Essar Oil recently completed acquisition of Stanlow refinery, Britain’s second biggest, in a $350-million deal with Shell. Naresh Nayyar, managing director and chief executive officer, Essar Oil, gives Jyoti Mukul an outlook on the business. Edited excerpts:
With the Stanlow deal completed, how is Essar planning to take its refining business forward?
We are in a transition phase. The complete takeover should take two to three months. Simultaneously, we are looking at opportunities to synergise our different refineries. Stanlow will help us export Euro IV and V specification diesel, which the UK is short on, from our Vadinar (Gujarat) refinery. The ancillary infrastructure we have acquired with the refinery — tankages, port and connecting pipelines — will help us do this effectively. Vadinar will begin producing these high-quality fuels when our Phase-I expansion is completed in the third quarter, increasing production to 375,000 barrels a day (bpd) from 300,000 bpd currently and, more importantly, enhancing complexity to 11.8 from 6.1 now.
What are your investment plans for Stanlow?
We will have a better idea once we take ownership, during the second half of 2011. Any investment that we eventually make will be with a view to increase GRMs (gross refining margins) and make Stanlow more competitive in the UK and European market. In addition to opportunities to increase margins through making special investments, there is a need to invest in normal capital expenditure to maintain reliability and safety of operations. This could be around $400 million over the next four years.
Are you looking at improving capacity utilisation of Stanlow or adding more capacity through de-bottlenecking?
In the Western world, refineries work at 75-80 per cent capacity. Stanlow is working at 75 per cent. De-bottlenecking is not required at this stage but at some stage we will have to do it.
Is it that demand in the Western world has not revived fully since the slowdown?
It is both due to lack of enough demand and excess refining capacity. Besides, refineries in that part of the world take advantage of the arbitrage and, therefore, keep the flexibility of operating at a different capacity.
Do you think the global demand has revived and it will be enough to sustain growth for your refining business, since you may need to export higher volumes?
Ever since the fourth quarter of 2009, which was not a very good year for the refining industry globally, we have seen the refinery margin improving every quarter. Our refining margins, for instance, have improved from $5.37 a barrel in Q3 to $8.15 a barrel in Q4. Recent developments in West Asia, Libya and Japan have led to tightening and strengthening of margins in the global refinery industry. Global demand was bullish in 2010, when it grew by 2.9 million bpd year-on-year. The International Energy Agency has forecast that in 2011, the demand will grow by 1.4 million bpd to 89.4 million bpd.
How different is the Indian market, since there is excess refining capacity here, too?
The Indian scenario is different, since we do not have the issue of demand which is growing.
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Private refiners, though, are unable to sell domestically due to price control.
We will continue to evaluate our options. There is disincentive in domestic retail sales but we sell to public sector companies at trade parity price. We have been supplying 70 per cent of our production domestically, mainly through PSUs on the international price, and exporting 30 per cent. Our exports have increased in 2010-11. After KG-D6 (Reliance’s D6 field in the Krishna-Godavari basin) started production, gas replaced use of fuel oil to some extent, so our fuel exports went up. In 2009-10, we exported around 27 per cent of our total production. In 2010-11, around 32 per cent of production amounting was exported.
Will the export market be lucrative enough to absorb private sector sale of products when PSU refiners add capacity?
We sell over half our production to all the oil marketing companies. However, despite the coming up of Bhatinda and Bina refineries and expansion of Koyali, PSU refiners will continue to buy from us. PSU calls on private refineries will come down in the short term but it will be a temporary phenomenon. In the next three to four years, we will see the country becoming deficit in diesel.
After Stanlow, what are the kind of acquisitions Essar is looking at?
Our strategy is driven by two considerations: An acquisition should either help us secure our raw material needs, which in case of the oil and gas business is crude oil. Alternatively, the acquisition should give us access to new markets to sell our high-value products, like in the case of Stanlow. However, we have no acquisition plans in the refining space in the near future.
With RBI changing norms for payment of imports from Iran, is Essar facing problems in paying for Iranian crude?
Currently, there is no disruption in the supplies that we receive from Iran. We have a 90-day credit line from National Iranian Oil Company and have cleared payment for all past consignments. Some of the more recent consignments are not due for payment yet. We are hopeful that the payment crisis will be resolved well in time.
What is the outlook on coal bed methane? How much is Essar currently selling and to whom?
At Raniganj in West Bengal, our first CBM block under development, we are producing about 35,000 standard cubic metres a day (scmd) of gas, and we will reach a peak production of 3.5 million scmd in the next three years. As of now, we are doing test sales through cascades from the Raniganj block. Commercial sales are scheduled to begin in a few months, after some statutory approvals. We have contracts in place to sell our entire output over the next one year from the block.
Besides, we have signed contracts for the four CBM blocks we were awarded under the CBM-IV bid round. We are in the process of obtaining appropriate licences, including the Petroleum Exploration Licence.