Bharat Petroleum plans to derisk biz through oil & gas exploration

Written by MG Arun | Mumbai | Updated: Jan 12 2012, 07:57am hrs
Indias second largest government-run oil refiner and marketer Bharat Petroleum Corporation (BPCL) plans to derisk its business through its oil and gas exploration foray to double its profits by 2017, even as it makes steep losses by selling petrol, diesel and cooking gas below their production cost.

The company, which owns minority stakes in oil and gas fields in Mozambique, Brazil and Indonesia through wholly-owned subsidiary Bharat Petro Resources (BPRL), says gas will flow from Mozambique by financial year 2017-18. Its a matter of five years for BPCL, RK Singh, chairman and managing director, told FE in an exclusive interview.

When oil and gas assets abroad start giving results, the upstream company will start supporting BPCL, he added. The Mozambique field is estimated to have 30 trillion cubic feet (TCF) of gas reserves, almost three times that of Reliance Industries find in the KG-D6 blocks off Indias east coast.

BRPLs 10% stake in the Mozambique field gives it right to sell 3 TCF of reserves. The huge revenue stream coming from that side will change BPCLs complexion, said Singh, who took over the reins in December 2010. BRPL owns 27 blocks, of which 10 are in Brazil, eight spread across Australia, Timor, Indonesia, Mozambique, Oman and the North Sea, and nine in India.

Experts say an integrated model helps refiners cushion high crude prices. Downstream companies like BPCL have ventured into the hunt for oil and gas so that it will give them their own crude, cushioning them from crude price volatility, said a consultant with a global consulting firm. Moreover, the global playing field is large, allowing them room to turn into integrated companies, straddling the entire energy chain. He cannot be quoted on specific companies.

Some Indian energy companies that had tried to derisk their business like BPCL are yet to make a similar start.

Hindustan Petroleum Corporation floated a joint venture, Prize Petroleum, in 1998 to hunt for oil and gas assets, but is not yet as successful. Its partners, Indias largest private sector bank by deposits ICICI Bank, private equity fund ICICI Venture and Indias largest lender to power, ports and airports HDFC exited from the venture in January.

Public sector oil companies have been foraying into upstream, as a strategy of backward integration to ensure feedstock, said K Ravichandran, senior vice-president and co-head, corporate ratings at Icra, a ratings agency. BPCL has fairly large reserves that have a good potential, and are active in gas marketing, which places them on a sound footing.

The government needs to pay R32,000 crore until now in this financial year to BPCL, which can refine 30.5 million tonnes of crude every year and sells petroleum products through its 10,000 retail pumps. The goverments delay in payment forces them to borrow at higher interest rate. It has borrowed R26,000 crore, for which it needs to pay an interest of R1,300 crore, which will hit its profits this fiscal. In the 2010-11 fiscal, the company made R1,742 crore on R166,038 crore sales.

The company, however, is keen to invest R10,000 crore in five years to dig out oil and gas in its 27 blocks. We are going ahead with our plans, it is being monitored by the Planning Commission, said Singh. BPRL holds 86,000 sq km of total exploration acreage, of which about 73,000 sq km is offshore. The investment will be met through a mix of internal cash flows and debt.

BPCL has an excellent portfolio in upstream, and will put it on priority to fund their share, said the consultant quoted earlier. They do not have big equity stakes in any of the blocks, and if required, can raise external capital.

But under-recoveries are a worry. To believe that you can run such huge subsidies without recovery is nothing short of being very short sighted. Any further depreciation of the rupee will add to this burden, said a senior official with a multinational oil company which operates in India. He cannot be named as he is not authorised to speak to the media.

If the under-recoveries rise much higher, and fuel prices are not revised, the government might ask us to absorb some part of the losses,said Singh. That situation can hit us badly, and impact our investment plans.

Experts said higher crude prices will spell trouble for oil refiners. The outlook is challenging for refiners, said Icras Ravichandran. If oil prices move above $140 a barrel on fresh tensions in Iran, or if that country carries out its threat to choke crude movement, refiners can be hit.

Oil refiners have a tough time ahead, say analysts. With a weaker rupee and no price hikes on controlled fuels, we expect under-recoveries to increase nearly 50% quarter on quarter and 100% year on year, analysts Anil Sharma and Ravi Adukia of global brokerage Nomura Equity Research wrote in a report released on January 5. For public sector companies, government compensation will be critical.

We, perhaps optimistically, assume the government will give additional cash support of R15,000 crore, else oil marketing companies may report losses again as in the first and second quarter of FY12, they wrote.

Ravichandran, however, said AAA-rated oil refiners like BPCL continue to have a good standing among lenders, enabling them raise debt to fuel capex plans. The current pain is temporary, as long as the government compensates, he said. AAA is the highest rating assigned to bonds of an issuer by credit rating agencies, implying they have little risk of default.