To refine 9-15 million tonnes of crude oil every year, the state-run Hindustan Petroleum Corporation [Get Quote] plans to set up a plant in the Konkan region.

It is looking to invest over Rs 20,000 crore (Rs 200 billion) for a greenfield project in Raigad or Ratnagiri districts of Maharashtra.

The Konkan region outweighed Gujarat and Andhra Pradesh as it was seen as a natural expansion of the refinery in Mumbai, which has the capacity to refine 6.5 million tonnes per annum.

"In view of the constraints in the expansion of the Mumbai refinery, we plan to build one closeby," said an HPCL executive. Sources familiar with the plan said HPCL would need 2,000 acres.

Asked about the funding plans in the wake of the losses incurred by HPCL, the executive said that it had reserves of Rs 11,000 crore (Rs 110 billion).

"The proposed refinery will be developed on a debt-equity ratio of 1:2 or 1:2.5.

Besides, over the next five years, we expect to earn a significant amount from the development of real estate around the refinery," he added.

HPCL plans to develop commercial complexes around the refinery in the Chembur-Mahul region, a part of Mumbai's central suburb.

The company, which reported a loss of Rs 137 crore (Rs 1.37 billion) in the quarter ended September 2009, has a refinery in Visakhapatnam with 7.5 MMTPA capacity.

HPCL has also sought incentives, including sales tax benefits and sops on the lines of those given by Gujarat to Reliance Industries [Get Quote] and by Orissa for the Paradip refinery being developed by the Indian Oil Corporation [Get Quote].

State industries minister Rajendra Darda said the government and the Maharashtra Industrial Development Corporation would provide the necessary support.

Along with L N Mittal, it is also setting up a refinery in Bhatinda at an investment of nearly Rs 20,000 crore (Rs 200 billion). A similar amount has been earmarked for a Petroleum, Chemical and Petrochemicals Investment Region in Visakhapatnam.

An analyst with a brokerage house said that a second refinery in Maharashtra was a logical move since HPCL faced constraints in expanding the Mumbai refinery.

"The viability of the project will depend on the state government's financial package. Land is a big issue in these districts. HPCL will be relieved if the government allots notified land," he said.

Public sector oil companies are bleeding. The underrecoveries are estimated at Rs 3.10 a litre for petrol and Rs 2.55 a litre for diesel. Sale of every litre of kerosene results in a loss of Rs 17.30, while the underrecovery on the sale of a cooking gas cylinder is Rs 241.

Earlier, the oil marketing companies had said that they would be forced to scale down their capital expenditure plans due to the underrecoveries.