Indian Economy News

Bharat Petroleum likely to invest Rs.35,000 crore in 3 years

  • Livemint" target="_blank">Livemint
  • August 28, 2014

Mumbai: Bharat Petroleum Corp. Ltd (BPCL), India’s second-biggest oil marketer, intends to spend Rs.35,000 crore in the next three years to increase its refining capacity by a third, upgrade all existing refineries to produce cleaner fuel and invest in overseas exploration projects, two company officials said on condition of anonymity.

“While the refinery expansion and upgradation itself will attract 50% of the planned investment and help us to bridge the gap in volumes between refining and sales, the remaining part will go into our exploration business in Mozambique, Brazil and Indonesia,” one of the executives said.

The investment in exploration and production is likely in the latter part of the three years, he said, adding that the firm will also strengthen its natural gas infrastructure such as city gas distribution.

The planned investment is equal to the company’s capital expenditure in the past 10 years and double what it had invested in the past three years, according to BPCL’s annual reports of the last 10 years.

Upgrading the refineries is necessary to produce fuel that conform to Bharat Stage IV and V emission norms.

The diversified investment plans set BPCL apart from its peers such as Indian Oil Corp. Ltd and Hindustan Petroleum Corp. Ltd (HPCL), analysts say.

“We like BPCL’s superior operational performance over other OMCs (oil marketing companies), investments in high-return refining capex and remain bullish on its E&P (exploration and production) assets in Mozambique and Brazil,” Jal Irani, analyst with brokerage Edelweiss Securities Ltd, said in a note released on 13 August, after the company’s fiscal first quarter results.

BPCL plans to invest up to Rs.16,000 crore for its main project of integrated refinery expansion at Kochi, Kerala, according to its annual report released on Tuesday. This project will not only increase the refinery’s capacity from 9.5 million tonnes per annum (mtpa) to 15.5 mtpa, the capital expenditure will also increase the gross refining margin (GRM) from $4.8 per barrel to 6.8 per barrel by May 2016, it said.

This will be accompanied by a 2 mtpa expansion of the Bina refinery in Madhya Pradesh and upgradation of all its refineries to meet the stricter emission norms.

“We are going for a creeping enhancement of capacity utilization of Bina refinery as major capex is being diverted to Kochi and other upgradation projects and hence it is difficult to allocate a major capex to the expansion of Bina to 12 mtpa,” said the second official cited earlier. “We want to go slow there.”

The upgradation plan may not be complete by 2016-17, he said, but the firm will be on track to meet the deadline of 2019-20.

By 2017-18, the second official said, the target will be to increase capacity of 27.5 mtpa to 35.5 mtpa, a jump of 29%, which is expected to help the company bridge the gap between refining and sales volumes.

In the year ended March, BPCL refined a total of 28.69 mtpa of crude oil to produce petrol, diesel, kerosene, fuel oil, etc., but sold 37.37 mtpa.

“While we have a gap of 30% currently between our refining and marketing volumes, we want to narrow this to 15% so that our dependence on private retailers is reduced substantially in the coming years,” the second official said.

He also said that on the upstream front, activities have picked up in Mozambique and Brazil, thus requiring higher capital allocation.

While he did not mention the amount earmarked for investments in the two countries, he said the company’s partner and operator in each of the assets has planned to start production from 2018-19.

BPCL owns 10% in a prolific natural gas asset in Mozambique that has 35-65 trillion cubic feet of reserves. It holds 50% in a crude oil asset in Brazil whose reserves have not yet been declared.

While these assets will lead to long-term gain for the company, analysts say it is the de-regulation of diesel which will give a major fillip to the company’s profits.

The increase in marketing margins for the oil marketers will be the major catalyst in the short term, analysts Nilesh Banerjee and Vinit Joshi of international brokerage Goldman Sachs Investment Research said in an 18 August note to clients.

The government has instructed fuel retailers to increase the price of diesel till it is fully de-regulated. The full freeing of diesel prices will lead to lower interest costs and a potential doubling in marketing margin for BPCL in the short term, Irani from Edelweiss said in his report.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.

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