"Going forward, we will be looking for opportunities to export for higher value creation as and when the market is attractive. On the longer term, we are actively looking at exports as an alternative opportunity for demand creation."
State-run oil refiner-cum-marketer BPCL, which is being privatised, has been balancing its refinery and petchem production during a period of demand destruction, and looking for export opportunities for higher value creation. R Ramachandran, director of refineries, BPCL, told Vikas Srivastava that the company was evaluating products such as very low sulphur fuel oil (VLSFO) and naphtha for exports and looking at global markets as an alternative opportunity for long-term demand creation.
Q1. The inventory gains in Q1FY21 were mainly led by huge marketing margins of Rs 5/litre, while refining margins were badly depressed. How do you see the marketing and refining margins in the short-to-medium terms?
The crude prices appear to be range-bound at around $40-45 /barrel (bbl) in the short-term. While the gasoline and diesel margins continue to be low, and below the minimum levels for healthy GRMs, they have rebounded from the previous quarter lows. The resurrection of demand, especially in the diesel market, coupled with the enforcement of crude oil production cuts by Opec-plus would dictate the medium-term situation.
Q2. Covid-19 has impacted demand for petroleum products as there are still various areas under lockdown. What is the current throughput from Mumbai and Kochi refineries and where are the products getting consumed?
Our refineries have been operating in the range of 60 to 75% of their capacities. Besides the traditional lower demand during the monsoon, the lockdown in major urban cities has also impacted the current demand. However, we see a revival happening in relative terms in the smaller cities and rural areas. Gasoline, on the back of enhanced personal mobility, has shown robust demand in the last few months.
Q3. What is the ratio of exports to domestic consumption of refined products?
From a limited perspective of our company, we have been balancing the production with demand, and looking for export opportunities whenever economics are attractive. While VLSFO and naphtha have been products under consideration, export of diesel was limited due to lower differentials in the last quarter. Going forward, we will be looking for opportunities to export for higher value creation as and when the market is attractive. On the longer term, we are actively looking at exports as an alternative opportunity for demand creation.
Q4. Most of the companies have put on hold their capex on low priority expansions. What is BPCL’s planned capex for FY21?
After the easing of lockdowns, we have revived our projects and the work at various sites are on with the protocols in place. We continue to place value in our strategic projects and our capital expenditure for them is in line with our plan of around Rs 8000-9000 crore across our group companies. We have, however, focused on projects with strategic intent and robust returns, including those in our petrochemical forays. Some of these are Atmanirbhar Bharat projects with complete focus on import substitution.
Q5. What is the total crude requirement for Q2FY21 and has there been any force majeure notices to suppliers in respect of lower demand and throughput rationalisation?
In line with the demand for transportation products, we expect a reduction of around 15-20% in crude requirement over last year. Traditionally, we have been operating with around 60-70% of our crude requirements from term contracts and the rest spot. We have enough flexibility to manage the demand variations through this strategy. Our major crude suppliers have also generally remained flexible in terms of supply during the period. We have not had any force majeure applications with the crude procurement sources.
Q6. With crude prices rising from the lows of $29/bbl to now around $45/bbl, have the discounts on premium crude fizzled away?
While the discounts we saw in the early parts of the last quarter are no longer existent today, the suppliers are varying the crude prices and premiums or discounts on month-on-month basis. As such, while the crude prices have gone up from the low levels of April and May, the discount on specific Asian premium, which refineries in India and other Asian countries have been disadvantaged, continue to remain.
Q7. Are we renegotiating any long-term contracts with US or West Asia since the spot prices have dropped substantially?
We do not operate long-term contracts on crude. With our term suppliers we work on yearly nominations and on prices which are benchmarked to published prices on monthly basis.
Q8. What is the outlook on demand and crude prices in medium- to long-term for FY21?
As stated earlier, with the crude oil demand projected to be lower by at least 10%, we expect the price to be around $40-45/bbl. Of course, Covid continues to remain the black swan in hazarding a prediction, especially in these volatile market situations.