As India adds to its refining capacity, it should simultaneously pay more attention to improve infrastructure to import crude oil and transport petroleum products as much as possible using the far cheaper and safer alternative of pipelines.

During the last 30 years, with the exception of short periods following the two oil shocks of 1973 and 1979, investment in refineries has never been attractive in regions where market forces decided the product prices. Yet, the world was awash in excess refining capacity during most of this period. Utilization rates were less than 75% in most regions. Many of these refineries were built either for export purposes or energy security reasons. Starting in the early 1980s, North America and Europe lowered their excess capacity while improving their utilization rates. At the same time, refining capacity continued to expand in the Middle East and Asia.

Refiners have been enjoying high margins once again in the last few years. The oil industry had correctly predicted that the world crude oil slate was getting both heavier and sour. At the same time, petroleum product specifications have been becoming more stringent in terms of emissions, especially in Europe and the US but also in some developing countries like India. Timely investment by major refiners to process heavy and sour crude oil to meet new product specifications while taking advantage of lower priced heavy and sour crude oil helped to raise margins.

If history were any guide, with high refining margin and increasing global demand pushing global refinery utilization rate close to 90%, there would be enough capital flowing into building refining capacity worldwide perhaps with the exception of western Europe. In fact, according to industry consultants $150 bn in real terms are expected to be invested between 2003 until 2015, most of it in North America ($40 bn) and Asia ($50 bn) and mostly for hydro processing and coking to handle heavier and sourer crude oils. According to the 2003 World Energy Investment Outlook of the International Energy Agency, the world needs to invest $412 bn in real terms between 2001 and 2030 in the refining sector to meet expected growth in demand. The IEA expects that Asia will attract the largest portion of this investment at $120 bn; the Middle East follows with about $100 bn.

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