Indian petroleum companies are short of resources at a time when energy sector needs huge investments
SK JOSHI DIRECTOR FINANCE, BPCL
With crude oil prices at historic highs, for how long will the government’s policy of subsidies be sustainable?
The government is trying to shield the Indian consumer from the effects of the rising global crude prices. The burden has been distributed amongst the government, upstream oil producers and downstream marketing companies. Consequently, India is one of the few countries where retail prices have not risen significantly despite the surging prices in the international markets. Though the government has issued oil bonds and reduced excise duties, they are not sufficient. The burden on OMCs is increasing with every passing day, severely compromising their ability to generate resources required for future investments. Given this, the current policy may not be sustainable in the long run. At the same time, duties on petroleum products remain high and there is enough headroom to reduce duties further. However, the impact on government revenues and fiscal deficit need to be taken into account. One also needs to consider the implications of the oil bonds issued to companies. These are in the nature of a consumption subsidy and as such have a negative impact on efficient utilisation of resources. Anyway, oil bonds have only postponed the burden to a future generation. The government will have to necessarily address these core issues.
Being the second largest marketing company in India, what are your growth strategies?
To have a focus on each segment of the market, BPCL has adopted the Strategic Business Unit (SBU)-based organisational structure. We have divided our market into SBUs –bulk customers, LPG, retail, lubricants and aviation and a dedicated team ensures that we grow in all these five segments. This focus enables us to provide customised products and value-added services to our customers in each of these segments. We have pioneered new products such as branded fuels, loyalty programmes and value-added services at retail outlets. BPCL continues to retain its market leadership in the premium fuel segment. Similarly, the ‘Beyond LPG’ initiative has been aimed at leveraging our large LPG consumer population by offering them a range of products on attractive terms. Going forward, we believe that cleaner energy solutions will have an important role to play. BPCL plans to have a major presence in the bio-diesel value chain and in supplying ethanol-blended fuel.
How is your non-fuel retailing shaping up? What role does it play in your overall strategy?
As I mentioned earlier, BPCL is striving to be more than a supplier of fuel. Towards this end, considerable emphasis has been laid on the non-fuel offerings at retail outlets and in our ‘Beyond LPG’ initiative. We believe that this is a key component of the overall strategy. One of the segments where growth prospects are attractive is the highway sector. The segment sees different customer groups ranging from truckers to tourists. We have set up ‘Ghar’ outlets, which provide a range of services to meet the needs of almost all segments. Rest rooms, restaurants, etc. are some of the facilities, which have been very popular. Most of these large format outlets are managed by the company itself. We have realised that the customers have a greater faith in company outlets. In urban areas, the ‘In & Out’ stores at our outlets have seen encouraging footfalls and sales volumes. These offerings also translate into higher fuel sales.
What are your views on the strategic investments made by BPCL in sectors such as petroleum exploration and gas distribution?
BPCL has been an early mover in LNG and the city gas distribution businesses. BPCL has also entered the upstream exploration and production sector with a view to secure its crude and gas sources. Some of our early strategic investments include the equity stake in Petronet LNG and Indraprastha Gas, which have now become established players in the gas business. We also formed joint ventures for undertaking city gas distribution projects in Maharashtra, Uttar Pradesh and Gujarat. On the E&P front, our plans are at a nascent stage. We don’t have any experience in this field and presently we are just investors. We have working interest in around 24 blocks both in India and abroad. The gestation period in this business is quite long. We are therefore trying to build a balanced portfolio of assets while developing our expertise. We have bid for fields offered under the different rounds of bidding besides farming into existing blocks. Over time, we would like to venture out as an operator in our own right. To provide the desired focus we have floated a 100% subsidiary company to implement BPCL’s plans in this sector.
How do you view the strong appreciation of the rupee against the dollar? What is your bet on the exchange rate for the next two years?
As a refiner, we are interested in the spread between crude oil and petroleum products, which is the gross refining margin (GRM). These GRMs are dollar-denominated and so the margins get affected in rupee terms when the rupee appreciates. However, on the borrowings side, the appreciating rupee provides benefits as debt service burden of foreign borrowings comes down. Considering the current global economic conditions, we believe the rupee will continue to appreciate in the future. However, we cannot expect it to appreciate at the same pace as in the last eight to 10 months. If possible, we plan to increase our exposure to foreign borrowings to benefit from this trend.
What is the status of your new refinery at Bina? How will it augment your refining capacity by ’10?
Currently, we are growing at nearly one million tonnes in marketing volumes every year. We have a 12-million tonne per annum (mtpa) capacity at Mumbai, 7.5 mtpa at Kochi and 3 mtpa at Numaligarh, which adds up to 22.5 mtpa of refining capacity. We are expanding the Kochi refinery by another 2 mtpa. With the commissioning of the 6-mtpa Bina refinery, the group’s refining capacity will increase to over 30 mtpa by the end of ’09.
The work on the Bina refinery is progressing well and we have achieved around 30% physical progress. The entire debt portion has been tied up and we are currently in the midst of finalising the equity portion. Till date, commitments in excess of Rs 7,500 crore have been made and all long lead items have been ordered. We are confident of meeting the commissioning date and expect the refinery to come on stream by end-’09.
What cost management measures is the company taking to keep the business on track?
With the caps on our revenue streams, cost management has become an extremely important aspect of our operations. We have an ERP system to control costs and monitor performance and manage inventories. We have managed to significantly bring down the requirement of LPG cylinders per customer resulting in substantial savings. We have also fine-tuned the lubricants supply chain management with the help of ERP. We are now in the process of replicating this in the LPG business.
The single buoy mooring (SBM) facility at Kochi refinery will become functional by end-November ’07. We would then be in a position to handle very large crude carriers (VLCCs), which will help optimise the crude import costs. This is expected to benefit both the refineries at Mumbai and Kochi.
How has your experience been with the ethanol-blending programme? What are the challenges that need to be overcome to make it really effective?
Ethanol blending is an environmentfriendly initiative. Besides considering high crude oil prices, this also makes economic sense. The government has mandated oil companies to blend 5% ethanol with the petrol sold domestically. However, the challenge is to get desired quantity of ethanol.Besides ethanol, we are also exploring opportunities in bio-diesel. We believe that bio-diesel has a promising future and we are looking at forming joint ventures to support the initiative.
What are your capex plans over the next five years? How do you plan to finance it?
Over the next five years, our capital expenditure is likely to be in excess of Rs 15,000 crore. The money will go into areas like exploration and production, investment in joint ventures, and expanding distribution and marketing facilities and upgrading the two existing refineries.
Although internal generation has been affected due to the burden of the rising oil prices, we are confident of generating a significant portion of the resources needed from our operations. In addition, we may borrow to bridge the gap. Given that our debt equity ratio has traditionally been low, we would be able to fund our capital expenditure requirements.
Do you have any plans of growing inorganically? We are always open to new business opportunities. However, the focus remains on our core business of fuel marketing and the upstream exploration and production sector. We are already into the LNG and city gas businesses and both these businesses are expected to grow big in days to come. Another area where we have now become active is bio-diesel. We have plans to have a major role in the bio diesel value chain. We are exploring opportunities in the area of ethanol in Brazil along with the other PSU marketing companies.
SK JOSHI DIRECTOR FINANCE, BPCL
With crude oil prices at historic highs, for how long will the government’s policy of subsidies be sustainable?
The government is trying to shield the Indian consumer from the effects of the rising global crude prices. The burden has been distributed amongst the government, upstream oil producers and downstream marketing companies. Consequently, India is one of the few countries where retail prices have not risen significantly despite the surging prices in the international markets. Though the government has issued oil bonds and reduced excise duties, they are not sufficient. The burden on OMCs is increasing with every passing day, severely compromising their ability to generate resources required for future investments. Given this, the current policy may not be sustainable in the long run. At the same time, duties on petroleum products remain high and there is enough headroom to reduce duties further. However, the impact on government revenues and fiscal deficit need to be taken into account. One also needs to consider the implications of the oil bonds issued to companies. These are in the nature of a consumption subsidy and as such have a negative impact on efficient utilisation of resources. Anyway, oil bonds have only postponed the burden to a future generation. The government will have to necessarily address these core issues.
Being the second largest marketing company in India, what are your growth strategies?
To have a focus on each segment of the market, BPCL has adopted the Strategic Business Unit (SBU)-based organisational structure. We have divided our market into SBUs –bulk customers, LPG, retail, lubricants and aviation and a dedicated team ensures that we grow in all these five segments. This focus enables us to provide customised products and value-added services to our customers in each of these segments. We have pioneered new products such as branded fuels, loyalty programmes and value-added services at retail outlets. BPCL continues to retain its market leadership in the premium fuel segment. Similarly, the ‘Beyond LPG’ initiative has been aimed at leveraging our large LPG consumer population by offering them a range of products on attractive terms. Going forward, we believe that cleaner energy solutions will have an important role to play. BPCL plans to have a major presence in the bio-diesel value chain and in supplying ethanol-blended fuel.
How is your non-fuel retailing shaping up? What role does it play in your overall strategy?
As I mentioned earlier, BPCL is striving to be more than a supplier of fuel. Towards this end, considerable emphasis has been laid on the non-fuel offerings at retail outlets and in our ‘Beyond LPG’ initiative. We believe that this is a key component of the overall strategy. One of the segments where growth prospects are attractive is the highway sector. The segment sees different customer groups ranging from truckers to tourists. We have set up ‘Ghar’ outlets, which provide a range of services to meet the needs of almost all segments. Rest rooms, restaurants, etc. are some of the facilities, which have been very popular. Most of these large format outlets are managed by the company itself. We have realised that the customers have a greater faith in company outlets. In urban areas, the ‘In & Out’ stores at our outlets have seen encouraging footfalls and sales volumes. These offerings also translate into higher fuel sales.
What are your views on the strategic investments made by BPCL in sectors such as petroleum exploration and gas distribution?
BPCL has been an early mover in LNG and the city gas distribution businesses. BPCL has also entered the upstream exploration and production sector with a view to secure its crude and gas sources. Some of our early strategic investments include the equity stake in Petronet LNG and Indraprastha Gas, which have now become established players in the gas business. We also formed joint ventures for undertaking city gas distribution projects in Maharashtra, Uttar Pradesh and Gujarat. On the E&P front, our plans are at a nascent stage. We don’t have any experience in this field and presently we are just investors. We have working interest in around 24 blocks both in India and abroad. The gestation period in this business is quite long. We are therefore trying to build a balanced portfolio of assets while developing our expertise. We have bid for fields offered under the different rounds of bidding besides farming into existing blocks. Over time, we would like to venture out as an operator in our own right. To provide the desired focus we have floated a 100% subsidiary company to implement BPCL’s plans in this sector.
How do you view the strong appreciation of the rupee against the dollar? What is your bet on the exchange rate for the next two years?
As a refiner, we are interested in the spread between crude oil and petroleum products, which is the gross refining margin (GRM). These GRMs are dollar-denominated and so the margins get affected in rupee terms when the rupee appreciates. However, on the borrowings side, the appreciating rupee provides benefits as debt service burden of foreign borrowings comes down. Considering the current global economic conditions, we believe the rupee will continue to appreciate in the future. However, we cannot expect it to appreciate at the same pace as in the last eight to 10 months. If possible, we plan to increase our exposure to foreign borrowings to benefit from this trend.
What is the status of your new refinery at Bina? How will it augment your refining capacity by ’10?
Currently, we are growing at nearly one million tonnes in marketing volumes every year. We have a 12-million tonne per annum (mtpa) capacity at Mumbai, 7.5 mtpa at Kochi and 3 mtpa at Numaligarh, which adds up to 22.5 mtpa of refining capacity. We are expanding the Kochi refinery by another 2 mtpa. With the commissioning of the 6-mtpa Bina refinery, the group’s refining capacity will increase to over 30 mtpa by the end of ’09.
The work on the Bina refinery is progressing well and we have achieved around 30% physical progress. The entire debt portion has been tied up and we are currently in the midst of finalising the equity portion. Till date, commitments in excess of Rs 7,500 crore have been made and all long lead items have been ordered. We are confident of meeting the commissioning date and expect the refinery to come on stream by end-’09.
What cost management measures is the company taking to keep the business on track?
With the caps on our revenue streams, cost management has become an extremely important aspect of our operations. We have an ERP system to control costs and monitor performance and manage inventories. We have managed to significantly bring down the requirement of LPG cylinders per customer resulting in substantial savings. We have also fine-tuned the lubricants supply chain management with the help of ERP. We are now in the process of replicating this in the LPG business.
The single buoy mooring (SBM) facility at Kochi refinery will become functional by end-November ’07. We would then be in a position to handle very large crude carriers (VLCCs), which will help optimise the crude import costs. This is expected to benefit both the refineries at Mumbai and Kochi.
How has your experience been with the ethanol-blending programme? What are the challenges that need to be overcome to make it really effective?
Ethanol blending is an environmentfriendly initiative. Besides considering high crude oil prices, this also makes economic sense. The government has mandated oil companies to blend 5% ethanol with the petrol sold domestically. However, the challenge is to get desired quantity of ethanol.Besides ethanol, we are also exploring opportunities in bio-diesel. We believe that bio-diesel has a promising future and we are looking at forming joint ventures to support the initiative.
What are your capex plans over the next five years? How do you plan to finance it?
Over the next five years, our capital expenditure is likely to be in excess of Rs 15,000 crore. The money will go into areas like exploration and production, investment in joint ventures, and expanding distribution and marketing facilities and upgrading the two existing refineries.
Although internal generation has been affected due to the burden of the rising oil prices, we are confident of generating a significant portion of the resources needed from our operations. In addition, we may borrow to bridge the gap. Given that our debt equity ratio has traditionally been low, we would be able to fund our capital expenditure requirements.
Do you have any plans of growing inorganically? We are always open to new business opportunities. However, the focus remains on our core business of fuel marketing and the upstream exploration and production sector. We are already into the LNG and city gas businesses and both these businesses are expected to grow big in days to come. Another area where we have now become active is bio-diesel. We have plans to have a major role in the bio diesel value chain. We are exploring opportunities in the area of ethanol in Brazil along with the other PSU marketing companies.
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