MANAGEMENT DISCUSSION AND ANALYSISGlobal Scenario
The oil refining industry is a global business because crude oil, other feedstock andrefined petroleum products can be transported at a relatively low cost by sea and bypipeline and there is worldwide demand for such products.
Global demand for light refined petroleum products has grown faster than refiningcapacity for those products. The share of the Asia-Pacific region in the world petroleumdemand has increased over the years from 23% to a current level of approx. 31%, drivenmainly by China and India. This is expected to increase to approx. 50% of globalincremental oil demand by 2015.
The average annual oil demand is expected to grow @ 0.9% p.a. till 2030 and the demandis expected to be around 105 mbpd in the year 2030. The maximum demand growth is expectedfrom the Asia-Pacific region fuelled by the demand growth in China followed by India. Outof total investments of around US $ 860 billion expected in the oil refining industryduring the period till 2030, major investments amounting to around US $ 320 billion areestimated in the Asia-Pacific region fuelled by strong demand growth.
Geopolitical unrest in the Middle East/North Africa regions has been a major cause forthe oil price increase in early 2011, with increasing focus on potential contagion tomajor oil exporters beyond Libya. Since the oil price spiked in February 2011, refiningmargins have strongly recovered and remain higher across all regions, driven by strongdiesel margins, with Asian margins close to all-time highs. Refinery outages of around 1.4MMBPD in Japan have taken away around 350,000 BPD of diesel supply from the domesticmarket. Prior to the earthquake, Japan's 4.5 MMBPD refining capacity was running at closeto 90% with diesel production of around 1.25 MMBPD. Large Asian export-oriented refinersare likely to shift products to Japan, leading to tightening supply in the Europeanmarket.
Indian Scenario
Oil accounts for 31% of India's total energy consumption and there is unlikely to beany significant scaling down of dependence on these fuels in the next five to ten years.Currently, of the six core industries identified in India, the oil and gas sector haspropelled the growth of Indian economy most and the Government is looking for moreinvestors in the sector. India is currently world's fifth biggest energy consumer and theneed is continuously growing. India will account for 12.59% of Asia Pacific's regional oildemand by 2014 while providing 10.13% of supply. The present Indian refinery capacity is185.40 MMT which will further reach to 240.96 MMT by the end of 2011-12. Refineryproduction (crude throughput) during 2009-10 was 160.03 MMT. The consumption of petroleumproducts during 2009-10 were 138.196 MMT (including sales through private imports) anincrease of 3.60 per cent over 133.4 MMT during 2008-09, according to the Ministry ofPetroleum. India's current petroleum products consumption rate from April 2010 to February2011 was 128.827 million tonnes (MT), as per the estimates of the Planning and AnalysisCell (PPAC). The major capacities in India are presently concentrated in the Westernregion while the Northern region faces a shortfall, which is fulfilled by supplies fromother regions. India imports around 80% of its crude oil requirement. The country is,however, a net exporter of petroleum products. There has been substantial increase inexports of petroleum products with increased refinery capacity.
India is emerging as the global hub for oil refining having lower capital costs edgeover its Asian peers in the ballpark of 25- 50%, also with huge potential to cater to itsrising local and regional demand due to various advantages it enjoys like:-
• Large population base with very low per capita per annum oil consumption.
• Rising personal wealth leading to increased demand for consumer goods.
• High reserve of trained & highly skilled manpower at a relatively much lowercosts.
• Generally various fiscal benefits being awarded from central / state governmentsas refinery projects are mega investment projects generating huge employment and regionalwell being.
Also availability of natural gas to various key sectors like power and fertilizers hasfreed up naphtha as a feedstock to petrochemical sector. A whopping 42% decline inconsumption of naphtha as a raw material for power and fertilizers is observed for year2009. This naphtha is either consumed by local petrochemical units or exported. TheGovernment of India declared three PCPIR zones in Haldia, West Bengal,Vishakhapatnam-Kakinada, Andhra Pradesh and Dahej, Gujarat. These PCPIR zones will bringhuge investment in the refining and petrochemical sector. This will also give fillip tothe refining industry as petrochemicals feed-stocks from refinery such as propylene,naphtha and aromatics will fetch good value.
The consumption of middle distillates, the part of the barrel that is most levered tothe economic cycle has picked up particularly strongly in recent months, leading to higherglobal oil demand. Middle distillate product cracks are expected to continue to rise dueto strong demand for these products across Asia. Stronger oil demand, delays in newrefining capacities in Asia, and widening light-heavy oil price differential going forwardprovide a further upside to complex refining margins in Asia.
Business & Developments
To meet the supply and demand gap in the eastern sector, your Company is implementing a10 MMTPA Refinery project at Haldia, West Bengal. As a co-anchor of Haldia, West BengalPCPIR, your Company can generate value not only by producing Transportation fuels but alsoby producing valuable petrochemicals feed-stocks like Propylene and Aromatics to thedownstream petrochemical units which will be a part of the proposed PCPIR. In addition,your Company will also be in a position to take advantage of the forward looking policiesof the State Government. Furthermore, the location of the project in the Eastern region ofthe country will also give a distinct advantage in catering to the far-east markets, whichare likely to face a short supply situation owing to growing demand. As the Company isstrategically located in the Eastern part of India, it can cater to local demand as wellas the potentially huge demand of neighbouring Asian countries.