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BPCL- For and against II
Apr 1, 2008

In the previous article , we began our study of the factors working for and against BPCL. We take the analysis forward in this article. For (contd.)

Upstream foray to secure crude oil supply: India is the world's sixth largest energy consumer having to import nearly 70% of its crude oil requirements. Also, with India's crude oil reserves expected to last for around 20 years, only major discoveries can prolong the inevitable. This translates to oil refining and marketing companies facing difficulties in securing supplies of crude oil. With a view to achieve a degree of self-reliance, BPCL has ventured into the upstream exploration and production arena. For this purpose, BPCL has promoted a 100% subsidiary company and has also bid for new fields in India and abroad in consortium with other players. It has also been looking at 'farming in' opportunities.

Against

Crude oil, price caps and under recoveries: The prices of the sensitive petroleum products viz. MS, HSD, LPG and SKO in the domestic markets have not moved in tandem with the international prices. The Government of India follows a policy of managing the adverse impact of the high levels of crude oil prices on the economy through a process of distributing the burden between itself, the oil companies and the consumer.

Cash flow problems and interest burden: Oil marketing companies have been facing tough times in managing their working capital position and funding their capital expenditure programme, even as they experience significant under recoveries on the sale of the four sensitive petroleum products i.e. MS, HSD, LPG and SKO.

Although oil bonds from the government and discounts on crude oil prices by upstream companies have ensured that oil marketing companies remained profitable, their cash flow position has been adversely affected. Consequently, their borrowing levels have increased, along with the corresponding rise in the interest outgo. This, coupled with the hardening interest rate scenario in the face of rising inflation, could pose serious challenges to the oil marketing companies who have all drawn up major investment plans in the areas of refinery upgradation, building new capacities, development of distribution infrastructure and exploration and production.

Making residual fuels viable: One of the greatest challenges that the Indian refining industry faces is the need for large capital investment for meeting increasingly stringent product quality requirement and for upgrading the residual fuels (Fuel Oil and LSHS) into valuable distillates, since their demand is on a decline. Keeping this in view, BPCL has initiated projects to produce Euro-IV quality transport fuels and is also examining the feasibility of upgrading the residue at its refineries at Mumbai and Kochi to enhance profitability. Mumbai refinery is evaluating various options for upgrading residual fuels, which include leveraging the synergy with neighbouring industries to overcome the space limitations and to secure financial viability for the project.

Worries from the flux in the aviation sector: The last few years have seen the Indian aviation sector undergo a sea change. While sales volumes have gone up significantly, challenges have also increased. There are signs of consolidation amongst the airlines and these are expected to have a bearing on the volumes of aviation fuel. As new airports are set up and existing ones modernised / privatised, the ownership and operations of the fuel infrastructure will be subject to uncertainty and challenges. Also, with competition increasing, there are inherent dangers of undercutting of prices, leading to reduction of margins on sale of ATF to airlines, besides higher risk of default in clearing customer dues. BPCL plans to meet the demands of this emerging scenario by leveraging its traditional strengths and brand image.

This concludes our profile of the factors working in favour of and against BPCL.

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