State-run oil marketeer Hindustan Petroleum Corp. Ltd (HPCL) plans to revive a petrochemical hub in Andhra Pradesh that was cleared by the Union government in February 2009, but didn’t progress much in the wake of the economic slowdown. Chairman and managing director Subir Roy Choudhury said in an interview that his company was speaking to potential partners to invest in the so-called petroleum, chemical and petrochemical investment region (PCPIR), where HPCL would be the anchor tenant.
According to Choudhury, HPCL needs a capacity expansion, with its existing refinery at Vishakhapatnam having reached a throughput of 9 million tonnes per annum (mtpa). Hence, expediting work at PCPIR, where HPCL plans to have 15 mtpa capacity, would help the company.
In his first media interaction after taking over the reins of HPCL on 1 August, Choudhury spoke on many subjects, ranging from new business avenues that would drive the company’s growth, to challenges and opportunities that follow the deregulation of petrol prices by the government. Edited excerpts:
What is your strategy for HPCL’s growth?
I have been a part of this company’s board and decision-making process for the last six years and my strategy would not be drastically different than what we already have in place. In addition to streamlining current businesses, we also have to explore avenues that we had lost out on and new business opportunities.
What are these lost opportunities?
Due to certain decisions taken earlier, we do not have any presence in selling liquefied natural gas (LNG). That’s one area that we have clearly missed. Going forward, building a presence in LNG would be a part of our strategy for which we can either work together with interested partners or proceed independently.
HPCL was jointly bidding with Gujarat State Petroleum Corp. Ltd (GSPC) and the other oil marketing firms to build a gas pipeline. Are you exploring any other new business avenue?
We have already submitted our bids along with GSPC and the other oil marketing companies, but they are yet to be opened. We are waiting to see how we perform. Building trunk pipelines to carry gas is definitely a strategic area of growth for us in the future. We are also looking at entering the city gas distribution business. The Petroleum and Natural Gas Regulatory Board is inviting bids for 250 cities for gas distribution. Either independently or jointly with GAIL (India) Ltd and other partners, we would definitely bid for those areas also. Every year, the government is inviting bids for six to eight cities.
How will petrol price deregulation impact your business plans?
Deregulation of petroleum product prices is both a challenge and an opportunity. In a de-controlled environment, only the player offering the best services would win. There would be stiff competition with private players coming into the market. Retail is the core business of HPCL that contributes 65% of its total business. We have to be careful that we do not lose ground there. It’s an opportunity at the same time as margins would hopefully improve, as would profitability. With better cash flows we can develop infrastructure and fund future expansions. For motor spirits, we have had additional revenue of Rs3,500 crore after the deregulation that has helped in reduction of under-recovery (losses from selling fuel below cost).
Can you raise retail prices of fuel in line with international crude prices beyond a limit?
It’s difficult to respond to this. Only motor spirit (petrol) prices have been deregulated. Though diesel is likely to be deregulated as well, we do not know when that could happen. We have to simply wait and watch how crude prices move and what impact that has on the retail prices of motor spirit.
HPCL posted a loss of Rs1,884 crore in the first quarter of the current fiscal, mainly due to non-receipt of subsidy payment from the government. When do you expect to receive this money?
We have the full support of the government and there is no need for any apprehension that we would not get the money. Though we may have to absorb some portion of the subsidy, I am confident that the government would help as much as possible.
HPCL had recently acquired two sugar mills in Bihar to produce ethanol that could be mixed with petrol. Are there plans of replicating this in other states as well?
Alternative measures: HPCL’s Choudhury says that with the projects in Bihar expected to start production in November, petrol mixed with ethanol has great potential in India as pure fossil fuel resources are limited. Mint
Petrol mixed with ethanol has great potential in India as pure fossil fuel resources are limited. The projects in Bihar are moving at a fast pace and are expected to start production by the time the sugarcane crushing season begins in November. We have offers from the governments of Andhra Pradesh and Uttar Pradesh to take over some shut sugar mills in those states, but it all depends on the success with which we commission the mills in Bihar. Once we have enough expertise, we can do something similar in other states as well.
Do you have any specific refinery expansion plans?
Our 9 mtpa refinery in Bhatinda, Punjab, that is being built jointly with Mittal Energy Ltd, is progressing at a fast pace and should achieve mechanical completion by March 2011. We have identified two-three locations in Maharashtra to build a 15 mtpa refinery as our Mumbai refinery has little scope for expansion, with the adjacent area getting congested with houses and factories. We would need at least 2,500 acres of land there to build the refinery and the township at an investment of at least Rs30,000 crore. The Mumbai refinery would have a high complexity index and we expect a gross refining margin of $10-12 (Rs465-558) from there. The detailed feasibility report for that would be complete by December.
HPCL was to be the anchor tenant at a petrochemical hub coming up in Andhra Pradesh, work on which was stalled. Are there any plans to revive the project?
Yes, we are working towards reviving the Andhra Pradesh PCPIR. Our existing refinery at Vishakhapatnam has reached a throughput of 9 mtpa and we are exploring the opportunity to build a new, 15 mtpa refinery in PCPIR. We are in talks with potential partners, whose names I cannot divulge at the moment. They have shown keen interest in reviving the project. Also, I think our local partners whom we had roped in the beginning like GAIL and Oil India Ltd would still be interested, though we are yet to begin talks with them.
ICICI Ventures Ltd, ICICI Bank Ltd and Housing Development and Finance Corp. Ltd were looking to sell their 50% stake in Prize Petroleum Co. Ltd, an exploration and production company in which HPCL owns the remaining 50%. Any update on this?
They are working very hard to find a buyer, which has to happen through a transparent process, and we hope that it is done fast. We prefer someone who has international experience as an operator…maybe a medium-sized company that has global expertise. Anyone can bring in finance, but experience as an operator is important.
Your gross refining margins (GRM) came down to $3.72 in the quarter ended 30 June, from $5.71 earlier. Do you see the downtrend in GRMs continuing in the coming quarters?
GRMs are cyclical in nature and they are in a trough now. But our GRMs are comparable with the benchmark Singapore GRM. If there is an upswing in the Singapore GRM then we might benefit as well. Another things that need to be pointed out is that our Mumbai refinery loses $1 on octroi. So the actual GRM is actually around $4.5. This is one of the reasons that we want to shift outside Mumbai.
Does HPCL have any overseas acquisition or expansion plans?
We had explored some markets like Fiji earlier, but the company we were targeting finally decided not to sell. We had looked at Africa also. We are open to a good opportunity. If we get a good one, we will move. Any acquisition could be on the fuel marketing side in developing countries like in Africa or South Asia.
We would also like to make our lubricants a global brand by building a manufacturing presence in Dubai and Singapore. We already export our lubricants to the Gulf countries but now plan to put up lube blending plants in Dubai or Singapore. We have also identified some parties to whom we can outsource in Dubai.
It was reported that Kingfisher Airlines had defaulted on some payments to HPCL.
We have almost recovered our entire money and our business with them continues on the existing arrangement of advance payment for procuring aviation turbine fuel.