'The era of cheap oil is over'

Q&A: M S Ramachandran

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Coping with rising crude prices may be the biggest challenge that India's public-sector oil companies face today, but de-regulation raises longer-term issues that require strategic thinking. M S Ramachandran, chairman of Indian Oil Corporation (IOC), the biggest of the government-owned oil companies, talks to Business Standard about the corporation's strategy for exploration and consolidation. Excerpts:

How will oil prices affect your performance during the year?

Oil prices are now stabilising. But they have affected us because we have not been able to increase the selling prices in line with the increase in the international prices. So we have suffered certain under-recoveries, especially in case of kerosene and LPG and, to an extent, on petrol and diesel.

Also, cost of purchases have gone up. So my borrowings, which were at Rs 10,000 crore at the end of June, will become Rs 15,000 crore by the end of September. My profitability is taking a hit because I am not allowed to increase prices now.

What was your expectation on the average crude price at the beginning of the year when you did your calculations?

It was less than $ 30 a barrel. I don't remember the exact number because it has lost its relevance.

How much is the under-recovery at the moment?

On LPG it is over Rs 100 a cylinder and on kerosene over Rs 7 a litre.

When do you see oil prices stabilising?

If I knew the answer to this I would not be chairman of IndianOil. I would be some sheikh sitting somewhere. It is believed that oil prices will come down in the run-up to the US elections. Prices will depend on the severity of winter in the US and Europe.

But the era of cheap oil is over and I don't think that you can get prices below $ 35 a barrel. I believe that the Indian basket is in the region of $ 35 to $ 40 per barrel.

What is your strategy to take on private players like Reliance, Essar and Shell, given that IOC has a good reputation?

We have the best country-wide network among the oil companies and we are well organised. We have one of the finest R&D centres east of the Suez. But we are not resting on our laurels. We have set in motion certain strategic interventions, which are working quite well.

Two years ago we hired a consultant to get a third-party view and based on that and our internal thinking we have implemented a series of measures in terms of organisational restructuring, strategic initiatives in marketing, integration and diversification, which will put us in an extremely competitive position.

Are more initiatives planned?

We have an optimisation group in the corporate office. We have a system by which we decide which refinery will process what type of crude and how much it will process and distribute to which market so as to optimise and reduce the cost of distribution.

This is working well. We also created virtual strategic business units for our retail organisation and direct and institutional sales and can feel the benefits. We have set up a branding organisation and are repainting the retail outlets as part of the visual identity programme.

What is the growth strategy from here?

Refining is already saturated and there is a surplus in the foreseeable future. In terms of downstream, there is potential for petrochemicals for forward integration. Gas is another growth area. We plan to invest around Rs 25,000 crore in petrochemicals. We have projects in Panipat and Baroda. We are looking at Iran, but nothing is firm as yet.

The government wants a policy to check diversification...

I am not aware of any such proposal. So far nothing has been communicated to us. But there is a lot of wisdom if it results in non-competition between public-sector companies, especially in the downstream markets.

Nowhere in the world do you have more than one government company marketing the same products and competing with each other. But here we have IOC, IBP, Bharat and Hindustan Petroleum. IOC and IBP will merge but there will still be three companies.

There is no need to have so many companies especially when you have the private sector. I think it's a waste of scarce resources to have three companies and then MRPL will also come in.

So what is the solution?

The solution is restructuring the companies. Earlier, the government had planned to disinvest in HPCL and BPCL because it thought there was no point in having so many companies. Post-sale they would have become private companies and the government could have got its money.

But since then there has been a change of thinking. But if they are going to remain government companies, then you should have either one mega-company or two mega-companies, whose merits can be discussed. If there are two companies, then we could follow the Chinese model and there should be a geographic demarcation.

What do you think of the proposal to merge IOC, OIL and BPCL?

It makes sense but there has to be some reallocation of assets. The government gave some assets to OIL and to ONGC to manage. If you are restructuring, you need to have a geographical division. If you don't have a geographical division, then there will be two companies fighting each other.

Geographical restructuring would mean that you get north because you have a dominant presence in the area.

IOC is present in the whole of the north and east and BHPC and HPCL are present in Mumbai and Vizag. IOC only has the Chennai refinery. So some restructuring will be required.

What about your international forays?

We are looking at many other markets in Asia-Pacific. The board has allowed us to open an office in Indonesia but the market has not opened up, nor has Bangladesh. As and when they open up we will be interested. In Africa, we are looking at areas where we can profitably start marketing.

You are looking at some refinery modernisation programmes in countries such as Nigeria. So do you intend to enter marketing as well?

That's in Edo state. We are also looking at modernisation programmes in Iran and Libya. We are starting with a memorandum of understanding in Nigeria and hope that it opens up more opportunities.

Your Sri Lanka IPO has been delayed...

There is only a question over the timing. But we are coming with an IPO. There are a few formalities that we are going through. We are looking at completing the process by the end of the year.

What are your plans for exploration?

We are looking at E&P (exploration and processing) as a field of activity. We are already there with minority stake in about 12 NELP (New Exploration Licensing Policy) projects. We are also looking at one Indonesian company, Medco and have got some offers from France.

E&P is another aspect where the government has a different view...

So far, the government has not communicated anything to us.

But there are reservations about IOC entering such deal without the requisite expertise. Since you are a navaratna company, they can't order; they can only say what they would prefer...

First, the government need not prefer, it can certainly order. It is the majority owner with an 82 per cent stake and even in the board management the government director's view has to prevail.

How does it fit into your scheme of things?

We want to be an integrated company. It is another matter that upstream is a tough game due to stiff competition. Most of the profits of the mega majors are coming from legacy acquisitions made quite some time ago. Now nobody is living on equity oil, most of them are service contracts.

But, in a governmental system, you can't have more than one company going and bidding abroad; you have to present one face of India outside the country. The government is justified in saying that it should be either ONGC Videsh Ltd (OVL) or somebody else.

But we can have a division. OVL can be asked to participate in some areas and an IOC-led consortium can look at some other areas to avoid conflict.

What is your exploration budget?

We don't have a fixed budget. We are looking at proposals on a case-by-case basis. It's not our core area.