Bharat Petroleum Expands International Reach

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Researched by Industrial Info Resources (Sugar Land, Texas)--Bharat Petroleum Corporation Limited (BSE:500547) (BPCL) (Mumbai) is extending the company's business beyond the borders of India. This is part of an $11 billion, 5-year expansion plan that involves the acquisition of refineries, power projects, oil and gas assets. BPCL is involved primarily in the Indian hydrocarbons sector, which the company believes will much more difficult sector in which to operate in the future. To counter this, BPCL will expand its international business dealings.

Oil industry veteran and observer Bhamy V. Shenoy said: "I would congratulate Bharat Petroleum's management to have finally taken the strategic step of diversifying into upstream markets and the power sector when the government was bleeding the downstream sector through populist pricing policy. In fact, the BPCL management should have taken these steps few years back when the government was planning to eliminate the Administrative Pricing Mechanism (APM) system, which had assured its profitability. At least when the government came back soon after dismantling APM, BPCL management should have anticipated that the government will not allow it to earn even the minimum rate of return on capital."

Authorities at BPCL having been quoted saying that approximately $6.3 billion will be invested in expanding the company's refining capacity and upstream activities. The remainder of the figure will be pumped into the exploration and development of production activities in international markets.

One of the company's first steps will be to foray into the power sector, although BPCL has not determined the location of the power projects. All of these projects will be international joint ventures. The main idea behind this expansion is the scaling up of revenues. All of these plans are part of what is called "Project Dream Plan," which will be implemented through 2015. The timing of the company's expansion is critical as India's fuel price deregulation will be in a relatively early phase.

One of the first moves under this plan will be to scale up of refining capacities by almost 50%. This will raise BPCL's refining capacity to about 960,000 barrels per day (BBL/d) by 2015. In a joint venture with Oman Oil Company SAOC (Muscat, Oman), BPCL plans to set up a 128,000-BBL/d refinery at Bina in Madhya Pradesh. This move will be central to BPCL's growth in the northern and western sectors of India. These sectors in particular have been witnessing an increased demand for petroleum products. This will require an investment of approximately $2.7 billion and includes plans to expand the existing capacities of the refineries at Kochi and Mumbai. When completed, BPCL will have about a 33% share in India's refining market.

These expansion plans are largely based on increasing ties with foreign nations. As a beginning to its entry into the power sector, BPCL plans to form a joint venture with an equity-based investment of between $135 million and $225 million. This funding will be a mix of oil bonds, internal accruals and debt. The company speculates that it can raise approximately $2.03 billion in oil bonds and obtain internal accruals of about $3.38 billion.

BPCL ventured into upstream exploration and production through a subsidiary about four years ago. About $7.5 billion has been set aside for this. Outside of India, BPCL has 27 blocks in several foreign nations, including Australia, Brazil, Indonesia, the United Kingdom, Mozambique and East Timor. Production from these is slated to begin in 2013. The idea is to buy blocks toward the end of exploration, allowing revenue to be generated much sooner. When exploration is complete, the company will spend an estimated $100 million on infrastructure.

BPCL is also considering garnering gas assets in Indonesia and Australia. The company is open to investments in these areas based on the positive viability of these projects and has set aside $100 million for this. BPCL's primary reason for getting into the gas sector is primarily due to the emission norms being established in India, making gas an ideal fuel.

Commenting on the overall feasibility of expansion and international participation, Shenoy said: "I have serious reservations about the availability of qualified managers at BP who are accustomed to administering the operations as per set rules, rather than managing under competitive conditions. In the case of international upstream operations, there is tough competition to secure attractive acreage for exploration. This is a different kind of business than managing refining and marketing operations. It is also an extremely risky business."

International companies involved in the upstream sector may not be willing to join with BPCL because of the company's inexperience in the sector. However if BPCL can use the goodwill of India through government contacts, these companies may be willing to make joint ventures. Otherwise, only smaller companies with less to lose may show willingness to participate.

Unlike Oil & Natural Gas Corporation Limited (BSE:500312) (New Delhi), which has huge reserves and deep pockets, a downstream company like BPCL may not have excess capital. Because of India's price controls, BPCL's balance sheet has been affected negatively in recent years. Because of this BPCL may find it difficult to raise capital through the stock market or banks. However, if BPCL succeeds in its exploration plays, raising capital will probably be much easier.

BPCL's foray into the Indian power sector may prove a bit risky. The state electricity boards to which BPCL must sell power are not in financially healthy positions. BPCL has to find power markets where it can sell power at attractive prices and be assured of payment.

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