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Mozambique gas find will prove to be a game changer for India, R K Singh, Chairman & Managing Director, Bharat Petroleum Corporation Limited

05 Nov 2012

Despite incurring losses on account of rising under-recoveries on sale of petroleum products, the second largest oil marketer in India, Bharat Petroleum Corporation Limited (BPCL) has set ambitious targets. Over the next few years, the company is looking to consolidate its core business areas of refining and marketing so as to maintain its competitive edge, and also plans to move aggressively in developing major oil and gas finds within and outside India. Speaking to InfralinePlus’ Neeraj Dhankher, BPCL’s Chairman & Managing Director, R.K. Singh talks about how the company’s fortunes are on the up after the recent gas find in Rovuma basin in Mozambique. Excerpts: 

Now that the price of diesel has increased by Rs 5 per litre, how has it impacted your under-recovery position?  Do you feel the current round of price hike is sufficient to mitigate the losses?

The under recoveries on the sale of Diesel by the public sector oil marketing companies was around Rs 17 per litre prior to the announcement of an increase in the price by the Government.  Out of the increase of Rs 5 per litre, Rs 1.50 is on account of excise duty.  As such an amount of Rs 3.50 per litre will go towards reducing the extent of the under recovery that is currently being suffered. As the burden of under recoveries is shared by the upstream companies, the Government and the downstream marketing companies, this increase in price will mitigate the losses to some extent.  

As can be seen, the increase in the price will not eliminate the under recovery on the sale of diesel.  However as diesel impacts all major economic activities and hence affects all sections of society, any increase in the price of diesel has a major impact on the rate of inflation. As such decision on revision of prices will need careful consideration by the Government.  At the same time, any downward trend in international prices and any strengthening of the Indian rupee will help in reducing the extent of under recoveries and thereby provide relief to the oil companies.

The recent dieselisation of economy has been attributed to excess use of diesel by customers receiving supplies through Retail Pumps as against consumption by bulk consumers. What is your analysis of the situation? Is there is a need to check retail sales by increasing diesel prices?

The increase in the use of diesel in the transportation sector can be attributed to the growing popularity of diesel vehicles.  The difference in the prices of petrol and diesel is leading to increase in the sale of diesel vehicles.  Increase in diesel prices will remove the price differential and would make the option of using motor cars running on diesel unattractive.  Similarly there is a preference for diesel as a fuel for running machines and equipment which can be attributed to the fact that it is cheaper when compared to alternate fuels like Furnace oil.  This arises mainly because the prices of the alternate fuels are market driven.  In these cases also the diesel consumption will come down once the diesel prices are increased.

What is the progress on the Integrated Refinery Expansion Project at Kochi?

The Integrated Refinery Expansion Project at Kochi is an ambitious project undertaken by BPCL.  With an estimated cost of Rs 14, 225 crores, this is the biggest project to be undertaken by BPCL. On completion, the refining capacity in Kochi will increase by 6 MMTPA.  The project has ambitious timelines for completion by December 2015.  The process of securing Environmental clearance has started and the same is expected to be received shortly.  Site grading work is currently underway.  Some of the initial contracts have been awarded and process packages have been released.  The Licensor selection for major units has been completed.  BPCL is also planning to enter the petrochemicals segment by using the raw material to be produced at Kochi after the completion of the IREP project.   

How has the increase in crude price and depreciation of Indian Rupee impacted your funding plans?

The increase in the crude oil price and depreciation of the Indian rupee has an impact on the cash outgo on procurement of crude oil.  Without any corresponding increase in selling price of sensitive petroleum products, the quantum of under recoveries suffered by the downstream marketing companies has increased.  Although the upstream companies have contributed their share of the under recoveries by way of discount on crude oil purchased, the compensation from the Government is received after a time lag.  Consequently, the downstream oil marketing companies have seen their level of borrowings go up substantially.  The interest cost has also shot up.  This has had an impact on their ability to raise funds and also the cost of such funds.  Notwithstanding these aspects, Oil companies have been able to raise the required funds for meeting their capital expenditure requirements.  Oil companies are also looking at innovative means of funding their projects with a view to reduce the extent of funds needed.  Common User Terminals (CUT), Build Own Operate & Transfer (BOOT) etc are some examples in this regard.  The increase in selling price of diesel and capping of the number of cylinders per household will help in reducing the extent of under recoveries and thereby improve the liquidity position.  As a growing economy, energy demand in India is rising.  Oil companies will need to ensure that infrastructural facilities are put up to meet the growing demand.  All this will call for substantial investments.  This can be achieved without any problem once the issue of under recoveries on sale of sensitive products is addressed at the earliest.

BPCL has been asked by ministry to adopt a cautious approach to future capital expenditure as the company was unable to spend its budgeted capital expenditure in 2011-12. Your comments.

BPCL has drawn up an ambitious capital expenditure programme for the next few years.  Several large projects like the capacity expansion at Kochi have been initiated.  In marketing also a large number of infrastructural projects are being planned.  The company will also be spending large sums of money in the upstream sector as the major oil and gas finds are monetized.  BPCL is confident of being able to raise the required resources for undertaking these projects.  At the same time BPCL is looking at different innovative models for funding the capex plans.  

Your public sector rival, HPCL, is pursuing an aggressive expansion of its refining capacity. What is BPCL doing to maintain its competitive edge over its other public sector cousins, both in refining and retail segments?

BPCL has drawn up an ambitious five year corporate plan covering its core areas of operations in refining and marketing and also in the upstream sector.  As on date, the BPCL group has a total refining capacity of around 30 MMTPA.  With market sales volumes having already crossed this level, BPCL has drawn up plans to expand the capacity at Kochi refinery and also to undertake low cost creeping expansion at the newly commissioned refinery at Bina.  This will enable BPCL to have access to higher volume of finished products from its own sources in line with the growth in the sales volume.  BPCL has also focused on making investments in building up its marketing and distribution infrastructure.  In 2011-12, over 1000 new retail outlets have been commissioned.  In addition, investments have also been made in upgrading a large number of the existing outlets.  A lot of emphasis is being put on new outlets in rural areas.  Investments are also being made in setting up LPG bottling plants, depots and terminal and airfield stations.  BPCL is also looking at strengthening the gas business by having a stake in new pipelines and LNG terminals.  These investments will enable BPCL to retain its competitive edge in the market.    Apart from these, BPCL is moving forward aggressively in developing the major oil and gas finds announced in exploration blocks where BPCL’s exploration arm ie Bharat PetroResources Limited has participating interests.

Work on BPRL’s shale gas block (EP413) in Australia seems to be coming up nicely. Do you have plans to bid for shale gas block next year? Is the company looking to increase presence in shale blocks elsewhere across the globe?

One well (Arrowsmith 2) has so far been drilled in the shale gas block (EP413) in Australia, in the Perth basin, and results have been encouraging so far. Five zones were targeted for fracturing, and all five zones have shown presence of hydrocarbon. Currently flowback is in progress. Further studies are to be conducted for firming up future plan of action.

BPRL is looking forward with keen interest to the shale gas bidding round in India and depending upon the evaluation of the data available during the bidding round, will be able to finalise its strategy and bid accordingly.

BPRL has currently invested in Australia and is open to evaluating shale gas opportunities outside India, but would proceed only after proper evaluation and if the project is attractive and robust enough to merit investment.

BPCL’s E&P foray in the Offshore Area 1 of the Rovuma Basin in offshore Mozambique seems to be coming up nicely. Do you think natural gas reserves in the basin can be a game changer when it comes to meeting India’s energy security? When are you expected to start exporting gas?

Experts are already talking of East Africa being the next energy frontier. Gas in Mozambique alone is said to be in excess of 100 tcf. LNG exports are the only option. India being geographically proximal and with a huge demand for gas, would obviously be a logical market to explore for selling this gas. However there are other options also and a final decision will be taken by the consortium partners in due course. As per present estimates, the first LNG cargo is expected to be by end 2018.

What, according to you, are the takeaways from Petrotech. How has been your experience so far?

It is by far one of the biggest professional conference and exhibition which showcase the Oil & Gas opportunities in India and abroad.  It focuses on the global trends in the development of technology in the field of Petroleum and Gas.  The Petrotech exhibition provides a platform to showcase the company’s capabilities and exchange knowledge on emerging technologies. It also gives an opportunity for networking and expand business prospects.  It is also a means of promoting bilateral relations with other nations through close cooperation in the energy sector.  As a country, India is looking at attracting foreign investment in the energy sector.  Similarly Indian companies are seeking to acquire participating interest in promising exploration blocks.  The event provides a means for all the stakeholders to come under one roof and have an understanding of all the relevant issues.  Similarly service providers get an opportunity to share their offerings which in turn facilitates the entry of the latest technology and practices in the oil and gas sector into the country. 

(InfralineEnergy thanks R K Singh, CMD, BPCL for sharing his valuable insights with our readers. The column 'In-Conversation', is a platform to engage experts from various sectors to share their views on the different transformations happening in the Indian energy sector.)