'R-LNG is the answer as natural gas output could stagnate in 5-6 years' says Chairman in an exclusive interview with FE
New Delhi 25-Oct-2010
B M Bansal,
Chairman,
IndianOil Corporation Ltd.
India’s largest commercial enterprise IndianOil (IOC) is rapidly diversifying into all sources of energy generation seeking to meet the needs of the second fastest growing major economy in the world. For Brij Mohan Bansal, the man at the helm, this is the journey towards, making IOC, “the energy company” of the nation. This chemical engineer from Delhi IIT with more than 35 years of experience in the hydrocarbon sector, is now presiding over IOC’s consolidation of traditional business of refining and marketing crude oil derivatives, while at the same time, spreading its wings over new sources of energy such as solar, wind, nuclear and gas hydrates. Bansal spoke to FE’s Gireesh Chandra Prasad and KG Narendranath about IOC’s journey forward. Excerpts from an interview:
How do you plan to use the proceeds of your follow on public offer, which is expected by the end of this fiscal?
We will use a part of the proceeds to lower our debt burden, which is about $10 billion at present. Right now, our debt equity ratio is 0.9%. We would like to bring it down so that even after new projects, our debt equity ratio would stay at a maximum of 1. We have many new projects. A naphtha cracker unit and a polymer unit in Panipat have already been commissioned. It produces paraxylene using captive naphtha from our refineries, which is subsequently converted to purified trephthalic acid or PTA. In addition to that, some new petrochemical projects are in the approval stage.
How do you assess the scope for capacity creation in the PTA business, considering the huge capacity that private sector player Reliance, already has?
The proposed plant in Gujarat has a 600,000-tonne capacity. It will help bridge the gap between our capacity and those of private players.
The potential for growth is quite good in this segment. PTA is the raw material for synthetic textiles. The sector is growing at 10-12% a year, a rate higher than the growth in cotton textiles, even as India’s cotton production has increased substantially in recent years.
China has a big presence in the global synthetic textiles market. Increasingly, synthetics are replacing cotton, even as cotton textiles are becoming a niche market.
Earlier, cotton was the poor man’s cloth and synthetic was the choice of the well off. Now, this has reversed. Once our new plants get commissioned, our total PTA capacity would be roughly 1.1 million tonne a year.
Also, because of our lack of strength in synthetics, are we not doing as well as China in export markets?
Yes, China and Indonesia have large PTA capacities which help them in texitle business also.
How do you compare your refining margins with those of your competitors?
Our refining margin is better compared to that of other public sector oil marketing companies (HPCL and BPCL). But if you compare our plants with those of the private refiners (like Reliance), they have the advantage of size and state of the art technology and hence, their refining margin is slightly better than ours. But our large refineries in Panipat and Mathura are competing with them. Our new refineries are going to be larger in size.
Do you have plans of setting up refineries abroad with a focus on the export market?
Earlier, we studied the option of setting up refineries in a few countries, including Nigeria and Turkey. But suddenly in 2008, crude oil price went up sharply and under-recovery became very high, straining our finances and halting our expansion plans. We cannot make huge investments abroad unless we are sure of our cash flow. Even now, (after petrol-price deregulation), we are not certain about our cash flow due to the high under-recovery in diesel, LPG and kerosene.
If diesel is also de-regulated, will you revive your overseas expansion plans?
Unless the under-recovery is taken care of in the Union Budget or there is certainty on how it would be compensated, OMCs cannot make investments that have long-term implications.
So your overseas expansion is contingent on further deregulation of fuel pricing?
Yes. There should be some kind of certainty to oil marketing companies on how they would be compensated for their under-recovery. We are not therefore, making new capital expenditure in downstream sectors abroad.
This, however, does not apply to our upstream expansion abroad. Our global projects in hydrocarbon exploration are on. If we make a discovery there, we will surely spend on developing and putting that field on production.
There is an intense global competition for acquiring producing blocks. Don’t you also focus on such fields? What is your budget for E&P ventures abroad?
We are also looking at a number of producing blocks. We have not been able to agree on the price being asked for some of these blocks. We do not want to acquire blocks at any price. We are ready to spend up to $1 billion (for E&P ventures abroad). But if it comes to paying up to $1.2-1.3, we would still consider it if the block is so promising. In Venezuela, we have (along with ONGC Videsh, Oil India Ltd) acquired a block recently with hydrocarbon discovery.
Currently, we are in negotiations for a couple of blocks but it is too early to discuss them. Going forward, we see IOC not only as an integrated company, but also as “the energy company” of the country. We are now present in alternative sources of energy as well, including bio-diesel, wind power and solar power. Some projects such as the one on wind power is already commissioned, while some others are in the approval stage. A solar power project is in the approval stage, which will be implemented now. We are also getting into nuclear energy with 26% equity with the Nuclear Power Corporation of India.
What about shale gas (unconventional gas from fine grained sedimentary rocks) and gas hydrates (an ice like formation in which a gas molecule is caged by water molecules around it)?
Shale gas is a new area. The available technology is few and the return may not be as high because the cost of production itself is high. But in India, interest in shale gas is growing with the government planning to come out with a bidding round next year.
On gas hydrates, we are doing the research and development work. India has vast potential in gas hydrates (with abundant reserves found in Krishna Godavari basin and near Andaman Islands) and we are one of the pioneers in this area. Gas hydrates can potentially reduce our over-dependence on coal. It would, however, take some time for the technology to fructify in the commercial arena.
In conventional gas too, we have our presence. We have made discoveries in a few blocks, for example, in Mahanadi, where IOC’s share is 20% with ONGC as the partner. We have also made a small discovery in the Assam region. Besides, we are already marketing 10 million standard cubic metres a day (mmscmd) of re-gassified liquefied natural gas (RLNG). Now, they (Tamil Nadu Industrial Development Corporation Ltd (TIDCO) are building an LNG terminal at Ennore. (IOC and TIDCO signed a deal this August to set up a-2.5 million tonne a year LNG import and re-gasification terminal and a gas fired power plant that is expected to benefit Karnataka, Andhra Pradesh, Tamil Nadu and Puducheri.)
Do you think that considering the volatility in RLNG prices, the likely re-configuration of the fuel mix and the requirement of infrastructure facilities for re-gasification, it will be a viable business for the future?
Indeed it will be. Natural gas production in the country is expected to stagnate after five-six years, while demand for it will be high. In that case, RLNG is the answer. (Now the country produces a little less than 150 mmscmd of gas and imports about 25-30 mmscmd of RLNG).
Do you expect any policy change before your follow on public offer later this fiscal, which could help the scrip reflect the company’s intrinsic strengths?
We expect clarity on the sharing of under-recovery (losses arising from selling fuel below cost). We also understand from the media about the government’s intention to let natural gas producers discover the sale price of gas from the market, which will be approved by the government while allocating the fuel to various consumers.
