With the government of India kick-starting petroleum product price reforms last month by freeing up petrol retail prices, public sector oil marketing companies can now look at raising resources to fund their critical distribution infrastructure. Bharat Petroleum Corporation Ltd (BPCL) alone has earmarked up to Rs 35,000 crore as capex over the next five years, and will focus on expanding its infrastructure to meet the growing demand for petroproducts, says Ashok Sinha, its chairman & managing director, in an exclusive interview with FE?s MG Arun. Excerpts:
Oil marketing companies have been relieved of a substantial burden following the deregulation exercise. What are your views on the timing of the move?
Deregulation is a very welcome move. Over the last five years, the kind of burden borne by the oil companies was not at all conducive for their future growth. Companies need to generate internal resources to invest in the future. The demand for petroleum products will move up from 140 million tonnes (mt) now to 200 mt by 2015. So, the additional investments that will be required to distribute these products will be huge. Production capacity is not a concern, but we will have to ensure that infrastructure in terms of tankage, ports, railways and pipelines are ready. All these are stretched today, calling for big investment. This was an ideal time to deregulate, since oil prices have been largely stable and remained in a short band. We think we can price this into the market, and we will be doing it as we go forward.
There is, however, a concern that the government may again step in to regulate prices, if crude oil prices go past $100 a barrel…
There is no point in speculating today whether the government will go back on the deregulation move if oil prices go very high. I would rather be positive, and say there will now be greater efficiency in the marketplace. As you price things right, the market will also allocate these to the right places.
People must pay for the energy they consume, because we are a net importing company. We produce only 33 mt per year and cannot bear the subsidy on 200 mt. We do not expect any abnormal movement to take place in crude prices, at least for the next two to three years, owing to the slowdown. Also, there is now an excess capacity of crude oil building up, of around 4 to 5 million barrels, so I don?t see a situation like earlier happening. Ultimately, this should lead to a competitive pricing to the consumers. Please remember that almost 50% of the price of fuel comprises various taxes imposed by local governments.
With the pressure of under-recovery easing, how much money will now be freed up for investments?
When you mark to market, the whole concept of under-recovery goes away. The under-recoveries arose because the government controlled the selling price. Once that gets freed up, it?s only a question of managing your margins. Fundamentally, you will have crude and product prices moving, and the difference is going to be the net realisation. That?s what you need to keep monitoring and managing. Companies do need these margins, since they need to meet the costs of distribution and transportation and getting it down to the final delivery to consumers.
So, how do you arrive at these margins under the deregulated environment?
There are models out there which I recommend. There is a model in aviation also, but that is directly to the consumer, and can be defined well. Here, we are dealing with an intermediary and the consumer gets it later. Almost 30% of our product is being sold at market price to the country at large. Finally, the lubricants. There also, it is base oil at one end, and finished products at the other. There is no issue of under-recovery there, only profitability. One of the processes we will go through is the discovery of a profit margin that is competitive in the marketplace.
Consumer has a choice. I cannot drive him to the petrol pump. So I need to attract him, and then have a margin?to recover my cost, and to generate resources which I can re-invest into the business.
In BPCL?s case, what are the programmes that the company would now take up?
For BPCL, the total capex over the next five years would be to the order of Rs 30,000 crore to Rs 35,000 crore. This will go into refining, pipelines, tankages, port locations, and inland terminals. We will be growing at 2-3 mt per year. We cannot meet this demand overnight. In five years, we would need to meet an additional 15 mt of demand and has to beef up our distribution accordingly. Over the last five years, no one has really gone into the expansion of infrastructure, since there were financial constraints. To keep up with the 6-7% growth, we need to go on a mission mode. Everything need not be built by us; we can contract it too. It is not our idea to just keep adding retail outlets.
What are your expectations from the E&P side, where you ventured from 2006?
By 2015, we will be a global integrated oil & gas player. We have discoveries, and we have wells currently under drilling. We expect more discoveries. That itself will build up the upstream portfolio.
We are an active investor. Our team here continuously tracks the progress of the wells online. We have a clear strategy to move up. We have now moved up to take the joint operatorship of a well in Rajasthan. We are fully aware of the technicalities involved in any programme. This is also valued by our partners. We are taking the first steps to become a full fledged operator, and have opened an office in Jodhpur to start looking at that block. Upstream will be a major source of revenue by 2015. Even before that, we will have revenues coming.
We have so much on our plate, so we will be selective in our projects. There are 13 wells to be drilled this year, so the main focus will be to get those out of the way. We will look to consolidate our positions near the basins that we are in. We have a balanced set of basins in different levels—from complete wildcat like the one in Mozambique, to highly prospective, as in Indonesia. We will move towards developing what we have.