Establishing Global Linkages

R K Mehra
Executive Director, International Trade, Shipping and Risk Management, Bharat Petroleum Corporation Ltd (BPCL)
R K Mehra, Executive Director, International Trade, Shipping and Risk Management, Bharat Petroleum Corporation Ltd (BPCL), has over three decades of experience which encompasses key businesses of one of the largest Indian oil marketing companies. He finds the current assignment most challenging in his entire career span due to ever-changing dynamics of the industry. In an exclusive interview with Mittravinda Ranjan he shares his opinion on India's moves towards energy security and BPCL's growth strategy.

Of all the functions in marketing, refinery operations, marketing logistics and international trading and commodity risk management which one has been most challenging so far?
Considering the ever-changing dynamics of commodity markets, my current stint with international trading is by far the most challenging. These markets run on 24X7 basis and every day we wake up to see new opportunities and challenges to generate incremental value. With increasing volumes of physical trading, shipping operations and risk management it is an imperative for us not only to monitor international commodity market fundamentals like demand-supply situation and inventories etc, but also keep a strong track of the factors such as global financial markets, geo -political scenario and domestic markets which have major impact on the commodity market.

Indian government has earmarked the funds of the order 2.8 trillion to give impetus to the country's hydrocarbon sector and has ambitious plans to set up 300 MMTPA of refining capacity by 2017. How do you view this move given the facts that we are relying big time on imports and there is a lack of crude oil storage capacity?
India is a growing economy and an important contributor to the global incremental oil demand growth along with China and other developing countries. Current refining capacity stands at 190 MMTPA. The expansion in domestic refining capacity is driven both by the continuing growth expectations and also due to availability of skilled manpower and high-end technology. However, this has increased our dependence on crude imports, but at the same time helped creating product surplus for export markets.
We anticipate a 4.4 per cent increase in demand of petrochemical products and India will be a major exporter of surplus products to the Middle East and countries like Japan, Singapore and Korea in the Far East. Though lack of crude storage is a challenge for the country, the on-going project of setting up strategic crude oil storage facility at Vizag/Mangalore will help us enhance crude oil security.

Oil Marketing Companies (OMCs) in India have suffered huge setbacks because of the subsidies offered in the country. How do you see this impact the company's bottom line and top line?
Today oil subsidy is a burning issue not only for OMCs but also for Indian economy as a whole. With oil prices continuing to remain in high trajectory coupled with the steep fall in rupee value against US Dollar, OMCs would require to fiscal support through subsidies on controlled products. A long -term approach to handle this issue is required considering different market scenarios.

Will BPCL be allocated some funds from the pool created for funding the Indian hydrocarbon sector since BPCL too could not remain immune to the impact of subsidies?
Being a 'Navratna' company, BPCL does not get funding from the Indian government. Despite the drop in our net results, we have continued to retain investors' confidence and attract investments for our new projects. Our recently inaugurated refinery in Bina is an example of investors' confidence , which has been set up with 26 per cent equity participation of Oman Oil Company and part funding by State Bank of India (SBI). We have rolled out the growth strategy for the next five years and are optimistic about attracting investments for the new ventures.

How did the Egyptian political crisis and the payment issues with Iran impact crude oil supplies to BPCL?
We were immune to the effect of Egyptian political crisis and supply disruptions from Iran. Having said that, we have a well-diversified basket of crude oil suppliers through our globally established linkages, which helped us, take care of supply issues arising from single supplier.

What are the crude oil linkages established by BPCL from international and domestic suppliers? May we have your comments on the increase in appetite of BPCL with the capacity expansions at Kochi and Bina refineries?
Considering our large scale dependence on imported crude oil and refinery configuration, we have tried to diversify our crude oil suppliers' basket and tied up significant volumes of imported crude through long-term contracts with major suppliers from the Middle East and Far East. However, we do procure some volumes from spot markets to ensure flexibility in the procurement system and also take advantage of market dynamics.
Our focus remains on ensuring crude supply security for our refinery system. We have now stepped up the term volumes to more than 70 percent of total import requirements to address this. We also try to process new crude to generate better Gross Refining Margins (GRM) and diversify the crude basket. Our Mumbai refinery has processed more than 70 types of crude oil so far.
With commissioning of new refinery at Bina and planned expansions at Kochi refinery, group processing capacity is expected to touch 1 million bpd in next 4-5 years which will enhance our appetite for crude oil consumption. With a view to take care of the transportation of imported crude oil from foreign ports to the refineries, BPCL uses a combination of Contract of Affreightment (CoA), Time Charter and Spot Charter arrangements.

Tell us about the BPCL and Matrix Marine Germany Joint Venture in BPCL's growth strategy.
Both companies are working together in the area of fuel oil trading and bunkering in both Indian and international markets. The arrangements are made in such a manner that both BPCL and Matrix are able to leverage each other's strength to generate value for the stakeholders.

May we have your comments on roadmap for the biofuels in India; tell us about BPCL's ethanol investments in Brazil? How do you compare the market in Brazil vis-à-vis India?
I was fortunate to be associated with some developmental studies on making investments in Brazil’s ethanol markets led by BPCL on behalf of OMCs few years back. I also represented India at International Biofuels Forum (IBF) at the United Nations to discuss cooperation between world’s major biofuel producers and consumers including India, USA, Brazil and China. Brazil has taken a pragmatic approach towards implemented ethanol blending programme in the country over the span of almost three decades. Automotive industry has also responded well to this move and supplies flexi engines, which work on blended fuel in any proportion. We are still far away to reach the same level. Brazil is a global role model for use of biofuels and India can definitely take a clue from Brazil's experience and fine tune biofuels implementation programme.

What are your views on risks and opportunities in the Indian market for the OMCs?
The overall business environment remains extremely challenging with several risks in the course of business operations. The high international oil prices remain a major area of concern, given the level of dependency on imports for meeting the crude oil requirements of the refineries. The issue of under-recoveries on the sale of sensitive petroleum products is another major concern, as any shortfall in adequate compensation for the same will adversely affect the financial position of the company.
BPCL has been proactive in strengthening its position in the market and protecting itself from the various risks. The commissioning of the new refinery at Bina and expansion of the refining capacity at Kochi will enhance product security. The oil and gas finds in exploration blocks where BPCL's 100 percent subsidiary, Bharat Petro Resources Ltd (BPRL) has participating interest, has the potential of providing a hedge against volatile movements in the international prices to the extent of BPRL's stake .
BPCL also continues to concentrate on achieving greater operational efficiencies and enhancing the focus on execution. The company is geared up to continue delivering excellence in all areas of operations in the days to come.