There is a renewed interest in investments on fossil fuel after the Russia-Ukraine war, which has forced countries to revisit their energy security strategy, even as the global push on energy transition continues. Larsen & Toubro Ltd (L&T) is well placed to gain from both, Subramanian Sarma, whole-time director and senior executive vice president (Energy), told Moneycontrol in an interview.
Sarma said that the company will bid for hydrocarbon orders worth $20 billion in the current fiscal year and hopes to convert 15-20 percent of that into executable orders. He said L&T is bullish about green hydrogen, as a developer and contractor. But the government needs to incentivise manufacturers as well as consumers to build a robust ecosystem.
Last year, L&T consolidated its hydrocarbon, thermal power and green energy operations into an energy vertical, which is now headed by Sarma.
Edited excerpts:
What is the order pipeline in the hydrocarbon space looking like? Based on your conversation with clients, what is their mood right now in terms of capex planning?
We are active in two markets -- India and overseas. The overseas market includes the Middle East and Africa. In the domestic market, we have good prospects in the refinery sector.
There is a Chennai Petroleum Corporation Ltd (CPCL) project, which is likely to happen in Nagapattinam, and there is expansion coming up at Paradip for petrochemicals, and BPCL’s Bina refinery. There may be some other downstream chemicals projects from Reliance Industries Ltd and other private sector companies. There will also be projects for LNG regasification terminals and storage facilities. The domestic market was extremely busy in the last two years. It may be a little less than that now, but it will remain busy.
The Middle East is seeing huge capital expenditure. A lot of projects have been announced and we are quite busy bidding.
This year, we should be bidding for projects worth $20 billion (Rs 1,64,443 crore). Generally, our success rate could be anything between 15-25 percent.
(L&T’s Energy project segment had bagged orders worth Rs 30,750 crore in 2022-23).
Refinery projects have been facing challenges. India’s mega West Coast refinery has been delayed on environmental clearance and land acquisition. Minister of Petroleum and Natural Gas Hardeep Singh Puri has even said that, given the challenges in land acquisition, the country may look at setting up smaller refineries. Will this impact the order pipeline and average ticket size?
Refinery expansion will happen in India. There is no change in that as we are a growing economy. We will have more and more demand for refined products, as well as petrochemicals. I don't expect any change in terms of how much capacity we need to add.
Currently, the debate is how that will be added, whether it will be a mega refinery or we will add multiple smaller refineries. If you look at the talent and skill available, requirements of infrastructure and logistics, capability of handling mega projects, and the timeline required for those mega projects, I am of the view that more medium-sized refineries will be a better option than mega ones.
They may be smaller than mega projects, but even the medium-sized ones are still quite big. They were talking about 20 million tonnes or 60 million tonnes, but even 9 million-tonne capacity is still large enough. It still fits very well within our range of offering and remains of interest to us.
There have been delays in exploration bids and refinery projects in India. Should we be concerned about the pace of growth in the energy sector in India, especially in the context of the Russia-Ukraine war, which highlights the need for energy security?
No, I am not concerned about it as there has been a huge amount of activity in the refinery space in the last three years and it continues. Those projects still have to be finished. I think we have enough on the plate between domestic and international markets.
There are reports that funding to fossil fuels is slowing amidst concerns over climate change. Do you see this impacting international hydrocarbon projects and how are you insulating your business from this risk?
Globally, the trend of energy transition, in my view, has slowed down a bit, after the conflict in Europe. People are realising that there is a journey we have to go through for the transition; it cannot happen rapidly. Also, the cost of energy, if not affordable, should be at least reasonable. So maybe the energy transition ambitions and aspirations were a little bit far-fetched to start with; it is getting moderated.
Some of the very well-known international oil companies have also rolled back and said that they will continue to allocate capital for gas and oil, and not completely switch over to clean energy.
In the Middle Eastern market, there is still enough thrust in developing conventional oil and gas projects. In addition, they have also started the process of transitioning. So, they are looking at reducing carbon footprint, setting up carbon capture and blue ammonia and green ammonia. So now, we don’t just have an opportunity in conventional energy, but also in emerging energy transition projects. I am not concerned at this point in time. I believe that all sources of energy will coexist for at least the next five years.
The government is pushing the green hydrogen agenda and L&T is in a very sweet spot as you are both a developer and also an engineering, procurement and construction (EPC) player in this space. Many companies have announced plans for green hydrogen. What is happening on the ground? Are they committing investment and looking to place orders?
I can’t speak for others who have announced projects and how far they have moved. As for L&T, we want to walk the talk. There will be four legs on which we will build our green energy strategy. One will be manufacturing of electrolysers, for which we have signed a technology licensing agreement. We are already in the process of building the manufacturing unit at Hazira, where we already have a pilot plant.
We are building a new manufacturing facility for electrolysers with technology from France-based McPhy. Our plan is to go to a gigawatt scale in phases. Hopefully in 2024, we'll see the first set of electrolysers rolling out.
The second priority is energy storage. We are searching for a technology partner and hope to announce it in the near future. The third leg is our EPC business, for which we will continue to bid for various tenders that are coming out and work on our own projects, if we decide to develop them. This will be dependent on the market.
The fourth focus area is the development role, where we have a joint venture with IOCL (Indian Oil Corporation Ltd) and ReNew for the domestic market, while we are on our own in the export market. Both are progressing as per plan. We are talking to various customers to look at some offtake agreements and purchase agreements.
In addition, we are also working on setting up our own R&D (research and development) centre to look at how we can indigenise the supply chain and how we can substitute with alternative materials to bring down the cost for some of these value chain components. We have a good plan and we are working on that. We will start seeing results from 2024.
The Indian government has approved an initial outlay of around Rs 20,000 crore for green hydrogen incentives. Some energy sector players believe this may not be enough to lure investments into the sector, especially given that countries across the world are aggressively offering incentives. What more can be done to make it lucrative in India?
Every country will have its own priorities. In India, our priority is energy security. But with that, affordability of energy is important. I think there are two ways the government can help. One, give incentives for generation and the second is to give incentives for demand creation.
The government has already put in enabling policies now to incentivise production and generation, be it in solar, or be it manufacturing under the PLI (production-linked incentives) scheme.
The second leg, which they are articulating or deliberating, is how do we create that incentive framework for demand creation. I think we are moving in the right direction.
There are concerns about the demand side for green hydrogen. How can demand creation be helped?
The fundamental problem is that price parity hasn't been achieved. There is still a gap between alternative and conventional sources of energy. How much are we prepared to pay a premium on decarbonisation, and whether this is the only method is something to be looked at. There has been a big push in biofuel and blending; there can be alternative methods. So you have to do it in a calibrated way, because if you go too fast, somebody has to pay that extra price.
At the same time, with improving technology, prices will come down. So you have to balance these factors. That's what the government and the industry is doing. I think India will become a key player in the future.
Oil prices have seen high volatility due to the Russia-Ukraine war, which disrupted the market at a time we were witnessing post-COVID recovery. With that backdrop, what will be the biggest challenge for the current fiscal?
As far as L&T is concerned, I am not too concerned because we have a strong order book to start with. (L&T’s consolidated order book stood at Rs 3,99,526 crore, as on March 31, 2023.)
We have a strong order pipeline, too. So, that gives us a certain amount of stability and certainty. Oil prices are in the $65-$75 range. They will also remain stable in that range, which is good for both suppliers and consumers. Besides, there are opportunities in energy transition. I think the next 2-3 years will be reasonably stable. Our focus has been good execution and to make sure that customers remain satisfied, so that we can continue to gain increased market share.
Disclosure: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.
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