secretary and Industry Secretary, ahead of the CII State Annual Meeting on the same day. Media was kept out of this and there was also little effort to share the deliberations. The contrast was seen in CII presenting policymakers and top leaders effectively projecting a larger picture of the economy and the industry.
There was also the concern over the TN government declaring districts and regions in the Cauvery delta out of bounds for hydrocarbon-based industries. These include zinc smelters, iron and steel industries, copper and aluminium smelter, tanneries, bone meal and processing of animal parts and exploration, drilling and extraction of hydrocarbons.

There was concern over the fate of the two large petrochemical projects cleared for this region – the 9 MT capacity refinery of Chennai Petroleum Corporation Limited (CPCL) at Nagapattinam at a cost of around Rs 30,000 crore and the recently announced petrochemical plant at Cuddalore by Haldia Petrochemicals at around Rs 50,000 crore of investment. Chief Minister of TN and senior officials clarified that the two large projects would be set up.

Manali attracts…

Dramatic changes are taking place in the Ennore-Manali region. Indian Oil’s gas terminal at the Ennore Port for importing CNG has become operational. Pipelines from the port to Manali have already been delivering gas to several petrochemical units. S Ilanahai, President, Chemical Industries Association and CMD, Cetex Petrochemicals, Manali, pointed to a double whammy: availability of piped CNG in profuse quantities and tertiary-treated water made available by the Chennai Metropolitan Water Supply and Sewerage Board. These have vastly improved the viability, profitability and prospects for expansion of the industrial units that have been languishing.

The Indian Oil gas terminal can also handle the import of basic chemicals like propane and ethane, which can be converted into propylene and ethylene, which can feed several downstream petrochemical units. These can be set up at much less cost than a large naphtha cracker. In course of time, these will improve the prospects for setting up a large naphtha cracker unit at Manali.

GAIL pipeline work to resume

The GAIL pipeline project, getting stuck for long, has bright prospects for getting completed in a quick time. A senior official mentioned handsome increases in compensation to farmers who have been resisting the laying of the pipeline, eg. 10 per cent of a ten’fold increase in the market value of the land made available for laying the pipeline and also attractive prices for the opportunity costs of crops lost. So, there is the prospect for gas with spur lines along the Kochi-Bengaluru route feeding the industrial belt of Western Tamil Nadu – Coimbatore, Perundurai, Tirupur, Erode, Salem…

The same logic of higher compensation can be extended to the delta farmers. Remember, the value of production of crude or gas will be many times that of raising paddy, of around Rs 40,000 per acre.

The pipeline from Chennai to Tuticorin would also make good progress. Indian Oil that has won the contract for supplying piped gas to Salem and Coimbatore and Torrent Gas the bid for providing piped gas to Chennai and Tiruvallur districts, are expected to provide supplies to domestic and industrial consumers from 2020-21.

B Santhanam, President, Saint-Gobain Glass India, in one of the IE seminars, mentioned that switching to gas from furnace oil could increase his company’s profits by Rs 100 crore p.a. Even without waiting for the pipeline, Saint-Gobain transfers gas through special trucks from Ennore Port to its Sriperumbudur plant. The company has been running its other large glass plants at Gujarat and Rajasthan on gas.

For some three decades, IE has been campaigning for the southern region to get a fair share of natural gas. We are happy this dream is coming true with the gas terminals of getting active in Kochi and Ennore. With natural gas prices crushing to $2 per million metric British thermal units, there is hope for welcome attention to petrochemical units, which can trigger large investments and employment through downstream units.

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