09-11-03 The state-run Indian Oil Corp (IOC) has said that it is prepared to build the Rs 12,400 crore Paradip refinery by 2009-10 provided the Orissa Government restores the tax concessions it had granted in August 1999.
"In case Orissa government restores 100 % sales tax incentives, IOC would endeavour to complete the project by 2009-10 taking into account the projected product availability in the medium term," the company has informed the Government.

Along with restoration of the original package of tax incentives from Orissa state, IOC has requested the removal of a five-year cap on exemption of entry tax on crude oil. IOC had earlier stated that the 9 mm ton refinery was unviable in medium term as it would end in a glut of petroleum products forcing other refineries to export or run below optimal capacity.
The refinery economics was based on Orissa government's incentives that were subsequently withdrawn in February 2000. The incentives were partially restored in July 2001 but these amountedto merely 32 % of the original concessions.

Sources said IOC had estimated that a deferment or exemption of sales tax by the Orissa government for 11 years would push the project's internal rate of return (IRR) to 10.33 % from current 2.56 % and the return on equity (ROE) to 12.26 % from the current 1.26 %. But that would not be enough to justify the project.
"The project will be viable with 100 % sales tax deferment for 11 years together with 50 % exemption in excise duty on products for 15 years," IOC has told the government. The IRR then climbs to 15.76 % with an increased ROE of 20.36 %.

Sources said IOC has sought restoration of sales tax deferment/exemption for 11 years as originally granted by Orissa government and 50 % excise duty concession on domestic sale of petroleum products in line with the concessions granted to northeast refineries. Paradip refinery was originally scheduled for commissioning in 2004-05 but the state-run refiner wants to reschedule it to the XIth Five Year Plan (2007-2012) as currently the country has surplus refining capacity.
India has a refining capacity of 116 mm tons as against petroleum product demand of just over 105 mm tons. Product consumption is growing at around 2 % per annum, much below the anticipated 5-6 % growth rate expected at the time of project conception in 1998-99.

While the concessions may improve the project IRR, it does not take into account the loss incurred by other refineries due to additional exports or backing down (in capacity). While IOC's Barauni refinery will have to back down output from 5.4 mm tons to 1.8 mm tons, others like Koyali, Chennai Petroleum and Haldia will have to export to accommodate Paradip's products. Koyali will have to ship out 8 mm tons, Chennai 2 mm tons and Haldia 0.6 mm tons, besides 2 mm tons export from Paradip refinery, sources said.
"Full evacuation (of petroleum products produced by Paradip refinery) is not possible. Domestic sale ex-Paradip refinery will be at the cost of additional export/backing down (in output) by IOC and its subsidiary refineries," they added.