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Indian Oil: For and against

Apr 7, 2008

We profile the factors working in favour of and against Indian Oil in this article. For

Leadership in downstream capacities: Indian Oil has an ubiquitous presence in the Indian downstream sector. It has 10 refineries with a 40% share in the installed refining capacity of India. 56% of total capacity caters to Northern/Western regions – high demand and growth areas. It also has 55% of the oil-marketing infrastructure in India and 45% share of the sales of petroleum products in value terms. Indian Oil also owns approximately 67% of India’s total product pipeline throughput capacity.

Enhanced capacities in refineries to boost topline: Indian Oil has major plans for capacity augmentation, de-bottlenecking and quality upgradation. Projects under implementation include naphtha cracker at Panipat, resid upgradation project at Gujarat refinery, hydrocracker unit and capacity augmentation project at Haldia refinery, and expansion of Panipat refinery from 12 to 15 MMTPA. In addition, petrol quality upgradation projects are under implementation at Panipat, Mathura, Barauni, Guwahati and Digboi refineries for completion by the end of 2009. In-principle approval of the board for setting up a 15 MMTPA grassroots refinery integrated with petrochemicals units (paraxylene, propylene and styrene) at Paradip has been obtained and the detailed feasibility report is under preparation. The project is scheduled for completion by October 2011. As a result, the Indian Oil group will have a refining capacity of 80 MMTPA by FY12.

Enhanced pipelines network capacities to boost thruput: Pipelines are the safest, cost-effective, environment friendly and energy-efficient mode of transportation and provide strategic logistics advantage to the marketing operations. The Indian Oil pipeline network is set to cross the 10,000 km mark by FY09.

Petrochemicals and natural gas verticals to enhance bottomline: Indian Oil is set to emerge as a major player in the petrochemicals business by FY12, with two petrochemical hubs shaping up at Panipat and Paradip. In natural gas business, it is attempting a quantum growth in LNG imports, infrastructure and marketing, besides city gas distribution. LPG and natural gas pipelines are part of several new pipelines and branch lines being laid. Green Gas Ltd., Indian Oil's joint venture with GAIL is operational in Agra and Lucknow and plans to expand to other cities in western UP. Indian Oil is also in the process of forming more joint ventures for city gas distribution in other parts of the country.

Expansion of the upstream portfolio to improve sourcing concerns: Indian Oil’s current interests are focused on oil equity and sourcing of natural gas, predominantly from African and CIS countries, by leveraging its downstream capabilities to form joint venture partnerships with reputed enterprises overseas.

Complexity and product slate management to improve margins: Indian Oil refineries processed heavy and sour crudes to 44% (of thruput) in FY07as against 39% achieved in FY06. Processing more sour crude helps refiners exploit differentials between light/sweet and heavy/sour crudes.

Ocean freight control to help margins: Ocean freight for crude oil transportation is a major component of the operating costs. To optimise freight costs and to have full control on supply-chain management, Indian Oil began chartering ocean tankers on its own from FY07.

R&D spend to open new vistas: Indian Oil plans to invest about Rs. 5 bn during the period FY07-12 period in R&D. While continuing with cutting edge research in the core areas of lubricants formulations, refinery process technologies and pipeline transportation, the thrust would now be on commercialising the developed technologies and initiating research in new frontier areas such as petrochemicals, residue gasification, coal-to-liquid, gas-to-liquid, alternative fuels, synthetic lubricants, nanotechnology etc.

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.

Massive capex plans in the face of low ROCE: Indian Oil has ambitious investment plans of Rs. 500 bn for the FY08-12 period. If the current state of low profitability to outright operating losses continues, further capital outlays are likely to earn poor returns on capital employed, translating to a reduction in value for the shareholders.

Refining margins cause concerns: Refining margins are dependent on the prices of petroleum products relative to the cost of crude oil. Introduction of trade parity pricing, reduction in duty protection, freight under-recoveries have had an adverse impact on Indian Oil’s margins.

Marketing compulsions due to the company’s standing: Indian Oil cannot afford to choose markets that are lucrative and carefully avoid the unprofitable ones due to its standing as India's flagship corporate. Although the company might earn returns that come to it in the form of accolades, returns on capital employed suffer, leading to reduction in value for the shareholders.

Human resources crunch: Recruitment of fresh talent has become competitive, while retention is also posing a challenge. The rate of attrition of executives in Indian Oil, which was on an average as low as 0.5% in the past, has risen to 1.5% in FY07, and is quite high in some areas like production, finance, marketing, etc.

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