One swallow does not a summer make

Last week, Hindustan Petroleum Corporation commissioned its Bhatinda refinery nearly 15 years after the idea was first mooted. The occasion wasn't accompanied by an IPL-like fanfare, but this would have hardly mattered to HPCL which finally got its big break after waiting so long.

Last year, Bharat Petroleum Corporation got its Bina refinery going after a similarly agonising period, when nothing seemed to go according to plan for years. This caused its partner, Oman Oil, to freeze further investments in the project while BPCL gamely carried on. Oman Oil, of course, returned when the refinery was all set to be commissioned and picked up a 26 per cent stake.

Why are these two projects so significant? One, they were conceived decades ago and became a reality, thanks to the persevering efforts of the key promoters concerned, HPCL and BPCL. Two, both refineries will assure more supplies to fuel-starved north India, where demand for petro-products is growing by the minute. In the process, BPCL and HPCL will have established their presence in this part of the country, after being largely confined to the west and the south.

CATASTROPHIC PERIOD

The most important factor, though, is that the Bina and Bhatinda refineries have been commissioned at a time when the downstream oil sector is experiencing its worst crisis in recent times.

The refiners were hard-pressed, with losses on the sale of subsidised fuels shooting through the roof. Estimates are that this fiscal alone will see the figure shoot to more than Rs 200,000 crore, thanks largely to diesel and cooking gas subsidies.

This has been the problem for some years now, and things got completely out of control in 2008-09 when crude prices touched $147 per barrel. The oil companies were borrowing heavily, and even though the Government finally bailed them out through the proverbial compensation package involving bonds and support from the upstream sector, it was clear that troubled times lay ahead. While crude prices plummeted to $40/bbl levels briefly, they quickly doubled in 2009-10 and are now at a stubborn $125/bbl.

It was during this catastrophic period that BPCL and HPCL stuck their necks out and persisted with their dreams for Bina and Bhatinda. Borrowings were heavy, and the interest burden even more worrying, but the job had to be done. To that extent, the commissioning of these refineries marks a triumph against huge odds, when one mistake could have cost these companies dearly.

Likewise, IndianOil is waiting for the commissioning of its Paradip refinery which is scheduled to happen next year. It is nearly a decade since the market leader put up its last refinery at Panipat. One of the biggest reasons has been the cash crunch which has impeded IOC for some years now. However, people insist that the company has just lost its way and is a mere shadow of the past when aggression was its business mantra.

DEMAND FOR FUEL

And to think that international consultant, Arthur D Little had, years ago, hinted that IOC's monarchy wasn't the best recipe for the hydrocarbons sector! The report caused a flutter within oil industry circles, but eventually spawned a restructuring exercise where standalone refineries got into the protective custody of their stronger marketing siblings. Hence, BPCL acquired Kochi Refineries, while IOC took charge of Chennai Petroleum Corporation and Bongaigaon Refinery and Petrochemicals. IBP, the standalone oil marketing entity, also became part of IOC.

However, these historical tidbits are of little relevance at a time when domestic demand for fuel products is on the rise and the supplier oil companies are starved for cash. Being Government-owned, they have little choice in the matter, unlike their private sector counterparts, which are under no pressure to retail their products in the local market. And why blame them, when they cannot sell petrol or diesel at market prices? The best option for Reliance or Essar, with combined capacities of 80 million tonnes, is to export products or just sell them to the trio of IOC, HPCL and BPCL.

This pretty much sums up the travails of the public sector oil majors. They are duty-bound to meet the needs of their consumers, but will constantly have to work with one hand behind their backs. With the years, they have been reporting laughable profits, while borrowings have skyrocketed.

Between the three of them, the capital expenditure during the next 4-5 years is estimated to be more than Rs 200,000 crore. Where is this money going to come from when Government compensation is so late in coming?

INVESTMENT DECISIONS

The Bina and Bhatinda projects must be seen in this context. Investment decisions were made when BPCL and HPCL were skating on thin ice. The sceptics had dismissed Bina as a non-starter, when there was no action at the ground level for years, and caused Oman Oil to walk out of the project. BPCL could have opted for the easier route, and dropped Bina completely. It persisted despite a liquidity crunch, and finally ended up selling a stake to the Oman Oil for a premium.

Likewise, HPCL realised Bhatinda was imperative when its West Coast refinery proposal with Oman Oil was shelved in the 1990s. It had also lost control of Mangalore Refinery and Petrochemicals to ONGC some years later, and was reduced to a minority partner with a 17 per cent stake. The Bhatinda plan was in danger of being consigned to the archives till a meeting between the top management of HPCL and the LN Mittal Group in mid-2007 led to making it a reality.

The next in line is IOC's Paradip refinery, but there is still more to come. BPCL is keen on putting up a new refinery at Allahabad, while HPCL has zeroed in on Ratnagiri for a similar initiative. There have also been talks of IOC eyeing the West Coast for a refinery, but nothing concrete has emerged since.

Each of these projects will involve an outlay of at least Rs 20,000 crore, which seems a tall order with the present financial health of the oil majors. Unless a pricing policy is formulated to keep them in good shape, it would be too much to expect another Bina or Bhatinda.

After all, one swallow does not make a summer!

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