Challenges posed to oil companies

The year 2006-2007 continued to be a challenging year for the downstream oil marketing companies in the country. During the period when the international prices had shown signs of easing, the Government of India had approved the reduction of the retail selling prices of petrol and diesel on two separate occasions. The rising crude oil prices, coupled with the inability to pass on the burden of the same to the final consumer are severely restricting the ability of the oil marketing companies to generate sufficient resources from the their operations. The sale of petroleum products at prices below the cost has exerted pressure on operating cash flows. Given the strategic nature of the oil industry and the fact that the continuing growth of the company is greatly dependent on the energy supplied by oil companies, there is a need to address the problem at the earliest.

The Indian economy is passing through an exciting phase with GDP growth being sustained at 9% levels. At the same time, the challenges are enormous. High levels of crude oil prices in the international markets and inability of the oil companies to pass on the burden of rising prices remain key risks for the oil sector. With India getting integrated with the global economy, developments around the world are bound to have an impact on the country. There is an increasing focus on areas like climate change and global warming, which has led to growing pressure on businesses to take responsibility for controlling carbon dioxide emissions. Given the high prices of crude oil, greater attention is being paid to non-conventional sources of energy.

The world oil scene:

The rising oil prices in the international markets continue to remain a cause for concern. Although there were signs during the year gone by, that the prices may ease, it was not long before they resumed their upward movement. In the recent past, prices have firmed up further and have touched levels of around USD 79 per barrel. For a country like India, which imports over 75% of its crude requirements, the implications are quite serious. The rising rupee has, to some extent, mitigated the impact of the high crude oil prices.

Geopolitical factors have been a major reason for the continuing volatility in the international markets. Adverse weather conditions like storms and hurricanes have also contributed to the situation. All signs seem to indicate that the era being made in the upstream sector. With increasing levels of activity in this area, exploration costs have gone up significantly. Greater attention is being paid to alternatives to the traditional fossil fuels.

Implications for the Indian energy sector:

With the Indian economy on a strong growth trajectory, the Indian energy sector has the challenge of ensuring that the growth of the economy is not hampered on account of supply constraints. As the economy matures, the usage of energy will increase, thereby leading to greater demand for energy. With oil and gas having a major share in the country’s energy basket, oil companies need to upgrade their facilities. This will call for significant amount of investments in the areas of exploration and production and augmenting refining, storage and distribution infrastructure. If these investments are to materialize, it is very essential to ensure the robust financial health of the oil companies.

In this article we are illustrating how an India’s oil company BPC has overcome some of the problems. BPC during the year 2006-07, the combined refinery throughout at BPC’s refineries at Mumbai, Kochi and that of Numaligarh refinery limited stood at 22.28 million tones (MMT), as against the level of 19.37 MMT in the previous year. Similarly, the total sales volume, including exports of 1.72 MMT, reached a level of 19.37 MMT in the previous year. The excellent physical performance has been reflected in the outstanding financial results achieved during the year. The group sales turnover for the year stood at RS 1,090.79 billion and the group profit after tax touched a level of Rs 23.56 billion. Apart from an increase in the quantum of crude oil processed at the refineries, the increase in the refining margins over the previous year has contributed to the increase in the profit levels.

The capacity expansion of BPC’s refinery at Mumbai, which was completed during 2005-2006, has led to the refinery achieving its highest ever crude mix and also derive value from the newly commissioned hydrocracker and lube oil base stock units, which have led to an increase.