Spiraling crude oil prices may continue to rise after Russia’s attack on Ukraine, but factors like the Organization of Petroleum Exporting Countries potentially increasing output or a resolution of the US-Iran nuclear pact would also be crucial for the energy market, said Mukesh Kumar Surana, chairman and managing director of Hindustan Petroleum Corporation Ltd (HPCL).
In an exclusive interview with Moneycontrol’s Rachita Prasad, Surana spoke about why oil marketing companies have not increased prices of petrol and diesel despite the steep rise in crude oil. Surana said prices will have to be aligned with global commodity prices if crude oil continues to rise. He also shared insights into state-owned HPCL’s expansion and diversification into clean energy. Edited excerpts:
The threat of Russia’s invasion of Ukraine had already led to crude oil prices rising. Now it’s a reality. What impact could this have on the price of crude?
The price was so far moving on the basis of news, not based on fundamentals. If we look at the fundamentals, supply is not picking up at the same pace as demand. Plus, OPEC has not been able to produce what they are authorised to do. There is a shortage of 900,000 barrels per day compared to what they should be producing. A third fundamental factor is that there is a very little cushion between the supply-demand and the market inventories. So any shock, which otherwise could be absorbed by the inventories, now gets immediately reflected.
On the news side, even a single day’s news immediately starts reflecting in prices. Speculators will play the news; they will take it up further. So what is happening today is there are fundamental issues aggravated by the specific disturbance and the result is magnified by speculators. Therefore, we are seeing prices going up.
There is one possibility – that all this can bring the Iran-US settlement to close quickly. Another thing to watch out for is whether Russia and Ukraine come to the negotiating table and the war situation subsides. In today’s environment, nobody can afford the long-term costs of war. So, the question is now how much time it will take for the tension to subside. Speculation activity built up prices in anticipation, but now what had to happen has happened. That’s why while crude prices are going up, intraday it also came down. For at least two or three days, we should see prices going up.
Has the market built up enough premium on the war concerns? Or would there be a significant upside?
We need to see the tertiary effect of it; what kind of impact will sanctions on Russia have on the energy supply. There is already a tight situation. If there is a further reduction in supply, it can push up the price. Russia’s capacity is around 11 million barrels a day, but we need to see how much they are exporting, which could get impacted. As far as India is concerned, we hardly get any Russian oil and gas, but the global shortage can create fragility in the system.
The finance minister and the oil minister have said the decision to leave petrol and diesel prices unchanged despite the steep rise in crude oil has nothing to do with ongoing state elections. They said it is the domain of oil marketing companies (OMCs). Why haven’t the OMCs increased prices?
You are actually paying less than what you could have. India is a price-sensitive market. Today, the crude oil market is extremely volatile. It may go up $7 a barrel and then come down by $3. So, OMCs can take a longer view of the prices and align it to the international market over time but insulate it against day-to-day price volatility because that creates problems. If prices continue to be higher for a long time, then we will have no choice but to align them to the international market. So it may not be aligned on a day-to-day basis, but the price is based on a 15-day rolling price, so that will capture the prices.
Is there a price band for crude oil that you are monitoring, based on which you will decide when to increase prices?
We don’t look at a price range. No matter what the price is, we have to align it to the international market and pass on the rise in price to consumers. Over a period, we will have consistent margins. But the base sizes may keep changing, depending on what the international product prices are. To be aligned to the international market is one part of it. The other part is whether the consumer has to pay a higher price or not because there is also an element of tax.
Tax on petrol and diesel, like you rightly said, is a significant part of the price the consumers pay. Do you think the government will give some relief to consumers by cutting that?
I can’t comment on their thinking – they will have their own thinking on this issue, depending on the total resource and utilisation management. But definitely, taxation is one of the tools which the government has got to ensure that prices can be kept under check while making sure prices are aligned to international prices.
This year has been volatile for the energy market. Now, as we near the end of 2021-22, how are the refining margins looking for HPCL?
The product mix has been good. Petrol and diesel prices were good in the last quarter. So, the gross refining margin is definitely better than the earlier quarters. We started the year with GRMs of around $2, it was almost $6 or $7 in the last quarter. Now the only thing is if crude prices go up very quickly and product prices do not go at the same pace, the GRM will be under pressure. I expect by the end of the year, the average GRM would be better than what we started within the year.
What about the marketing margin?
I won’t comment on that – we normally do not comment on it.
As an outsider looking at the developments, it seems to me that it must be under pressure. Is it sustainable?
In today's volatile market, we should not be talking about it.
How have the capital expenditure plans panned out for HPCL?
In the last three-four years, we did a massive capex on the expansion of the refining capacity and in making inroads into the new product portfolio of petrochemicals, LNG, etc. Incidentally, we did the capex when borrowing rates were benign and we are completing the projects when GRMs are good. All the projects which we undertook are either completed, at an advanced stage or will be getting completed in a few years.
Our Mumbai refinery expansion is already completed, Vizag refinery expansion is in the advanced stage and will be completed next quarter, and our HMEL (HPCL-Mittal Energy Ltd) petrochemical plant will be commissioned this quarter. The Rajasthan refinery will be getting completed by 2024. The Chhara LNG (liquified natural gas) terminal will be completed in 2023. The cross-country pipelines will be completed in 2022-23. Our major projects will get over, which will give leverage in terms of petrochemical, LNG and biofuels.
We have worked to strengthen retail and marketing infrastructure. We are much stronger in our traditional business– refinery and marketing– we had a capacity constraint between our marketing and supply, which is getting breached. We have some weaknesses in the product portfolio but that is getting strengthened by petrochemical and LNG, which are all in a sweet spot now. Our foray into non-fuel retail is working well. We are very keenly looking into the opportunities in green hydrogen and renewable energy. We have announced setting up 5,000 electric vehicle charging stations, of which we have already done 750.
What are the plans in the green hydrogen space?
We’ve already placed the order – or rather, we’re the only company to have placed the order – for a 380 tonne per annum capacity green hydrogen plant for Vizag. And that should be getting completed by this December. This is the electrolyser-based green hydrogen generation unit. Our refinery uses hydrogen produced by naphtha cracking right now, which is grey hydrogen. We are replacing a small part of it with green. We want to develop the understanding of operating these in a refinery set up so that we can increase the capacities.
Environmental, social and governance (ESG) investment is gathering momentum. Are there any concerns over the financing of energy transition?
ESG components will become important without any doubt, but a one-sided narrative will be detrimental and will lead to chaos. There should be a calibrated approach to energy transition and ESG. I don’t think transition funding would be a challenge. The industry has got the resilience to do it. But if we do it in a disruptive manner, then that becomes a problem.
