High crude oil prices have impacted Ruias-promoted Essar Oil's [Get Quote] working capital. The company, which has interests in exploration, production, refining and marketing, has seen a significant increase in its working capital requirement from $600 million (over Rs 2,600 crore) to $1.6 billion (over Rs 6,500 crore) in recent times.

Naresh Nayyar, MD & CEO, Essar Oil,  tells Business Standard that a windfall profit tax on private oil companies will only worsen the situation.

Excerpts:

Do you think the idea of a windfall tax on private players is feasible?

No. In the case of refining companies, the high price of crude oil has already multiplied their costs and led to an increase in the working capital.  Refinery business profits are determined by the difference between finished product prices and crude oil prices.

Finished product prices are not moving in tandem with crude oil prices. It is determined by the available capacity and the demand-supply balance of finished products. The refinery business is cyclical.

As a matter of fact, there is tremendous pressure on refining companies and there cannot be a case for a windfall tax.

How has the increase in crude oil prices impacted your day-to-day operations?

We buy around 8 million barrels of crude oil every month for refining. When oil was at $70 a barrel, our working capital requirement was close to $600 million. But now with the price doubling, our working capital requirement for 45 days has gone up to around $1.6 billion.

There is huge pressure on funding the working capital. Besides, the recent monetary policy has squeezed liquidity in the market. Whatever money available costs a lot as a result of a higher interest rate. Our costs have certainly multiplied.

Will the liquidity crunch affect your expansion plans too?

We have fully tied up around $6 billion for expansion of our projects. Of this, the promoters will infuse $2 billion fresh equity, $1 billion will come immediately after the financial closure and another $1 billion by March 2009.

We also expect $1 billion from internal accruals during the project execution stage at the existing refinery in Vadinar. So around $3 billion of fresh equity would be coming in. We have an existing equity of about $1 billion, making a total equity of $4 billion. We are raising fresh debt of about $5 billion.

Of this, we have already arranged for around $4.3 billion debt and will announce the financial closure shortly.

Is the volatile crude oil price putting pressure on your profit margins?

Yes. There is a significant pressure on our profitability. There is a time lag of 45-50 days between buying crude oil and selling our finished products in the market.

We take an oil price risk during this period. If we buy crude oil today at $140 a barrel and by the time we process it and sell it in the market, oil prices fall by $20, it hits us. The fluctuation is so much in the marketplace right now that it has tremendously multiplied our risks, impacting our profits significantly. 

Is Essar still in the race for Kenya Petroleum Refinery?

We were never out of the race. The Kenyan government had asked Oil Libya to induct Essar Oil as a partner, with Oil Libya and we sharing a 25 per cent stake each in the company. There are some issues at the political level in Kenya that need to be resolved.

Only 20 of your fuel stations are operational of the total 1,274. Do you plan to shut them and go for an alternative use of the land?

We are maintaining all our 1,274 outlets and compensating the dealers to the tune of Rs 100 crore (Rs 1 billion) every year. Our fuel is priced at Rs 5-6 a litre over what the public sector outlets sell. So the footfalls are very less and, therefore, there are limited options for the alternative use of land. But we do hope that the market will see a correction.

In fact, in the next few years, we plan to increase the number of outlets to around 5,000 when we see that the market is ready for private sector players with a level playing field. We have our blueprint ready for the same.

Meanwhile, we have taken up with the government the issue of a large retail network of Essar and Reliance [Get Quote] lying idle, which the government can think of utilising as national assets.

Do we see any surprises from Essar in the exploration and production (E&P) segment this year?

We are looking at various E&P opportunities globally. We recently got a block in Vietnam. We are gradually expanding our portfolio and our focus is on quickly implement the work on blocks that we have acquired.

The prospects in some of the blocks are very promising and we see large gas reserves in the Vietnam block.

What will be your refining capacity in times to come?

We plan to take our refining capacity from the present 210,000 barrels per day to 1 million bpd in the next three years. With the expansion at Vadinar, our capacity will go up to 700,000 bpd. As for the remaining 300,000 bpd, we are looking at opportunities for greenfield and brownfield expansion and acquisitions.