Management Discussion and Analysis Report
After the global economic meltdown, the year 2009-10 saw signs of recovery, especiallyin countries like India and China. During the year, nations and corporations across theworld were focused on trying to adjust and come to terms with the new business paradigm.There is a growing realisation that with economies being so interdependent, potentialshocks are truly global, although the degree of impact may vary depending on the localconditions. The economic disruptions of the previous year continued to impact countriesfor a major part of the financial year. As economies were shrinking consequent to theslowdown, there was a sharp decline in the global demand for oil. The Indian economy wasone of the few bright spots with Gross Domestic Product (GDP) estimated to have grown at7.4% during the year with the fourth quarter of the year seeing a growth of 8.6%. Asindustrial production across the biggest economies declined, the volume of global tradesaw a substantial reduction. Towards the end of the financial year, there were signs ofnew crisis cropping up in the European Union, with countries like Greece, Portugal andSpain facing problems caused by the high levels of borrowings. Even as rating agencieswere downgrading bonds of several countries, Governments initiated measures to contain theensuing damage.
The year was witness to a sharp fall in the global refining margins. At the same time,the crude oil prices recovered considerably as compared to the previous year. While theinitial months of the year saw oil prices rise to around USD 70 per barrel, the subsequentperiod saw prices being range bound before closing at around USD 80 per barrel in March2010. Given the concerns around growth in demand for oil and the comfortable supplyposition, there was no sharp rise in crude oil prices. The economic crisis in Europe hashad some impact on the international oil prices, which declined to some extent in May 2010before starting to creep up once again.
The Indian economy continued to show resilience and grow notwithstanding the generaladverse conditions. At the same time, it could not achieve growth rates in excess of 9%which had been achieved consistently before the slowdown set in. Although the stockmarkets recovered, risk aversion amongst investors was evident, which was reflected in thetepid response, particularly from the retail segment to the Initial Public Offerings (IPO)and Follow up Offerings of Indian companies. Even the offerings by the public sectorundertakings, as part of the divestment plans of the Government, did not generate theenthusiasm levels seen before the economic crisis. However, the Foreign InstitutionalInvestors continued to be optimistic of the India growth story. The Indian rupeeappreciated during the year which had an impact on the export sector as well as on majorimports like crude oil.
Agriculture, which remains a major segment of the Indian economy, was affected by thelack of sufficient rains in many parts of the country. Despite this, the sector recorded amarginal growth in 2009-10. Inflationary pressures started impacting the economy. The risein the price indices remains a cause for concern and there are expectations of the ReserveBank of India (RBI) hiking key interest rates as it tries to rein in inflation. The RBIhas also commenced the process of gradually withdrawing measures that it had introduced inits efforts to help industry tackle the economic downturn.
TRENDS IN THE OIL & GAS SECTOR
During 2008-09, oil prices had reached record levels before retreating sharply. Thefall in global demand consequent to the economic downturn contributed to the fall in theprices. The International Energy Agency had in April 2010 estimated the global demand foroil in calendar year 2009 to be of the order of 84.9 Million Barrels per day (MBPD)representing a decline of 1.3 MBPD over the previous year. This decline could beattributed to the fall in demand in Organisation for Economic Co-operation &Development (OECD) countries. The Organisation of Petroleum Exporting Countries (OPEC) hadin response to these developments, put in place production cuts and had tried to ensurehigh levels of compliance. As a result, oil prices started recovering although they didnot go back to the record levels reached in 2008-09. The benchmark Brent crude touched ahigh of USD 80.5 per barrel and a low of USD 46.5 per barrel during 2009-10. Demand forcrude oil and prices thereof were helped by strong demand from countries like China. Oilprices continued to remain above USD 80 per barrel before declining to some extent onaccount of the crisis in Europe. Oil prices are expected to be influenced by the pace ofthe economic recovery in the developed countries.
Even though there was a sharp fall in the demand for oil as compared to the previousyear on account of the decline in demand in Europe and North America, strong demand incountries like China and India ensured that the overall fall was contained. As per the OilMarket Report issued by the International Energy Agency in July 2010, the world oil demandin 2010 is expected to be around 86.50 MBPD, which could increase to 87.8 MBPD in 2011.This increase in demand is expected to be driven by the sustained growth in demand fromnon-OECD countries.
The year 2008-09 had seen a compression in the light-heavy crude and productdifferentials with the Brent-Dubai differential down to USD 1.6 per barrel. The trendcontinued in 2009-10 and the average differential for the year was negligible. The declinein the differentials can be attributed to reduction in the production of heavy crude oil.Although the differential between Brent and Dubai crude reappeared in April 2010, theposition has changed significantly in May 2010 when the differential became negative. Atpresent, there is modest differential between light and heavy crude and this is expectedto continue during the remaining period of 2010-11.
Even as demand for crude oil shows signs of improving, OPEC countries which had cutback production to arrest the slide of prices can be expected to increase output graduallyto meet the rising demand. At the same time, prices are not expected to move downwardssignificantly. However, the uncertainties plaguing the global economy could have an impacton the crude oil prices, as was seen recently when crude oil prices declined in responseto the Greek debt crisis.
As in the case of crude oil, the average prices of key petroleum products in 2009-10were lower than the prices in 2008-09. This has brought some respite to countries whichare dependent on imports for meeting their requirements of petroleum products. Demand forgasoline in key markets like United States of America has remained flat on account of highunemployment rate and changes in consumer spending habits. Demand is expected to grow oncethe global economy recovers fully. Demand for diesel also fell significantly in 2009 onaccount of the economic slowdown. This was offset to some extent by higher demand forheating during the winter. As the global economies recover, demand for diesel shouldincrease significantly. The aviation sector was one of the worst hit in the economicdownturn and consequently, demand for ATF has suffered. Demand for ATF is also expected toincrease in line with the overall economic recovery.
INDIAN PETROLEUM SECTOR
The year 2008-09 saw the GDP grow at around 6.7% over the previous year. This was incontrast to the previous few years when the growth was sustained at above 9% levels.Although the Indian economy was amongst the few in the world to remain on the growth path,the GDP grew only at 7.4% in 2009-10. With the monsoon being deficient in large parts ofthe country, agriculture was impacted and lack of growth in this sector affected theoverall growth rate. However, the Industry has shown strong signs of rebound while theservices sector is slowly recovering. As per the provisional figures released by thePetroleum Planning & Analysis Cell in the Ministry of Petroleum & Natural Gas,consumption of petroleum products in the country in 2009-10 was of the order of 138.2 MMT,which represented an increase of 3.44% over the previous year when the demand stood at133.60 MMT. The growth rate was in line with the rate of increase in consumption in2008-09.
Even as demand for transportation fuels like MS and HSD has grown over the previousyear, the two products reflect different growth trends. While demand for MS has grown by14% as compared to 9% in 2008-09, the growth in Diesel demand at 9% is around the samelevel as in the previous year. The demand for LPG has increased by around 6.3%. Theprevious year had seen demand for ATF fall on account of the slowdown in the Aviationsector. This trend was reversed in the current year with demand for ATF increasing by4.6%. However, the consumption of Naphtha has declined significantly during the year. Thegrowth in Bitumen consumption has been sustained and there has been an increase in demandfor Lubricants reflecting the improvement in industrial activity.
During the year under review, the cost of the Indian basket of crude oil averagedaround USD 70 per barrel as compared to an average cost of USD 85.3 in the previous year.The reduction in the cost of the Indian basket of crude oil was a welcome relief to theoil marketing companies who have had to bear the burden of under-recoveries on account ofselling MS, HSD, SKO and domestic LPG at prices which were below the cost. Although theaverage price of the Indian basket of crude oil was lower, there was a sharp rise in thequantum of crude oil imports.
As compared to the imports of 128.16 MMT of crude oil in 2008-09, the quantum of crudeoil imported in 2009-10 stood at 159.26 MMT. However, the foreign exchange outgo on crudeoil imports in 2009-10 at USD 80 billion did not differ significantly from the level ofUSD 77 billion in 2008-09. This can be attributed to the lower level of crude oil pricesas compared to the earlier year and also on account of the appreciation of the rupeeagainst the dollar. The international prices had shown signs of firming with averageprices during the period April 2010 to July 2010 being higher than the average price in2009-10. However, with concerns centred on the economies in Europe, a sustained rise inprices is not expected in the near future.
While the increase in the country’s refining capacity has meant rising volumes ofcrude oil imports, it has also led to a reduction in the import of petroleum products. Thequantum of product imports declined to 14.66 MMT in 2009-10 from a level of 18.29 MMT inthe previous year. Consequently, there has been a significant reduction in the foreignexchange outgo on product imports from USD 13.5 billion to around USD 7 billion in thecurrent year. At the same time, India’s exports of finished products have increasedfrom 37 MMT in 2008-09 to touch a level of 51 MMT in the current year. However, the totalexports realisation in foreign exchange of USD 31 billion was not significantly higherthan the amount of USD 27 billion realised in 2008-09, mainly on account of the lowerprices in the international market.
The volatile crude oil prices in 2008-09 had imposed an enormous strain on the financesof the public sector oil marketing companies. Although the volatility reduced during theyear, the marketing companies continued to suffer from significant amounts ofunder-recoveries, which was impacting their liquidity position and leading to increasedlevels of borrowings. The Government of India therefore allowed prices of petrol anddiesel to be hiked by Rs. 4 per litre and Rs. 2 per litre respectively in July 2009. Inthe Union Budget presented to Parliament in February 2010, the central excise duty andcustoms duty in respect of petrol and diesel were increased and this impact was passed onto consumers. Apart from this, there were no revisions in the prices of the four sensitivepetroleum products during the year. The under-recoveries on the sale of petrol and dieselwere compensated by the upstream oil companies by way of discount on the crude oilpurchased by the refining companies. In the previous years, the Government had issuedbonds to the oil marketing companies to compensate for the losses suffered on sale of SKOand domestic LPG. During the current year, there was a change in the mechanism adopted bythe Government, when it decided to provide cash instead of bonds as compensation againstthe under-recoveries on the sale of SKO and domestic LPG. Although this will help inimproving the financial situation of the downstream oil marketing companies, thereimbursement from the Government was only partial and BPCL had to absorb an amount ofaround Rs. 1200 crores.
In February 2010, the Expert Group on ‘A Viable and Sustainable System of Pricingof Petroleum Products,’ headed by Mr. Kirit Parikh, submitted its report to theGovernment of India. The report recommends the permitting of free market pricing forpetrol and diesel and the raising of the administered prices for domestic LPG andkerosene. The Government had constituted an Empowered Group of Ministers (EGM) headed bythe Union Finance Minister to decide on the recommendations of the expert group. The EGMat its meeting held on June 25, 2010 took the decision to immediately free petrol frompricing controls. The EGM also decided that decontrol would also be extended to dieselpricing in due course of time. Consequently, retail selling price of petrol has beenincreased by Rs. 3.50 per litre. In the case of diesel, retail selling price has beenincreased initially by Rs. 2 per litre. The EGM also decided to increase the retailselling price of a 14.2 kg domestic LPG cylinder by Rs. 35 and that of kerosene by Rs. 3per litre. These decisions will bring significant relief to the public sector oilmarketing companies by reducing the quantum of under-recoveries besides improving theircash flows. Further, the decision on decontrol of prices of petrol and diesel will impactdemand and will lead to enhanced competition from private sector oil companies.
India’s domestic production of finished products is considerably higher than thedomestic demand. The domestic crude oil processing in 2009-10 stood at 186.6 MMT ascompared to 157.1 MMT in the previous year. With additional capacities expected to come onstream in the coming days, India will continue to remain long on refining capacity.
With the expected entry of the major private players following the decontrol of pricingof petrol and diesel, public sector oil marketing companies will face serious competition.At the same time, the global economic scene continues to remain an area of concern. Anycrisis that may erupt on account of past excesses would have a major impact on commodityprices and demand. The coming days therefore, are likely to be challenging while offeringimmense opportunities for growth.
OPPORTUNITIES AND THREATS
India’s GDP is expected to grow at a healthy rate in the coming years. As energydemand grows, oil and gas companies will have a major role to play in meeting the risingdemand. At the same time, enormous challenges lie ahead. As the country is largelydependent on imported crude oil, the price volatility will be a major concern. Thedecontrol of pricing of auto fuels will significantly enhance the level of competition asa consequence of private oil companies resuming their marketing operations. At the sametime, if the under-recoveries continue on products like SKO and LPG, the public sectormarketing companies could face constraints on the liquidity front.
The product specifications for MS and HSD have become more stringent with effect fromApril 1, 2010, and a road map has been laid down for these specifications to becomeeffective across the country. Oil companies have to ensure adequate supplies of productsmeeting the specifications. Although refineries have geared up to meet the newrequirements, there are logistic challenges involved in handling and moving products ofdifferent specifications. The refineries in Mumbai and Kochi are in a position to makeavailable the products and the commissioning of the refinery at Bina will furtherstrengthen BPCL’s position in this regard.
The capacity of the Kochi refinery has been expanded and the new grass roots refineryat Bina is slated for commissioning during the year 2010-11. The BPCL group includingNumaligarh Refinery Limited will have a combined refining capacity of 30.5 MMTPA. Thegeographical distribution of the refineries will enable BPCL to have access to its ownsource of supply in markets across the country.
The new grass roots refinery at Bina in Madhya Pradesh, which is being set up by BharatOman Refineries Limited (BORL), a joint venture company promoted by BPCL, will becommissioned in 2010-11. Although the company has not been able to go ahead with itsproposed Initial Public Offering of shares, the joint venture partner, Oman Oil Company(OOC) made fresh investments by subscribing to further shares of BORL at a premium. WithBPCL having already made available sufficient funds, the progress of the project wasmaintained.
Unlike the previous year, refining margins during the year were under pressure.However, things are expected to improve in the coming days. The narrowing of the spreadbetween heavy and light crude has to an extent negated the benefit arising out of theability to process heavier crude oils and achieve better margins.
The retail fuels market continues to offer immense potential for growth andprofitability. With the economy doing well, the higher levels of disposable incomes andenhanced aspirations of people have led to automobile companies recording significantsales growth. This in turn, offers opportunities for oil marketing companies to grow interms of volume. With the Government having decided to decontrol prices of these fuels,public sector oil marketing companies would no longer have to bear the burden of theunder-recoveries which had been impacting their operations in the last few years. At thesame time, the degree of competition is expected to go up with the major private playerscoming back into the market. The overall demand is also likely to be affected based on themovements in the prices. There will also be challenges in terms of ensuring site securityof the outlets. BPCL remains confident of facing these challenges and growing in themarket.
The LPG business continues to be impacted by the burden of under-recoveries on the saleof domestic LPG. Although the decision of the Government of India to provide cash in lieuof the under-recoveries in 2009-10 was welcome, the fact remains that a part of the burdenhad to be borne by BPCL, as the entire quantum of under- recoveries was not reimbursed.Further, there is no clarity on the mechanism that will be adopted during the year 2010-11and at current levels, the marketing companies continue to sell domestic LPG at priceswhich are lower than the costs. With the recent increase in the price of a domestic LPGcylinder, the burden of under-recoveries will be mitigated to some extent. The Governmentof India has ambitious plans of giving a big push for making available LPG in rural areas.This will offer significant potential to the oil companies for enhancing their salesvolumes. BPCL also continues to strive for maximising value through increased sales ofcommercial LPG where prices are decontrolled.
The Industrial & Commercial business continues to operate in a highly competitiveenvironment. With the increased availability of gas in the country, the sales of productslike Furnace Oil, Naphtha and LSHS have been impacted. The business has focused onincreasing the sale of Bitumen, particularly in markets with good potential and highmargin special products like MTO, SBP and Hexane. The business has also carried forwardits plans of entering the international bunkering market with the commencement ofbunkering sales at Mumbai Port. The first exclusive International Bunkering Terminal ofBPCL was inaugurated in JNPT Port in May 2010. The launch of similar facilities in CochinPort in July 2010 will further boost this initiative. This will remain an extremelychallenging business in the days to come and the overall economic and industrial growthwill hold the key for the growth of the business.
BPCL was one of the first entrants in the emerging gas business. With the increaseddomestic availability, the gas business was hived off from Industrial and Commercial and aseparate SBU was created. This will help bring the required focus and enable BPCL to moveforward with its plans. Having access to the distribution infrastructure is critical inthe gas business. BPCL is looking at joining hands with other companies for submittingbids for new pipelines to be put up in different parts of the country.
The Lubricants sector has seen an uptrend in line with the overall economic recovery.Although there are a large number of players in the market, the business expects to holdits own in the days to come by leveraging its strengths in terms of availability of baseoil, tie-ups with some of the leading automotive companies and focusing on Research &Development to offer better products to customers.
The Indian aviation scene is characterised by domestic airlines having serious cashflow problems which are posing major challenges to the oil marketing companies.Consequently, the oil companies are grappling with the issue of high levels of outstandingdues from their airline customers. At the same time there is intense competition forretaining and acquiring customers. BPCL was successful in sustaining its sales volumes byretaining most of its existing customers and acquiring new customers, especially foreignairlines from other companies.
BPCL’s wholly owned subsidiary company, Bharat PetroResources Limited has takenrapid strides in the field of exploration & production. As on date, it has gotparticipating interests in 26 blocks spread across different countries including India.Discoveries have already been announced in two blocks in Brazil and Mozambique. These holdimmense promise. At the same time, the business will involve considerable investmentsduring the exploration and development phases. BPCL remains confident that its effortswill bear fruit in the coming years.
The business environment remains very challenging. At the same time, the growingeconomy offers immense potential for oil companies. The Government’s move todecontrol prices of MS and HSD will benefit oil companies by helping them to implementtheir capital expenditure plans and rein in their interest costs. Although competitionwill increase, companies like BPCL, with their traditional strengths in the market areexpected to keep growing. Also, the mechanisms put in place during the period of economicslowdown will stand the company in good stead. BPCL is therefore confident of not onlyfacing the competition, but also remaining on the fast track for growth.
The performance of the various Strategic Business Units (SBUs) and Entities isdiscussed in detail in the following paras.
BPCL achieved a combined refining throughput of 20.41 MMT in 2009-10 as compared to19.95 MMT in the previous year. During the year, the refining capacity at Kochi refinerywas increased from 7.5 MMTPA to 9.5 MMTPA. At Mumbai Refinery, facilities for upgradingthe quality of MS and HSD were put up and the refinery commenced production of the Euro IVgrades well in time to meet the requirements under the Government’s auto fuel policy.
Despite the major shutdown of key units for revamp and turnaround activities, bothrefineries managed to achieve capacity utilisation in excess of 100%. The Mumbai refineryrecorded its highest ever production of C3, LPG, ATF, Lube Oil Base Stock and 380 cst FuelOil. Kochi refinery achieved its highest ever production of ATF and packed Bitumen duringthe year. The gross refining margin (GRM) during the year for Mumbai refinery was USD 1.78per barrel as compared to USD 4.48 per barrel in 2008-09 while for Kochi refinery, the GRMfor the year was USD 4.87 per barrel as against USD 6.27 per barrel in 2008-09. Thereduction in GRM in the two refineries can be attributed to the unfavourable crack spreadsduring the year, as reflected in the fall of the Singapore Dubai cracking margin from USD5.8 per barrel in 2008-09 to USD 3.5 per barrel in 2009-10.
During the year, several measures were taken to achieve better refining margins.Substitution of Naphtha as feed and fuel by Regasified LNG (RLNG), recovery of hydrogenfrom CRU offgas and production of light lube fractions were some of the improvementmeasures undertaken in the Mumbai refinery. Similarly, the implementation of IntegratedRefinery Business Improvement Program (IRBIP) proposals at Kochi refinery was completedduring the year, with a net benefit from implementation of 17 proposals of approximatelyUSD 17.95 million which translated to a benefit of 32.05 cents per barrel. Kochi refineryhas also implemented a state-of-the-art integrated Manufacturing Execution Systemconsisting of software solutions for Planning, Scheduling, Blending, Production managementand Laboratory Information management which is helping to streamline the processes andimprove decision making.
The refineries have brought about significant improvements in their day-to-dayoperations through quality circles and six sigma clubs. The quality circles which spanalmost all major functional areas were exposed to industry best practices through trainingprogrammes, industry visits and competitions. Mumbai Refinery’s Quality Control Teamwon the Par Excellence Award – the highest category award – in theNational Convention of Quality Circle Forum of India (QCFI) held at Bangalore in December2009. Three Circles (Power & Utility / Manufacturing / Maintenance) won the ExcellenceAward at the same convention.
The refinery quality assurance systems strived to achievehighestqualitystandardsthroughmeetingtherequirements/ standards of reputed externalcertifying agencies and accreditation bodies like National Accreditation Board for Testingand Calibration (NABL), Directorate General of Civil Aviation (DGCA), Directorate Generalof Aeronautical Quality Assurance (DGAQA), Centre for Military Airworthiness andCertification (CEMILAC), International Organisation for Standardization (ISO) etc. Therefinery laboratories continued to perform very well in the international laboratoryproficiency testing scheme run by Shell Global with more than 90% rating.
BPCL Mumbai Refinery won the Indian Merchants Chamber – Ramakrishna Bajaj NationalQuality Award (RBNQA) – 2009, the highest recognition in the manufacturing category,for the third consecutive year. RBNQA is one of the most prestigious quality and businessexcellence awards modelled on the world famous Malcolm Baldrige National Quality Award inthe United States of America.
High safety standards were maintained during the year at the refineries leading to goodall round safety performance. The Occupational Health and Safety System at both therefineries are certified to OHSAS 18001:2007 standards. Kochi refinery continued itsstellar performance in safety management this year too and reached the milestone of 17million man-hours without any lost time accident. Mumbai refinery reached the 4 millionman-hours mark and achieved a 32% reduction in total number of first aid and minorinjuries as compared to the previous year.
In order to enhance the mechanical integrity and reliability of static equipment, bothrefineries have completed implementation of Phase I of the Asset Integrity ManagementSystem (AIMS) involving systematic scheduling & monitoring of inspection activities,improved analysis of inspection data, generation of equipment health records etc. througha state-of-the-art software solution. The refineries have now embarked on Phase II of theproject consisting of Risk Based Inspection (RBI), an initiative to prioritise plantinspection based on the associated risks (probability and consequence of failure) andschedule maintenance activities accordingly.
On the environmental conservation front, the replacement of liquid fuels with RLNG inMumbai refinery has contributed to the reduction of CO2 and SO2 emission from therefinery. The refinery also achieved recycling of around 1200 MT/ day of effluent water tothe Cooling Water System, thus saving equivalent quantity of precious fresh water. Morethan 7000 M3 of sludge, generated mostly from crude oil tank bottom cleaning,was treated successfully at the refineries using efficient techniques including BLABOtechnology recovering valuable oil before residual treatment. New rainwater harvestingfacilities were commissioned at Mumbai refinery with catchment potential of 15000 M3of water. A Biogas plant based on technology developed by Bhabha Atomic Research Centre,with a capacity to treat 1000 Kg/day canteen waste was installed at Kochi Refinery.
In tune with BPCL’s philosophy of harnessing the human resource potential, variouslearning and development initiatives were organized at the refineries. These includedfunctional programmes, strategy workshops, people management skills and on-the-jobtraining. More than 4000 employees benefited through such training programmes during theyear. A series of leadership skill development workshops were also conducted for theofficers. In addition to in-house programmes, staff were also sent for training programmesorganized by premier institutions in India to keep them abreast of the global trends aswell as to provide them with the opportunity of collaborative learning with seniorexecutives of other organizations.
Social welfare and development has been at the core of BPCL’s corporate socialresponsibility philosophy. The company’s efforts have been to bring about qualitativechanges in the lives of the surrounding community through well planned & coordinatedsocial welfare initiatives. During the year, BPCL initiated a number of major communityprogrammes such as rejuvenation of
Thannerchal fresh water lake at Irimpanam, housing scheme for the poor in theneighbouring Panchayats at Kochi, vocational guidance courses and medical services atMahul and Karjat villages near Mumbai.
In its continuous endeavour to ensure quality education, programmes such as donation ofscholarships and utilities for poor students, extending capability exploration andenhancement programmes for talented poor children and setting up of one-teacher schools inremote tribal settlements of Kerala were undertaken. Child guidance clinics providingcounselling on scholastic problems, behavioural patterns and coping with stress forstudents on a one-to-one basis and in groups were arranged regularly at schools nearMumbai Refinery.
For enhancing community safety and security, traffic signal systems at the busyjunction of Vyttila, Kochi were renovated, a training scheme for State Fire & RescueService in handling hazardous chemicals was started and a quick reaction armed vehicle tocounter terrorism was donated. BPCL has also joined hands with Cochin Heritage ZoneConservation Society under the District Administration in its effort to conserving theheritage sites at Kochi.
The Retail segment of the oil market in India saw sales volume grow by 9.3% in 2009-10.The sales volume of only the public sector marketing companies grew by 7.8% over the year2008-09. The year 2009-10 saw the resumption of retail operations by the private oilmarketing companies, who had scaled down operations in the previous year, owing to theirinability to absorb the high level of under-recoveries on the sale of MS and HSD. BPCLended the year with a retail sales volume of 17.21 MMT as compared to 16.16 MMT in theyear 2008-09.
BPCL’s sales volume of MS in 2009-10 stood at 3.56 MMT as compared to 3.22 MMT inthe previous year reflecting a growth of 10.69%. Although the total volume of MS hasincreased, the trend of decline in the sales of branded fuel continued with sales of‘Speed’ going down by 42% over the previous year. The sale of ‘Speed’in 2009-10 was 355.7 TMT as against 610.5 TMT in the previous year. The continuing declinein the sales volumes of branded fuel can be attributed to the difference in the basis oftaxation as compared to unbranded petrol, leading to very high price differentials.
BPCL ended the year 2009-10 with a sales volume of 11.92 MMT of HSD reflecting a growthof 6% over the volume of 11.24 MMT recorded in 2008-09. As in the case of MS, there was asharp decline in the sales of branded HSD ‘Hi Speed Diesel’ with sales decliningfrom 782.37 TMT in 2008-09 to 274.07 TMT in the current year.
BPCL commissioned 304 new retail outlets during the year. The public sector oilcompanies together commissioned 1557 outlets as compared to 116 outlets commissioned bythe private players. The emphasis on site quality in the urban markets and strategicexpansion on highways paid off handsomely. In the Highway sector, the throughput peroutlet for One Stop Truck Stop (OSTS) outlets has reached 811 KL per month showing agrowth of 14.7% and that of Highway Star outlets has reached 400 KL per month. Thequalitative aspect of the retail network continued to make it stand apart from otherindustry members with overall throughput per RO for BPCL at 214 KL, which is 21% higherthan other industry members. Throughput of OSTS was less during 2009-10 as compared to2008-09, due to commissioning of new OSTS and supply related issues during the first halfof the year. BPCL has ambitious plans of commissioning over 800 new outlets in 2010- 11.
The sales volumes of CNG and Auto LPG increased as compared to the previous year.During the year 2009-10, CNG sales volume stood at 177.02 TMT, representing a growth of16.63% over the volume of 151.78 TMT achieved in the previous year. Similarly, the salesof Auto LPG showed a marginal increase from 53.72 TMT in 2008-09 to 57.78 TMT in thecurrent year. During the year, 21 CNG stations and 6 Auto LPG stations were added toBPCL’s network.
The emphasis during the year was on enhancing customer enablement through a CustomerAcquisition Programme using business models for MS and HSD. It aimed at acquiringcustomers outside the outlet, revival of dormant customers and enrolling more customers toSmartFleet and Petro Cards. Sales campaigns were organized to build relationships with thedealers and customers. Special attention was paid to outlets which had been lagging behindand registering negative sales growth. These measures have contributed significantly toincreasing sales volumes.
The throughput handled by Logistics during 2009-10 was 44.17 Million KL, an increase of15.6% over the throughput of 38.2 Million KL during 2008-09. The thrust during the yearwas on achieving better Inventory control and this led to a reduction in the workingcapital to the tune of over Rs. 900 crores. The Vehicle Tracking System now covers theentire fleet of 6000 tank lorries used for delivering MS and HSD to the retail outlets.The volume of rail movements crossed 39.5 MMT during 2009-10 which is the highest achievedin a single year. Efficient operations resulted in the reduction in operating costs andoperating losses.
The Pure for Sure (PFS) network was further expanded and a total of 7091retail outlets are now certified under the PFS banner. Over 84% of the retail outletnetwork now consistently delivers superior value to the customers.
On the Retail Automation front, the total number of outlets covered under automationhas reached 2266, which is the highest in the oil industry.
BPCL has launched the Financial Inclusion program for the Small Distance CommercialVehicle (SDCV) customers on 13th July, 2010 in the presence of the HonourableFinance Minister, Mr. Pranab Mukherjee. BPCL has joined hands with Corporation Bank andUTI Asset Management Company in this initiative. The programme seeks to help BPCL’sdealers to build a strong relationship with the customers, many of whom have a great needfor financial inclusion. BPCL’s select Retail Outlet dealers will work as BusinessCorrespondents of Corporation Bank to facilitate branchless banking to the truckingcustomers through biometric smart card based technology. The customers will be offered abasic savings account involving small cash deposits and withdrawals, recurring deposit,micro credit, micro pension, micro insurance and health insurance. Micro credit toeligible customers will be given at normal banking rates. BPCL is the first and the onlyoil company in India so far to offer Financial Inclusion services through its RetailOutlets in Mangalore and Patna territories, where pilots were launched.
The PetroBonus Program was the first of its kind to be introduced in India with thelaunch of Petro Card. The 10th anniversary of the launch was celebrated on 29thSeptember, 2009. During the year, the Petro Card base grew by 62,575 customersto reach 1.02 million and the SmartFleet base grew to 1.14 million with the enrolment of98,640 vehicles during the year. Keeping pace with the increasing penetration of creditand debit cards in various consumer segments, the business entered into strategic paymentfacilitating alliances with HDFC Bank for increased customer convenience and to drivetheir respective customer bases to BPCL outlets. This has grown into a 2.16 million strongmembership base clocking about 1 lakh transactions every day at BPCL outlets across thecountry. BPCL’s customer loyalty programmes continued to scale new heights byachieving sales of over Rs.10,000 crores reflecting a growth of 19.5% in volume terms. Thecustomer acquisition strategy adopted and the focus on getting new telecom customers hascontributed significantly in achieving these numbers.
During the year, the Allied Retail Business grew by 18% with a turnover of Rs. 359crores making it not only the largest non-fuel revenue generator in the oil industry, butalso one of the leading retail networks in the country offering a basket of servicesranging from C-stores and Quick Service Restaurants, to financial and travel relatedservices. The network of 235 In & Out stores is by far the largest organizedconvenience retailing proposition in the country and recorded a sales turnover of Rs.146crores. As part of the alliance management strategy, 332 ATMs from multiple banks arecurrently operating at BPCL outlets. The alliance initiative with Western Union MoneyTransfer continues to do well. A pilot project for selling Motor Vehicle Insurancepolicies through the retail network has been initiated. The In & Out e-Traveller - thee-ticketing/ e-booking facility for rail, air and hotel accommodation is presentlyavailable at 190 outlets.
INDUSTRIAL AND COMMERCIAL
Even as the economic revival commenced, the year 2009-10 saw the Industrial &Commercial (I&C) business face numerous challenges like increasing trend of crude oiland product prices, large scale import of products by traders and end users, aggressiveselling of products by private marketing companies and improved availability of gas. Afterthe creation of a new business unit to handle Gas, I&C business achieved a volume of5.6 MMT in 2009-10. The increased availability of gas in the country and priorityallocation to the power and fertilizer sectors has affected the sale of liquid fuels likeNaphtha and LSHS, which has seen a marked reduction of around 21% and 24% respectively involume terms during 2009-10. The business continued its focus on Bitumen marketing indeficit markets, which resulted in BPCL achieving the highest growth in packed Bitumensales of 4.76% even as the public sector oil companies saw a decline of 9.3%. BPCL alsorecorded the highest growth in the sale of products like SBP and MTO.
The business has entered the international bunkering segment with the commencement ofthe 380 cst fuel oil bunkering sales at Mumbai Port during the year. With the inaugurationof bunkering facilities at the JNPT port in May 2010 and the commissioning of similarfacilities in Kochi in July 2010, the bunkering initiative is poised to grow in the comingyears.
Efforts were continued to achieve speedy collection of customer dues to ensure bettercash flow management. The collections from customers through channels like Real Time GrossSettlement (RTGS) and National Electronic Fund Transfer (NEFT) reached a level ofRs.12,000 crores during the year 2009-10. At present, over 60% of the total turnover ofthe business is being collected through these platforms.
Having been able to successfully withstand the fierce competition and challengingmarket conditions, BPCL is gearing up to face fresh challenges by devising appropriatestrategies for re-aligning and positioning itself in high consumption centres andunrepresented markets.
BPCL was one of the first movers in the emerging gas market in India by becoming one ofthe promoters of Petronet LNG Limited (PLL). BPCL is one of the marketers of LNG which ismade available from the PLL terminal at Dahej. BPCL also has a share of 40% in theupcoming LNG terminal of PLL at Kochi. BPCL is also a pioneer in setting up City GasDistribution (CGD) networks in India and has promoted four Joint Venture Companies in thisarea. With a view to have greater focus, gas marketing, which was earlier a part of theI&C Business, has been made as a separate business from 2009.
During the year 2009-10, the total gas volume handled was 820 TMT as against 866 TMT inthe previous year. The decrease in volume is on account of the completion of the contractfor supply of RLNG to Ratnagiri Gas Power Private Limited in September 2009 after theallocation of the indigenously produced gas to them. Apart from the 710 TMT of sales toconsumers, 110 TMT of gas was supplied to Mumbai refinery. BPCL was the first publicsector refinery to start drawing from the KG D6 gas allocation from February 2010. BPCLpresently has a firm allocation of 0.26 mmscmd and fall back allocation of 0.31 mmscmd ofRIL D6 gas for use at Mumbai refinery.
A Gas Sale Agreement has also been signed by BPCL along with other offtakers, withNational Thermal Power Corporation Limited for supply of RLNG for a period of 20 years totheir Kayamkulam plant, with BPCL having a share of 0.4 MMTPA.
The Lubricants business, which was the first to be decontrolled in the oil sector, isalso one of the most competitive. Given that the Indian economy is expected to deliverhealthy GDP growth rates, the Lubricants business offers immense potential for growth.BPCL has inherent strengths including a strong geographical presence across the country,Research & Development competency enabling continuous product upgrading, own source ofGroup II+ base oil at Mumbai, pan India presence in terms of distributor network and youngand energetic workforce committed to achieving excellent performance. At the same time,there are inherent threats like increased competition from re-refiners offering localbrands of lubricants and the continuous phasing out of two stroke engines. Given thisbackground, the Lubricants business delivered a sales volume of 231.12 TMT in 2009-10 ascompared to 203.22 TMT in the previous year representing a growth of 13.73% over theprevious year. The finished lubricants volume grew by 23% during the year. Both theReseller channel (Retail & Bazaar) and Direct channels grew by over 20%.
In the retail channel, focus remained on generating secondary sales at the outlet.Initiatives like MAK QUIK and One Day Wonder improved visibility of the brand and offereda value proposition to customers. A value added service was created by offering authorizedHero Honda service stations under the brand ‘City Works’. As at 31stMarch, 2010 there are 160 City Works operating at various locations across the country.The Bazaar channel has assumed great importance and BPCL has identified high potentialmarkets and remained aggressive in those markets to achieve deeper penetration.BPCL’s MAK Lubricants are now available across the country at more that 23,000 retailcounters apart from small mechanic shops and authorized service stations. New productslike MAK Boat XP, MAK Chakda were launched during the year.
BPCL has expanded its customer base in the Direct market across segments with specificfocus on key growth sectors in India. The full range of products are on offer from normalapplications like Engine oils to Hydraulic, Cutting, Marine and very specialized productsfor applications in Defence and Railways. During the year, products were launched forspecific applications like MAK Steel for steel plant applications, MAK Amocam Plus andsuperior Industrial Gear Oils. On the exports front, BPCL entered the Bangladesh andSharjah markets during the year.
Considering the importance of the Original Equipment Manufacturers’ (OEM) segment,there was a special focus on OEM business and BPCL entered into two new alliances whichsaw the introduction of Escorts 4 stroke Bike Engine oil and TATA Passenger Car Motoroils.
Given that the per capita consumption of lubes in Asia is 1/6th of some of the westerncountries, this category has a promising future in the Indian market. Barring the recenteconomic slowdown, the projections for the automotive sector remain strong and this willhelp the lubes sector to remain on the growth path. However, the future volume growthwould be impacted by the use of better quality, long drain lubes thus increasing thereplacement cycle for lubes. In the short term, intense competition can be expected andsuccess of a product would largely depend on how well it is positioned, branded anddistributed.
The year 2009-10 was an eventful year for the LPG Business. While the internationalprice of LPG has been vacillating, the domestic LPG consumers were by and large insulatedfrom those fluctuations. Although BPCL’s profitability and liquidity have beenadversely impacted, the demand of genuine customers was fully met while ensuring increasedefforts to avoid leakage of subsidized LPG to the non-domestic segment.
BPCL’s total LPG sales for 2009-10 stood at 3235.82 TMT giving it a market shareof 25.8%. LPG sales volume grew by 6.68% as compared to the previous year when the salesvolume was 3032.9 TMT. With the addition of 1.9 million new customers during the year,‘Bharatgas’ is present in approximately 28 million households as on 31stMarch, 2010. The customers are serviced through a network of 2187 LPG distributorships. Interms of LPG bottling infrastructure, BPCL has 49 LPG Bottling Plants with a ratedcapacity of 2472 TMTPA. The total LPG bottling during the year 2009-10 was 2936 TMT,representing a capacity utilization of 107%. BPCL has also connected 48,533 households ason 1.4.2010 through the LPG Reticulated System or ‘Piped LP Gas system’including 10,332 households who were enrolled in 2009-10. In the commercial packedsegment, where the product is sold at market determined prices, BPCL’s volumesregistered a growth of 26.44%.
BPCL has commenced refill booking through SMS and IVRS system. The refill bookingthrough SMS has been introduced at all state capital markets and metros. Refill bookingonly through SMS/IVRS has been taken up as a pilot for the Delhi market.
During 2009-10, the ‘Beyond LPG’ initiative registered a turnover of Rs.700crores representing a 59% growth over the previous year. BPCL’s efforts are directedat enrolling more distributors into the programme so that a larger section of theconsumers could benefit from the value proposition. Bharat Metal Cutting Gas (BMCG), whichwas developed by BPCL to replace the conventional Acetylene, has come to be accepted as anideal product for the metal cutting and brazing applications in the industrial sector. Theproduct has gained tremendous popularity and confidence amongst the industrial users,primarily because of its performance efficiency and low cost vis--vis Acetylene.Continued refinement of this product is on and IIT, Roorkee has developed new nozzleswhich could further improve the cutting performance of BMCG. During the year 2009-10, 6323MT of BMCG has been sold to the industrial sector, registering a growth of 33% over thevolumes achieved in 2008-09. As part of the initiative to market BMCG overseas, BPCL hasformed strategic alliances in the Middle East. With over 189 customers in Saudi Arabia andmore than 50 customers in Oman, the product has been well received. Technicaldemonstrations were held in the United Arab Emirates and the product was launched in theEmirates of Fujairah, Sharjah, Dubai and Ras Al Khaimah.
BPCL continues to accord the highest priority to HSSE initiatives. A number ofinitiatives are being pursued in this area with particular focus on leading a healthy lifeand injury free workplace. Several measures have been taken to ensure real time safetyassessment of LPG plants with a view to identify and take corrective measures withoutdelay.
To meet market challenges and ever rising customer expectations, effective steps wereundertaken to upgrade the skills and capabilities of field staff through focused Trainingand Development plans. During the year, e-learning modules on BMCG, benchmarking andsafety in LPG plants have been developed and launched through the LPG knowledge portal -Bharatgas University.
The Indian aviation sector has been passing through some tough times in the last twoyears, on account of the high prices of aviation turbine fuel and the effects of theeconomic slowdown. However, there were signs of passenger traffic increasing in the laterpart of the financial year and consequently, the industry sales volume of ATF which haddeclined in 2008-09, reflected a growth of 3% in 2009-10. During the year, BPCL hadinitially lost market share, mostly in the domestic segment, which was made up byacquiring new business from international airlines. Consequently, BPCL ended the year2009-10 with a sales volume of 925 TMT, which represented a nominal growth of 0.91% overthe previous year.
During the year, BPCL commissioned ATF fuelling facilities in seven new airports. BPCLcurrently has a presence in 30 airports across India. The focus was on reducing the levelof inventory holding, which has come down to 9 days from 19 days as at the end of theprevious year. BPCL also commissioned the Hydrant Fuelling System at Gwalior Airport,which is the first of its kind at any Defence Airport. With domestic airlines facingsevere liquidity constraints, BPCL’s working capital increased on account of higheroutstandings from these customers.
It is BPCL’s continued endeavour to enhance its growth through the effectivedevelopment of its human resources. As on 31st March 2010, BPCL had 13898 employees on itsrolls. In the recent past, a combination of demographic factors, market forces and foraysinto new businesses has brought in a new urgency for the need to cultivate a workforcethat offers true competitive advantage. Several learning processes and initiatives havebeen designed and delivered keeping this in view. In order to enable people at variouslevels to take up leadership roles in the future, a number of customised assessmentprocesses and training programmes were introduced, keeping in mind business priorities andkey skills required for critical roles. Further, to enable the resolution of the ongoingchallenge of aligning business goals with individual goals, a series of workshops onStrategic Performance Excellence covering a large number of executives, arebeing conducted. Using the existing Balanced Scorecard framework, these workshops enableexecutives to appreciate business strategy, discover appropriate measures, takeaccountability and understand and respect interdependencies.
Continuing its journey as a ‘Learning Organisation’, BPCL is in the processof creating its second generation cadre of Internal Coaches equipped with the knowledge,skills and tools of Organisation Learning technology. These coaches will work with teamsand help them in dealing with change/ crafting change for themselves and developindividual and collective capacity to reach goals.
In an effort to take learning beyond training rooms, an innovative Case Study Challenge‘Socratix’ was launched for employees to develop strategic insights andorganizational vision. An E-learning portal was recently launched to reach outto over 4500 employees at several locations across the country, to provide themopportunities to enhance their soft skills as well as technical skills.
Over the years, employees have been motivated to generate more ideas with a view toengage their creative minds to achieve excellence and enhance their learning process. The‘IDEAS’ platform is one such initiative to recognize and promote creativity atthe workplace. This participative tool has helped to promote employee commitment andinvolvement, besides improving efficiency derived from the ideas contributed by them. In2009 a total of 272 entries were received under Creative Stroke for ideas thathave been successfully implemented and 567 entries under Mind’s Eye Category forideas that may have huge potential in terms of business benefits, but have not found theright platform for implementation. A total of 35 entries were adjudged winners under thevarious categories, in recognition of the contribution made by the participants toenhancing the organization’s effectiveness.
Another milestone in strengthening the human resource management systems is themigration of the Performance Management System (PMS) into the SAP platform. The migrationof PMS in SAP will bring about positive changes, such as enhanced accountability acrossthe spectrum, discipline in terms of timely completion of the PMS and transparency in theend to end appraisal process. It is also envisaged that this should bring in sharper focuson performance culture in the organisation.
Leveraging technology to further strengthen the quality of services provided to theinternal customer by human resources is another core area of focus for BPCL. A modulecalled My Portal is a one-stop dashboard available to every employee in theorganization, wherein transactions related to leave, travels and tours, approvals, salaryand offcycle payments and a host of other HR/Administration related activities areuploaded. By providing world class systems to make HR services smoother, faster,accountable and more effective, BPCL has taken another step to enhance its performancedriven culture.
Apart from providing opportunities to employees within the organization, BPCL alsoendeavours to promote excellence in higher education of meritorious students through theBPCL scholarships scheme for higher studies. During the year 2009-10, 29 students goingabroad for pursuing higher studies were provided financial support through this scheme.
Employee Satisfaction Enhancement (ESE) Cell is a unique and innovative initiativetaken by BPCL in its endeavour to make BPCL A Great Place to Work. Theobjective of the ESE Cell is to lay down a framework for prompt redressal of genuinegrievances of all the employees of the Corporation. One of its focus areas is to reach outto the maximum number of employees in a proactive manner to listen to them, to understandtheir issues and concerns and resolve them. BPCL recognizes that unless adequately andpromptly resolved, these issues would result in lower productivity and a demoralized workforce. The Employee Assistance Programme - ESE Roshni was carried forward during the year.Through this programme, counselling services are provided for management staff and theirfamily members by professional counsellors. More than 1100 management staff have takenadvantage of the programme, appearing for online self assessment tests, reading selfdevelopmental articles and going for counselling. The ESE cell also conducted sessions onYoga / Pranayam, team building exercises etc. These measures and initiatives undertaken byESE Cell have reinforced BPCL as a caring and employee friendly organization and immenselycontributed in enhancement of overall satisfaction and wellbeing of its employees.
INTEGRATED INFORMATION SYSTEMS
Information Technology remains one of BPCL’s strengths. BPCL has continued itsefforts to leverage information technology with a view to achieve greater efficiencies inall its operations. A number of strategic initiatives were launched during the year indifferent areas.
The product exchange arrangement with other oil companies is an important part of thesales and distribution process. With a view to leverage the technology for mutual benefit,BPCL has put in place a B2B system with IOC. The two companies have exchange transactionsat over 100 locations across the country and the value of the transactions exceeds Rs.40,000 crores annually. The settlement of these transactions involves considerablereconciliation efforts. The technology backbone in the two companies was leveraged and aseamless integration of the systems was achieved across the two companies coveringlogistics, operations and finance functions. The time and effort taken for reconciliationhas reduced significantly in both the companies. It is planned to extend the solution tocover exchange transactions with other oil companies.
The implementation of the Access Control module of the Governance Risk& Compliance (GRC) solution of SAP R/3 was completed in all businesses. This is animportant part of the overall risk mitigation mechanism. The solution will enable ease ofuser access provisioning, transparency and the availability of audit trail. This will alsofacilitate the synchronization of the Manual of Authorities with the SAP system to defineaccess privileges and ensure segregation of duties.
As part of the Business Intelligence (BI) system, information dashboards have been madeavailable to the role holders in all businesses and for the senior management team. Thesystem has many user friendly features and being role based, provides all the informationneeded for taking effective business decisions.
The travel management module of SAP R/3 was made operational from 1stSeptember 2009. A robust platform is now in place for managing the travel processesefficiently with budgetary controls and integration of the vendor settlement process. Byextending part of the process to travel agents, the back end HR processes have beenstreamlined and simplified.
The Indian GAAP (Generally Accepted Accounting Principles) is proposed to be convergedwith IFRS (International Financial Reporting Standards) from the financial year starting 1stApril 2011. The New General Ledger solution in SAP R/3 addresses therequirements for the above transition and BPCL has migrated to this solution with effectfrom 1st April 2010.
During the year, a major effort was undertaken to standardize the service procurementprocess in the system. This was initiated with a view to ensure correct accounting, bettercompliance with tax laws and to secure proper adherence to provisions relating todeduction of tax at source. The new process has since been rolled out across allbusinesses and entities.
The security systems, both at the external and internal peripheries, have been upgradedwith new tools and solutions to secure the environment from external threats. The Symantecendpoint security solution implementation has been completed and rolled out across theorganization. Another major initiative undertaken was the implementation of the RSA TwoFactor Authentication system for ensuring safe and secure access of the systems by endusers.
During the year, BPCL’s network was upgraded to Multi Protocol Label Switching(MPLS) involving close to 180 locations. This has helped the implementation of newapplications systems besides improving the network uptime and bandwidths. Improvedconnectivity was also established through alternate routes to the existing 16 MBPS linkconnecting the Corporate Data Centre at Mumbai to the Integrated Data Centre at Noida nearDelhi through a 45 MBPS link. A state-of-the-art e-mail archival system has beenimplemented to safeguard important business information and to comply with therequirements relating to retention of data.
For the fourth time in succession, the ERP Competency Centre has been awarded the CCOE(Customer Centre of Excellence) certification from SAP. This certification is valid for 2years.
HEALTH, SAFETY, SECURITY & ENVIRONMENT
BPCL continued to adopt a holistic approach on Workplace Health, Safety, Security andEnvironment as prime areas with a view to achieve sustainable performance. The RegionalHealth, Safety, Security & Environment (HSSE) Councils played leading roles in termsof employee engagements through active participation and sharing best practices acrossbusinesses and entities. Special emphasis was given to training programmes with a thruston reinforcing safety culture across BPCL. In this direction, several training programmesand workshops covering workplace health, workplace security & surveillance, waterharvesting at locations, safety & safe driving training to transporters’ crewwere arranged regularly at locations. During the safety audits at the locations, theimportance of using the Personal Protective Equipments (PPEs) by all at the workplace washighlighted to ensure safe operations.
Workplace Security remained a key concern for the entire sales network in general andoil & gas storage locations in particular. Locations were operating under the frequentsecurity alerts raised from time to time even as they kept the supply and distributionchain uninterrupted. Security preparedness and response was ensured at all locationsacross the country. A unique workshop on ‘Workplace Security & Surveillance’was designed in close co-ordination with the State Police / CISF experts and rolled out tocover vital locations.
BPCL published the 3rd Corporate Sustainability Report for the year 2008-09with the theme ‘Responsible Development’. This report was as per GRI-G3 normsand it is a matter of pride that the report was rated A+ by the third party assuranceprovider, M/s. DNV. This is the first Corporate Sustainability Report to be assured inIndia as per Standard: AA1000 AS 2008 version.
INTERNATIONAL TRADE AND RISK MANAGEMENT
Crude oil prices moved from their lows of USD 45 per barrel at the beginning of thefinancial year to around USD 80 per barrel at the end of the financial year 2009-10. Thiswas mainly on account of optimism in the market following the global financial recovery.Unlike the earlier years, the general trend of sweet crude oil grades (Brent) commandingpremium over sour (Dubai) grades, the year 2009-10 saw Dubai prices commanding premiumover the Brent price. This was mainly due to regional variation like reduced demand in theUnited States, strong demand in India and China, production cut by OPEC countries andstability in countries like Nigeria resulting in increased production of low sulphur crudeoil. In order to take advantage of the prevailing low Brent-Dubai differential, BPCLcarried out suitable changes in its procurement strategy by changing the crude oil mix ofits refineries.
During the year, the average price of Brent Crude Oil reduced by about 18% from USD84.45 per barrel in 2008-09 to USD 69.62 per barrel in 2009-10. Further, the sweet / sour(Dated Brent / Dubai) difference reduced substantially from USD 1.6 per barrel in 2008-09to USD 0.05 per barrel in 2009-10.
During the year, BPCL imported 14.40 MMT of crude oil as compared to 12.70 MMT in2008-09. In value terms, the cost of imported crude oil on Free on Board (FOB) basisamounted to USD 7560 million (Rs.35,419 crores) as compared to USD 7961 million (Rs.36,114crores) in 2008-09. The average price stood at USD 70.4 per barrel as compared to USD 85.3per barrel in the previous year. The ratio of Term to Spot purchase ofimported crude oil was 62:38 which was lower than the 85:15 ratio in 2008-09, mainly dueto the cut in production by OPEC. For procurement of spot cargo, BPCL sought better termsand conditions with the suppliers, expanded the vendor base, added new grades of crude oiland opened up new avenues for procurement of crude oil from floating storage.
On the products front, BPCL imported 1588 TMT of HSD, 33 TMT of SKO, 211 TMT of MS, 228TMT of LPG to meet the shortfall in supply from domestic sources. BPCL also imported 48TMT of Reformate as blendstock during the year 2009-10.
During the year, BPCL exported 2698.91 TMT of refined products. This was higher thanthe level of 1381.88 TMT exported during the previous year. Export of Fuel Oil increasedfrom 664.29 TMT in 2008-09 to 982.58 TMT during 2009-10. Export of naphtha increased from703.45 TMT in 2008-09 to 1341.45 TMT during 2009-10. During the year, BPCL also exported352.39 TMT of High Sulphur Gas oil. In recognition of its export performance, DirectorGeneral of Foreign Trade recognised BPCL as a Premier Trading House. This wasan improvement over the earlier recognition status as a Three Star ExportHouse.
In order to ensure regular transportation from the foreign ports to its refineries,BPCL entered into a Contract of Affreightment (COA) with Shipping Corporation of India(SCI) for upliftment of 6 MMT per annum of imported crude oil for a period of three years.On the same lines, a COA is signed with SCI for upliftment of 2.35 MMT per annum of MumbaiHigh Crude for Kochi Refinery. Further, to ensure fixed cost of freight and take advantageof a depressed freight market, BPCL has taken two Afframax size vessels (80000 tonnage) ontime charter. Strategies on optimal parcel size were worked out in order to bring downfreight cost and inventory holding cost. A thorough examination of the existing terms andconditions of COA was carried out. These steps have contributed in reducing freight cost.
Considering the high volatility in the prices of crude oil and petroleum products,hedging of refinery margins continued to remain an important focus area. Besides hedgingthe refinery margin, BPCL has undertaken hedging the price of platinum required for KochiRefinery’s modernisation plan. With this hedging, BPCL achieved the distinction ofbeing the first company in the Indian Oil Industry to cover exposure on the preciousmetal. BPCL added yet another feather in its cap by becoming the first company toundertake hedging of freight rate exposures.
BPCL continues to be a front runner in the Industry with its expertise in RiskManagement and is now a widely respected name by a number of players in the internationaloil market. The Trading and Risk Management (TRM) Board articulated the risk appetite ofthe Corporation. The Audit Committee of the Board also reviewed the hedging activities.The Risk Management Committee (RMC) continued to provide direction and guidance besidescarrying out regular review of hedging positions. Regularreviewofcreditexposureofcounterpartieswasundertaken. Credit ratings of the counterpartieswere analysed and internal credit limits adjusted to incorporate any change in theircredit ratings. New counterparties were enrolled with a view to diversify the credit riskand obtain competitive quotes.
RESEARCH & DEVELOPMENT
BPCL continued its focus on Research & Development activities at the CorporateR&D centre at Greater Noida in Uttar Pradesh, Product & Application Centre,Sewree, Mumbai and the R&D Centre at Kochi Refinery. R&D forms the backbone forLubricants Business, to achieve a higher growth and better profitability throughdevelopment of new formulations and alternate formulations for the existing Lube &Grease products.
During the year, new products developed include Passenger Car Engine Oil for a majorOriginal Equipment Manufacturer, Fully Synthetic Gear Oil, customer specific Metal WorkingFluid, High Performance Grease etc. These would bring a number of business benefits interms of improving BPCL’s market share, making available better quality products,reduce input costs etc.
The Corporate R&D Centre filed five Indian and five foreign patent applications toprotect the intellectual property that resulted from innovative research. As part of itsnew initiatives, BPCL continued its research collaborations with a number of leadingresearch institutes. These include collaborations with Indian Institute of Science,Bangalore, Osmania University, Hyderabad, Tamil Nadu Agricultural University, Coimbatore,IIT, Roorkee, IIT, Madras and Institute of Plasma Research, Gandhinagar.
BPCL had taken up three projects with the Indian Institute of Science, Bangalore oncutting oils, adsorption of natural gas using nano technology and photo voltaic cellsusing new materials like copper, indium, gallium, sulphur, zinc. While the first two werestarted in May 2008, the third project was started in May 2009.
The project on cutting oils was undertaken after it was found that the stability ofsoluble cutting oils was poor leading to complaints from customers. During the course ofresearch, BPCL and the Institute have developed a machine that can measure friction at thepoint of contact. BPCL is in the process of obtaining a patent for the same and putting itinto commercial use. There are challenges to be overcome before the product can becommercialized. Work is currently on with regard to the other two projects on improvedmethods of storage of gas and the next generation of solar cells.
BPCL is planning to undertake further research projects with the Indian Institute ofSciences in areas like residue upgradation for producing value added products, alternatefuels, treatment of effluents, hydrogen production using solar energy etc.
EXPLORATION AND PRODUCTION OF CRUDE OIL AND GAS
Bharat PetroResources Limited (BPRL) was incorporated on 17th October, 2006 as a whollyowned subsidiary of BPCL to focus on exploration and production activities. Till date,BPRL has participating interests (PI) in 26 exploration blocks, in India and abroad (ofwhich 9 blocks are in India and 17 are abroad - in 6 countries), with PI levels varyingfrom 10% to 40%. The countries (besides India), where BPRL has blocks are Australia,Brazil, East Timor, Indonesia, Mozambique and the United Kingdom. All these blocks are invarious stages of exploration, and BPRL’s acreage in all these blocks is about 81,000sq km, of which approx 91% is offshore acreage. All the above interests are held eitherdirectly by BPRL, or through its Joint Ventures / wholly owned subsidiaries.
BPRL, through its wholly owned subsidiary company, Bharat PetroResources JPDA Limited(BPR-JPDA LTD), has a PI of 20% in Block-JPDA 06-103-East Timor in the Joint PetroleumDevelopment Area between Australia and East Timor.
IBV Brazil Petroleo Limitada, a joint venture company where BPCL and VideoconIndustries Limited each have a 50% share of the capital, has PI in 10 blocks in Brazil.Further, BPRL has incorporated a wholly owned subsidiary company, BPRL International BV,which in turn, has incorporated BPRL Ventures BV, BPRL Ventures Mozambique BV and BPRLVentures Indonesia BV as wholly owned subsidiary companies for undertaking explorationactivities in various countries. BPRL Ventures Mozambique BV has PI in a block inMozambique, and BPRL Ventures Indonesia BV holds PI in a block in Indonesia.
While the previous year was focussed on acquisition of exploration acreages, thecurrent year predominantly was the year of consolidation with streamlining of operationsin Brazil, moving ahead decisively on the Indian and overseas work programme, andventuring into the unexplored virgin basin of Mozambique. Also, PI in a block in theNunukan basin in Indonesia was acquired during the year 2009-10, through the farming inprocess. The year also saw the announcement of 2 world class discoveries, one each inMozambique and Brazil. The award of Joint Operatorship with Hindustan Oil ExplorationCorporation Ltd. (HOEC) in the Rajasthan block during the NELP VII bid round was anothermilestone for BPRL.
Looking ahead, BPRL is focused upon consolidation of its portfolio, while at the sametime, keeping an eye open for potentially good opportunities. Constant updation andaugmentation of the technical data base and in-house capabilities are also being activelyundertaken.
AWARDS AND RECOGNITION
BPCL was conferred with the prestigious FE EVI (Financial Express & EmergentVentures India) Green Business Leaders Award for the year 2009-10. The award recognizesthe excellent green initiatives towards climate change. Team FE EVI, along with knowledgepartner Indian School of Business, Hyderabad had conceptualised a unique model to awarddeserving companies in India from the ‘FE 500’ list. The selection criterion forthe awards involved a study of 80 Indian businesses and evaluation of their performanceover an extended period of time. Selection was also based on a company’s initiativestowards becoming a ‘Green Company’. BPCL has been awarded for understandingClimate Change to cut down the greenhouse gas (GHG) emissions and taking necessary stepsto find cost effective mitigation solutions.
BPCL received the Best Cash Management Deal for Electronic Receipt Solution institutedby the Asset Magazine, Hong Kong, a well respected finance magazine. The Asset Triple Atransaction banking award is the industry’s most prestigious award for banking,finance, treasury and the capital markets. This award was in recognition of BPCL havingintroduced RTGS/NEFT collection with full integration with SAP through BNP Paribas Bankfor the realization of money from the customers, which has led to reduction of interestcost, bank charges, credit exposure, saving of man-hours relating to dealing with physicalinstruments and hassle free operations for the customers.
BPCL was awarded the Fleet Enabler of the Year in The Apollo-CV Awards2010. Apollo Tyres Limited, in association with CV magazine, announced the first set ofdedicated awards for the commercial vehicle segment in India. A unique feature of theseawards was that, apart from recognizing commercial vehicle and ancillary manufacturers,fleet operators too were acknowledged for their contribution to the industry.
The BPCL brand has climbed up three notches to the sixth place, bettering its valuationto US $ 2.62 billion, according to the valuation of India’s Top 50 Most ValuableBrands by M/s. Brand Finance.
BPCL has reinforced its standing in the energy industry by ranking 97thglobally, 15th in Asia and 5th in Refining and Marketing among theAsian companies, as per Platt’s Top 250 Global Energy Companies 2009 list.
The Bharatgas brand has been recognized as Business Superbrand 2009, the ranking givento exceptional brands on the criteria of market dominance, longevity, goodwill, customerloyalty and market acceptance.
BPCL won the Readers Digest Most Trusted Brand Award in the Gold category for the thirdyear in succession.
The Association of Business Communicators of India (ABCI) recognized the company byselecting the ‘MAK online viral’ for the Gold Award. The external magazine– Journeys - lifted the Silver Award and the CSR campaign & Corporate Website wonthe Bronze Awards.
INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
BPCL has a system of internal controls to ensure optimum utilization and protection ofresources, IT security, speedy and accurate reporting of financial transactions andcompliance with applicable laws and regulations, as also internal policies and procedures.For this purpose, the company has formulated a clearly defined organization structure,authority limits and internal guidelines, rules for all operating units and serviceentities. ERP Solution and Business Information Warehouse systems have further enhancedthe internal control mechanism.
BPCL has an Internal Audit department consisting of experts from various functions,which supplements the review of key business processes and controls through regularaudits. Audit reports, significant risk area assessment and adequacy of internal controlsare also periodically reviewed by the Audit Committee through meetings held withManagement, Internal Audit and the Statutory Auditors.