‘Gains in refining get neutralised by losses in marketing’

Refiners the world over are seeing their gross refining margins improve on the back of high product prices. However, public sector integrated oil companies in India continue to be under pressure from mounting under-recoveries. But that has not deterred Bharat Petroleum Corporation Ltd from planning big for the future. RK Singh, chairman and managing director, BPCL , discusses the global events and the India impact, and the plans of the company going ahead, in an interview with MG Arun. Excerpts.

The unfortunate turn of events in Japan are also seen as an opportunity for refiners. Diversion of petroleum products is also creating a shortfall elsewhere. How have these affected Indian refiners?

Due to the loss of refining capacity in Japan, (two refineries with capacity of around 4.5 million barrels per day are shut), the crude requirement has come down. It was, therefore, expected that prices of crude will go down. However, the likely cooling of prices has been neutralised by the events in the Middle East and Africa. Moreover, any disturbances in Saudi Arabia can be critical, since Saudi is the second largest crude producer today, after Russia.

Since the refining capacity in Japan has collapsed, the requirement of finished products has gone up. In the West and the US, refinery operations have been drastically scaled down. Therefore, the shortfall has only aggravated. Product prices are going up, but crude prices haven?t moved up as expected. The gap between product prices and the cost of crude has widened. It used to be $8-$10 , but now it has gone up to $24-$25. Therefore, the gross refiners? margin (GRM), has improved. Refiners all over the world are making more money, including in India. Unfortunately in India, being an integrated company, we also market, and that too, below the cost.

How much has been the impact of these events on PSU refiners? How bad is the situation?

With the cost of crude on the rise, under-recoveries have been shooting up, too. In diesel alone, we are losing about R14-15 per litre. Although petrol is decontrolled technically, the government is well within its rights to intervene if the prices go unusually high. Kerosene is also heavily subsidised. The gains on the refining side are thus being neutralised by the losses we are making on the marketing side. We cannot scale down the marketing requirements, since we have to meet the needs of the country.

There are free trade products like fuel oil and ATF, where we have raised prices, since there is no government intervention. Again, the gains there are being neutralised by huge losses on petrol and diesel. If we continue to raise prices of furnace oil like this, there could come a time when it becomes costlier than diesel, and diesel will become a preferred fuel. The diesel demand will then again go up, and with it, marketing losses, too.

What are the options that are there before oil companies and the government now?

The government has to either raise the price, go in for duty restructuring, or continue to compensate us so that we remain afloat in terms of profits and margins. But we certainly cannot be allowed to bleed, incur losses at the rate at which we are doing now. The provisions made for next year, R23,000 crore, will be consumed in the first quarter itself. Our own under-recoveries will be to the tune of R20,000 crore. I don’t think we have the capacity to absorb this. We need to invest in infrastructure for the future, be it in refineries, pipeline or cleaner fuels. Our average rate of growth is 5-6%.

BPCL has some ambitious plans ahead. How do you see these panning out in the current scenario?

We will invest R50,000 crore in the next five years. We have entered the upstream segment in a big way and are lucky enough to hit upon some discoveries, in Brazil, Mozambique and Indonesia. We are entering into the development phase, and we have to give in our share. It can?t be held back. We will spend R10,000 crore in the next five years in E&P alone. We have commissioned the Bina refinery, and today, our refining capacity stands at 30.5 mt and this year, we would end up selling 29 mt. Considering the demand growth, we have to right away take steps to augment our refining capacity, which we have started.

How were the diversification plans conceived? What would be your priorities?

The diversification plans are well within our scheme of things. It all depends on how we prioritise. We are already in upstream. We have aspirations to get into petrochemicals, and our team is going around to identify products and technologies in this. We also have a mission to get into power, be a big player in gas. We are bidding for city gas distribution. We have our own gas in Mozambique, which we can bring into the country. We produce a lot of feedstock at the Kochi refinery. We thought we should convert this into a value added product and make more money. We are looking at specialty products like naphtha and propylene. We have set up a task force and are working on it. We are hoping to invest R5,000 crore at Kochi in petrochemical alone. Kochi is a coastal location, and gives us access to global markets. We have enough land near Kochi.

In upstream, we have joined hands with some good partners in the upstream sector. They have the expertise and the resources. Now our are hands are full, and the time has come for us to consolidate. The ongoing E&P projects will need R10,000 crore in the next five years. We are now focusing on development and monetisation of the blocks.