Mr. U. Sundararajan, Chairman & Managing Director of Bharat Petroleum Corporation Ltd (BPCL) in an exclusive interview to Mr. R Venkataraman and Nirmal Jain of India Infoline talks about the future of Indian oil industry as it opens up to private sector and what that means for India's smartest oil company - BPCL.
Mr. U. Sundararajan, Chairman & Managing Director of Bharat Petroleum Corporation Ltd (BPCL)
What is your outlook on refining margins? We believe that this would come under pressure because of regional oversupply situation.
India imports about 20 million ton of products every year. The creation of additional refining capacity in India and in the region in general will also contribute to a surplus situation in Middle-East/ South-East Asia. Though this may depress the refiners margin in India, it is not likely to affect the Indian refiners as there will be some duty protection. With the proposed duty rationalization, the margins are, in fact, likely to go up.
But the government seems to be dragging feet on implementation of the Nirmal Singh Committee Report on tariffs.
No I don't think so.
What would marketing decontrol entail for the common man?
Marketing decontrol is meant to serve the cause of the consumer. Once the administered pricing mechanism is withdrawn, competition is bound to increase and the customer will get his rightful choice. Consequently, the offerings to the customer, both in terms of the product quality and customer service will improve to a great extent depending on the intensity of the competition.
Do you envisage entry of new players post decontrol?
I am sure new players, including multinationals, will enter the market. Entry of new players is vital to ensure full and fair competition.
What route do you think the private sector refineries and other new entrants would adopt to grab a piece of the marketing pie?
Different companies will adopt different strategies. Those who adopt innovative methods will definitely succeed. I think, initially, they would begin with bulk dispatches to organizations like defense and railways. Setting up retail outlets in rural, semi-urban areas and highways, where land is relatively inexpensive, could perhaps be the next step. Sharing of the distribution infrastructure could be resorted in order to reduce the cost of storage. Once the subsidy on LPG is withdrawn, or even reduced, there will be intense competition in LPG. Whatever it is, one thing is sure that the entry strategy could be one which we cannot even think of today.
From a customer's perspective, what in your opinion would become key differentials?
In a decontrolled scenario, brand image is critical. Customer service will be the key to success. We, at BPC, have learnt from our experience that whenever quality of product and service improve there is a pick up in sales volume. We have taken a number of steps to provide better value to our customers. Customer Advisory Councils have been set up in some territories to gain knowledge about the customer needs and obtain feedback. Customer service standards developed in-house are rigorously implemented. Training of driveway salesmen, who form an important link between BPC and the customer, is being undertaken very seriously. We are sure that we will build a strong brand and provide better value to the customer and thereby become a preferred supplier for them.
What would be the impact of deregulation on marketing margins?
Currently, under the Administered Pricing Mechanism our marketing margins are roughly Rs300 per ton or $1/barrel. These margins are based on "return on net worth". On deregulation, margins should improve significantly depending on the level of service provided to the customer. We believe different segments of market will offer different levels of margin.
What has been the global experience with marketing deregulation?
The experience has been varied depending on the socio-economic climate. In Thailand and Philippines, for example, margins increased, but their geography is different from ours. In France, on the other hand margins turned negative as hyper-markets took away market share because of lower costs, till the oil majors fought back. So it is difficult to generalize. I am very confident that marketing margins in India would improve from the current levels as the current pricing mechanism is based on historic asset costs, which is low and will not sustain new investments.
Are you not afraid of competition from multinationals?
In BPC, we are certainly not afraid of competition. In fact we view it as an opportunity. We are fully aware of the impact of the competition and have taken adequate measures to prepare ourselves to face the competition.
Two years ago, we began a major restructuring exercise, which is now being implemented. We have created five customer- based business units and one asset-based business unit. The organization is much flatter - the levels have been reduced considerably to improve response time. These business units are process-based so that staff can understand the needs of the customer and satisfy these needs in a most cost-effective manner. Above all, we have been successful in changing mental models. In business units, staff-function as a cohesive team. In the retail business unit, for example, there are 66 self-managed teams. They work together with a common purpose, which they themselves elect to pursue. They have been adequately empowered. To improve the effectiveness of the teams, Innovation Associates, USA, an Arthur D Little Company, has trained some of our staff to function as coaches and the results of their HR interventions have been phenomenal. I am confident that BPC is acquiring the new organizational capabilities to function effectively in a competitive environment and that the re-configured organization will surely add value to the customer as well as to the stakeholders.
There have been a number of rumors regarding the Essar Oil deal. Can you explain to our audience the rationale for the same? Why don?t you sign a product offtake agreement with Essar Oil or Reliance instead of taking a equity stake?
The Chairman of BP Amoco has recently made a statement in press saying that refining is a value destroyer and marketing is the key to future growth. He also said that BP Amoco would now depend on merchant refiners for product supplies, which is logical when we are talking of a regional product surplus situation. Do you think in such a scenario, the Essar Oil deal makes sense?
BPC is extremely short on refining capacity. During 1998-99 against our sales of 17.5 mn ton, our refinery production was only 8.57 mn ton. This puts us in an extremely vulnerable position. We need to have a long-term product security to serve our markets, especially in the North. With this background, we are looking at the Essar Refinery, the construction of which can be completed within a period of two years. The advantage is that within a short time, we can augment our refining capacity.
We are also looking at other options. Procuring products from other refiners is an option available to us. However, any company engaged in refining would, in the long term, like to market the product themselves so as to augment the returns on their investment. Therefore, the product procurement option can, at best, be a short/ medium term affair. Imports are yet another option, but product prices are highly volatile - a severe winter in Europe for example, can push up the prices of fuel oil. Moreover, imports depend upon the policy of the Government - whenever there is a foreign exchange crunch, Government may impose restrictions on imports. In such situations, BPC will be in a disadvantageous position.
As of now, no decision has been taken on Essar Oil. These investment decisions need approval not only from BPC's Board but also from the Government.
We are carefully examining all options. But whatever we do, will be in the best interest of all stake holders.
In a decontrol scenario, what would happen to pipelines and their ownership? Don?t you think that Indian Oil is better placed because of its dominant ownership of pipelines?
These are the issues to be addressed by the Regulatory Authority. I think that the policy that would emerge would be based on common carrier principle.
There has been confusion regarding petrol exports. Has the government finalized its policy on this issue and what would be the impact on BPCL?
We have not received any communication from the Government in this aspect.
BPCL processes Bombay High crude. Post decontrol, has there been any problem in sourcing Bombay High?
There are no problems in getting Bombay High crude. Incidentally, even though the BPC refinery is optimized for Bombay High crude, it has one of the most flexible configurations and can process a number of different crude. Our refinery has so far processed 47 different types of crude.