Crude oil prices have seen a southward movement, as have refining margins. This does not, however, signal the need for revisiting business plans for refineries, even though the long-term price of oil is expected to stabilise at $40-50 per barrel, Ajay Arora, partner at Ernst & Young, tells Vandana Gombar.

Where do you see refining margins headed in the medium to long term? Do you think the current dip in margins is temporary or of a more fundamental nature?
I think this current dip is a small correction, with refining margins expected to remain robust until 2008-2009, given the sustained growth in demand for petroleum products and incremental demand being higher than incremental supply till 2009, after which large capacities are projected to start coming onstream. These capacities are being built in the Middle East, China and India.

Do you think there is then a need to rethink refinery investments, especially inland refineries?
There will be a softening in refinery margins when the new capacities come onstream. However, these additions are now in an environment of high crude prices and stringent environmental norms and product specifications, which is also resulting in existing capacities going off market, specially in the developed countries.

How would you rate the country's overall refining capacity?
In 2000, there was pressure on our older refineries to be overhauled - these have benefited from the upsurge in refining margins over the last three years, but could come under pressure again with the next dip in margins. The Reliance [Get Quote] refinery is very modern and capable of handling heavy sour crude - which has resulted in gross refining margins of $9-11 or above vis-�-vis $5-7 for the other refiners.

It seems the new Reliance refinery would be commissioned at the tougher time of the refining cycle?
The Reliance refinery is projected to come onstream in 2008 at which time healthy margins are expected to continue. Further, the refinery faces limited challenges given its configuration, locational advantage, huge economies of scale and degree of integration.

At what price do you see crude oil averaging?
I believe crude prices on a long-term basis will be between $40-$50 per barrel, achieved through the natural demand-supply balance and market adjustments. These levels are significantly higher than the long-term prices considered by industry participants five years ago.

There are still those who talk about oil at $100 a barrel?
I do not subscribe to the $100 per barrel school of thought, especially on a sustained basis, though it is true that oil markets have seen a lot of speculation, given the nervousness around supply in the last 3-4 years. However, short-term spikes in oil prices are likely to continue in the future.