New Delhi, Feb. 9: The finance ministry appears to be stonewalling a petroleum ministry proposal to restore 100 per cent excise exemption to the beleaguered Numaligarh refinery.
Sources say a series of meetings held with the finance ministry on the issue have failed to make headway.
The petroleum ministry has been strongly recommending the case as the newly-built refinery has to bear a crushing interest and depreciation burden of Rs 330 crore apart from loan repayments. The excise payment entails an additional annual outgo of Rs 135 crore.
The refinery was born out of the Assam Accord and is not ideally located from the economic standpoint.
As part of the case for the excise waiver, it has been pointed out that the refinery was built after the new industrial policy for the North-East came into force in 1997. This policy provides for 100 per cent excise concession for new units.
During the first year of its commissioning, the Numaligarh refinery was given 100 per cent excise concession. However, in the last budget, the finance ministry gave 50 per cent concession to all the refineries in Assam and clubbed the Numaligarh refinery in this category. The petroleum ministry has come out in favour of restoring status quo ante to the Numaligarh refinery.
The North-East refineries had been receiving an assured return on their investments under the administered price mechanism (APM). However, with the dismantling of the APM in the current financial year, these refineries are in trouble as they have to compete with larger refineries which are also better located purely from the economic standpoint.
Refining is characterised by economies of scale and the ideal size of a viable refinery is around 9 million tonnes. The refineries in Assam are much smaller in size. The Numaligarh refinery, which is the largest, has a capacity of only of 3 million tonnes.
There is also a deficiency of crude oil in the region vis-a-vis the refining capacity. While the four refineries have a total capacity of processing 7 million tonnes of crude, only 5 million tonnes is available in the region. Importing crude from outside is uneconomical for these land-locked refineries.
The Numaligarh refinery, for instance, gets only 2 million tonne of crude. The failure to run to full capacity hits its profitability.
The refinery has to be shut down because of the crude shortage, which further adds to the costs.
Since the demand for petroleum products in the North-East is only around 1.4 million tonnes, more than 3 million tonnes have to be moved out. The cost of transporting these products to the demand centres adds up to around Rs 400 crore per year.
The viability of these refineries is expected to be further affected as large investments will have to be made to improve the quality of fuel to meet the new emission norms. This investment is not expected to translate directly into revenue.