Fortune 500 India: Fuel mix — The metamorphosis of oil marketers

IMAGINE DRIVING TO THE nearest ‘petrol pump’, but not to tank up your vehicle. There are no takers for petrol or diesel since vehicles now run on electricity and other non-fossil fuels. So, instead, the ‘pump’ offers facili- ties such as rest rooms, dining, charging stations, restaurants, toy shops and convenience product stores. Companies, including Mukesh Ambani’s Reliance Industries, the country’s biggest private refiner and an early mover in most such cases, has already spotted the opportunity and is transforming itself. For RIL, data is the new oil.

But what about state-owned oil refining and marketing companies such as Indian Oil Corp. [IOC], Bharat Petroleum Corp. Ltd. [BPCL] and Hindustan Petroleum Corp. Ltd. [HPCL], set up to source and refine crude to meet India’s growing energy demands?

Legacy of the Past

From 1947 to June 2010, the Central government controlled and subsidised petroleum prices to protect consumers (diesel was de-regulated only in 2014). The OMCs were at the receiving end most of the time, their balance sheets in red each time international crude prices shot up. Expansion and modernisation depended on the government, and most of the refineries were operating at gross refining margins (GRM) of less than $4 per barrel. GRM — the amount a company earns from turning every barrel of crude oil into fuel — is the global benchmark for efficiency and profitability of a refiner. IOC was started in 1959, BPCL in 1952, and HPCL was incorporated in 1974. Some of their refineries (23 put together) are more than a century old.

It takes around seven-eight years to set up a new refinery. However, the economy is growing fast and so is the country’s energy need. Fuel demand is set to reach 400-450 MMTPA by 2040, from the current 249 MMTPA, acc ording to various estimates. In 2015, the government set a target to reduce India’s import dependence on crude to 67% by 2022 vis-a-vis the current 84-85%. Also, the world is moving towards a greener future, and private sector companies, including RIL and Adani, are betting big on renewables.

For OMCs, however, the immediate priority is to increase capacity. They are giving thumbs down to energy transition for at least two-three decades, and are instead transforming themselves into technology and research-based high-value petrochemical makers. IOC, BPCL and HPCL together are investing around ₹2 lakh crore [$27 billion] to increase their refining capacities [from 249 MMTPA to 298 MMTPA] and double their petrochemical capacities [to over six million tonnes by 2025].

Capacity Additions

IOC is increasing its capacity by 25 MMTPA to 106 MMTPA by 2023-24, says Chairman and Managing Director Shrikant Madhav Vaidya. “The refineries will have the latest technology with high energy and operational efficiency. These will be petrochemical-intensive and plans are to have at least 15% of crude converted into petrochemicals, where the margins are more,” he adds.

IOC currently has 11 refineries, and is increasing capacity by 26.5 MMTPA to 107 MMTPA by 2025-26. Capacity of its Koyali refinery in Gujarat will go up from 13.7 MMTPA to 18 MMTPA post-expansion, and capacity at Pa- nipat refinery in Haryana will increase to 25 MMTPA from 15 MMTPA. A new 9-MMTPA plant is being built at its subsidiary — Chennai Petroleum Corp. Ltd. At its five-year-old Paradip refinery, built at an investment of over ₹34,555 crore, a new ₹5,654-crore mono ethylene glycol (MEG) plant is coming up, which will make IOC a major producer of polyester fibres. A similar ₹5,251-crore petrochem plant is coming up at its Gujarat refinery, which will help reduce the country’s dependence on butyl acrylate — a key ingredient for polyester and plastics.

Expansions are also underway at its Guwahati and Barauni refineries. Old plants are also being refurbished for better efficiency and high-value petro- chemical products such as the styrene monomer project at Panipat and the lube integration project at Gujarat refineries. “All new refineries have higher complexities and can process heavier crudes to give a better yield for our products. Petrochemicals contribute 4% of revenues and 18% of profits,” says Vaidya. The refinery expansions, costing over $13 billion, or over ₹1lakh crore, are slated to be commissioned within the next four-five years.

BPCL has 35.30 MMTPA of refining capacity [14% of India’s total capacity and 23% of the domestic fuel market] across three plants in Mumbai, Kochi and Bina in Madhya Pradesh.

Though it recently sold its entire 61.5% stake in the 3-MMTPA Numaligarh refinery in Assam to a consortium of Oil India Ltd. and Engineers India Ltd., the company still has enough firepower. “We have 43-44 MMTPA of steady refining capacity and need not go for expansion in the next four-five years. BPCL is the only company among state-owned OMCs, which is slightly ahead of the curve in terms of refining capacity,” says CMD Arun Kumar Singh. The company recently implemented a propylene derivatives petrochemical project at its Kochi refinery to foray into specialty chemi- cals production, and a Motor Spirit Block project last year to make BS-VI grade MS production. It is setting up a Kerosene Hydrotreater at its Mumbai refinery, which will take off next year. Around ₹9,688 crore is being invested to make value-added niche petrochemicals with high- growth rate and demand like polyols, propylene glycol and MEG, utilising propylene and ethylene feed stock from its Kochi refinery.

The third major PSU oil refiner, HPCL, is increasing its crude oil refining capacity by 17.7 MMTPA, with about 4.1 MMTPA of petrochemical capacity by 2024. Its current refining capacity is around 27 MMTPA, including in joint ventures, which will increase to around 45 MMTPA by 2024, says Chairman and Managing Director Mukesh Kumar Surana.

The company is raising capacity from 7.5 MMTPA to 9.5 MMTPA at its Mumbai refinery, and from 8.3 MMTPA to 15 MMTPA in Visakhapatnam. A new greenfield refinery-cum-petrochemical complex at Pachpadra in Barmer district of Rajasthan will add another 9 MMTPA. The HPCL Rajasthan Refinery (HRRL) is a joint venture between HPCL and the gov- ernment of Rajasthan, with 74% equity participation by the former and 26% by the latter. “In Rajasthan, out of 9 MMTPA, around 2.4 MMTPA will be petrochemicals. Additionally, we have got 11.3-MMTPA capacity at Bathinda in a joint venture with Arcelor Mittal where we are putting up an additional petchem plant of 1.7-MMTPA capacity, which will be completed this year itself,” says Surana. The Mumbai refinery expansion project has been completed and units are now in the stabilisation phase. The Vizag refinery expansion project is in advance stages and the company plans to start commissioning units by the last quarter of FY22. Expansion at these two refineries costs around ₹31,000 crore, and HPCL has invested over ₹1 lakh crore to set up a modern refining and marketing infrastructure over the years, says Surana.

Towards a Gas Economy

The transition to 100% cleaner fuels and green energy will be through natural gas, according to the three CMDs. They are gearing up for a 25% share of natural gas in India’s energy mix by 2030, an ambitious target set by Prime Minister Narendra Modi. To achieve it, India will have to qua- druple the share of gas in its energy mix from the current 6%. Over half of the country’s gas requirements are imported as LNG, and OMCs are in the process of setting up the infrastructure for the same.

Petronet LNG Ltd. (PLL) — promoted by Indian Oil, Bharat Petroleum Natu- ral Gas Company, ONGC and GAIL — has contracts with Qatar’s RasGas for the supply of 7.5 MMTPA of LNG over a period of 25 years to its Dahej terminal, and with ExxonMobil Australia for the supply of around 1.44 MMTPA LNG over 20 years for its Kochi terminal. PLL has signed long-term sale purchase agreements with both.

BPCL has a 10% stake in a gas field being developed by partners, led by French petroleum major Total, which is expected to produce 12.9 MMT of LNG a year beginning 2024. Bharat Petro Resources (BPRL), a wholly- owned subsidiary of BPCL, has participating interest in 17 upstream exploration blocks — seven in India, six in Brazil and one each in Mozambique, Indonesia, Australia and East Timor — besides Russian assets.

IOC, along with a JV partner, has developed a 5-MMTPA LNG terminal at Kamarajar Port at Ennore in Tamil Naidu for ₹150 crore. “We are targeting to double its capacity and long-term plans are to run all IOC refineries on gas,” says Vaidya. The company is also adding to its pipeline networks [from 15,000 kilometres to 21,000 kilometres]. According to Vaidya, the company has 9 MMTPA of gas-handling capacity under development and is planning to augment its city gas distribution network (it already has 40 geographical areas).

HPCL, on the other hand, has 20 GAs in nine states for city gas distribu- tion, and is setting up 5 MMTPA of LNG capacity, further expandable to 10 MMTPA in future, at Chhara port in Gujarat. It is likely to be completed by 2022-end. The company is also expanding its pipeline network from 3,700 km to 5,500 km, says Surana. HPCL has 800 pumps to dispense natural gas, and plans are to increase it to 5,000. It is also looking at dispensing LNG directly as a transport fuel and is setting up 11 stations on an experimental basis.

Eye on Biofuels, EVs

IOC is setting up a 60-acre R&D centre in Faridabad for over ₹3,200 crore, to support research in alternative energy domains. Besides offering fuel efficient, value-added fuel variants like XP95, India’s first 100 octane petrol XP100, Xtra green (diesel), the company is also investing around ₹1,000 crore in 2G ethanol and compressed biogas (CBG) segments to strengthen the bio-energy portfolio. HPCL has nine labs and seven more under-construction to expand its100-acre Bangalore Green R&D centre, where 200 scientists are working and have already secured over100 patents in last five years.

IOC also intends to convert the grey hydrogen at its Gujarat refinery to blue hydrogen. In this regard, a joint feasibility study has been undertaken with ONGC for capturing about 1,500 tonnes per day of CO2, for enhanced oil recovery from ONGC oilfields in Gujarat. “We intend to run fuel-cell buses from the Gujarat refinery to the Statue of Unity in February 2022, which will be a big demonstration of using hydrogen in the transport sec- tor,” says Vaidya.

HPCL is setting up a 2G bio-refinery in Bathinda, which will convert agri-waste to ethanol, and a 370-tonnes-per-annum green hydrogen plant at its Vizag refinery. It already has a green hydrogen plant at its R&D centre in Bengaluru.

Electric vehicles [EVs] is another focus area. IOC, which has over 33,000 fuel and 439 EV-charging stations plus 30 battery-swapping stations, plans to set up 10,000 EV-charging stations across the country. BPCL is looking to set up 7,000 charging stations across the country over the next few years, while HPCL is eyeing charging facilities at around 5,000 retail outlets within the next three years. Its 322 outlets already have EV-charging facilities. However, all three believe the domestic EV industry is still in a nascent stage, and issues such as the cost factor, range anxiety, battery problems, etc., need to be addressed first.

Battery manufacturing is another area of interest. IOC is conducting research on aluminium batteries as the mineral is abundantly available in India, as a replacement for lithium batteries for the raw material has to be imported.

All three CMDs say the future will be a mix of the traditional business, in addition to gas, renewables and biofuel and speciality chemicals, as well as non-fuel businesses in the long term.