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BPCL: For and against I - Views on News from Equitymaster
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BPCL: For and against I
Mar 31, 2008

We shall study the pros and cons of BPCL from this article onwards. We begin with a look at some of the important factors working in favour of the company. For

GDP growth to drive off take and topline: The growth in consumption of petroleum products in India during FY07 was 6% YoY. The average growth in the consumption of petroleum products over the FY02 to FY07 was 3.4%. Off take of petroleum products is closely linked to economic activity. Even cautious projections for the Indian GDP growth rate will translate into increased volumes for BPCL.

Increase in refinery complexity to exploit crude spreads: The average spread between light Brent crude and the heavier Dubai crude (the two main components of the Indian basket of crude) hovered around US$ 3.2 per barrel during FY07. After the commissioning of the refinery modernisation project at the Mumbai refinery, the processing of heavier crude was increased significantly to take advantage of this spread. Moreover, the ongoing capacity expansion and modernisation project at the Kochi refinery would enhance flexibility in terms of processing a higher percentage of heavy-sour crude oils.

Buoyant refining margins aid the beleaguered marketing side: The refining margins have been buoyant of late and have contributed significantly in improving the bottom lines of the oil companies, thereby mitigating to some extent, the under-recoveries on the marketing side. Better margins are also the result of the refineries no longer having to contribute towards sharing the under recoveries of the marketing companies on the recommendation of the Rangarajan Committee.

Remedying port infrastructure: The Indian oil companies face the constraint of poor port infrastructure making it difficult for them to achieve economies of scale in crude oil imports. Considering the potential available for savings in crude transportation cost, BPCL is in the process of commissioning crude oil import facilities at Kochi, which can handle very large crude carriers. Besides Kochi refinery, the new facilities are also expected to benefit Mumbai Refinery by way of a reduction in the freight cost of crude.

We shall continue with our profile of BPCLs pros and cons in the next article.

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