with R K Singh, Chairman, Bharat Petroleum Corporation Limited (BPCL)
Clearly, as the former head of refining at BPCL, your appointment sends a certain message about the priorities of Bharat Petroleum today, but since you became Chairman & Managing Director in December 2010, what have been your biggest priorities?
The first priority was deciding where we want the company to be in five years from now. Having decided on our aspirations and vision for Bharat Petroleum, we needed to work out how to attain them. Therefore, the management team sat together and created a plan for the next five years and worked out the key action points. Today, we are in the process of finalising our action plan and starting to work towards it.
Predominantly, BPCL is a downstream company, dealing with refining and marketing of petroleum products. But we have also looked at other available opportunities, and have entered the upstream sector and have been fortunate to make some discoveries along with other consortium members. This has certainly encouraged us, and we now want to consolidate this upstream business, and work towards monetization of the discoveries.
We have also looked at other opportunities in petrochemicals and power, but they are both in the nascent stage, as we have not taken any major steps towards that.
BPCL needs to consolidate and grow its core sector that has been our strength. We are working towards expanding our existing business in terms of volume and market share, and also improving our brand image and customer service, so that we remain ahead of the competition as far as our core business is concerned.
How do you expect the relative importance of each of these activities to develop in the years to come, not just in terms of turnover but in terms of potential in the years to come?
We should always be in a position to carry out our core business without any disruption. Today the BPCL group has a refining capacity of 600,000 barrels per day, or 30 million tonnes per annum. Our Sales volume for 2010-11 should be around 29.8 million tonnes . The average growth of Petroleum products in India is 5-6 % and BPCL’s future growth will be almost on similar lines. Now if the company is to grow at this rate, BPCL will have to expand its refining capacity in order to remain self-sufficient.
So my first priority is to make sure that my marketing requirements are met. For that, either I import or I create my own refining capacity. Therefore, in terms of the investment plan, the current refining capacity will have to be augmented. So we are thinking of expanding our Kochi refinery, which is coastally located. We have just commissioned the Bina refinery, which will have a capacity of 120,000 barrels per day, with the potential for it to be raised to 300,000 barrels in the future.
Together with this, we also need to augment our distribution infrastructure, which includes pipelines, tankages, and other related infrastructure to make sure that we are able to handle increased volume and distribute it to different parts of the country.
Another area where we cannot hold back is upstream. We need to spend about $2 billion USD in the next five years to fund our share in the upstream business, and we have ten blocks in Brazil, and gas discoveries in Mozambique. The potential in Mozambique is about 10-12 tcf of gas, and we hold 10% share. We also have discoveries in Indonesia. These are three places where the development phase will start. Our gas discovery in Mozambique for example came from a wildcat well, so there is no infrastructure in place; no jetty, no pipeline, and no liquefaction plant, so we are certainly going to spend a lot of money in developing the entire facility there.
BPCL is also trying to be a big player in gas marketing. In order to do this we need two things; the gas availability and infrastructure to distribute it. Therefore our next priority will be working out what kind of infrastructure we need and with whom we collaborate in order to achieve our aims. We are also talking to the other members of our Mozambique consortium and trying to bring that gas to India where there is demand. Ideally it should be absorbed in that country itself, but Mozambique does not have much of a market and gas demand in India is rising.
Of course we are marketing gas even today, but we are sourcing it through Petronet LNG and also through spot purchases. But if gas is going to replace liquid fuel in the country, BPCL will certainly feel the effects, so we need to capture a market share in gas. This is our third priority. And whatever investment is required, we are going to make it.
Gas also brings up the issue of city gas distribution. BPCL was the first company to set up facilities in Delhi, through IGL, our equal joint venture partnership with GAIL. We have also started a city gas distribution company in Gujarat that is called Sabarmati Gas Ltd. with GSPC, and we have other city gas distribution companies in Pune and Kanpur with GAIL. Today we are trying to get into more and more cities together with other companies.
BPCL’s next priority is petrochemicals. Today we have no involvement in the sector, but we are producing some feedstock in Kochi, where we have enough land to set up a petrochemical complex which will require an estimated investment of $ 1.5 billion. Rather than going into conventional petrochemical products, we are aiming to produce speciality products that are imported into India, for which BPCL is making the feedstock. We thought that instead of simply selling the feedstock, we could create our own value-added products.
Another area where we would like to take the initiative is the power business. India has a power deficit. We are talking to the Nuclear Power Corporation of India to see if we can collaborate, because nuclear power is going to become very imjportant in India in the years to come, following the country’s nuclear deal with the US.
In marketing, we see new opportunities coming BPCL’s way. Therefore we have taken some initiatives in new areas, such as biodiesel. We have started a company in one of the largest states in the country, Uttar Pradesh, for Jatropha plantation. It is a long-term project because cultivation can take five to six years, but we have begun the process.
We also realise that most of the refineries are going for bottom upgradation, to create more value in the refining side. We are going to do that in Kochi, so that most of the crude is converted to middle distillate rather than producing 20% as heavy ends.
Increasingly, refineries are trying to ensure that there is a minimum heavy end. Unfortunately we cannot do that in Mumbai, because the Mumbai refinery has space constraints. Therefore, perforce, we will have to produce fuel oil there. The heavy end will be converted into fuel oil and bitumen. There is a great demand for bitumen, so we want to cash in on this opportunity. We have discovered that there is a big market of fuel oil for the purpose of bunkering. Therefore we have floated a joint venture company with German multinational Mabanaft, who have a leading presence in Singapore and Houston, where they supply bunker fuel. We have started a company with them, realising that we cannot wish away the fuel oil in Mumbai, and should therefore look for an opportunity to market it.
Although BPCL started its international activities in 2003, it was in 2006 that you decided to create the separate entity, Bharat PetroResources. What are the advantages for you today in having the E&P activities separated into a different entity away from BPCL?
Bharat Petroleum’s E&P initiative was started way back in 2003, but after three years it had not proved particularly fruitful, so we decided that unless we create a focused group nothing would come of our upstream aspirations. We created a new company, 100% owned by BPCL, where we recruited some experienced upstream persons including geoscientisits and geologists, whose experience was in the upstream sector.
Taking this step, the new business took a lot of initiative and was fortunate to have the two elements that really mattered: application of talent in using the data and the element of luck. Many times you take the initiative but have to simply write off the investment because you lacked the right decision making mechanism.
All your moves have been in quite high-risk ventures so far – deepwater in Brazil, a wildcat well in Mozambique and shale gas in Australia. These are all areas where even experienced players are quite wary about entering. What was the rationale behind such moves?
Two things played in our mind. As far as Brazil is concerned for example, we bought assets owned by Encana Canada. A lot of data was available for us, and we knew that the prospectivity was very good, but it was important for us to find out why Encana was exiting the blocks if the prospects were so good. This was explained by the fact that the company wished to concentrate only on the oil sands business in Canada.
The second aspect of this is that Brazil is now having a lot of discoveries in deep water. It is a big success story. The operator of the blocks is Anardarko, a very established player, and Petrobras also has a stake. They are known to be experts in deep water drilling, and have all the necessary rigs and the equipment that are required for deepwater drilling. So the operator’s image, their capabilities and data meant that we took the decision that this would be the place to grow our upstream business. I hope that by 2015, oil will start flowing in Brazil for BPCL. Despite the high risk, I believe that the upstream business is more profitable. Even if you get only one producing block, it will neutralize the losses that your incur in five or six other blocks, because the money that you make by selling crude is much more than what you make through the refining process or by any other industry.
In three or four years from now, the profile of Bharat Petroleum will be totally different, once we start producing oil. Profitability will become a different story, and I hope that this will happen soon. Unfortnately I will not be there to see that happening, because I will be retiring.
The PSUs have a responsibility to provide energy to fuel India’s growth. At the same time, you have to prioritise and find a way to become a profitable company. How difficult is it to balance these two objectives?
Our aim is to make sure the fuel requirement of the country is met. Private parties will always look at the economics: if it is economical for them they will supply, and otherwise they will drop out. The PSUs cannot do this, because we are obliged to make these products available to consumers.
What is required to make sure that we continue to supply fuel? It is that we make profit, and have enough money to generate and distribute the fuel. We are not charities, and we do not receive any budgetary support from the government. We have to generate our own revenue and spend accordingly. The government subsidizes certain products like LPG, kerosene and diesel. Eventually, they will have to allow us to raise the price, or they will have to compensate us for the losses we incur. If they compensate us 100%, I see no reason why we will not be in a position to go ahead and meet the country’s fuel requirement. We have told the government that if they do not compensate us the we cannot invest further to meet the growing demand for fuel.
If the GDP is growing at 9% you have to fuel the future economy. To do this, the country needs more pipelines, more refining capacity, and more port infrastructure, as well as more crude. That investment can only be made if companies like BPCL are making a reasonable profit.
The government is currently reimbursing the PSUs for these under-recoveries, but under the current system, the time it takes to compensate us is too long. In the interim period, we keep borrowing from the banks to meet our working capital requirement, and interest costs go up. The government does not compensate the interest cost. Therefore, we have requested the government that whatever compensation comes, let it be timely rather than delaying it.
Once, the PSUs in India had very defined role. Today, we see many overlaps between the activities and priorities and the strategies of the PSUs. Given this, how do you define the role of BPCL today?
The question of whether BPCL continues to remain downstream or diversifies and looks at other opportunities has been debated at length. Any company, whether it is a PSU or a private sector business, wants to grow and have access to more opportunities. BPCL also wants to grow and diversify its business activities, but not at the cost of the core activities. Therefore we have created strategic business units, so that each remains focused on their core activities.
India is short of crude: we currently import 80% of our crude oil, and accordingly the government has placed a lot of emphasis on increasing crude production. That is how the NELP policy came into being. When India has such a demand for crude, it makes sense for companies like BPCL to enter the upstream sector. We took a risk, but we succeeded. As an organization, we have dreamt to grow and make more profit and diversify our portfolio and activities, and I am sure that BPCL now has a good future ahead.