But will have to do away with SEZ benefits in case of domestic sales

After folding Reliance Petroleum into itself, Reliance Industries Ltd (RIL) is weighing selling fuel refined at the former's Jamnagar refinery, an export-oriented unit located in a special economic zone, in the domestic market.

Under Section 80IB of Special Economic Zone Act, any entity having a facility in an SEZ, which is otherwise treated as an export-oriented unit, can sell the product in the domestic market in case the market for export is not viable.

"The objective of an SEZ isto try and sell maximum in the export market but in case it is not available or viable, the products can also be sold in the domestic market," said a source close to RIL.

The company will weigh all options and will try to sell the product wherever the margins are good, the source said. However, a top energy sector analyst with a leading foreign brokerage house said under current market conditions, especially when crude is ruling at $45 per barrel, none of the markets is lucrative.

"No matter where you sell — in the export market or inthe domestic market, goodmargins are not possible," theanalyst said.

The only benefit in selling in India is that the company will not have to bear the shipping freight cost, which is marginal.

In last six months the Baltic Dirty Tanker Index, theindex which refers to liquid freight rates, has dropped from 1854 on September 1, 2008 to 626 on March 2, 2009, a fall ofover 66%.

However, in case the company plans to sell in the domestic market, it will not be allowed to enjoy the benefits of an export-oriented unit and will be treated as a unit inside the country.

The source said once the refinery achieves 100% operating capacity and churns out 580,000 barrels of petroleum products per day, the refining margins are expected to be $2-3 per barrel higher than the currentrefining margins that RIL clocked in the third quarter.

In the third quarter, the company posted a gross refining margin of $10 per barrel, but in the wake of crude coming down to levels of below $50 per barrel, the margins in the fourth quarter are expected to take a hit.

Another analyst with a leading international brokerage firm said after the merger of RPL into RIL, the average complexity of the company will stand at 12.6.

"This is among the highest in the world and this will help the company in getting better margins. India, for the time being is a better market as demand for petroleum products is gradually flaring up here," the analyst said.

The earlier refinery of earlier, which process 660,000 barrels of crude per day, has a Nelson complexity of 11.4, while RPL's 580,000 barrels per day refinery has a complexity of 14.

Another advantage the company would have post merger is on the use of fuel to run the refinery.

Analysts Vinay Jaisingh, Mayank Maheshwari and Surabhi Chandna of Morgan Stanley, in a March 2 report, said, "Once RPL starts using the KG basin gas (as and when it is available) as fuel for internal consumption, it should not have to pay any taxes for the usage of the gas." This would benefit the company in the long term.

The requirement for RPL's unit would be close to 10 million metric standard cubic metres of gas per day.

However, it depends on whether the government gives it permission to divert the gas for its use or not. The company had to recently call off its 400 mw Patalganga gas-based power plant because the gas for the plant could not be tied-up for its own plant.

Promit Mukherjee/ DNA-Daily News & Analysis Source: 3D Syndication