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Interview

with S Roy Choudhury, Hindustan Petroleum Corporation Limited

01.09.2010 / Energyboardroom

HPCL has built an impressive reputation as one of India’s leading downstream players, accounting for 20% of the market share, 10% of the nation’s refining capacity and 40% of the nation’s lube oil capacity, employing over 11,000 people. You became CMD in August 2010. What did you see as your mission when you first took over the position?

I have been at HPCL for a long time. Before taking over as CMD, I was the Director-Marketing for six years in this organisation. I worked in every aspect of the business and have experience of all the operations of the company.

Before becoming CMD, I was part of the decision making team at the company. Upon taking the position, I was happy with the direction that the company was headed in, but I felt that we needed to place more emphasis on new sectors. As a downstream company, our growth opportunities are limited. If a company does not grow, it is difficult to survive.

In order to address this, I convened a strategy workshop with the top management of the company, which led to the drawing up of a five-year action plan. The thinking in the company as a whole was along the same lines as mine, namely that it was time for HPCL to venture into new areas to grow its existing business.

Today, HPCL’s product self-sufficiency stands at around 55%. The company’s two refineries in Mumbai and Visakhapatnam produce around 16 million tonnes, but at HPCL we sold about 26 million tonnes during 2009-2010 and we have touched about 27 million tonnes during 2010-2011.The company buys the required products from private companies like Reliance and Essar.

The Mangalore refinery is a joint venture of HPCL in the sense that this refinery was actually created by us as the first joint venture in the country with a private party. But because of certain decisions taken along the way, HPCL today has a 16.95% participating interest. So 9 to 10 million tonnes of product we either take from these three companies, or we import directly.

HPCL has refineries on the West and East coast, but no refinery in the northern part of the country. We had a desire to build a refinery in the north. Finally this happened in Punjab, at Bathinda, and we got a very good partner in the form of L. N. Mittal group, and today the refinery is almost ready mechanically. Pre-commissioning has already started, and the whole project has been completed in three and a half years, which is a record.

Even after you take into consideration this new refinery, HPCL will only be able to meet 56-57% of its requirement, because of the company’s growth rate. HPCL projects a sale of about 40 million tons by 2015-2016. In order to address this, we have resolved to put up two new refineries. One is the resitement of our Mumbai refinery, the current incarnation of which is built on an area of only 300 acres. It was started at 1.25 million tonnes, and today the refinery processes 6.5 million tonnes, a figure achieved by debottlenecking and increasing efficiency. However, there is simply no room to increase capacity further, so HPCL has resolved to put up a new refinery on the west coast, which will replace this refinery in the future. We are not going to close it immediately – we will keep it as it is, commission the refinery first at West Coast, then we will take a call. The new refinery will have a 9 million tonnes capacity, expandable by another 9 million tonnes in the future.

We are not going for the full capacity straight away because of the costs involved. Today we are walking on a tightrope economy, especially the public sectors. We have a lot of borrowings, and already HPCL’s debt equity ratio is very tight. We concluded it would be better to start at 9 million tonnes, start to bring in revenue, and then go for another 9 million tons.

Another project we are working on is the expansion of the Visakh Refinery by 9 million tonnes. We will consume whatever these refineries produce, as there is no problem of demand, and in terms of product sales, all our refined products meet EURO IV standards, and our new refineries will produce EURO V quality products.

While the refineries come into existence we will be doing a lot of investments in marketing. HPCL needs to build more pipelines, depots, and terminals. In the next five years, we have a plan to invest about $9 to $10 billion USD in the company. This is one area we must work on so the next generation bear the fruit of these refineries.

HPCL also wants to make aggressive moves into the upstream. We had two upstream business models. One was the internal E&P division with parent company, and the other was the joint venture private company Prize Petroleum. Prize Petroleum had funding limitations and therefore could not capitalize on acquiring the requisite critical mass nor profitability. It was expected that a private company structure would perform better because of faster decision making processes.

After giving an opportunity to various private equity players and E&P company, we have taken a decision to take over the company, and convert it to a 100% subsidiary of HPCL. Our entire E&P operations will now be run through that single entity instead of having two books of accounts.

Today HPCL has participating interest in around 29 blocks, with a maximum participating interest of 25% in collaboration with NOCs like M/s ONGC, OIL, GSPC and GAIL. We have 24 domestic NELP exploration blocks, and overseas assets in Australia as well as Egypt and Oman. These are all exploratory in nature, so the gestation period is 7-8 years before commercial production can commence. In the mean time we are scouting for suitable opportunities that would provide near-term cash flows.

BPCL has had a focus in its upstream expansion by farming in to producing assets internationally. Is HPCL now looking to move along the same lines?

The focus has been now to have a balanced portfolio by acquiring assets that are discovered or about-to-produce, from preferred regions of Australia, SE Asia, West & East Africa and North Latin America. This would minimise the exploration risks and am confident that our young & dynamic E&P team would fulfil this ambition. The requisite resources would be arranged at an appropriate time for the new 100% subsidiary.

HPCL has also started looking into gas business. The Government of India has announced tenders for city gas distribution in 250 cities. We are already present in 2 or 3 states in collaboration with GAIL. We have started bidding independently for other cities also. We have got a very strong pipeline division at HPCL, with over 3000km of pipeline already laid, maintained and operated.

Another area of focus is an R&D centre for the corporation. HPCL already has one for marketing, but a corporate R&D centre is currently missing from our portfolio. The Corporate R&D Centre’s objective would be to make HPCL a Technology Leader through continuous innovative R&D efforts in developing, adopting and assimilating competitive, energy efficient & eco-friendly technologies for producing cost effective , profitable and customized quality products/processes. We have acquired land for building the R&D Centre at Bangalore and are in the process of construction. Also we are in the process of appointing senior scientists to head various labs in the R&D Centre. We have planned to make the Centre operational in about 2 year’s time.

Despite these new areas, HPCL cannot ignore its current expertise and competencies– the company currently has 10,000 retail outlets. Our market share gain today, and over the last seven years, has been the highest. We are spending a lot of money in the retail business. We are also one of the leading lube marketing companies in the country.

It is going to be a challenge to maintain your expertise and dominance in downstream and marketing whilst at the same time looking at all these new sectors. How are you going to address this?

We will address this challenge firstly through investment in human capital. The recruitment relating to the R&D centre is a good example of a new move for HPCL, where we are looking to take on people with a lot of experience in the industry. Normally in our company we do not encourage recruitment at the senior level. However for upstream sector we have recruited experienced geo-scientists at middle management in addition to fresh graduates from Geoscience and Petroleum Engineering discipline. All the man power are trained through renowned consultants.

On the financial side, we have spent time prioritizing projects and working out a very detailed investment plan in order to establish at what point we will need capital on each project.

We may not get 100% compensation, but whatever percentage we get will help us maintain our profitability. We make a good profit, which is how we have been building the internal resources of the company. Today, HPCL has networth of over $2.5 billion USD. However, detracting from this is the problem of interest related to our short-term borrowing, and hence the need to carefully strategize our investment plans. Our first priority has to be our refinery upgrades, and whilst normally we would complete all these projects internally, we have taken the decision to outsource many aspects of the construction process in order to be more efficient with our capital.

How conservative have you been in your financial planning? Today the oil price is rising – how well structured are the plans in order to compensate for this?

When we created our investment plan, oil prices were $100 USD, compared to the $115 and $118 USD level that we have seen over the last two months. We hope that soon the price will settle back to the $100 mark. Futures are coming down, which is a promising sign.

Fortunately the government supports us through this, in order to make sure that the Indian oil marketing companies can continue their role of supplying the population with access to petroleum products.

HPCL will fund its development through a debt to equity ratio of 2:1. You have been aggressive in financing your growth through debt. How will you raise the capital to fund your projects while making sure growth happens sustainably?

In the past Capex has been funded more from internal resources than from debt. However, the situation is coming where we will need to rely more on borrowings. We are already involved in short-term borrowing in order to compensate for under-recoveries and reimbursement from the government, and this explains our current debt equity ratio.

I do not want HPCL to go into long-term borrowing. I believe that rather, this should be done through the organisation’s subsidiary companies. This is the financial engineering we have to do. HPCL is definitely borrowing, and we borrow at a very good rate. We have also done a lot of cost cutting across the company, which is a continuous process. Also, if our planned return on investment is less than 15% we do not take the projects. This is our internal hurdle rate, which is very good for this tight financial position.

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 HPCL today?

Hindustan Petroleum is the amalgamation of Esso and Caltex. As a result, we have a very rich cultural blend of Esso and Caltex mixed with our experience in the public sector. Putting all this together, I think HPCL got a very clear defined strategy to service the people of the country at the same time maintain its growth. Whatever we do, we should always remember that we are a commercial organisation. We must generate profit in order to grow, and we will ensure that we achieve this growth hand in hand with India.

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