Managing a Public Sector Company: The case of BPCL
with Ashok Sinha
With all the focus on the financial sector, the decline in Index of Industrial Production (IIP) has served a reminder about the difficulties faced by the Indian industry and Mr. Ashok Sinha is ideally placed to deal with our queries on these issues. BPCL has bucked the trend of a typical public sector company riddled with bureaucratic inefficiency and has blazed a trail of innovation. It makes for a fascinating case in favour of public sector firms amidst the constant clamour for privatization. With oil prices and alternative energy sources at the centre of every conversation, Mr. Ashok Sinha provides us with his keen insights into these issues.
In this guest interaction with Mr. Ashok Sinha, Chairman and Managing Director of Bharat Petroleum Corporation Ltd (BPCL), Tejas quizzes him on on issues ranging from changing business models in the context of the financial crisis to issues in supply-chain management in India.
Changing Business Models in the Oil and Gas Industry
Tejas:
Internationally, independent oil firms are facing severe problems due to financing issues and the fall of oil prices from their summer highs. With everything that is happening around us in terms of the financial meltdown, do you foresee a change in the business model of companies?
HM:
The oil industry is broadly divided into 3 business segments: Upstream Oil Exploration & Production (E&P), Petroleum Refining and related businesses and Marketing & Distribution business. Currently, the demand for Marketing & Distribution business end is facing a challenge - the end consumer is reducing his spend on fuel and this is beginning to impact the profitability of refinery companies. Even a substantial change in the upstream E&P has been seen with the oil prices shot up through the roof. In July 2008, E&P companies had to back out because of their inability to raise capital. Moreover this E&P market is fragmented with small and niche players, and with increasing capital requirements, these companies have come to a standstill. The players who recently entered this market have faced the heat the most and the old players who have continued in the E&P industry have stopped exploration or slowed down their development plans.
This industry is also very liquid and you can buy and sell shares quite easily. But the speed of downturn has largely kept the buyers off the table due to the sudden dip in confidence in the markets. The Fed rates have touched 0% which essentially means "Don't give the money to me and give it to someone else" and banks still are not willing to lend. We need to watch when this will end. Nevertheless, many acreages being pursued are slowing down.
Understanding BPCL
Tejas:
BPCL has acquired participating interests in 26 exploration blocks; in consortium with other companies outside India, in Australia, UK, Oman, Mozambique and East Timor and Brazil. Is this a conscious part of your strategy to integrate downstream and upstream facilities?
HM:
Absolutely; oil pricing is really a political commodity in India and we needed to have ways to safeguard ourselves. So in 2006 we created a 100% subsidiary called Bharat Petroleum Resources Ltd. to implement BPCLs plans in the exploration and production sector. BPRL, through its wholly owned subsidiary, is looks at petroleum development areas between East Timor and Australia and also new exploration and production opportunities both in India and abroad. We have moved in this sector very consciously and have targeted to produce 30% of our requirements as we are looking at requirements of 450,000 barrels of crude per day which are expected to touch 600,000 barrels of crude per day by December next year.
Tejas:
BPCL has implemented a tracking system to improve logistics and to remove adulteration. How has this enabled BPCL to gain a competitive edge?
HM:
Measuring effectiveness of tracking systems is a challenge, but cases of adulteration have definitely come down over the years. The level at which you can track tankers has improved but it has its own limitations. While we also use marker systems, the challenge always has been that even after tracking, differentiating between kerosene and diesel is a challenge. We have now capabilities to track up to adulteration levels of 1%, an improvement from the earlier 5% levels.
In a refinery, kerosene and diesel could be blended to each other, so the primary problem can potentially start there. By and large however, adulteration does not happen in the cities. The outlier cases happen once in a while in the outskirts which need to be kept under check. Also, the problem gets handled when the oil prices come down as the risks become much higher than the gains you could get.
Tejas:
Also, how do you manage to retain employee morale and motivation levels in BPCL, given the fact that other companies are seeing massive retrenchment?
HM:
For one, we will not be retrenching; we have over the period kept out numbers down. In terms of worldwide benchmarking we do employ more people than what we could ideally do with, but our salary levels are much lower which proportionately take care of our costs. Hence we maintain our competitiveness. The real key to retaining people is letting them know that they are indeed doing things worthwhile and important and that we what we strive to achieve.
Investments in the Indian Oil & Gas Industry
Tejas:
Western Oil Majors have been slow in entering the Indian oil & gas industry. Do you see more aggressive strategy in the way they look at Indian investments?
HM:
I don't particular see that. Oil majors are holding off because of their view of availability of oil in the country vis-à-vis where they are located. The Oil majors look at large field sizes and it doesn't make sense of them to look at smaller opportunities. They are not as yet receiving signals that India has the scales and capabilities they are looking for.
India has a KG basin and some players have come to India. Also as far as the field bids are concerned, Indian firms tend to overbid. Some foreign players, for example, were not ready to bid for more than 2 wells while the winning bids will potentially go for 8 wells. This is potentially one of the reasons they have not come to India in a big way. However, these companies come in with their expertise once the first round of competitive bids are over. In terms of what India offers; the licenses are fairly attractive and should not keep foreign players at bay.
Tejas:
In terms of alternative strategies, could you expound on the efforts of BPCL in the alternative energy source area? Do hedging strategies work?
HM:
Alternative hedging strategies and fuels exist, however they are not going to replace the fuel oil. We are looking at building up a portfolio of different alternative fuels specifically catering to the automotive sector which we believe can work. In terms of hedging, we don't hedge on the absolute value of oil, but what we try and do is margin hedging; we hedge the difference between the crude oil and the finished products. This is to ensure that our margins are intact. We don't believe that betting on the oil prices is a good strategy.
Impact of Government Regulations
Tejas:
It was recently reported that the Indian government may free petrol and diesel prices from its control. Should fuel prices be set by the PSU's rather than the Government? And in the absence of subsides, will the PSU's be able to maintain their competitive position?
HM:
We have many problems with absence of subsidies. It is unfortunate that the government does not let it float with the prices. We have seen a period where in 2002 the pricing of oil was free. Unfortunately, we still had subsidies coming. While we don't have issues with subsidies either, but what we want is that it should be outside out system. If we can look for it transparently through the budgeting system, please give it to the persons who need it. We have no issues with fighting competition with anybody in the marketplace.
Tejas:
Shell chairman van der Veer had recently stated that Government regulation was needed to control Carbon Dioxide (CO2) emissions seemingly at odds with the capitalist nature of his job. Do you go along with his views?
HM:
If you visit Shell's website, you will see that they have worked out many scenarios for the world. One of these scenarios is the carbon-headed world. We need to understand that it is a capitalistic world and the success of capitalism world over is questionable. We need to see the nature of the business and the environment in which it operates to really answer this question.
For example, let us look at global warming. You can choose to say what you want to do about it, but if global warming does takes place, your business is going to get impacted whether you want it or not. Shell knows that sooner or later theses interventions will come. So it is a better business practice to build resources keeping this in mind.
In India however, the issue is slightly different. The question we need to answer is if we should divert our resources to this as this will significantly impact the essential and required growth in the country. Nevertheless, there is no running away; ultimately we have to take care of the environment.
Profile
Ashok Sinha is the Chairman and Managing Director of Bharat Petroleum Corporation Ltd (BPCL) since August 2005. In his 32-year-long tenure with BPCL, Mr Sinha has served in key areas such as finance, corporate affairs, treasury operations and information management. BPCL is India's second largest integrated oil refining and marketing company. The BPCL group which includes the subsidiary company Numaligarh Refinery Limited (NRL) had a turnover of Rs 862.23 billion in 2005-06 (USD 19.16 billion).
He is an IIT Kanpur graduate with a postgraduate degree in management from the Indian Institute of Management, Bangalore (Class of 1977). He is a recipient of the prestigious Distinguished Alumnus Award, given to Alumni who have excelled in their chosen field of endeavor and made outstanding contributions. Besides being the Chairman & Managing Director of BPCL, he is also on the board of Kochi Refineries Ltd, Numaligarh Refinery Ltd, Petronet LNG Ltd and Bharat Shell Ltd.
