Livemint: March 06, 2017
New Delhi: With private investors remaining shy of making large bets, state-run companies are taking the lead in asset creation and driving economic growth. The large capital spending by public sector oil companies are not only seeking to narrow the country’s energy deficit but also meeting government’s strategic goals of creating jobs and correcting the disparities in regional development. Indian Oil Corp. Ltd, the nation’s largest refiner, will spend Rs 1.8 trillion over the next six years. Does such a huge spending in infrastructure at a time global oil producers have cut supplies to boost prices make business sense? Chairman B. Ashok explains in an interview. Edited excerpts:
Indian Oil Corp. is apparently swimming against the tide when global energy companies are cutting down capital spending. Why?
It is well known that India is a bright spot in the world economy and our growth story is bound to continue. If we are growing at say 8-9%, with an emphasis on manufacturing industry, energy requirement will be very high. All global reports predict that India will be heavily dependent on hydrocarbons at least until 2040. Our expansion plans are based on that premise. Secondly, we cannot start planning for adding energy capacity after demand comes up.
We need to create supply ahead of demand. That is how we have always been adding refining, marketing and logistics capacity ahead of demand, which is coming in handy in the wake of volatility in demand due to seasonal changes and availability or otherwise of other forms of energy. For example, power cuts leads to higher demand for diesel. Gasoline consumption has been growing at nearly 15% a year.
With the commissioning of Paradip refinery in Odisha, our refining capacity is over 230 million tonne a year while demand is hovering around 200 million tonne. We are simultaneously enhancing infrastructure for importing petroleum products in case a refinery needs to be shut down briefly for maintenance. We need to ensure supply ahead of demand. That is why Indian Oil and other companies have strong capital spending programmes. Over the next six years, Indian Oil alone will be making a capital expenditure of about Rs 1.7 to 1.8 trillion. This will go into new and better capacity for refining, marketing and new areas of growth such as natural gas, infrastructure, petrochemicals, renewable energy and for some aspirations in upstream exploration and production.
Improving the quality of the fuel in line with our climate change goals is another area where we are making huge investments. More than half of the county is now on Euro/BS IV fuel. From April 1, 2017, the entire country will go on BS IV. From 1 April, 2020, the entire country will straight away switch to BSVI/Euro VI, which is unheard of anywhere else. In BSVI grade, sulphur content will come down to 10 parts per million (ppm) or less from 10,000 ppm in the diesel we were marketing in year 2000, which is a substantial improvement in fuel quality. Indian Oil Corp. is working on all possible brown field expansion in almost all our existing refineries including in the newest one at Paradip in Odisha. We are also looking at how we can expand refining capacity in the north-east.
How do you cope with the extreme volatility in oil prices seen in the last few years?
Refining business being what it is, we believe that if we are an integrated player, the fluctuations in financial performance of the company can be minimized which is important in generating sufficient cash for the huge investments in projects which we fund in part with internal accruals. We meet the rest with borrowings. However, as an organisation, we are way less leveraged than the typical industry leverage. That is because value addition in refining business is low and crude oil accounts for 90% of the cost of the final product. We will continue to invest from our resources and borrow when needed.
What are the other businesses you are getting into to be an integrated energy company?
We are looking for all value addition opportunities in petrochemicals from our existing refineries. For the last few years, petrochemicals have been contributing almost 30% of our profits. Already we are the second-largest petrochemical company in the country and we will continue to pursue growth in this area. We are also into natural gas in a big way as there is a lot of emphasis on serving cleaner fuels for transportation, power generation and production of fertilizers.
We, as one of the promoters of Petronet LNG Ltd, have been marketing 30% of gas available from it.
But now we have set our goals much higher and will play a larger role in setting up infrastructure for a gas-based economy. Since gas cannot be stored, we need transportation networks when the fuel is ready to be supplied.
Also, since we have limited domestic gas, we need terminals to import liquefied natural gas (LNG) and re-gasify it. Our 5 million tonne import terminal at Ennore near Chennai will be ready by early 2019. There is a lot of demand for gas in Chennai.
Our own subsidiary Chennai Petroleum Corp. will be an anchor customer of this import terminal. We have a stake in the proposed Damra LNG terminal in the East Coast that will serve customers in East and North East parts. (Adani Group and Gail India Ltd. are the other investors in this project.) Our own refineries being big consumers of gas, gives us a comfort in sourcing the clean fuel and in absorbing some market shocks. We are investing heavily in gas infrastructure.
What is the social impact of these investments, job creation for example?
Since it is a highly technology oriented industry, the core activity in a large refinery where processes are automated, may require only about 1,000 specialists and engineers. But the indirect employment potential is huge. A large number of associated businesses come up around every refinery including in transportation and services related to maintenance of the refinery. These numerous businesses will develop the area into a self-sustaining town. The multiplier effect is tremendous. The petrochemicals produced in an integrated refinery are the building blocks for many small and large ancillary units that make items from furniture to sophisticated components for the aerospace industry.
Does the state’s development goals play a role in your investments?
While as a commercial enterprise we need to make profits, we are very much involved in social transformation. For example, providing access to clean cooking fuel to poor households without upfront charges is a national imperative under the Prime Minister’s Ujjwala Yojana. Access to clean fuel to more people saves environment, lowers health risks of smoke in the kitchen and gives more productive time to people. What keeps us going, is the influence that we have on social transformation.
Fuel stations have been at the forefront in changing consumer behaviour as far as payment modes are concerned. Give us an update.
Today, out of our nearly 26,000 fuel stations, 18,000 have a card swiping machine. We are trying to get these machines issued to the remaining stations also. Wherever, point of sales machines are not there, we are accepting e-wallet payments. Before discontinuation of large currency bills (From 9 November), cashless transactions were about 1% or less of the total number of transactions. Now average cashless transactions in our outlets across the country have gone up to 25%. In some towns, where company owned filling stations are there, conversion to digital transaction is about 96%. We hope to reach a national average of 50% cashless transactions at our outlets soon. Indian Oil outlets report about two crore transactions every day.
You have been focusing a lot on North East business. What are the specific expansion projects underway?
Three of our refineries are in the north-east. The Digboi refinery in Assam, the world’s oldest operating refinery commissioned in 1901 is constantly upgraded to meet today’s requirement. We have been investing in upgrading refineries to process imported crude and in building infrastructure, which we will continue to do. New depots and LPG bottling plants are being built in this region. We are also expanding pipelines. Pipeline has been built from the east coast to our Bongaigaon refinery. We are now going to extend it to our Guwahati refinery also. We will constantly explore widening the range of petrochemical products from these refineries.
Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.