with B.M. Bansal, Chairman, Indian Oil Corporation Limited
In recent months there have been talks of the introduction of a divestment program from Indian Government towards its main energy companies – Indian Oil Company (IOC) topping the list. How advanced is this program?
Actually IOC has already received the approval from our ministry to go ahead with the divestment process. The CC approval is yet to be obtained and we are now approaching our shareholders to obtain their approval. We also have to line up the leading managers, bankers, legal department, and so on. But yes, this project has already started and we expect that by the end of October, or beginning of November, we will finalize this it. In the meantime, we will receive the CC clearance. And then the road-show will start, with IOC expecting to come to the market by the first week of January 2011.
What are the reasons behind such disinvestments plans and how will it change the way IOC does business?
Today, because of under-recoveries produced by the remaining fuel subsidies, the cash-flow of state-owned companies is not at optimal levels— we buy the crude at normal prices but we are not able to sell at market price.
The government does compensate us, but there is uncertainty over when the compensation will come. For instance, this year, two quarters have already passed to date and we have not received any compensation yet. Hence, cash-flow and profits are shrinking. In order to maintain growth and ongoing projects, we need money. So the borrowing goes up, and if the borrowing goes up, then the interest rates increase as well.
Therefore, the resources acquired from the release of our shares in the market will mean fresh capital and a bigger control over IOC debt level. Of course the under-recoveries money that should be coming as restitution will help a lot to reduce the debt burden and give us the help and boost that we need as well.
You are a state-owned company with a 48% market share in the petroleum products market, 34% of the national refining capacity, and more than 70% of the downstream sector pipelines. You portray yourself as the ‘energy of India’—a company that defends the national interests of India and Indian consumers. Given this fact, IOC is subject to a lot of risk, especially in an environment where there are price controls. How do you balance the need for profit as a business, with the need to secure energy, and accessibility of use, for Indians?
Being a national company, our prime responsibility is to see that the product is available to the customer, in each and every corner of India. Even when oil prices have shot up more than 140 US$ a barrel in July 2008 and the government was not allowing us to increase internal prices there was still no shortage of products on the Indian market. IOC understands that clearly as our responsibility. But we definitely depend upon government help to compensate us for these kinds of losses and they have been doing so to a large extent.
However these compensations still lag behind the losses created by the subsidies. Around 2008/09, our profit was less than 1 billion USD, which for a company of sales of more than 60 billion US$ is nothing.
These constrains still have an impact on us. But even so, thanks to our financial solidity, IOC was able to borrow almost 17 billion USD during 2008/9 fiscal year. But for the medium-term it is very important for the government to either provide this compensation or to deregulate products, one by one.
Deregulation seems to be already happening.
It’s true. The government has already taken a very positive step by deregulating petrol on June 26th. Now we are waiting for diesel to be deregulated, and I believe it should be deregulated soon. We hope that the government will come out with some formula for compensating LPG, because these benefits should basically be for the benefits of the poor.
We have seen that India is increasingly portrayed in international markets as an emerging refining hub. IOC is largely responsible for this image, as it owns 10 of the 20 refineries in the country. What are the main competitive advantages of Indian refiners, and your IOC specifically? How do you manage to make front to internal and international competition?
IOC refineries are located in various places— being distributed all over the country. Some of the older refineries are quite small, serving the local public only; they are not intended to meet international markets. It is advantageous that our refineries are located in a variety of places, because we are able to meet requirements in high-demand areas, without much transportation.
Therefore, IOC is using these refineries to meet our own needs in India, and only surplus production is exported. When the Port of Paradip refinery comes, roughly 60-70% of its production will be consumed in India and only 30-40% will be exported for the 2-3 initial years, and afterwards even that will be consumed internally. The extra surplus products, such as nafta, will be exported to international markets. For that also we have taken major steps to upgrade the nafta produced.
Regarding our competition with refineries outside of India you have to bear in mind that IOC refinery costs are much lower in terms of both construction and operating costs than other players around the world. Besides that, we are capitalizing on the strength of our home-grown technology. The fact that India has a traditional refining industry that has grown many-folds in recent years gives it both the hard-earned expertise and the advantages of having mostly brand-new and more efficient capacity.
Other main crude refineries such as Reliance Industries are basically export-oriented. Their oil is being supplied to far away markets such as Europe and the USA. That’s why IOC is not feeling the impact of other companies’ surplus capacity.
With India’s energy needs projected to grow by 40% in the next five years, we have seen IOC expanding its activities much beyond its traditional refinery business, moving upstream, with acquisition of blocks inside and outside India; downstream, into petrochemicals; and going as far as Nuclear Energy. How are you building the necessary synergies among all these different business and where do you foresee the main potential for growth?
Up until the early 90s Indian Oil was mostly a downstream company, specialized in refining and marketing. Because of the restrictive regulation the refineries were not allowed to go into petrochemicals, upstream, gas, etc. After the deregulation, we formed a business development group that was working on the areas of integration in a very focused manner. This group was formed in early 1995 and we identified the new areas where IOC should have invested.
You have to understand that all the oil natives are integrated, so fluctuation in any sector affects the other sectors as well. The bottom line (downstream) is almost maintained by the upstream local players. Based on this, we decided with whom to further integrate in the upstream and downstream business. For upstream, we were going, initially, with the experienced operators: Oil India Limited and ONGC, for instance.
In our current expansion, however, petrochemicals are our priority – growth of petrochemicals in India is very, very high. It is going into double figures, almost 30%-50% in the last few years. So that gives a good idea of the concept of moving into petrochemicals within our own facilities.
It is a well-known fact that your efficiency goes up substantially if you are a 100% integrated company, including if you are active in natural gas market. But as new gas finds are not an assured business, IOC has also invested in increasing LNG capacity through a joint venture with BPC, ONGC and GAIL to create a new LNG terminal in India. With the national fast growing demand of LNG, these projects are only the start of a wave of important investments in the Indian LNG market.
Now that we have tighter environment requirements people are shifting from oil to gas, a cleaner fuel. In the USA, shale gas has picked up, but only in the last year. In India, we still don’t have knowledge on shale gas, so we are betting in the LNG market and looking forward to also help the country develop its shale gas potential within two or three years once we have the adequate knowledge to do so.
Therefore, IOC has interests in E&P, petrochemicals, LNG, and natural gas: this is why we are identified as the ‘Energy of India’.
Furthermore, since there are already so many players in sectors such as refining, the opportunity for growth there is limited, you must diversify and grow in other sectors. For example, nuclear power is now rising in India. It is a clean energy, and although the initial construction cost is high, the operation cost is very low. And since IOC is a PSU (Public Sector Undertaking), we are allowed to enter into this sector, closed to private players. With India’s booming energy demand, IOC thought it was the right time to go into nuclear.
Last but not least, IOC is also looking into other alternative energies—wind, solar, etc.—but these operations are small-scale pilot projects.
The world has seen a number of Indian corporations expand their activities much beyond its borders, with IOC being one of the major examples. What are the main guidelines of IOC’s increased internationalization?
As I’ve mentioned, once you grow substantially in one industry the opportunity for further national growth is limited; going abroad is the other way to boost growth and capitalize on the expertise already acquired. So if others can come to your market to build refineries, you must take opportunities to go out and enter new markets as well.
That is how IOC started putting up downstream facilities in Sri Lanka. We are also growing in Dubai and elsewhere in the Middle East and in CIS countries. In fact, we could have gone much farther with our globalization, but with prices going up and subsidy issues increasing in many countries, especially developing ones such as Sri Lanka, where IOC faced some losses, we are being very careful with our internationalization strategy. Indonesia, Malaysia, Iran: these are markets that we are targeting thanks to their market size and our level of competition. Internationalization is one of our target focuses to increase long-term growth.
You’re the head of a company with more than 34.000 workers, many of them young talent who have just been recruited into IOC. And the truth is, they all aspire to one day follow your steps and lead India’s number one O&G company. What will be your advice for them to arrive where you are today?
My advice to the young people is that there is no replacement for hard work and dedication. You set your targets and work to achieve them in a dedicated manner. Always keep a positive approach—don’t be upset if you are not getting something within the timeframe you’d like. You may not get it soon, but then you will get it later. So: be patient and keep working. You will achieve your dreams.
Do you have a final message for the readers of Oil and Gas Financial Journal?
I can only wish that oil prices remain stable for the benefit of both producers and consumers, and that developing countries can keep developing the way that they are currently.