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Home >Companies >Bina refinery’s race to profit speeds up capacity expansion

Mumbai: The Bina refinery of state-owned oil refiner and marketer Bharat Petroleum Corp. Ltd (BPCL) will likely post its first full-year net profit in 2015-16, generating some of the cash required for a planned capacity expansion, top company officials said.

Bharat Oman Refineries Ltd (BORL), a special purpose vehicle majority-owned by BPCL that runs the four-year-old refinery, reduced its annual losses in 2014-15 and posted a net profit in its last quarter.

The refinery in Madhya Pradesh plans to expand its 6 million tonne per annum (mtpa) capacity, in what it calls a creeping expansion, up to 7.8 mtpa over the next three years at a cost of 3,000 crore, and further to 15 mtpa with an investment of 18,000 crore.

“We have been able to reach a net profit in the last quarter with a robust GRM (gross refining margin) and we are sure we can continue this trend in the current year. We are now ready for the planned creeping expansion," said P. Balasubramanian, director-finance, BPCL.

GRM refers to gross refining margin, the difference between the price at which refiners purchase crude oil and the price at which they sell the end product after refining, and is a major factor in a refinery’s profitability.

BPCL holds 49% stake in BORL, while Oman Oil Co. SAOC owns 26%. The rest is held by financial institutions.

Balasubramanian said BPCL has already started work on the first phase of expansion to be completed by 2018.

In the March quarter, the Bina refinery posted a GRM of over $16.5, driven by better gasoline, naphtha and fuel oil prices. This was further aided by an inventory gain due to a stable crude price, said a 30 May note by IDBI Capital Market Services Ltd.

“Consequently, Bina reported net profit of close to 5 billion ( 500 crore) during the quarter," said the note. The refinery also managed to reduce its full-year net losses from 1,500 crore in 2013-14 to 790 crore in 2014-15. Its full-year GRM stood at $6.1, according to a 30 May note by HDFC Securities Ltd.

R. Ramachandran, managing director, BORL, admitted that its “exceptionally good" March quarter GRMs will not be sustainable, adding, “However, we are still confident of clocking one of the best in the industry GRMs in the current year."

Part of the cash required for the initial expansion will be generated from the refinery operations itself, Ramachandran said.

The refinery, which was to be commissioned in 2009, faced several cost overruns and was finally opened in May 2011. However, technical problems related to power generation have often forced the unit to operate below capacity.

“All the problems have been ironed out and we have operated the refinery at a capacity utilization of 103% for the fourth quarter of the last fiscal," Balasubramanian said, adding the company is confident of maintaining this level for the full year.

Ramachandran said BPCL has started work on the blueprint for its second expansion phase and is talking to the state government to set up a petrochemical complex as well. “These are very preliminary discussions and will take time to fructify," he said.

The first phase of expansion is essentially de-bottlenecking, in which refinery equipment is used at optimum capacity, said Raj Nair, chairman of Avalon Consulting, a petroleum refining and marketing consultancy firm.

Usually, after a refinery opens, several low-capacity equipment are replaced by higher capacity equipment, he said. This raises its capacity to process additional feedstock, increasing output at a minimal cost.

A senior executive at the Bina refinery, who requested anonymity, said the profitable operations at Bina have revived discussions for a proposed initial public offering of BORL.

“We have a plan to simultaneously approach the market with the second phase of expansion when the first phase is stabilized and cash flows are healthy. You can see a public offer sometime in 2017-18 when the investment for expansion to 15 mtpa will be needed," he said.

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