BPCL is a fortune 500 oil refining, exploration and marketing PSU. Singh in an interaction with InfralineEnergy's Sangeeta Tanwar talks about healthy gross revenue margin (GRMs) being achieved by public sector refineries despite rising crude oil prices, BPCL's aggressive plans for its overseas E&P assets where it has made some world-class discoveries.
During the conversation Singh also shares the company's plans to spend close to Rs 50,000 crore in the next five years.
With high crude oil prices, how are public sector refineries competing on GRM (gross revenue margin) with private refineries?
There are two aspects to oil and gas business. One is refining and the other one is marketing. Refineries in India are deregulated, they do not have any budgetary support and there is no governmental control in case of refinery business. It is with all these restrictions that we have to compete with ourselves and the private refineries like Essar and RIL (Reliance Industries Limited).
In the current situation where crude prices are really high the heartening news is that the refining margins are also good. Because if crude oil is priced high then the products made from crude are also being sold at high price and GRM is the difference between the cost of crude and the sales realisation from the product that is made from crude oil.
A few years ago GRMs for refineries used to be US$10/bbl to 12/bbl. Now it has gone up to US$20/bbl, so refineries are making money and their margins have improved even though they are buying costly crude.
"Whatever gain integrated marketing companies are making from their refineries are being neutralised by the losses that they are forced to incur on marketing of products."
Also, owing to rising prices of crude oil refineries are making inventory gains. If, I am buying crude oil for US$100 in the month of May and the next month (June) the crude prices goes upto US$120 - it means that there has been an inventory gain for me. In this case I will be taking June prices of crude oil as my refinery margin which means that I stand to register a gain of US$20. So, standalone refineries which are not engaged in marketing of oil and petroleum products end up making lots of money. Refineries including RIL, Mangalore Refinery and Petrochemicals Limited (MRPL), and Numaligarh Refinery Limited (NRL) fall under this category.
What are the disadvantages that integrated marketing companies like BPCL face while striving for healthy GRMs?
Refineries sell the products to marketing companies at import parity price and thus do not incur under recovery losses. In such a scenario the burden shifts to the marketing side of the value chain.
Ideally the marketing companies which buy from the refinery should be selling these products at a price which covers the cost at which the products are being bought from the refinery, plus the additional costs that the marketing companies incur in the form of logistics costs, terminaling costs. Unfortunately, marketing companies are not being allowed to sell majority of their products at market price by the government. A case in point is diesel which accounts for 40 to 50 percent of refined products or marketing volume for a marketing company but it is being sold below cost. Similar is the case with other products like LPG and kerosene. Bulk of the products are controlled by the government owing to its own compulsions of controlling inflation and not burdening consumers.
In the given scenario whatever gain integrated marketing companies are making from their refineries are being neutralised by the losses that they are forced to incur on marketing of products. Since, the government is not allowing us to raise prices for our products they are compensating us by extending subsidy by way of budgetary support.
Given the business environment in which we have to conduct our business, I believe we are doing quite well when compared with private refineries. We are making money, enjoying good margins. But all these gains are being washed away because of restrictions that we face while marketing our products.
What are the growth deterrents affecting the performance of public refineries?
If we talk about refinery business alone I will say we are not making as much profit and recording high GRMs as is the case with RIL, Essar. And this is so because most of the PSU refineries are more than 50 year old and have old configuration and equipment, they lack critical facilities such as bottom upgradation, crude blending facilities and Single Point Mooring (SPM) facilities among others.
"We have assets in Brazil, Mozambique, Indonesia, Australia, UK and East Timor. With some of our overseas assets there have been world class discoveries."
Now, lack of some of these facilities means that we are unable to convert 20 percent of our heavy distillate into middle distillate. We face challenges when it comes to optimising the crude cost. Private refineries have an edge over us. However, over a period of time public sector refineries have been taking steps to optimise their operation and efficiency. In terms of operational efficiency, we are at par with private companies. There are some inherent advantages that private refineries enjoy over PSUs in terms of their scale of operation, world-class equipment and facilities that they have.
What are the steps that needs to be taken in order to enhance the performance of public sector refineries?
The biggest challenge facing us is how to increase our efficiency. The key task is to plan and invest in new plants and equipments to acquire the ability to process all sorts of crude oil. Players like RIL right from day one have got the configuration and ability to produce better quality fuel. For some of our 50 year old refineries it will take time to make progress on conserving energy and reducing their losses.
At BPCL we have undertaken performance improvement exercise as part of which we have taken up number of projects comprising energy conservation, reduction of fuel losses, taking to gas usage to save fuel and replacing old equipment with the new ones. We are also in the process of putting up facilities for further value additions. BPCL is now producing specialty products which serve as feedstock for some of the petrochemical units.
What is BPCL' short-term and long-term strategy for importing crude oil?
With the commissioning of Bina refinery in Madhya Pradesh, BPCL's total capacity has gone upto 30 MMTPA. Out of this three MMTPA comes from Assam oilfields for Assam refinery which is a landlocked refinery. Out of the remaining 27 MMTPA about 6.5 to 7 MMTPA comes from another indigenous source - the Bombay High. The rest of the 20 MMTPA has to be imported as we do not get any oil from other fields including Ravva and Gujarat oil fields. So, we have to necessarily depend on imports.
We import from Middle East countries. We largely buy from them on term contract basis which accounts for nearly 80-85 percent of our total requirement. These contracts are signed yearly. The balance is bought through spot purchases.
The strategy is to secure long term contracts with leading oil producing Middle East countries such as Saudi Arabia, Kuwait, Abu Dhabi, Iraq and partly Iran. For oil imports we are also looking at African countries like Algeria. Though Libya is in trouble as of now but it's not impacting us because we are importing only small quantity of crude oil from Far East.
What are BPCL's business plans for its domestic and overseas E&P assets?
We have lately made an entry into E&P business. Currently we have
27 E&P blocks. Out of the total 27 assets that we have, 14 blocks are within the country whereas remaining 13 blocks are located overseas.
We have assets in Brazil, Mozambique, Indonesia, Australia, UK and East Timor. With some of our overseas assets there have been world class discoveries. In Brazil we have made discoveries for oil, in Mozambique for gas and in Indonesia both for oil and gas. In the next five years, we will find ourselves in developmental phase in all the places where we have made oil and gas discoveries.
The developmental work for these assets will see us spending nearly Rs 10,000 crore over a period of five years. This is going to be our share of expenditure as part of the consortium that owns these assets. BPCL's equity share in the consortium is between 10 and 15 percent.
"There is going to be turn to turn exchange between BPCL and upcoming HMEL-Bhatinda refinery to avoid any crisscross movement of products and therefore there is no competition as such."
It is expected that oil will start flowing from these assets by
2016-17. Thus, we will be further required to spend another Rs 2,000 crore for monetising these assets. For example in Mozambique having discovered the gas, BPCL in tandem with our other consortium partners and developers has developed and set-up pipelines, jetty and liquefaction plants to move out gas from these fields. We plan to bring this gas to India as we have a huge market for gas in the country.
We do have a couple of overseas assets which do not require any further investments. A case in point is Brazil because the country with its existing oil producing fields offer adequate operational infrastructure including pipelines facilitating operations for players like us.
BPCL had plans of coming out with 7 MMTPA Lohagara refinery in Uttar Pradesh (UP). When do we see BPCL commencing work on it?
There has been no further action so far on Lohagara refinery on our part because we were waiting commissioning of Bina refinery in Madhya Pradesh. It is always better to expand existing refinery in order to meet increasing demand rather than going for a grassroots refinery.
"Our strategy is to grow by having a combination of initiatives with focus on enlarging our network, continuing with a good brand image and improving the throughput per outlet."
Bina refinery has been commissioned with 6 MMTPA capacity and it can be expanded upto 15 MMTPA. At some point of time we will have to take a call for putting up a new refinery. As and when such a need arises we will be looking at UP refinery for which we have already got the land. The need for a new refinery will come into consideration after five years from now.
The 100 percent excise concession for BPCL's subsidiary in Numaligarh was withdrawn in 2002. Are there any hopes of government restoring it back?
Earlier Numaligarh was the only refinery in North East that was enjoying 100 per cent excise exemption. The government then decided to withdraw 100 percent excess concession enjoyed by Numaligarh refinery and instead decided to extend 50 percent excise benefit to all the refineries in the North East including Numaligarh refinery.
It appears highly unlikely that the government is going to restore back the 100 percent excise concession earlier enjoyed by Numaligarh refinery. However, we have been urging the government to continue maintaining the 50 percent concession.
The reason being that with surplus refinery capacity in North East the bulk of the product from here is moved into other regions. The marketing companies are asking these refineries to absorb the additional freight that is incurred on moving these products in other markets. If the custom duty concession is withdrawn then North East refineries will incur loss because partly they are being funded for out of zone movement of goods.
How do you perceive the competition from upcoming HMEL-Bhatinda refinery in Punjab?
I have my captive market and my refinery as such does not face any challenge from existing or upcoming competition. Moreover, we have the ability to further increase our capacity to meet any increase in demand, so that I do not have to depend on other refineries.
"We have large commitments in upstream business. In the on-going 12th five year plan period BPCL will be spending close to Rs 50,000 crore."
In fact, in Punjab we have an arrangement with the HMEL-Bhatinda refinery as part of which they will be buying products from BPCL's Bina refinery to meet their zone requirements and in turn we will be buying products from them to cater to market demand in Punjab.
There is going to be turn to turn exchange between the two of us to avoid any crisscross movement of products and therefore there is no competition as such.
What is BPCL's market share in different product categories including petrol, diesel and retail market?
At present BPCL has a market share of 30 percent in petrol and 26 percent in diesel. Other than motor spirit (MS) and diesel our market share for other products is between 18 and 20 percent.
Our strategy is to grow by having a combination of initiatives with focus on enlarging our network, continuing with a good brand image and improving the throughput per outlet.
We are working towards becoming the preferred seller of fuel to consumers by attracting and providing customers comfort through initiatives such as 'Pay for Sure' assuring them of right quantity at the right price.
What are BPCL's business plans for next five years?
The average growth witnessed by the petroleum product business is 5 to 6 per cent. If this continues to be the case then with an existing capacity of 30 MMTPA and with sales to the tune of 37 MMTPA things as of now stand balanced for BPCL. But to meet increasing requirement of the country - BPCL needs to expand its refining capacity.
Secondly we need to expand our infrastructure comprising pipeline, tankage alongwith augmenting our port facility to meet the additional movement required for increased demand of products. The third area that we need to concentrate on is to go for specialty products to improve our bottomlines.
"The only way in which we can encourage people to take to branded fuels is by effectively communicating to them the benefits of using branded fuel."
We have large commitments in upstream business. In the on-going 12th five year plan period BPCL will be spending close to Rs 50,000 crore. And to raise this kind of resources to fulfill our investment commitments, we are required to at least make profit to the tune of Rs 2,000 crore per year. This will put us in a position to raise and borrow money from the market and fund our growth plans.
I believe with these measures our equity reserves should be enough for us to borrow money from the market in order to go ahead with our planned investments.
The government has asked integrated marketing companies to be prudent in expanding their retail network. What is going to be the likely impact of this move on BPCL's expansion plans for its retail outlets?
The government has asked all public sector refineries to exercise more discretion in expanding their retail network. It has made a call for looking at the economics of rolling out new retail outlets a highly vigorous and prudent process. Proliferation alone should not be the aim for establishing more outlets. Also, the government wants 50 percent of the new facilities-outlets to come up in rural areas.
At the same time private sector players have struggled to expand their retail network simply because they are not able to match up the product prices with public sector integrated marketing companies. Neither are they compensated by the government. These are some of the reasons why private players are unable to compete with us and most importantly nobody would like to do business for a loss.
As far as BPCL is concerned, we plan to put up another 500 to 600 retail outlets in the next five years.
Branded fuel is struggling to find favour with consumers. Why has it failed to take off as a product category?
Branded fuel has failed to do well because of prohibitive taxes. The category took off very well but there is dampness owing to taxation issues. Also, India being highly price sensitive market there is a very small segment of consumers that is actually looking for quality.
The only way in which we can encourage people to take to branded fuels is by effectively communicating to them the benefits of using branded fuel. People need to understand that the branded fuel might be costlier but it has its advantages.
(InfralineEnergy thanks R.K. Singh, Chairman and Managing Director, Bharat Petroleum Corp Ltd (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 in the Indian energy sector.)