It has occupied the top spot on the Fortune India 500 for the past seven years. Through all the ups and downs in the economy, state-run Indian Oil Corporation (IOC) has remained the country’s biggest firm in terms of revenue, though not in terms of profit. This year it has climbed two notches to rank third on the Fortune India list of the 50 most profitable public sector companies.

Over the past three years India’s top refiner and retailer has stepped beyond to compete with players on the global stage. IOC chairman B. Ashok’s global push is hardly surprising. The $61 billion (Rs 3.8 lakh crore) company has been shopping overseas to bolster its crude supplies because oil demand is surging and crude prices have slumped. “Sustained low oil prices since 2014 opened a huge window of opportunity,” says Ashok. “We decided to bid more aggressively than ever before.”

So, when Russia’s biggest oil producer, Rosneft, was looking to sell stakes in its oilfields in 2014, IOC bid as part of a consortium with Oil India and Bharat PetroResources, a 100% subsidiary of Bharat Petroleum Corporation. It landed a $3.1 billion deal, the largest in India’s hydrocarbons history, giving the consortium a 29.9% stake in the Taas-Yuryakh oilfield for $1.1 billion and 23.9% in the Vankor oilfield for $2 billion.

With the Rosneft deal, IOC says its oil equity portfolio will rise by 1.6 million tonnes a year. Taas-Yuryakh produces 20,000 barrels per day and is expected to touch 100,000 barrels per day by 2021; Vankor produces 400,000 barrels daily. “We have adopted a consortium approach, which not only helps us in diversifying risks but also in leveraging our combined strengths,” says Ashok.

In 2014, IOC also tied up with Progress Energy Canada, Pacific NorthWest LNG of Canada, and Malaysian oil and gas company Petronas to acquire a 10% stake in Progress Energy’s British Columbia gas reserves and a proposed export-oriented LNG facility. It plans to spend $4 billion on this. The next year, it partnered Delonex Energy, an Africa-focussed oil and gas explorer, to win an oil block in Mozambique’s Palmeira basin. The other exploration and production fields abroad are in Libya, Nigeria, and Gabon.

The decision to acquire new supplies isn’t merely about India’s energy security or getting visibility abroad. It is also in line with IOC’s aim to reduce its dependence on imports and source at least 10% of its feedstock from its own fields. “By 2025, when IOC’s crude demand is expected to be 105 MMT [million metric tonnes], we expect to get 10.5 MMT from our own fields,” says Ashok. Today its refinery capacity is 80.7 MMT and it imports most of its crude.

In many ways, buying oil and gas equity abroad was the logical next step for the company. It was already an integrated player, with 11 refineries that have a combined refining capacity of 80.7 million tonnes, 12,000 km of pipelines, and a 5 million tonne liquefied natural gas (LNG) terminal coming up in Ennore, Tamil Nadu. Last year the company also commissioned a 15 MMT per annum refinery at Paradip, which will boost IOC’s profit by processing far heavier but cheap crude.

“The growth seen in India will soon happen in other parts of South Asia and Africa. We must not miss those opportunities” Sanjiv Singh, director, refineries, IOC.
“The growth seen in India will soon happen in other parts of South Asia and Africa. We must not miss those opportunities” Sanjiv Singh, director, refineries, IOC.

IOC’s overseas moves are already paying off. Its average daily production from global assets touched 53,820 barrels of oil equivalent per day (boepd) in 2015. Similarly, proven reserves of oil and oil equivalent also went up 61% in 2015—from 556 million metric barrels of oil equivalent to 895 mmboe. The benefits of IOC’s strategy are also reflected in its bottom line. Its gross profit leapt 89.5% to Rs 23,177 crore in 2015-16 from Rs 12,233 crore in the previous year, making it the most profitable among its oil marketing peers.

Business might be good, but IOC can’t afford to drop the ball. Being aggressive on deals and acquisitions is critical because prices of assets will start rising once oil prices recover. “As long as crude prices are low, the government will allow the companies to set prices. Once prices shoot up, the subsidy regime may kick in, hurting profitability,’’ says K. Ravichandran, senior vice president and group head, corporate ratings, ICRA.

IOC might only have begun buying global assets in the past few years, but it had been providing fuel and petrochemical products to countries like Nepal and Bhutan for the past 40 years and gained a foothold in countries such as Malaysia and Kuwait in the mid-’90s before spreading to other countries in the neighbourhood. Besides deals to bolster crude supply, IOC has set up subsidiaries and opened offices overseas to augment its operations. It has nine exploration and production facilities abroad and eight in India.

It has a huge presence in Sri Lanka, where Lanka IOC, a subsidiary of IOC, is ranked No. 1 among listed companies. It operates 189 petrol and diesel stations and runs Sri Lanka’s largest petroleum storage facility. In lubricants, IOC Lanka has an 18,000 tonne per annum blending plant in Trincomalee, a state-of-the-art testing laboratory, and a marketing network. It has leased the China Bay tank farm in Trincomalee, the only such facility between West Asia and Singapore. “With its vast experience in downstream operations, IOC is building a healthy and competitive industry for the island nation,” says Ashok.

Similarly, the product portfolio of Indian Oil (Mauritius), an IOC subsidiary, includes automotive, aviation, and marine fuels, and Servo lubricants. It runs 20 filling stations, a 24,000 metric tonne storage terminal in Mauritius’s capital Port Louis, and commands 42% of the aviation fuel business. It has also bought a 25% stake for $16 million in the new petroleum terminal at SSR International Airport near Port Louis.

In West Asia, IOC is a consultant for oil analysis and is engaged in blending and marketing lubricants in Oman, Yemen, Bahrain, and the United Arab Emirates. It is still to make its presence felt in Latin America.

IOC’s global operations, which earlier revolved around training and maintenance of their refineries, have expanded into another sphere: building oil and gas infrastructure like refineries and pipelines. “Not only have we become more aggressive in bidding [for oil and gas assets], but our offerings have changed too,” says Sanjiv Singh, director, refineries, IOC. The company believes that it has an edge in building refineries that can process all kinds of crude because of the range of technologies being used in its plants across India. It also enjoys the advantage of cheaper manpower.

IOC would also like to showcase its talents in pipelines and LPG. It wants to bid for the long-delayed but important Turkmenistan-Afghanistan-Pakistan-India pipeline and is in talks with Bangladesh Petroleum on a 6,900 km gas pipeline to link Bangladesh, Myanmar, and Northeast India.

IOC needs to move fast because low prices are not going to last forever and there is competition from its public sector peers, too. Bharat Petroleum, for example, has started its global foray by launching operations in Brazil, Mozambique, and Indonesia and buying shale gas acreages in Australia.

Analysts say IOC needs to be cautious about its global push. Most crude is available in politically unstable regions such as the Gulf countries, Nigeria, and Russia. There have been instances of exploration and production blocks being suddenly nationalised, like those in Iran or Saudi Arabia. Also, there are associated geo-technical risks. “IOC needs to remain mindful about the various risks such as geopolitical and partnership issues involved in doing business abroad,’’ says Deepak Mahurkar, partner and leader, oil and gas industry, PricewaterhouseCoopers, India. For example, Oil and Natural Gas Corporation (ONGC) acquired British company Imperial Energy in 2009, but the deal turned sour. It lost Rs 1,180 crore in the 15 months ended March 31, 2010, after Imperial produced at half the target rate. Then there is also the risk of partners failing to deliver on their promises. For example, Brazil’s Petrobras has held up work in fields which it holds jointly with IOC and ONGC.

But the experience from the new markets is good preparation to tide over tough times. When domestic demand slows, IOC will be well-placed to make the most of another cycle of opportunities. “The growth seen in India will soon happen in other parts of South Asia and Africa. We must not miss those opportunities,” says Singh.