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Sushil Maroo, Chief Executive Officer, Essar Energy

01 May 2014

Chief Executive Officer, Essar Energy, Sushil Maroo, speaks to Deepak Sahu about the problems being faced by private refineries, hurdles in growth, the role of government in improving sentiment and the overall prospects of investment in the sector. Excerpts.

Which are the most serious policy challenges India must overcome in energy sector?

In my view, not getting timely statutory approvals is the biggest challenge. There are multitude of clearances required, at times more than once from the same government department, for the same project. This results in crucial management bandwidth as well as time being wasted. If the entire approval process could be streamlined into a time-bound mechanism, it would aid the industry significantly. Other challenges facing the sector are acute shortage of raw material – coal or gas, high interest rates, challenges associated with land acquisition, health of state electricity boards (SEBs) and changes in sovereign laws of countries like Indonesia which have led to prices of imported coal going up.

What will be Essar Energy’ strategy to capitalize on India’s growing requirement for energy?

Our strategy remains clear – create a world-class, low-cost integrated energy company, positioned to capitalise on India’s rapidly growing energy demand. We have a diverse portfolio of 15 blocks and fields in the various stages of exploration and production of oil and gas in India, Indonesia, Madagascar, Nigeria and Vietnam. Total reserves and resources across these blocks is 2,034 mmboe. In midstream, we have a 20 mmtpa refinery capacity at Vadinar in Gujarat, which represents about 10 per cent of India’s refinery capacity. It is a state-ofthe- art facility, capable of processing a very high proportion of heavy and ultra heavy crude and produces Euto IV / V grade products. We also have a 14 mmtpa refinery at Stanlow, UK, which meets about 15 per cent of the country’s transport fuel requirement. In marketing, we have a network of 1400 retail outlets, with another 200 in various stages of commissioning. Out retail network is stated to rise to about 3000 in the next three-four years. On the power front, we have about 4,000 mw capacity, which will rise to about 5000 mw by this year end. All these make us a significant player in India’s energy sector. Our corporate strategy is to optimize performance of all existing assets, deliver growth through a variety of power and oil and gas projects and leverage skills and Indian asset base to identify growth opportunities.

What potential is there for both domestic and foreign private sector investment to help meet India’s growing energy demand?

India can attract significant foreign as well as private investment across the energy value chain. We import about 80 per cent of our crude oil requirement and hence significant investments need to be made in the E&P sector for our energy security. We need policies which will attract investors, both global as well as domestic, to the sector. In refinery, India is already a major exporter of finished products and can continue to remain a significant player in this field. Already we have several marque foreign investors in our refinery sector and given the capital intensive nature of the business, we will continue to attract financial and strategic investors in the sector. India lags behind other developing economies in terms of providing reliable power to a large section of its population. We have a severe supply deficit to even those we have been able to connect to the grid. Hence we see long-term steady growth prospect in the power sector. However, we need to have enabling and conducing policy environment for investors to come and stay invested. As of now, the power sector is facing severe handicap in terms of raw material supply issues and delays in securing various approvals. Once these issues are addressed, then this sector can attract significant capital, which will aid all other sectors.

What are the respective roles of the Central government and states in establishing and carrying out energy policy and are they delivering as per the expectations?

The government’s primary role is to ensure level playing field for all players so that there is a healthy competition, which will ultimately benefit the end consumer. Its role is also to act as an enabler or a catalyst by formulating policies and practices which aid the industry. For instance, market forces must be allowed for price discovery instead of government intervention. With adequate protection mechanism for vulnerable sections of society, we must have price parity of products like diesel with international markets. This also helps in demand management, prevents slippage, and encourages efficiency. Case in point is diesel regulation, which if implemented, will help control subsidy burden (and resulting inflation) and also open the sector to competition. We were encouraged to see the government taking graded price hike of Rs 0.50 per litre for diesel for over 12 months. However, we are disappointed that this monthly price hike has now been stopped. Private sector has invested significantly in setting up a nation-wide retail network which is now idling due to the differential of diesel prices between our pumps and those of PSU players.

What kind of challenges do you continue to face while doing business in India and is the slow progress with regulatory approvals hurting?

Getting timely approvals is a challenge and this has hurt India’s standing in the international market as an investment destination. While we are convinced about the long-term demand and are committed to the market, not getting required approvals and clearances has impacted our business. For instance, we have a situation where we have commissioned a power plant with the promise that the linked coal mine will be also operational. However the reality is that the coal block is yet to be operational because of approval delays, putting a huge strain on us in terms of securing raw material for the plant’s operation.

With oil and gas consumption staying strong and government also removing subsidies, how will it help private sector retailers including Essar Energy?

We are bullish on the country’s oil and gas sector. In the medium to long term, India’s consumption story is expected to remain strong and we foresee India becoming a net importer of petro products over the next three-five years. With subsidies being removed, we see our retail network coming back on stream by being able to sell diesel, which accounts for about 80 per cent of auto fuel. At present, due to lack of level playing field, the private players are not eligible for any subsidy for selling diesel below market-linked price, while the PSUs are compensated by the government for doing so. Once deregulated, our network of 1,600 retail network (1,400 operational and 200 under commissioning) will be able to compete on their own for market share and will add a great value to the organisation.

What according to you should be the new government’s move to attain long-term economic growth?

The government should, along with focusing on ease of doing business, also put necessary efforts to taming overall inflation to attain and support long-term economic growth. Also essential are ease and speed of getting regulatory approvals, lower interest rates, level playing field in the various industries and the right environment to conduct business, which would go a long way in improving investors’ confidence.

With refining margins under severe pressure and market volatility also creating an impact, how challenging will it be for you and how is the company planning to come out of this situation?

As far as Essar Energy is concerned, both our refineries, Vadinar and Stanlow, enjoy significant premium over benchmark refinery margins. For instance, Vadinar, post completion of its expansion and optimisation, gets $7-8/ bbl over the benchmark IEA margins. Similarly, the Stanlow refinery’s GRMs are about $2-3/bbl premium over NW European margins. Hence even when general refinery margins are depressed, our refineries will continue to do better than the industry.

How much have you paid to the Gujarat government till date in lieu of sales tax liability of $1171 million?

All I would like to say on this is that we continue to meet our sales tax obligation dues to the state government as per the schedule set by the Supreme Court.

Do you think the worst is over for power sector in India?

If we compare the last three years with the last six months or so, it gives us a lot of comfort to see the government getting serious about addressing industry’s issues. We see several important decisions being taken (e.g. granting clearance to several coal blocks) which gives us a lot of comfort and reaffirms our commitment to the sector.

How has the company been doing on power front? What is the current capacity and which all are the projects which will be completed this year?

We have a total installed generation capacity of 3,910 mw with seven operational power plants in India and one operational power plant in Algoma, Canada. We also have access to approximately 500 mmt of coal resources across seven coal blocks in India and overseas. This year we plan to add 600 mw unit II of Mahan I, 270 mw of Hazira II and 120 mw of Paradip.