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Spotlight | November 2013

Exploring the unknown

Corporation is now seriously into upstream
The state-run refiner Bharat Petroleum Corporation Ltd (BPCL) is once again making news with its increasing reach in overseas operations. The company, which has already acquired assets in the Rovuma basin in Mozambique, in a joint venture with Videocon Industries, has participated in the recent oil discovery made in an ultra-deep water block off Brazil. BPCL and Videocon together hold about 40 per cent interest in the block.

Brazilian oil giant Petroleo Brasileiro SA (Petrobras), which is the operator of the block with 60 per cent interest, has confirmed the Farfan-1 oil discovery in the ultra-deep waters of the Segipe-Alagoas basin. According to analysts, the discovery has been estimated to hold one to three billion barrels of oil.

The Exploration and Production (E&P) assets of BPCL in Brazil as well as Mozambique have always been considered as a game changer for the company and hope it enjoys superior valuations as compared to peers such as HPCL and IOC.

The state-run refinery has also confirmed excellent productivity of good quality crude following a drilling test. This could be said to be one of the greatest achievements this year by an Indian company. BPCL expects that both of its offshore assets will start its supply in the next 2-3 years.

According to former Chairman and Managing Director RK Singh, BPCL´s $550 million investment in Brazil could start generating revenues by 2017, which can also be utilised for local projects. He also expects the investment of $350 million in Mozambique to generate revenues by 2018.

Petrobras has completed a test in well 3-BRSA-1178D-SES (3-SES-176D), informally known as Farfan 1, to test the production capacity of the accumulation in the BM-SEAL-11 concession area of Block SEAL-M-426.

Farfan-1 is located 104 km north of Aracaju, the capital of the north-eastern Brazilian state of Sergipe. It lies in a water depth of 2,476 m, about 5 km from the Farfan discovery well. Petrobras is the operator of the block with a 60 per cent interest, while IBV Brasil (a 50:50 joint venture between BPCL and Videocon) holds the remaining 40 per cent stake.

Up the ladder
BPCL has plans to invest around Rs 45,000-50,000 crore by 2017 for its capacity expansion and new projects.

S Varadarajan, new Chairman and Managing Director, says that of the overall capex of more than Rs 45,000 crore, the biggest share of around Rs 15,000 will be utilised for the capacity expansion of the Kochi Refinery to 15.5 mt from 9.5 mt. The company is also setting up an integrated refinery expansion project at Kochi with a proposed investment of about Rs 20,000 crore.

The project is scheduled to be completed by 2016. It is also investing about Rs 5,000 crore for the upgradation of Mumbai refinery. And the remaining will be invested in various projects including E&P. The company, through its subsidiary Bharat PetroResources Ltd, will make investments towards monetising the finds in Mozambique and Brazil in upstream assets.

According to an analyst in an international brokerage, BPCL´s upstream asset could be valued at around $2 billion. ´We have so far invested around Rs 4,500-5,000 crore in upstream business and will be investing another Rs 12,000 crore in the next two years,´ said D Rajkumar, MD & CEO of Bharat PetroResources.

LPG inroads
To consolidate its presence in the LPG business, BPCL has recently commissioned a state-of-the-art cryogenic LPG import terminal at Uran near Mumbai. Given that imports contribute significantly in meeting the requirements of bulk LPG, the terminal will go a long way in handling the growing volumes of LPG imports. Large investments are being planned in the gas sector, as the company looks at scaling up the business and having better access to the gas distribution infrastructure. According to company officials, the growth in the Indian industrial sector is bolstered by timely supplies from BPCL´s portfolio of industrial and commercial fuels. International bunkering has been initiated through the joint venture company, Matrix Bharat Pte Limited based in Singapore. One of its branded lube range-MAK lubricants has established a growing presence in Sri Lanka, Nepal, Africa and Bangladesh. The aviation sector has seen some volatile developments in recent times.

However, BPCL has taken proactive steps to consolidate the business and seek fresh avenues for growth and development. The company has recently signed a MoU with Kannur International Airport Limited to have an equity stake in the proposed new airport. Project ´Customer Understanding for Business Excellence´ (CUBE) was undertaken with a view to get to know our customers better and ensure that the requirements are met. Initial results have been encouraging and efforts are currently on to strengthen the relationship with customers across all the businesses.

Full marks
Analysts in general are gung ho about BPCL´s strategy. Credit Suisse and other foreign brokerage houses have upgraded BPCL to outperform after the recent accretion in oil reserves in its Brazilian fields and its presence in gas-rich Mozambique. Its E&P investments in Mozambique as well as Brazil are panning out quite well and have seen certain transactions done by even Indian companies in Mozambique where they have acquired stake at fairly large valuations.

According to Barclays Capital, lower under-recoveries, improved cash flows and reduce interest expenses for all oil marketing companies such as IOCL, BPCL and HPCL, will provide them better outlook. However, with under-recoveries still annualising at Rs 1 (FY13E = Rs 1.62tn), clarity on the subsidy sharing framework is key to earnings visibility. This is unlikely in the near term. ôWhile BPCL should benefit from policy tailwinds like its peers, it has also outperformed them on downstream performance for the past decade,´ said Somshankar Sinha, a Senior Research Analyst with Barclays Capital.

ONGC attributing almost 2.6 billion valuation for Anadarko´s 10 per cent stake, wherein BPCL also holds a 10 percent stake. So if one calculates, it can clearly get Rs 160-180 per share value for Mozambique assets into BPCL valuations, added Sinha.

Ongoing projects thriving to be self sufficient integrated source of fuel supply

  • Integrated Refinery Expansion Project (IREP) at Kochi  Increasing refining capacity from 9.5 mmtpa to 15.5 mmtpa along with modernization of existing facilities to produce future quality fuels
  • Mumbai Refinery Catalytic Cracking Reformate (CCR) unit & Replacement of CDU I & II
  • Investments in Gas pipelines GIGL & GITL pipelines in Joint Venture
  • Retail: Network expansion with infrastructure growth and upgradation
  • Expansion of marketing infrastructure across all business areas

Significant Expansion in Downstream & Marketing network to drive future growth
Upcoming projects
  • Kochi - Foray into Niche Petrochemicals
  • Funding for upstream developments and new assets
  • Mumbai Refinery  Upgrade/de-bottlenecking
  • Bina Refinery Creeping Expansion
  • Investments in Gas
  • Kota  Jubner pipeline  Augmentation of existing product pipeline
  • Expansion of marketing infrastructure across all business areas
  • Investment of Rs. 40,000 crore on Upcoming and Ongoing project over the period of next 5 years

More expansions in Upstream, Downstream business & Marketing network
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