Need stability in crude price before moving on petrol: BPCL

In their last fortnightly meeting, oil marketing companies withheld any changes in the price of petrol despite crude prices remaining below USD 100 per barrel for most of June. In an interview to CNBC-TV18, chairman and managing director of BPCL RK Singh explains that they are looking for a sustained stability in crude prices before moving on petrol.

“Just a reduction of crude price, petrol price or exchange rate for a day or two doesn’t make any sense because we can't rush through the decision based on such information,” he said. He goes on to say that if the pattern does call for revision, the benefits will be passed on to the consumers. As of now, Singh says that BPCL is not losing money on the sale of petrol and that the company’s refining margins have improved. With regards to the reports of OMCs paying VAT or octroi on net realisations instead of gross realisations, Singh says he has not been informed of any such changes. Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying videos. Q: We understand that oil marketing companies such as yours will now be paying VAT or octroi on the net realizations not on the gross realizations which you were doing earlier. Could you confirm whether this has become the rule and how much this might benefit you? A: Frankly speaking I have no clue about this. I heard about this from the media itself. But as far as we are concerned we have received no such indications, no such instructions, so I am afraid I can’t talk about it. Q: Assuming it was to come, what would it mean in terms of an improvement in margins for you? A: I don’t think I am in a position to quantify the benefits to the consumer oil companies because this is news to me. You are the second person telling me about it. Q: Just wanted to focus on petrol prices, at the moment are you making a loss at the current prices of petrol? A: We are not losing at the current price the petrol; that was the case earlier on. Q: I understand that you had decided not to move on petrol prices in your last fortnightly meeting. Any reason why OMCs chose not to cut prices then and whether there is any room going forward to do so? A: We have to wait and watch the price movement over a period, it has to sustain itself. Just a reduction of crude price or petrol price or exchange rate for a day or two doesn’t make any sense because we can't rush through the decision based on such information. As you know, petrol prices and crude prices have a very high degree of volatility in the market. There are three factors which influence the price revision, upward or downward. One is crude price, the second is price of petrol itself in the international market, because that is the price we pay to the refiners, and third is the rupee-dollar exchange rate. Now all these three components are highly volatile. So we have to wait and see how they move because whatever decision we take has to sustain. We can't change the decision every now and then, so we are watching and we’ll take a view very soon as far as petrol price is concerned. Q: Considering that all through June crude prices has remained lower, is there a chance that at the next fortnightly meeting a downward revision in petrol is possible? A: It could be upward as well because we don’t know how the prices will move. So I can’t say upward or downward. Q: But crude has remained under USD 100 per barrel for practically all of June? A: At times it has moved up to USD 102-103 I remember. So one has to wait and see the pattern of movement and if it does call for revision we would certainly be very glad to pass on the benefits to the consumers. But we can’t rush through such decision in a highly volatile situation, therefore we have to wait and see. _PAGEBREAK_ Q: Shifting focus from petrol to diesel, can you tell us what your current under recoveries on diesel would be and therefore what will be your expected loss from the current price on a possibly full year basis? A: The current Indian crude basket is close to USD 95 plus, and at this crude price and the exchange rate of 56 the under recovery at the end of the fortnight on June 16 works out to Rs 10.20 per litre on diesel. On kerosene and LPG the under recoveries have reduced by Rs 2.5 per litre. With this kind of under recovery, BPCL will be losing something like Rs 90 crore a day on these three sensitive products. On a monthly basis it will be about Rs 2700 crore, so this is the kind of loss that BPCL alone will be incurring if this current trend continues. If crude prices come down drastically, the situation may change, bit it may go upward if the crude prices go up. As I told you, the crude price and the rupee-dollar exchange these are the two main components that will determine the losses as far as oil companies are concerned. Q: The rupee depreciation has cut your gains, but from April to today there hasn’t been a dramatic depreciation in the rupee. On other hand, crude has managed to stay below USD 100 per bbl for possibly all of June at least. Hence wouldn’t your losses be lower in June? A: Yes, it has fallen. It used to be Rs 13.64 paise in April and May and the it came down to Rs 12. Now it has come down further to Rs 10.20 paise Q: How are refining margins panning out? A: Refining margins have improved. Refinery grade price is determined based on international price and the rupee depreciation has helped the refinery in the sense that they get higher price for the product that they produce. But at the same time, the cost of crude also goes up, so whatever gain they have by way of rupee depreciation is being eaten away by the cost of the crude that they have to pay. So all in all there is some gain and not much of deterioration as far as refinery margins are concerned. But another thing affects the refinery margin, which is if crude is falling there could be inventory loss. We normally maintain a stock for about 10-12 days or 15 days in refinery. If you have purchased crude at USD 100 and it has come down to USD 95 per bbl, there is an inventory loss. So there have been fluctuations, but not much of problem as far as refinery margins are concerned. Q: Is there any move on the part of the ministry to ensure that you buy your dollars directly from RBI. There was some talk, but has it fructified? Are you at the moment buying from the RBI? A: I remember this was done once in 2008 or 2009. This does help the matter because when we buy dollars from the market there will be trading and there will be all kinds of premium and wider range of fluctuations. I agree with you, but there is no such move to my knowledge at least. But if it does happen, it will help. _PAGEBREAK_ Q: There is lot of pressure from rating agencies such as Fitch and S&P to cut the fiscal deficit and the subsidy burden. In light of that, has the government consulted you with regards to reducing the under recoveries and any measures that you would undertake for the same? A: Not really, but my personal view is that these kind of under recoveries we are incurring is not sustainable. Government will have to take a call, but at the same time they will have to take into account the inflation scenario. % of the total petroleum sales is in account of diesel, so the government will really have to do some kind of a balancing act and not pass on the entire burden on the consumers and at the same time reduce the subsidy to make sure that prices do now not go abnormally high leading to inflation. So in my view they will have to do combination of things. There could be little price increase, duty cut, VAT cut and state governments will have to cooperate. So it has to be a combination of many factors. I don’t think the only solution is to raise the price and burden the consumers because that kind of situation will create chaos in the market. As you know the usage of diesel unfortunately in this country is highest today. It is being used by various segments of the society so much so that the furnace oil, which is supposed to be the cheapest fuel today, is costlier than diesel. And about 1.5 million tonne of diesel goes to replace furnace oil, which is a sheer waste of energy resource. So because diesel gives high calorific value, diesel is cheaper, it is the cleaner fuel, people tend to use diesel in those applications where furnace oil could easily be used. So this price distortion needs to be corrected. What can be done is a partial de-regulation or a combination of many things, that is something government will have to decide. I cannot comment on it and we are not being consulted at the moment. Q: Have you been able to quantify what exactly the discoveries in the Mozambique block will mean to your company in terms of net present value? A: The discovery announced so far on the conservative side is about 60 tcf, that is the announcement operator has done. We have all analysed this properly, we are party to such analysis, so I can say that most conservative figure is close to 60 tcf. Some more is yet to be drilled so it is kind of a gold mine, it is real world class discovery and we are all very bullish about it. Now as far as the valuation is concerned, I don’t think we have done any valuations but one of the British companies, Cove Energy, which holds 8.5% stake in this block, are talking about something in excess of USD 2 billion for 8.5%. That was the quote when the announcement was 50 tcf, but now it has further gone up to 60 tcf. So it is anybody’s guess, but I am quite sure that this is a world class discovery and this is something which will change the complexion of BPCL in next 4-5 years. The gas is going to be monetized, it is going to be available and it is going to flow by 2018. So we are all very bullish about it and we are going to stay on and we are going to do marketing because we are a gas marketing company. Gas is going to replace liquid fuel, we want to be a big player in gas marketing therefore we have no intention of selling it. We are not a venture capitalist who will sell in and get the money, we are going to stay on and be a part of the consortium, be party to the entire process of monetization and hopefully will bring gas to our own country. Q: How much more money will you have to possibly commit to the Mozambique block? A: Our share alone will be close to about USD 2 billion. The total investment that is required for development as well as the downstream facilities will be to the tune of USD 20 billion and our 10% will be USD 2 billion. But we are not worried about it because there are banks coming forward to lend money for the developmental activities. Infact, there is some kind of competition going on based on the reserve that has been discovered and announced, so there are banks coming forward to lend money for the developmental activities. So we are not worried in terms of mobilization of resource.