MANAGEMENT DISCUSSION AND ANALYSISGlobal oil scenario
The growth of an economy cataiyses oil demand in that region and vice versa.
Demand and supply. The year 2009 was most challenging in the global oil industry sincethe oil crisis of the early Seventies. Oil demand was affected across all regions.Stimulus economic packages strengthened energy demand in the fourth quarter of 2009.China, the Middle East and India consumed more oil, leading to a demand growth of 0.6 mb/din 2009. However, this was offset by a decline of 1.9mb/d in the OECD region. The netimpact was a decline in global demand by 1.4 mb/d to 84.4mb/d in 2009.
The use of oil in categories like industrial fuel, jet and kerosene accounted for 75%of the total decline in world demand. Automobile fuel and LPG were the only categoriesthat reported a y-o-y increase in 2009.
Non-OPEC supplies accounted for around 50% of global oil production (estimated at51.02mb/d in 2009, a growth of 0.61 mb/d).
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 |
| World demand | | | | | | |
| OECD | 49.5 | 49.8 | 49.5 | 49.2 | 47.6 | 45.6 |
| North America | 25.4 | 25.6 | 25.4 | 25.5 | 24.2 | 23.3 |
| Western Europe | 15.5 | 15.7 | 15.7 | 15.3 | 15.3 | 14.6 |
| Pacific | 8.5 | 8.6 | 8.5 | 8.4 | 8.1 | 7.7 |
| DCs | 21.9 | 22.7 | 23.4 | 24.4 | 25.3 | 25.8 |
| FSU | 3.8 | 3.9 | 4.0 | 4.0 | 4.1 | 4.0 |
| Other European nations | 0.9 | 0.9 | 0.9 | 0.8 | 0.8 | 0.8 |
| China | 6.5 | 6.7 | 72 | 7.6 | 8.0 | 8.2 |
| (a) Total world demand | 82.6 | 84.0 | 85.0 | 86.0 | 85.7 | 84.4 |
| Non-OPEC supply | | | | | | |
| OECD | 21.3 | 20.4 | 20.1 | 20.1 | 19.5 | 19.5 |
| North America | 14.6 | 14.1 | 14.2 | 14.3 | 13.9 | 14.2 |
| Western Europe | 6.2 | 5.7 | 5.3 | 5.2 | 5.0 | 4.7 |
| Pacific | 0.6 | 0.6 | 0.6 | 0.6 | 0.6 | 0.6 |
| DCs | 11.6 | 11.9 | 12.0 | 12.0 | 12.4 | 12.6 |
| FSU | 11.1 | 11.5 | 12.0 | 12.5 | 12.6 | 12.9 |
| Other European nations | 0.2 | 0.2 | 0.2 | 0.2 | 0.1 | 0.1 |
| China | 3.5 | 3.6 | 3.7 | 3.8 | 3.8 | 3.8 |
| Processing gains | 1.8 | 1.9 | 2.0 | 2.0 | 2.0 | 2.0 |
| OPEC NGLs + non-conventional oils | 3.7 | 3.9 | 3.9 | 3.9 | 4.1 | 4.4 |
| (b) Total non-OPEC supply and OPEC NGLs | 53,3 | 53.5 | 53.9 | 54.5 | 54.5 | 55.4 |
| OPEC crude oil production (secondary sources) | 29.6 | 30.7 | 30.5 | 30.2 | 31.2 | 28.7 |
| Total supply | 82.9 | 84.2 | 84.4 | 84.7 | 85.8 | 84.1 |
| Balance (stock changes and miscellaneous) | 0.3 | 0.2 | (0.6) | (1.4) | 0.0 | (0.3) |
All figures in million barreis per day.
Note: Totals may not add up due to individual rounding
(Source: OPEC)
In recent years, about one out of every 20 barrels of oil produced globally and morethan half of the Saudi Arabia production has come from a single field - Ghawar. The Ghawaroilfield is saturated and largely depleted.
Global spending on offshore exploration is forecast to increase from US$260 billion in2008 to US$360 billion in 2013, a CAGR of 6.7% between 2008 and 2013.
Depleting Ghawar reserves: Saudi Arabia possesses around 20% of the world's provenreserves of crude. It is the world's largest crude exporter and a leading OPEC player.Crude oil production in Saudi Arabia peaked in 2005 at 9.6 mb/d; since then, productiondeclined to 9.3 mb/d in 2008 and an estimated 8,1 mb/d in 2009 (Source. Oil Orum).
The Ghawar oil field represents the world's largest known oil deposit, stretchingacross 170 miles. It is estimated that the field produces twice as much oil as any otherfield globally and accounts for over 50% of the country's oil production. The country hasbeen extracting oil from this reservoir for over half a century, since its discovery in1948. The reason behind the country's declining production can be linked to the saturationof the Ghawar field. Researchers indicate that northern Ghawar is largely depleted,(Source: Atlantic magazine).
Outlook: The international Energy Agency forecasts that annual global oil demand wouldreach 86.6 mb/d (Source: Business line). Even as European oil consumption is forecast todecline by 0.2mb/d in 2010 to 14.7 mb/d, Latin America and Asia are expected to more thanmake up for the decline. China's oil demand is expected to increase 4.7% in 2010, risingto a strong rural development programme (Source: OPEC). The additional demand is expectedto be met by production from outside the OPEC region.
Indian oil scenario
Nearly 75% of India's oil consumption is imported. Domestic crude production for2009-10 was placed at 36.7 million metric tonnes (MMT), an increase of 11 % over 2008-09.With 15 new oil and gas discoveries being made during 2009-10, domestic supply is expectedto improve (Source: Economic Survey 2009-10).
India's estimated sedimentary deposit available for ollshore and onshore exploration isaround 3.14 million sq. km, out of which 1.35 million sq. km are in shallow waters and0.34 million sq. km in deep waters. Out of their respective areas, 29% of shailow waterand 31% of deepwater acreage are yet to be awarded (Source: Research Oracle),
At the end of NELP VII, 203 production-sharing contracts were signed. Nearly 46% ofIndia's sedimentary basin was awarded for exploration under NELP. Under NELP VIII, thehighest number of blocks were awarded for exploration, covering an area of 1,63.535 sq. kmas on April 2009. The trend indicates a growing number of blocks being awarded foroffshore exploration, creating a window of opportunity for the rig industry.
Onshore/Offshore blocks offered under NELP
(Source: Research Oracle)
Exploration and production (E&P): In the backdrop of rising oil demand, decliningproduction from maturing fields and a dearth of new discoveries, offshore E&P activityhas gained significance. Offshore E&P contributes 35% of the world's oil production,catalysed by high crude realisations.
In turn, rising global oil demand, depleting reserves and difficulties in finding newreserves strengthened crude realisations over the last few years. Crude oil prices droppedto a low of US$40 in December 2008, prompting E&P companies to defer theirinvestments. With crude prices regaining momentum towards the end of 2009, E&Pinvestments revived.
In 2009, some 350 oil and gas discoveries were made worldwide, a majority in South andCentral America followed by the Middle East and Africa, the Asia-Pacific Europe and NorthAmerica, strengthening prospects for the global rig industry.
Outlook: Deep water exploration is expected to grow faster than shallow waterexploration as the potential in most shallow water reserves is on a decline. Deep watercapex is expected to increase from US$20 bn in 2008 to US$31 bn in 2013; shallow watercapital expenditure is expected to rise from US$53 billion in 2008 to US$58 billion in2013 (Source. Research Oracle).
Offshore capex: shallow water/deep water (U5$ bn)
(Source: Research Oracle)
The growing gap (regular conventional oil)
During 2004-08, an estimated 18,310 offshore exploratory wells were drilled; this isexpected to increase 7% during 2009-13 to 19,570. The highest exploratory activity isexpected in Asia followed by North America and Western Europe (Source: Research Oracle).
Rig industry
There was demand erosion in the rig industry in the early part of 2009 with E&Pexpenditures being curtailed. This reflected in tow day rates, rig demand and utilisation.However, most rig markets revived in the second half, mirroring crude prices. By end 2009,the worldwide rig industry had stabilised and idle rigs deployed.
India has around 30 billion tonnes of unexplored oil reserves. (Source: Businessstandard)
The global jack-up rig count declined about five months after crude prices dropped.However, jack-up count stabilised in the second half of 2009 in the range of 315-325.
The floater rig count increased 5% in 2009, reflecting a carry over of contracts fromthe upcycle of 2008. The only floater class that declined was the midwater segment with nonew additions and shorter contract durations. On the other hand, the deepwater andultra-deepwater rig counts increased owing to a limited availability and a backlog oflong-term contracts. The result: mid water floaters utilisation was 78% compared with 91 %for deepwater and ultra-deepwater rigs at the end of 2009.
Outlook: With oil prices stabilising in the US$70-80 range, E&P spending is likelyto nse from its 2009 level, translating into a stronger rig industry. Recent indicatorsfor the jack-up market are positive with ng count and day-rates having bottomed out.Forecasts suggest that by end 2010, jack-up rig population would be about 340, an increaseof 7%. The world wide floaters count is expected to remain flat owing to an increase inthe count of deepwater and ultra-deepwater rigs that will be offset by a decline inmid-water rigs (Source: Rigzone).
Wind energy
India evolved as a major player in the global wind energy market. It is ranked thefifth largest producer of wind energy after the US. Germany, Spain and China. India added683 MW of wind power capacity in 2009-10. increasing its cumulative capacity to 10,925 MW.Wind power generation in India crossed 74.85 billion units as on December 2009.
State-wise wind power installed capacity (MW)
| State | Installed capacity |
| Andhra Pradesh | 122.5 |
| Gujarat | 1,711.8 |
| Karnataka | 1,390.6 |
| Kerala | 27.0 |
| Madhya Pradesh | 212.8 |
| Maharashtra | 2,004.4 |
| Rajasthan | 855.4 |
| Tamil Nadu | 4,596.2 |
| West Bengal | 1.1 |
| Others | 3.2 |
| Total | 10,925 |
(Source: Ministry of New and Renewable Energy)
Outlook: India's potential in onshore wind power generation is estimated at 48,500 MW,based on the assumption that only 1 % land is available in potential areas (at 12 acresper MW). The Indian government encouraged wind power projects through various incentiveslike excise duty exemption, income tax exemption on profits made on wind power generationand 80% accelerated depreciation. Various states also introduced obligations related tothe purchase of renewable energy.
Opportunities and threats
| Opportunities | Threats |
| Rig industry | Rig Industry |
| • With the rising demand of oil and decreasing production from mature fields, there is a scenario wherein offshore E&P activities have gained significance. | • The drilling Industry is closely related to the E&P activities, which in turn is related to crude prices So reduced crude prices can have an indirect effect on the rig industry. |
| • The offshore E&P activities contribute around 35% of the world's oil production. | • Reduced crude prices can affect rig rates and rig utilisation. |
| Wind energy | Wind energy |
| Growing sensitivity towards the environment and depleting reserves of fossil fuels are the reasons behind the growth of wind energy in the 21 st century. | • This is not a reliable source of energy, wind being difficult to predict; it requires knowledge of the weather and wind conditions on a long-term basis. |
| • Various Types of incentives like excise duty and Income tax exemptions are provided by the government to encourage wind power generations. | • Many potential wind farms, where wind energy can be produced on a large scale, are far from places for which wind energy is best suited. As a result the economical nature of wind energy may be overshadowed by the cost of substations and transmission lines. |
| • Wind energy is the fastest-growing energy sector. The global wind energy market has grown over 25% annually over the last ten years. | |
Operational overview*
Drilling division: Revenue generated from drilling was Rs. 3,367.05 crore for 2009-10compared with Rs. 3,441.90 crore in 2008 09. Majority of Aban rigs were operational as on31st March 2010, enhancing the Company's revenue visibility for the next financial year.
Wind energy division: Aban's wind energy division generated 413.83 lakhs units of powerin 2009-10 compared with 346.12 lakhs units in 2008-09. Revenue generated from the windenergy division was Rs. 13.41 crore in 2009-10, a 7.72% increase over 2008-09.
Note * Consolidated figures
| Segment wise performance | | | Rs. in lakhs |
| 2007-08 | 2008-09 | 2009-10 |
| Drilling | | | |
| Revenue | 212,292 | 344,190 | 336,705 |
| Profit | 20,399 | 70,175 | 46,183 |
| Wind energy | | | |
| Revenue | 1,209 | 1,245 | 1,341 |
| Profit/(Loss) before tax | (2,331) | (2,154) | (1,879) |
Financial overview*
The Company reported a topline growth of 10.12% in 2009-10 compared with previous year.The total income stood at Rs. 335,866 lakhs in 2009-10 compared to Rs. 305,009 lakhs in2008-09 and core profit after tax grew 65.67% to Rs. 55,180 lakhs in 2009-10 compared toRs. 33,307 lakhs in previous year.
Note: * Consolidated figures
Risks and concerns
The section has been addressed in a later part of the report.
Human resource management
Human resource management is given importance by the Company in terms of not onlyretaining its staff but also nurturing them. A measure like value-centric managementensures employee loyalty. It provides various compensation packages and performance-basedincentives for its operational team. Training and development programmes are conducted ona regular basis to ensure that the employees get an opportunity to upgrade theirknowledge. Aban's employee strength at the end of 31st March 2010 was 1,400.
Internal audit and controls
The internal audit reviews internal control checks of the various significantoperations of the Company. It is carried out on a regular basis to ensure effectiveness ofits internal control is existing and that deviations are reported. The Company also has onAudit Committee which is responsible for reviewing the Audit Report submitted by theInternal Auditors. The feedback from the Committee is considered and the necessaryimplementations are carried out. The Audit Committee also invites the Statutory andinternal Auditors for regular meetings to review its internal control system. The Board ofDirectors are kept informed from time to time about any major observation.