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View from the top: Looking through the lenses of Indian oil CEOs



Clean fuels, petrochemicals figure in HPCL's growth roadmap

By Sambit Mohanty


India's state-run Hindustan Petroleum Corp. Ltd. is embarking on a major expansion drive that would include refinery expansions, strengthening its distribution and pipeline network, as well as sharply expanding its presence in petrochemicals, chairman and managing director Mukesh Kumar Surana said.


Mukesh Kumar Surana

The company is also planning to sharply boost its exports of lubricants to the Middle Eastern and African markets, as well as to selectively look at acquiring upstream assets as part of its strategy to expand its presence beyond the country's borders, he added.


"We have finalized a very robust capital expenditure plan," Surana told S&P Global Platts in an interview. "The plan not only involves refinery expansions, but also expanding our pipeline and marketing network, as well as LPG plants and terminal depots."


With India's oil demand growth expected to remain robust, Surana said that HPCL was gearing up to meet the challenge, not only to supply the incremental volumes, but also to produce cleaner fuels in order to meet the government's target to implement the Euro-6 fuel mandate across the country by 2020.


"India is a bright spot for oil and gas demand, compared with other parts of the world, and therefore, we have to be ready for that," he added.



INVESTMENT PLANS

Surana said that HPCL has set aside Rupees 610 billion ($9.5 billion) for capital expenditure for the next five years.


India Jan-Aug oil products demandWhile HPCL is pursuing expansion of its Visakhapatnam refinery from 8.3 million mt/year to 15 million mt/year at a cost of Rupees 200 billion, it is also aiming to expand its Mumbai refinery's capacity from 7.5 million mt/year to 9.5 million mt/year, at a cost of Rupees 42 billion.


"Both expansions are targeted to be completed by about 2020. That is the time when Euro-6 fuels are supposed to be produced," Surana said. "The expansions will also help to increase our distillate yields and help to improve our gross refining margins," he said.


In addition, HPCL has recently signed an agreement with the provincial government in the state of Rajasthan to set up a refinery in Barmer, which will have a capacity of 9 million mt/year. It is expected to cost $6.5 billion, and both the Rajasthan government and HPCL will hold stakes in it.


"This project will also have a petrochemical complex and is expected to be ready by 2022," he added. "In addition, we will be adding about 1,000 km of products pipeline across the country to our existing pipeline network. That will happen in the next three to four years."


Surana said that the Rupees 610 billion capex plan does not include two other major projects that HPCL is actively pursuing -- a mega refinery on the country's western coast, as well as a petrochemicals complex in Kakinada.


"The Kakinada petrochemical complex is supposed to be a mixed feed cracker and will use both ethane and naphtha as fuel and will have a 1.3 million mt/year ethylene capacity. We are trying to explore the possibility of setting it up in joint venture with Gas Authority of India Ltd.," Surana said.


"As far as the west coast refinery is concerned, preliminary work is going on around getting the land ready for the refinery," he added.


The west coast refinery will have a capacity of 60 million mt/year and is being set up as a joint venture with other state-run oil companies -- Indian Oil Corp. Ltd. and Bharat Petroleum Corp. Ltd.



ROBUST GROWTH OUTLOOK

Surana said the availability of US crude has helped to open up another strong supply source for India, helping the country's crude buyers to diversify their purchases. State-run firms IOC and BPCL have already sealed deals for US crude this year.


"We are also looking to buy some US cargoes but it will mainly be spot purchases. It's too early to decide on whether long-term purchases of crude oil from the US will take place," he added.


Commenting on the outlook for oil products demand in India, Surana said that LPG and jet fuel would be the front-runners over the next few years, as far as the growth outlook was concerned.


"There is a special thrust on pushing LPG as a clean fuel for women in rural areas and people living below the poverty line. We will surely see double-digit growth in LPG demand over the next two-three years. After that, demand growth will moderate once the target for the new connections are achieved," Surana said.


"In addition, demand for aviation turbine fuel is receiving a boost because of the efforts of the government to provide air connectivity to second-tier cities.


In addition, rising disposable incomes and low-cost air travel are also helping to boost demand for ATF," he added.


Surana said he expected the overall oil products demand to grow at a rate of over 5% in the next 10 years. "Demand for some oil products would grow at a much faster pace than others. But that's just the average."



GST AND DEMONETIZATION

India in July embraced a unified tax structure across a wide range of goods and services -- called the Goods and Services Tax -- while it kept crude, natural gas and some oil products out of its purview. Government officials have said that New Delhi would look into the possibility of bringing the energy commodities under GST at a later date.


But oil companies -- both state-run and private -- have highlighted that the move to keep the five products out of the GST list could affect investments in infrastructure, as their input costs would rise because of the GST but they won't be able to pass on the tax burden to consumers.


"The issue has been flagged to the government. Unless we bring the oil products under GST, it would be difficult to claim input credit," Surana said.


He said that GST, as well as the demonetization move, have affected India's oil demand to some extent, but added that the demand drop was largely temporary.


"Whenever reforms of this scale are undertaken, there are some teething troubles and we meet a steep learning curve. But once we are past that initial period, these reforms will ultimately be good for the economy and in turn will help oil demand in the longer run," Surana added.


S&P Global Platts India CEO Series: Mukesh Kumar Surana, HPCL | Sudhir Mathur, Cairn | Sashi Mukundan, BP | Dinesh K. Sarraf, ONGC | B. Anand, Essar Oil | Sanjiv Singh, IOC


Interviews in this series were conducted and first published by S&P Global Platts in September 2017, except for the IOC interview which was conducted and published in November 2017.







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