When crude oil price tumbled in 2008, it splashed red on the books of Chennai Petroleum Corporation Ltd (CPCL) for the first time in its history in 2008-09. Though the physical performance and other business fundamentals were equal to, if not better than, those in the previous fiscal, the huge inventories of high-priced crude already purchased had to be devalued. High-cost crude was processed in a falling market. The company could not hold the dip. However, a turnaround has been possible in the current financial year up to December 31, 2009, owing to reasonable refinery margins, reduced interest cost and other positive factors, says K Balachandran, the newly appointed managing director of CPCL. As the company changed its name from MRL (Madras Refineries Ltd) to Chennai Petroleum, there has been several changes in its ownership and shareholding pattern, until the company became the subsidiary of Indian Oil Corporation Ltd (IOCL). Balachandran, in his first media interview after taking charge as managing director, spoke to FE?s Joseph Vackayil about the smart recovery of the company, the future plans and its forays into the non-conventional energy sector.

CPCL suffered a net loss (Rs 397.28 crore), maybe for the first time, during 2008-09. What is the prospect for 2009-10?

It is definitely a first-time loss, though the physical performance of the company has been similar to the earlier years. The turnover was, in fact, higher?at Rs 36,489.67 crore?during 2008-09 than the Rs 32,889.32 crore in the previous year. However, we incurred a net loss of Rs 397.28 crore because of the unprecedented, volatile market conditions that prevailed from the second quarter of 2008-09, leading to heavy unexpected loss. We also had to process high-cost crude in a falling market. During September-December 2008, CPCL could not even recover the crude cost and made negative margins.

However, we view this setback as a one-off event and a resilient company like CPCL would certainly look ahead. The market conditions have started to stabilise and for the current Q3, there was a net profit of Rs 220 crore against a loss of over Rs 1,200 crore in the previous Q3. The cumulative net profit for the three quarters is about Rs 664.28 crore against the loss of Rs 669.28 crore for the same period last year.

This turnaround has been possible mainly due to reasonable refinery margins, reduced interest costs, etc. The margins of Q4 will be subdued on account of the planned shutdown for routine maintenance and capacity expansion. There has been a discernible change in the petroleum product prices in the international market that may have adverse impact on the refining margins. A clear picture on the outlook for 2009-10 is expected to emerge in the second half of March, 2010.

The 45-year-old track record of CPCL does reflect its inherent strength and we hope to end this financial year on a positive note.

Being a subsidiary of IOCL, do you feel CPCL has lost its corporate identity in the marketplace? What are you doing to ward off an identity crisis?

In the entire history of our company, there has been continuous shuffling in the ownership pattern every other decade. From a joint venture among the government of India, Amoco and NIOC, we have transitioned to 98.7% ownership of GoI after Amoco?s withdrawal, to incursion of public holding by disinvestment by GoI, to our own public issue and to the current position of a group company of IOCL. It is interesting to note that in some form, the equity stake of NIOC has continued. The company has shown resilience and adaptability in its functioning during all these developments.

Post the administered pricing mechanism, the government decided to merge standalone refineries to oil marketing companies (OMCs) to bring in synergy in operations and accordingly, the government?s stake in CPCL was acquired by IOCL. CPCL is now a subsidiary of IOCL. Still, CPCL continues to operate as an independent company with its own board of directors and currently we have more than 60,000 shareholders and our shares are widely traded in the stock market as an independent entity.

CPCL derives strength from its association with IOCL in terms of financial muscle, project execution, technology adoption and crude sourcing. All of these help CPCL better its performance. There is no identity crisis.

How would the two programmes undertaken in association with Shell Global Solutions?refinery business improvement, and risk & reliability management ? impact the company?s bottomline? Also, comment on other business optimisation exercises.

CPCL has taken up an integrated refinery business improvement programme through Shell Global Solutions, which will include fuel and loss reduction, margin enhancement and reliability improvement. Under this programme, eight out of 12 proposals for improvement have been completed. It is an 18-month programme. We have completed 12 months. When fully implemented, this programme is expected to give an annual benefit of $20 million, that is, about 25 US cents/barrel of crude processing. Some of the major proposals are capacity increase, reliability & risk management, and energy conservation measures. This will definitely add to the profitability of the company. CPCL is a pioneer in implementing this programme. Other refineries may emulate us.

What are the new initiatives for capacity enhancement and increased output of value-added products?

Modernisation and capacity expansion programmes will raise the capacity of the Manali refinery to 10.5 million tonnes with an investment of Rs 200 crore. The work is scheduled to be completed by next month. It is being carried out in refinery III at Manali. Its present capacity of 3.5 million tonnes is being raised to 4.5 million tonnes.

After expansion, it will produce additional value-added products like LPG, naphtha, special kerosene, diesel, etc. To produce high quality petrol (high octane) for meeting Euro-IV specifications, the existing naphtha hydrotreating/catalytic reforming unit at the Manali refinery is being revamped at an estimated cost of Rs 270 crore. This project also is expected to be completed next month.

An auto fuel quality upgradation project has been undertaken at an estimated cost of Rs 2,615 crore in the Manali refinery to produce petrol and diesel according to Euro-IV specifications.

Preparation of process packages for the major process units and environmental studies have been completed. Order is placed with Engineers India Ltd for design, engineering, procurement and execution of the project. Commissioning is to be completed by July 2010.

CPCL has also products that it market directly?

Majority of the products produced by CPCL are marked by IOCL, the holding company. However, CPCL directly markets certain specialty products like propylene, poly-butane feedstock (PBFS), methyl ethyl ketone feed stock (MEKFS), sulphur and lube extracts, etc. During 2008-09, about 1.59 lakh tonnes of products were directly marketed for a value of Rs 623 crore and in 2009-10, until December, we have marketed 1.55 lakh tonnes of products for a value of about Rs 372 crore.

Exports seem to be a key component of CPCL?s business and future growth. How is the going on the export front?

CPCL exported about 13% of its products, or about 1.09 million tonnes, in 2008-09. In 2009-10, until December, we have exported about 9%?or 6.48 lakh tonnes?of our production. They include naphtha, HSD, LOBS and FO. In money terms, they are worth about Rs 2,520 crore and Rs 1,527 crore, respectively. Though selling domestically is better, export is also a viable option to look up to, especially in times of crisis on the domestic front. Compared to the domestic market, exports may not go up in a big way. But it always offers flexibility to have an export outlet, especially since CPCL has a coastal refinery.

What are the future plans of CPCL? How is the work on the proposed greenfield refinery project and other expansion projects progressing?

One of the major initiatives is the residue upgradation project to improve the distillate yield of Manali refinery. Preparation of a detailed feasibility report, and pre-project activities like selection of licensor, preparation of process packages, environmental studies, etc are being done now. On establishing the economic viability of the project, the project would be taken up,for completion in 2013.

There is a proposal for setting up a mega refinery of 15-million tonne capacity. The site identified earlier at Ennore seems to be unsuitable for such a large project, mainly owing to the soil and ecology of the area. Search is on for a suitable site in Cuddalore or Nagapattinam. Apart from this, feasibility studies are underway for a 9-million tonne capacity refinery at Manali itself.

With better availability of crude oil through Karaikal port, the Cauvery basin refinery would run to its full capacity of one million tonne. CPCL is also proceeding with the installation of a single-point mooring and crude terminal off Ennore for oil imports for its Manali refinery at an estimated cost of Rs 830 crore. It is expected to be completed by May 2013.