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HPCL says refinery expansion key to face private competition
Posted on 10th September 2014
Hindustan Petroleum Corp Ltd (HPCL) is looking to bridge the gap between its refining and marketing capacities to maintain its strong position in fuel retail as competition from private players is likely to increase post diesel deregulation.

Complete deregulation of diesel is likely to be soon announced by the Government as the under-recovery on sale of auto fuel has fallen to 8 paise in the beginning of this month. Currently, HPCL is dependent on companies like Reliance Industries Ltd and Essar Oil for purchase of petrol and diesel as it own refineries are not able to match up with its marketing capacity.

According to analysts, out of the company's total sales volume about 10% is petrol and 35-40% is diesel. It sells twice as much it refines. In fiscal 2014 it sold 31 million tonne (mt) of petroleum products as against refining 15.51 mt of crude.

There is a possibility that private players like RIL can divert its export volumes in domestic market to rapidly gain share. They can also provide a small discount to gain market share of auto fuel retail market, which is currently being dominated by three state-owned oil marketing companies.

On being asked about whether this gap between refining and marketing capacity would affect the company's retail position due to onslaught of private competition, Nishi Vasudeva, managing director of HPCL, said this gap will not be a big factor in competition against private retailers as the company is also expanding its refining capacity.

"We have 9 mt refinery at Bhatinda, so that is the additional volume. As far as Reliance is concerned, they are exporting. They have excess capacity. Expansion of Mumbai and Vizag refinery would also help," she said.

HPCL has a 9 mt refinery at Bathinda, Punjab, in a joint venture with Mittal Energy Investment, in which it hold 49% stake and complete marketing rights.

The state-owned company also plans to expand its Mumbai refinery capacity from 6.5 mtpa to 9.5 mtpa and Vizag 8.3 mtpa to 15 mtpa. Apart from this, HPCL is also setting up a 9 mt greenfield refinery at Barmer in Rajasthan. However, these projects are unlikely to come on-stream immediately. These new refining facilities would enhance the company's refining capacity to around 33.7 mt. As against this, its sales volumes are likely to rise 6-7% every year, which means that even after five years the gap between its refining and marketing capacity may remain around 7 mt.

The company's Rajasthan refinery project is currently being reviewed by Rajasthan government. "The new government which came in to power in Rajasthan had decided to review all major projects, this is one of them. So far there is no communication regarding renegotiation as such. Very soon, may be in next 10 days we will be having a meeting with government authorities to discuss the project," Vasudeva said.

Analysts believe it will take at least five years for the company to bridge it refining and marketing capacity gap. "In long term, HPCL aims to achieve 42 mt of refining as well as marketing capacity. This will help the company to reduce vulnerability and dependence on other players. It will also increase efficiency operation and would result in margin stabilisation," an analyst with local brokerage said.

Earlier in 2006-07 when diesel was deregulated private competition from players like RIL and Essar OIL had eroded market share of oil retailing companies. "But even then, our loss of market share was the least. Since then we have improved a lot and have been consolidating our position in terms of various customer-centric initiatives. There is no steady state, one has to keep watching, change strategy accordingly. We will do whatever it takes to beat the competition," Vasudeva said.

She, however, stressed that if private players resorts to discounting HPCL will not lose profit to sell more. "We are a commercial organisation," she said.

Related Companies: Hindustan Petroleum Corporation Ltd.(HPCL)   

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