As oil marketing companies face headwinds from the negative growth in diesel sales, Bharat Petroleum Corporation Ltd (BPCL) is looking at offloading some portion of its inventory through export sales under term contracts to fetch better prices, director finance N Vijayagopal said in an interview. Excerpts:

What does the September quarter financial results indicate about the state of play in the oil marketing business?

The Q2 performance of refineries in India and globally is affected generally by the crack spreads of diesel and motor spirit (MS).

If you compare the crack spreads of diesel and MS to the corresponding period last year, diesel has gone up by $1 to a barrel and MS has come down by $2 to a barrel. These are the products which gives us money. So, MS cracks coming down by $2 and diesel going up by $1 effectively evens it out because we make 20-22 per cent from MS and 45-48 per cent from diesel. Therefore, generally, our margins should have been at the same levels if all the other factors remained the same.

Our margin was about $3.3 at the core level, excluding the inventory gains and losses in Q2FY19. It was $3.8 this quarter ― that’s a $0.5 increase. We are not unhappy but the only thing is that even $3 is not a good number for us. Yet, compared with IOC’s $1.28 and HPCL’s $2.7, we are not bad off or worse off. But, I would have been happy if the margin was, let’s say $6.

Has diesel contributed much to this?

There is no growth in diesel sales in the country now. In the second quarter, the country’s diesel demand has actually come down by about 2.5 per cent, compared to the second quarter of the previous year.

Why?

Demand for diesel is generally a reflection of GDP growth. We have not seen this kind of a de-growth in diesel in the recent past.

Is there a revival in sight on diesel demand?

We don’t see any reversal of this de-growth overnight. Upto September, the growth has been minus 2.5 per cent and October has been worse.

BPCL’s growth rate has come down by 2.4 per cent. Our minus growth is lower compared to IOC. BPCL cannot perform in a vacuum; we’ll have to work only within the country’s diesel market. BPCL cannot be any different.

What was the actual sales in diesel?

We have a market of 40 mt in a year. Of this, 50 per cent or 20 mt will be diesel; and roughly in a quarter, it will be 5 mt.

We exported 200 TMT of diesel in September because it could not be sold in the country. We sold it to traders in Singapore. So, there is a possibility (for exports).

However, when we produce diesel anticipating market demand in India and then sell in distress in the export market, the discount will be very high. That’s the problem we are facing.

How do you propose to work around this?

We need to produce diesel and cannot reduce the throughput because it is not profitable. But, we can plan ahead for the next three months for exports so that we can term-up. When we commit to give so much in November, December, and so on, then the prices will be better. So, we term-up for diesel because we don’t anticipate an overnight improvement and reversal of this decline.

How critical is this?

It is a matter of concern for the oil industry because diesel is giving the maximum. For example, MS crack is $8 a barrel, while diesel crack is double at $16 a barrel. So, when diesel gives me maximum money and half of my production is diesel and when diesel (demand) suffers, we are very badly affected.

Then, you are left holding inventory…

We are carrying inventory. In fact, we have a problem of carrying excess inventory because we don’t anticipate any increase or improvement in the price situation anytime soon. So, we cannot keep inventory for three months. Therefore, we are having an inventory to the extent possible and permissible, but there is a risk in carrying inventory.

Are you looking to cut down on diesel production?

No. We cannot cut down on diesel production alone; we can cut down on the crude throughput. I don’t think that reducing the diesel throughput is a better option because we will maintain the throughput and export diesel. Because of IMO regulations from January 1, 2020, we are expecting the current crack spread on diesel to further go up. That increase, we will be sacrificing by exporting. So, we won’t be worse off; still, we’ll be able to make money.

So, it’s a cause for concern, what to do with diesel?

You can say that. It’s a cause for concern because half my sale is diesel and diesel is not moving. Actually, not moving is not the correct thing to say, don’t be under that impression. We are selling 20 mt of diesel. If we need to export 1 mt probably in the next six months, we will still make full money on the 19 mt; I mt could have actually given me full money, now we’ll be losing a part of it. So, to that extent, it’s a cause for concern. My profit will be affected because of exporting diesel. The loss on exports is a very small amount and we would not be losing even a single paisa if there is an environment and an eco-system of growth to sell diesel in India. Without diesel nothing moves in India.

The one-time tax reversal of Rs 580.33 crore in Q2 came as a huge relief…

The tax refund was a very significant contributor to our PAT. But, even without that, our PAT is very good. We have been holding on to the market share growth; we are leaders in market share growth in MS and No 2 in diesel. Though all of us are negative in diesel growth in Q2, we are still No 2 in diesel.

Diesel is a concern for all of us. If diesel doesn’t go, we have a problem. I’m not commenting on the government’s difficulties given the global situation, Chinese demand issues, etc. The government may be struggling with a difficult global environment.

We have never seen a diesel negative growth like this in the recent past. Diesel growth is actually critical for our operations and profitability because that is the most profitable product.

Earlier, MS used to give $12 a barrel when diesel was giving $15 per barrel.

MS crack has come down very drastically ― to minus levels ― because of the Chinese slowdown in Q3 of FY19.It was at $1,1.5 or $2 a barrel. It was very poor for us. As a government company, we have no option and also as a customer-friendly company, we have no option. We have to supply petrol.

Petrol was not giving us much money. Now, MS cracks have improved and is in the range of $7-8 a barrel, but it is still not enough.

Has that impacted your gross refining margins (GRM)?

That is one reason why you find our GRMs are $3 a barrel; we cannot perform in a vacuum. We would have preferred to get a GRM of around $6-6.5 a barrel having invested so much money in the upgradation and modernisation of the Kochi refinery and being in the midst of a major revamp of the Mumbai refinery with huge investments and for producing B6 grade fuel.

We need to be getting adequate compensation for these investments, otherwise investors won’t be happy. Diesel is therefore, a concern. I’m not overemphasising that, am only stating the fact.