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Mr. LK Gupta, MD & CEO, Essar Oil

15 Jun 2015

‘Fall in crude oil prices has not impacted our plans’

As crude oil prices in international market have fallen, oil refining companies have revised expansion plans. MD & CEO, Essar Oil, LK Gupta shares his views with InfralinePlus, on how does the development impact the company and its future plans. Excerpts

Many energy majors have cut capex. How has the fall in crude prices impacted your capex plans and performance?

As a refiner, we are agnostic to crude oil prices. What matters to us are the product crack prices (price of individual petroleum products like gasoil, gasoline, naphtha, ATF etc. versus the crude prices) which have been stable in a range. In the second half of last fiscal, when crude oil prices fell by about a half, we delivered the highest ever average GRM.

Having said that, we have no major capex plans lined up and hence the fall in crude oil prices has not impacted our plans.

What do you make of the recent remark of our oil minister Mr. Dharmendra Pradhan, when he urged OPEC members to stop premium pricing for India and Asia over crude purchase?

We welcome the hon’ble oil minister making a strong case for Indian and Asian refiners and consumers by pitching for a level playing field by OPEC. Inspite of enjoying strong economic, cultural, and political relationship with the West Asian nations, we continue to pay a premium for Middle East crude import, which needs to be corrected./p>

We agree that our refining capacity can be much more competitive if we get crude oil at a price at par with what European or US refinery get. This can neutralize the advantage of cheap gas the US refiners enjoy, resulting in competitive product price. This would increase the disposable income in the hands of consumers leading to an economic virtuous cycle.

How is the existing oil demand?

We expect 5-6% pa sustained growth in India’s petro product demand in the medium to long term. This would imply India requiring one new refinery of ~400k bpd capacity every two years. India’s current excess capacity will get absorbed in the next 3-4 years. There is only one new refinery of 15 MMTPA capacity coming up in next few years viz. IOC’s Paradip refinery (expected to be fully commissioned by the end of current financial year), besides 6MMTPA capacity expansion at Kochi Refinery by BPCL in 2016/17.

How have private refiners influenced the Indian market?

The private sector has transformed India from net importer to net exporter of petroleum products. Around 15 percent of the country’s total exports are now petroleum products. Private refiners Essar and Reliance together account for the export of roughly 80-90 percent of all petroleum products from the country.

The private sector has also set benchmarks for their public counterparts in terms of energy efficiency, power costs and usability of heavy crudes. For instance, Essar Oil uses coal-fired stations to power its refinery, while most other refineries use fuel oil, naphtha or diesel to fire their power stations. We have demonstrated that producing power from coal saves about 15 percent in power costs compared to using oil to power stations.

Tell us your retail presence and expansion plans? How do you plan to win marketshare? How are retail margins as compared to refinery margins?

Essar Oil has about 1,500 operational outlets and another 1,400 in various stages of implementation. In FY15, our retail volumes more than doubled from FY14. Retail sales now account for 8% of our revenues (in Q4FY15) against 2% (Q4FY14) a year ago.

Essar Oil accounts for about 10% of India’s refining capacity. On a medium to long term basis, we would like our retail market share to be commensurate with our refinery market share. In terms of margins, while refinery margins vary depending on product crack prices, marketing margins are largely stable.

In E&P, what is the status on your Durgapur CBM Block?

Essar Oil has become India’s largest CBM gas producer, with production at our Raniganj block rising to 0.63 million scmd and 1.2 million scmd is clearly in sight. This will rise to 2.5-3 million scmd finally. While 120 wells have been already placed on gas production, additional 142 wells have been drilled and presently are at various stages of the hydrofracking-completion-dewatering cycle for production ramp up. We have built a high quality infrastructure including gas conditioning and compression stations, in-field pipelines of 120 kms. and last mile pipeline connectivity network to end users of approx. 60 kms. We anticipate completing the development program ahead of the May 2016 deadline as per the Contract with the Government of India.

What is the debt of EOL? Isn’t it very high?

Essar Oil’s long term debt is about $3 billion against an asset whose replacement cost is around $12 billion. Any new refinery of similar size and complexity will have debt of about $7 billion, even assuming 1.5 : 1 debt to equity ratio. In this background, you can see that the debt of $3 billion is very reasonable. The company continues to generate strong cash flow through operations and is comfortable servicing this level of debt.

We have dollarised about $1.5 billion of rupee debt till date through ECBs, Currency SWAPs, EPBG and POSs.. This has played a big role in reduction of our interest cost, which stood at about `2,500 cr for FY15 against `3,300 cr in FY14. Further, since we have no major capex lined up, we are going to utilize the free cash flows to lower the debt and strengthen our balance sheet further.

What is the debt of EOL? Isn’t it very high?

Essar Oil’s long term debt is about $3 billion against an asset whose replacement cost is around $12 billion. Any new refinery of similar size and complexity will have debt of about $7 billion, even assuming 1.5 : 1 debt to equity ratio. In this background, you can see that the debt of $3 billion is very reasonable. The company continues to generate strong cash flow through operations and is comfortable servicing this level of debt.

We have dollarised about $1.5 billion of rupee debt till date through ECBs, Currency SWAPs, EPBG and POSs.. This has played a big role in reduction of our interest cost, which stood at about `2,500 cr for FY15 against `3,300 cr in FY14. Further, since we have no major capex lined up, we are going to utilize the free cash flows to lower the debt and strengthen our balance sheet further.