BPCL:“Challenge was converted into an opportunity”

Year 2008 was probably one of the toughest phases in the history of Bharat Petroleum Corporation (BPCL), country's secondlargest oil marketer. The company however used the crisis as an opportunity to squeeze out the last drop of inefficiency from its system. In a conversation with ET Intelligence Group's 

Ramkrishna Kashelkar, BPCL's chairman and managing director, Ashok Sinha, discusses the company's learning from the crisis and how is he is preparing the organisation for the future

In the last one-year of turmoil, what were your experiences? 
The steep volatality in crude oil prices created a lot of constraints for our industry. Being in PSU we could not raise the prices of our four key products that constitute around 70% of our output, since we are essentially fulfilling the local demand. 
    This external constraint created liquidity problem for us. However, the government was well aware of this and it did provide us certain windows in making available the liquidity. Access to foreign exchange was provided to us through the central bank. That was most welcome. 
Being a PSU, you've to keep markets supplied… 
Yeah, we have the commitment to serve the customers. People expect to buy fuel when they visit the petrol pump. As a company, I can't say today I will sell, tomorrow I won't. There are so many externalities — fluctuating exchange rates, interest rates can go against you, oil prices are volatile, under-recoveries, inventory valuations —that are for us to handle. We cannot make the consumer bear the burden of the external factors affecting our business, right? 
What were the strategies used by BPCL to counter these adversities? 
These constraints made us look inwards and squeeze more efficiency at every level for generating cash that in turn created value for the company. It was all about innovating without losing the focus and simultaneously creating value and benefits, which we can share. 
    First thing was to sensitise the entire organisation to external events and what can we do to help ourselves. For example, we reviewed our entire debt collection system. We moved to the RBI's real-time-gross-settlement (RTGS) for our debt collection from LPG and retail dealers to reduce working capital requirement. The benefit was mutual as it freed them from the routine of making demand drafts and sending them across. Similarly we looked at areas like transportation, inventory, capital productivity to prioritise the use of cash. 
    We formed a team that spanned out and gathered inputs from the employees because ultimately all the knowledge resides in them. A system was created to harness it, test it, challenge it, analyse it and to see how our earlier decisions would have changed and implement it for the future. The project was called WIN – We Innovate Now. It brought in a sense of urgency and induced everyone to innovate. Now these processes have got so institutionalised that it has become part of the company's DNA. So the challenge was converted into an opportunity. 
Now that the crude oil is around $75, would you still need the oil bonds? 
This year the volatility is substantially less compared to last year and I don't expect to see that sort of volatility in next six months. However, on the current prices, we have started going negative on cash — although it's not very high, as witnessed last year. Still we need to get that compensation quickly. Firstly for the liquidity reasons and most importantly to take care of our long-term projects. After all, why does any company need to make profit? The profit is essential for investing in the business for the future growth. If the country wishes to achieve the GDP growth we talk about the investment cycle must continue. Therefore, the current hand-tomouth situation must change. Stability in the system can enable us to take long-term view. In our industry, what you decide today can fructify 3-4 years down the line and without stability in earnings, we can't commit for such long-term projects. 
What is the current status of your Bina refinery? 
The Bina refinery was conceptualised way back in 1994. The project envisaged nearly 1000-km of pipeline with offshore installations. So there were delays in obtaining environmental and other clearances. But once we took our final investment decision in Dec 2005 after getting all those clearances, the project has progressed smoothly and is scheduled for mechanical completion in first quarter of 2010. The pipeline, single buoy mooring (SBM), tank farm etc are already completed. Even most of the refinery units are in place; only the final linking up process is on. It is taking time just because these are the processes that are done sequentially and not simultaneously. Within couple of months of taking our investment decision we had closed the entire debt funding. In terms of equity we have taken up 50% with 26% subscribed by the Oman Oil. About the rest of the equity, we will see when and how to raise the funds. Our primary focus right now is on completing the refinery and getting the product out. That is more important for us than the equity funding. 
How far India's refining capacity addition is justified at a time when globally the industry is not doing so well? 
The recent fall in gross refining margins (GRMs) is mainly due to the huge demand destruction that has happened. The global refiners are down to 85% capacity utilisation. This is just a temporary adjustment and ultimately the additional capacities would get consumed as the global demand is expected to grow. In global scheme of things India's capacity addition is not very significant. 
    Petroleum refining is a cyclical business. At times there is overcapacity and at others there are shortages. As a result when the GRMs are below minimum acceptable rate of return, the refiners start cutting down production. Whatever said, in the long term the refiners will make money. You must understand that it take atleast 5 years from concept to commercialisation while setting-up a refinery. 
You are growing, diversifying, innovating day-by-day. How do you manage talent to sustain this growth? 
Four-five years ago we started the process for project DESTINY setting up fairly aspiring goals like doubling our volumes and the profits by four times by March 2010. This was broken up in who will contribute in which way. So the next challenge was to have the leadership pipeline to deliver it. So with that, we started the project CALIBER. We have looked from the top-downwards, taking a 360 degree feedback on each employee. We have so far reviewed our top 500 people. Everybody has been reviewed by five directors besides his/her immediate seniors and juniors etc. 
    The competencies of each employee are mapped and compared with the global benchmarks. A team of facilitators presents the individual candidate to us in terms of where each person stands. Someone can be good at executing projects, someone can be good at strategic thinking, someone at technical matters, while someone else at creative things and so on. This has helped us in drawing up personalised development programmes for each of them. Then the training department steps in to ensure that they are given the world class training.
    I believe we are the first among PSUs to take such a holistic view of the HR challenges. And why just PSUs, we are perhaps first among all Indian companies! 
How do you view competition? 
Competition is always there but you must understand that there is collaboration also. And it is not just between PSUs. We will collaborate with anyone if it makes business sense for us. Long ago, immediately after Indian Oil was born, an agreement was signed in 1962 between IOCL, Esso (now HPCL after its nationalisation) and Burma Shell (now BPCL) for product supply. The principles of that agreement still remain valid today. In this industry, you don't fight over infrastructure and products, rather you leverage that. 
    In fact, an example of such collaboration with a competitor could be our B2B IT tie-up with Indian Oil, which is perhaps the largest of its kind in India. The value of transactions captured by the system could be in excess of Rs 30,000 crore per year right now. 
Today all the oil companies are going for investment in upstream. What has caused this? 
Our selling prices are completely controlled but our production costs are market driven. So we have to look for a hedge by investing upstream. Presently, BPCL has 26-27 blocks in which we have participating interest. Plus now we have 2.5% stake in Oil India, which has several producing assets. 
    So our portfolio now looks a little more balanced with blocks from different stages of development —from wild cat exploration, post 2D, 3D portfolio to developmental drilling and now the producing blocks. 
    We are now in a consolidation phase in E&P. We are present in mostly proven regions, except for Mozambique, which is totally unexplored area. Most of these are phase-I commitments. Most of them will complete by end of 2010, when we will have to take call on where we want to go, where we want to get out of and so on. We have a separate company for focussing on the E&P business, since this is a very specialised business with high risk and the mind set needed there is totally different. The next target in this area is to move into being an operator. Apart from being an active investor in all our blocks, we already have a joint operatorship in a Rajasthan field. The learning from this block will enable us in taking up operatorship in future projects. 
    ramkrishna.kashelkar@timesgroup.com