Essar Oil is tripling capacity at its Vadinar refinery to 700,000 barrels. It also has a host of initiatives lined up in the upstream and downstream sectors to ratchet up capacity by another 300,000 barrels. The company's managing director Naresh Nayyar spoke to DNA Money's Promit Mukherjee on his vision to make Essar Oil an integrated energy player that can refine more than a million barrels a day. Excerpts:

When is the financial closure of the Vadinar refinery expansion? Is funding tied up?
Very shortly. We are awaiting final approvals and after some documentation, we will formally announce financial closure. As far as funding is concerned, the expansion is expected to cost us about $6 billion. Of this, $2 billion is equity, which is being infused by the promoters and the balance $4 billion is debt.

Have you tied up for crude?
We have started looking into the kind of crude we will be able to process that can give best value. We are also exploring possibilities with various suppliers.

What kind of realisation is possible from the new refinery?
We are building a refinery that is highly complex, which will process the toughest crude and meet the specifications of all global markets. So our gross refining margins should more than double the existing level once the refinery is operational.

Have you set production targets?
We aim to source at least 30% of our total refining requirement from captive sources. Since we are targeting a million barrels per day of refining capacity by 2011-12, our crude production target should be close to 3,00,000 barrels per day. This is a very ambitious target to achieve in 3-4 years unless we go for massive M&A activity. Considering current valuations, our focus is to acquire more exploration assets and develop them.

What is the output now?
We are operating at 120% capacity, which is almost 250,000 barrels per day.

Where's crude being sourced from? What's the quality?
Most of the crude is from Middle East and some comes from South America. We categorise crude three ways - low sulphur or light crude, the medium suplhur and high sulphur and tough crude. About 25-30% refining is of tough crude that we normally source from South America, 40% is of high sulphur crude and balance sweet or medium sulphur crude.

What will be the Nelson complexity at Vadinar? And the product mix?
The complexity will be 12.8. As far as the product mix is concerned, we will mostly be producing Euro-V products and majority of products will be auto-fuels such as gasoline and gas-oil. 90% of the gasoline that we will produce will meet the Euro-V specifications and also the Californian specification. Almost 60% of gas-oil will be of Euro-V specification. In fact, we are building a refinery which on the one hand will be able to process high sulphur and very tough crude and on the other will make products that can meet the specifications of any market in the world. This is our underlying objective.

What will be the investment over and above the Vadinar refinery expansion?
It all depends on the kind of the project we undertake for achieving 300,000 bpd.

What will be the investment in case it's a greenfield or brownfield plan?
Globally, refining assets in the mature world (developed economies) are currently trading around $2,000 per complexity barrel. So that is the broad number. However, it varies significantly from region to region and from refinery to refinery. So it is difficult to put a number at this stage.

Can you tell us something about the upstream plans?
In India, we have an oil producing block at Mehsana. The oil production from there is very nominal, close to 100-200 barrels per day, but we are ramping it up. We expect to achieve around 1,000 barrels per day in the next couple of months. In addition to this, we have two coal bed methane (CBM) blocks - one in Raniganj and Mehsana each.

In both the blocks, the initial exploratory work has started and they have good prospects. We also have two exploration blocks in Assam but they are currently at very early stages and we are conducting seismic studies.

We also have blocks outside India - two blocks in Madagascar, one in Nigeria and one in Vietnam. And on a continuous basis, we keep on participating in the licensing rounds of different countries.

How many blocks do you expect to win at the National Exploration Licensing Policy (Nelp) VII round?
We are likely to get one.

Any outline on capex in upstream and downstream activities?
As far as the refinery is concerned, our major capex plan is of expansion with an investment of $6 billion. For upstream, the capex we have earmarked is broadly to cover our work commitments in our existing blocks. This will be between $350-400 million and will be over the next two-and-a-half years.

What is the secret behind Essar Oil running its retail fuel outlets when other private players are shutting shop and PSUs are racking up losses?
There is actually no secret. We always keep a very close watch on the market. About a few months back, when the differential in the market-related prices and the prices at which the PSUs were selling was very large, there was hardly any opportunity for private sector players. But recently, we have seen that there is a demand for petroleum products in the domestic market even at market-related prices. There are consumers who are ready to pay a higher price, particularly in the case of petrol. So we are now servicing those consumers through our retail outlets. Still the number is not very large.

At what price are you selling the products now?
The market varies from fortnight to fortnight. Currently, the differential between the petrol prices is very low. It is Rs 3-4 per litre but in the case of diesel, it is high, around Rs 10-12 per litre.

So the retail operation is profit-making..
We normally sell on cost-plus basis, where base prices are at par with international prices with a very reasonable and low margin.

In case retailing operations do not yield targeted profits, do you have a plan to derisk the business model?
We have already tied up with oil PSUs for sale of our petroleum products and sell our products to them at our refinery gate. Basically, this is a win-win situation for all the players as the public sector is importing diesel and other petroleum products, so sourcing from the domestic market is more cost-effective.

Do you have plans to enter the city gas distribution business?
We have plans to set up an LNG terminal, but that is still at a very early stage. There are no plans for city gas distribution.