Last year, the Ruias-promoted Essar Energy completed some of its major growth projects in the energy space. Though there were concerns on the regulatory front, some of the company’s power plants finally hit the ground. Essar Energy also expanded the Vadinar refinery’s capacity. Chief Executive Officer Naresh Nayyar tells Kalpana Pathak that in 2013, the company would focus on optimising the operations of the commissioned units and generating cash flows. Edited excerpts:
How was 2012 for Essar Energy?
In 2012, we raised the capacity of our Vadinar refinery from 18 to 20 million tonnes per annum (mtpa) and increased its complexity to 11.8. This has really changed the refinery and made it world-class. In the power space, we commissioned a number of power plants, beginning with Salaya-I, located near Essar Oil’s refinery complex at Vadinar, Gujarat, which has been commissioned with a full capacity of 1,200 Mw. Later, we also commissioned the Vadinar P1 power plant at the Vadinar refinery. Recently, we commissioned the first unit of our Mahan power plant. Overall, we have nearly tripled our capacity in the power space and by the end of this financial year, we would be operating 4,500 Mw of power generation capacity.
What would be the agenda for 2013?
The focus for 2013 is on optimising the operations of the commissioned units. We want these units to begin generating the envisaged revenues in their stipulated timeframes. We would also focus on developing coal mines to ensure we get the full benefits of the integrated operations in the power business. This would also be a year of further consolidation for the Vadinar refinery — to begin cash flows, its operations would be fully stabilised.
What about your refineries in the UK and Kenya?
In our Stanlow refinery in the UK, things have progressed very well. All the schemes we planned have started delivering results. As of now, there is another set of 100 schemes under implementation. We have already delivered a benefit of about $1 a barrel and expect another dollar-a-barrel benefit by March 2013. The remaining would come later this year. Kenya is, however, a relatively small play. We have a share of only 50 per cent in this refinery and its capacity is four (mtpa). Currently, the capacity being utilised is less than half. While there is huge potential here, as this is the only refinery in Kenya and Mombasa is the only port for the import of hydrocarbons in that region, the initiatives here would have to wait for a while. Once we have our major initiatives in place, we would look at Kenya.
Is Stanlow cash-positive yet?
Our total investment in Stanlow has been $350 million. About a year after buying it from Royal Dutch Shell, Stanlow has declared earnings before interest, tax, depreciation and amortisation (Ebitda) of $193 million. That’s a substantial return and it reflects the fact that we acquired this asset at a very attractive price. Immediately after we acquired it, we launched a 100-day plan to look into each and every sphere of the refinery, ranging from procurement methods, market mix, operating expenditure and capital expenditure to identifying areas in which we could create more value. Historically, Stanlow has been delivering $2 dollar a barrel more than the Northwest European benchmark gross refining margins. Once the schemes of the 100-day plan are fully implemented, this delta would rise to $5 a barrel. Today, Stanlow is a debt-free company.
Given your presence in the UK and Kenya, would you consider retailing fuel in those countries?
Carrying out retail operations in Europe is a very expensive proposition. According to our analysis, it doesn’t give very attractive returns. The only place is Kenya or East Africa. But there are a large number of regulatory challenges there. So, we are going a bit slow on this front. Once there is clarity on how we wish to commit ourselves to East Africa, we will finalise a strategy.
Have your fuel retail margins in India turned positive yet?
I do not want to comment on whether our margins are plus or minus, or big or small. Our model is almost a franchise one and, therefore, we don’t have any capital commitment. So, we are retaining this as a strategy, even if we are incurring losses. As and when the sector opens up, we would have a platform to quickly ramp up. The only commitment we have is to provide some sort of return to the dealers who have invested in us. In the overall scheme of things, it is not a large amount for us. On an average, we are paying our dealers a commission or service charge of about $1 million a month, or about Rs 60-70 crore a month. We do make some money and we are trying to enter the non-fuel revenue segment. In India, we have about 1,400 retail outlets. We have no plans for any aggressive expansion on the retail front.
Essar’s performance on the exploration and production (E&P) front has been quite unimpressive.
If our E&P performance is termed unimpressive, it is also because one is stuck with approvals. If we do not get an environment clearance for drilling, we cannot go ahead with it. We also get stuck with land acquisitions. To reduce the need for land and to work within the same environment clearance, we have come up with an innovative proposal to drill more wells or access a greater area within the same piece of land. This is applicable to all blocks in India. Even after a block has been awarded by the government of India, you need hundreds of approvals. E&P companies have been talking about a single-window clearance system, but that has not come about. Having said that, if we look at where we started and where we have reached, we have made far decent progress than other companies.
Should one expect any surprise from Essar on the E&P front this year?
This year, we would begin producing substantial gas from our coal bed methane (CBM) block at Raniganj, West Bengal. We have already drilled 100 wells there. But I see the E&P business as one with a huge luck factor. If you look at the business, both in India and abroad, though there are 100s of E&P companies, not many of them have struck gold. It is a game for big boys. If you drill a well and that turns out to be dry, you have to write off $50 million immediately. So, we focus on an area in which most Indian E&P players don’t---CBM. We have five CBM blocks, with acreage of 2,700 sq km and prospective resources of about 10 trillion cubic feet of gas. We have developed expertise in this area. Currently, our focus is on coal seam gas and generating cash flows from here.
When do you expect cash generation from these businesses?
This year, our broad guidance to the market is Essar Oil India would generate Ebitda of about $1 billion a year. That from our Stanlow refinery would be $200-250 million a year, while $500 million of Ebitda should come from power. Our targeted debt-equity ratio is 2:1. At this stage, it is a bit higher. We are taking a number of initiatives to bring it down. Our debt would peak this year and, therefore, we expect this would give us sufficient flexibility and leverage to reduce our debt. Second, in our oil & gas business, we have a large currency and maturity mismatch in our balance sheet. Most of the rupee debt we raised to finance our projects is of shorter maturity, while we have created assets that would result in cash flows for decades. Also, while most of this debt is rupee debt, Essar Oil India has a dollar balance sheet, as all our sales and exports are in dollars. We are working on this and hopefully, we would see some result in the next financial year.