Insight Conversation: B. Anand, Nayara Energy

B. Anand is CEO of Nayara Energy, the owner of India’s Vadinar refinery and a top buyer of Iranian oil. In a recent Insight Conversation video, Anand spoke to Sambit Mohanty about the company’s crude purchases and wider strategy.

There are two major themes affecting the market right now: US sanctions on Iran and the US–China trade war. How will those two factors impact the dynamics of crude flows into India?

As you know, India and Iran have been very robust partners as far as crude supplies are concerned. India has been the logical market for much of the Iranian crude to flow and Nayara has been relying a lot on Iranian crude. It's a logical fit. There is a great relationship that we share, which I am sure other refineries in India also do. So the US sanctions on Iran will definitely have a massive economic impact, as far as India is concerned.

We are keenly watching the developments and how the replacement happens, should there be a complete embargo on Iranian crude. Those are the kind of uncertainties everyone is talking about. As far as we are concerned, fortunately the kind of refinery that we are, it offers us plentiful choices to look at alternate crudes. More importantly, [we are fortunate in] the shareholders that we have, both in terms of Rosneft and Trafigura… Both have substantial footprints, or if you like to use the word, access points. This will help us get crude from all over the world and we will rely a bit on that to combat the situation.

Would Nayara be open to buying US crudes?

What drives our decision is the economic value of the crude.  We are probably one of the very few refineries that has the ability to process crudes with a range of APIs, from the light to the heavies. Having invested substantially in a coker and other related secondary facilities, it means the lower the API, the more margins you make. US crude is very much on the table for one to evaluate and to look at. I'm sure that, with all the geopolitical gyrations that are happening, we may see some different kind of economics emerge which may not have been there before. So for us the short answer is that we will definitely consider US crudes to the extent that they are viable for us.

Looking from a global supply perspective, do you think the market is ready for the shortfall of up to 2 million b/d that everyone is expecting because of the sanctions on Iran?

The challenge is not just Iranian replacement. There are also issues around declining production in some of the other mature markets – be it in Venezuela or some other parts of Latin America, or the challenges of many of the OPEC countries to step up their production. So we are steering towards a bit of an uncertain environment in terms of how these barrels will get replaced. Everyone is in the wait-and-watch zone.

I'm sure there are a lot of requests made to some of the OPEC producers to step up their production. I'm sure Russia is doing their bit in terms of stepping up production and I am sure there is sufficient crude being produced, even back in the US. So it's to be seen how the balance gets matched.

India’s retail oil prices have been rising , with prices of gasoline and diesel hitting record highs in the past few months. What are the options for the government? Do you think this might impact demand?

 In countries like India and other emerging markets, high fuel prices have cyclical ramifications in terms of inflation. The ramification straightaway straddles back to your currencies in terms of the depreciation they have to go through. And of course, [there are] associated industry-related ramifications which come alongside it, let alone the emotional ramifications which come from the people.

In India, rising fuel prices is a matter of massive concern for the government. You keep hearing about rising prices in the news and the concerns of the common man. So I generally believe that at some point in time you will start noticing some demand destruction. We haven't noticed that yet, but there will definitely be a point in time when you will know that this is not going to sustain itself.

Coming back to what are the choices the government has in terms of how it will manage this: clearly, one of the great initiatives the government took a couple of years back was to deregulate prices. On those premises, players like us have made substantial investments in the retail fuel space. There is a strong initiative from the government to get more and more private partners into the supply and distribution side. So we believe and we are hoping that there won’t be any change in the progress of policies the government has undertaken.

The only tool the government has, considering that we rely substantially on imported crude, is to evaluate the tax structure. Tax revenues play an important role in the recovery of the current account and fiscal deficit. But in the past, the government did not necessarily pass on the benefit of low prices to the consumer. I'm assuming the government may look at that and try to give some relief to the Indian consumer if the trend is going to be rising prices.

As the CEO of the company, could you give us a brief overview about your crude and product strategy and your vision for Nayara Energy?

For us, the most important thing is to ensure that we run the refinery at its optimum. The refinery has in the past demonstrated ability and flexibility to digest different crudes and producing products to meet the needs of the market. In this context, the vison is to further diversify that basket. We would like to diversify the entire gamut of what we can use, including condensates that can come into the game along with stable crude. We are looking to develop ourselves to have the flexibility of looking at different energy sources as well, while producing these hydrocarbons.

On the products front, there are two interesting developments. One is the government’s initiative to be more environmentally friendly and move to BS-6 [Bharat Stage 6] fuel norms, which are equivalent to the Euro 6 emission norms. I think we have our investments in place and we hope to play a leadership role in building up that product basket. The second is the huge opportunity coming our way when the IMO 2020 regulations set in. It will become our priority to make sure that we have the right set of crude and products.

As far as the product distribution strategy is concerned, our barrels have traveled to far, far places. So we clearly understand how to make inroads into different markets from where demand can emanate. The strategy also embraces the fact we have built a very robust on-ground fuel retail network. There is a clear ambition to reach 7,500 retail stations in the next two to three years, with a clear focus towards enhancing throughput and embracing India into the energy scene, which you know has challenges of penetration.

So that's how we will blend it. I think we will eventually have a strategy on products that will leverage our global reach and the reach of our shareholders Rosneft and Trafigura, and our own focus on India from the domestic side.