Currently, oil marketing companies are incurring heavy losses due to under-recoveries. What is the ideal solution to this problem?
Of late, oil prices have increased substantially. As under-recoveries increase, we need to rationalise the burden borne by all the stakeholders, including upstream companies, downstream refineries, the government and consumers. One way of reducing the burden is to cut excise duty rates and move to a system of specific duties from the current ad valorem levies. (Due to ad valorem duties, taxes increase with soaring oil prices.) The industry has made representations to the government to consider this option. However, the government’s concerns regarding fiscal and revenue deficit also have to be taken into account.
Besides petroleum refining and marketing, in which other segments of the energy value chain is HPCL making substantial investments?
Some of our current revenue streams are under strain. A company of HPCL’s size must have robust alternative revenue sources to sustain its growth. We are looking at exploration and production (E&P) as a key growth driver in the long term. We are also studying investment avenues in the natural gas value chain and petrochemicals. We have interest in 22 exploration blocks, including two blocks outside India. In 5-7 years, we will invest over Rs 5,000 crore in E&P activities. We are keen to operate oil-producing blocks on a revenue-sharing basis and are scouting for suitable opportunities.
We are also investing in the natural gas business, especially in city gas distribution projects. HPCL has already set up three joint ventures (JVs) with Gail for this purpose, namely Bhagynagar Gas in Andhra Pradesh, Aavantika Gas in Madhya Pradesh and a yet-to-benamed JV in Rajasthan. These companies will market CNG in the domestic market and enter the piped natural gas (PNG) business as more gas becomes available. Wind power generation is another area in which we plan to invest up to Rs 475 crore to generate 100 mw of electricity. The first phase of 25 mw has been partially commissioned in Dhule district of Maharashtra.
What is the progress of the new refinery project at Bhatinda? How do you plan to supply crude oil to the same?
The 9 million metric tonne per annum (mmtpa) refinery at Bhatinda is a JV between HPCL and Mittal Energy. The total project cost works out to Rs 18,900 crore at current prices. The equity portion in the project will be Rs 7,230 crore, while the debt portion will be Rs 11,670 crore. The project represents the largest foreign direct investment (FDI) in the petroleum downstream sector and is also the largest rupee-debt syndication ever made in India. We have already acquired 2,000 acres for this project. Licensor agreements have been signed, the EPC contractor has been appointed and around Rs 2,000 crore has been committed. The mechanical completion is scheduled for September ’10. This, along with some minor additions at existing refineries, will push up our total refining capacity from the current 16.5 mmtpa to 28 mmtpa by ’12. To supply crude oil to the refinery, a 1,000-km pipeline is being laid from Mundra to Bhatinda at a capital expenditure (capex) of around Rs 4,000 crore, which forms part of the project cost.
What are your plans with regard to setting up another refinery at Visakhapatnam (Vizag), along with a petrochemicals complex?
Under the Petrochemical and Petroleum Investment Region (PCPIR) policy, the Andhra Pradesh government plans to develop nearly 35,000 acres from Vizag to Kakinada. We are the anchor industry for developing the PCPIR in Vizag and have been allotted 1,500 acres. We have signed a memorandum of understanding (MoU) with Total of France, Mittal Energy, Gail and Oil India for a new 15-mmtpa refinery-cum-petrochemical complex there. At present, feasibility studies for this new project are under way. We will have a better idea about the total capex involved once our feasibility studies are over.
What are your major capex plans for the next five years? How do you plan to finance the same?
Our estimated capex for the next five years is Rs 18,000 crore. These funds are required to fund ongoing initiatives and invest in new initiatives such as upstream E&P, upgradation and modernisation of existing refineries, creation of additional tankages, investment in equity of JVs (including Bhatinda refinery), setting up of LPG bottling plants, as well as upgradation of facilities at retail outlets and petrochemicals.
Financing the capex is a challenge for HPCL in today’s environment. Even if we consider 1:1 debt-equity ratio, we need to generate a profit of Rs 9,000 crore over the next five years to fund our capex plans. After paying 30% of profit after tax (PAT) as dividend, HPCL requires a PAT of Rs 3,000 crore per year. Unless the current level of under-recoveries comes down, achieving the PAT target seems challenging.
What cost management measures is HPCL undertaking to keep the business on track, even while it incurs operating losses?
In the case of refineries, we have increased our capacity utilisation. As a result, against the rated capacity of 13 mmtpa, we processed 16.5 mmtpa, translating into a capacity utilisation of 128%. We are also maximising processing of sour crude to improve our gross refining margins (GRMs). Currently, nearly 63% of the crude oil processed by HPCL has high sulphur content, which is a significant improvement over earlier years. We have recently commissioned a 60,000-tonne LPG storage facility at Vizag. This will result in freight savings of $35-40 per million tonne, as imports through very large gas carriers (VLGCs) become possible. To reduce the cost of transport, we are also investing in product pipelines.
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