MANAGEMENT DISCUSSION AND ANALYSIS
(Forming part of the Directors Report for the year ended 31.03.2013)
The global economic environment during 2012-13 was challenging. Growth slipped inadvanced economies as a group, EU experienced further weakening, while US & Japan didshow signs of improvement, their growth rates continued to be low. Among advancedeconomies, during Q1 of 2013, growth in US and Japan improved while that in the Euro areacontracted. The Emerging economies also witnessed a significant deceleration in growth onaccount of weak external situation and their domestic issues and constraints. In 2013,consolidation is expected in the global economic scenario, with advanced economies groupprojected to grow at the same rate of 1.2% in 2013 as was in 2012 and emerging economiesgroup is projected to experience acceleration in their growth.
Growth and more particularly industrial growth in India slowed down in 2012-13, but thedecline appears to have bottomed out. Overall economic growth is expected to rise to morethan 6.0 per cent in 2013-14 from 5 per cent in 2012-13. Inflation continues to remainhigh, but there are definite signs that headline WPI inflation is coming down. Asinflation comes down, it may create more space for monetary policy to support growth. Theoil sector has seen some signs of reform but more reforms are required in the entireenergy sector to push growth.
The rising fiscal deficit was one of the major concerns last year but the most recentnumber on the countrys fiscal deficit, at 4.9 per cent of GDP for 2012-13, hasturned out better than expected and instills confidence in the Governmentscommitment to contain the fiscal deficit for 2013-14 at 4.8 per cent. These developments,which have been acknowledged by international credit rating agencies, should have afavorable impact on investor confidence.
High current account deficit was a major concern during the year. which stood at 4.8%of GDP in 2012-13. Another area of concern on the external sector front, has been themovement in the exchange rate. The rupee slumped to a record low in recent past, impactingthe overall external account.
The rate of growth of global primary energy consumption (12476.6 MTOE) was 1.8% in2012. China and India accounted for nearly 90% of the net increase in the global energyconsumption. Oil continues to be the worldRs. s leading fuel at 33.1% of primary globalenergy consumption followed by coal at 29.9% and Gas at 23.9%.
Indias Primary Energy consumption in 2012 at 563.5 mtoe registered a growth of5.1% with 4.5% share in global primary energy consumption. While Coal continues to remaina major fuel at 52.9% share in Primary Energy consumption, Oils share is 30.5%followed by Gas at 8.7%. On domestic Oil production front, India produced around 1.1% ofglobal oil at 0.92 mbd , a decline of 0.034 mbd from previous year. IndiaRs. s Natural Gasproduction at around 40.2 bcm in 2012 was 1.2% of global production and declined by 13.1%compared to 2011.
The world energy scenario has witnessed significant changes with resurgence of growthin oil and gas production on account of production from unconventional hydrocarbons andcontinued stress on use of renewable energy sources like wind and solar , supported byGovernment policy interventions across the globe. Increased production of oil and gas byUnited States will reduce imports into American continent and will impact oil and gastrade flows across the world, as oil movement will be predominantly from Gulf to Asiancountries. While the average Brent Crude price in 2012-13 came down to $ 110/bbl from $114 / bbl in 2011-12, the global oil demand marginally increased by 0.9 % to 89.7 mbd.India imports about 78% of its crude oil consumption and the total crude oil import billin 2012-13 shot upto $ 144 billion from $ 138 billion in the previous year.
Refining Industry and Oil Market Developments
Global Refining capacity stands at 92.5 mbd with a marginal 0.4% growth in 2012,whereas Asia Pacific Refining capacity registered a growth of 3.3% to reach a capacity of30.1 mbd and a share of 32.6% in Global Refining Capacity. India with 4.1 mbd Refiningcapacity in 2012 achieved 8.8% growth rate and a share of 4.4% in Global RefiningCapacity.
The 4.9% growth in petroleum products consumption in India was mainly contributed bygrowth in demand for HSD (6.8%) , MS (5%) , Naphtha (9.5%) and Petcoke (48.5%) whereasdemand for FO & LSHS, ATF and SKO registered negative growth at 17.5%, 4.8% and 8.8%respectively.
The Indian Refineries have processed 218.8 MMT of crude during 2012-13 as compared to203.8 MMT in 2011-12. As the production is more than the demand for petroleum products,India has emerged as a major exporter of petroleum products with exports of 63.8 MMTduring 2012-13.
Opportunities and Challenges
As per the Report of the Working Group on Petroleum & Natural Gas for XII plan, thedemand for petroleum products in India is expected to grow at around 5% CAGR during theXII plan period and reach 245 MMT by the end of XIII plan. Further, over the long term aswell, India is projected to be one of the fastest growing markets for oil and grow atrates significantly higher than the world average, implying abundance of growthopportunities in the Indian petroleum products market.
The supply of LNG in India is expected to increase in next 5 years as many LNG ImportTerminal project proposals are at various stages of approvals and implementation. Thisalong with domestic production should increase gas supplies in the country. Natural Gas atright prices provides a good alternative as a fuel in refineries besides many otherapplications in industrial and city gas distribution. CPCL is already working on changesthat are required in internal equipments and process modifications to utilize natural gasas fuel in refinery operations. IOCL is in the process of setting up 5.0MMTPA LNG terminalat Ennore which will provide Natural Gas to the refinery and usage of gas will also helpin reducing the pollution level in Manali industrial area significantly.
India being highly dependent on imports for meeting its energy needs, sourcing of crudehas to be optimized to meet the twin objectives of low cost energy as well as securedsupply. CPCL proposes to continue its efforts to widen the crude basket to increase thecapability to process a variety of crudes including heavy & high TAN Crude oils.Necessary infrastructure like additional tanks will be created to handle and processdifferent types of crudes in Manali and CBR.
Energy efficiency has been identified as one of the major solutions to reduce carbonfoot print from industrial activities and vehicular pollution. Also, energy generationrequires lot of water for various purposes in the processes as well as for coolingpurpose. One of the key utilities i,e Water being essential for both industrial and livingpurposes, there is a likely chance of crisis in water availability and water shortageswhich in turn calls for sizeable investments towards higher level of water recycling andre-use in refineries.
One of the major concerns and challenges for the Corporation today is the Refineryprofitability. In the year 2012-13 both physical and financial performance was low due toplanned shutdown of Refinery-II , unplanned shutdown of some critical units, consequentlower distillates and higher fuel & loss and lower Gross Refining Margins. TheCorporation also incurred higher interest cost burden followed by foreign exchange lossesdue to rupee depreciation accompanied with higher operating costs which resulted inoverall loss for the Corporation during the year 2012-13. These issues are being addressedthrough many initiatives to improve reliability in operations, to reduce fuel & loss,to conserve water by reducing steam leaks through steam leaks management system, and crudeoil inventory management etc.
Risks and Concerns
Your Corporation has formulated a well-defined policy framework includingimplementation procedure and monitoring mechanism for the risk management system. RiskManagers are evaluating the identified risks on periodical basis.
Some of the key Risk areas that your Corporation encounters are Foreign Exchange Marketfluctuation, Geo-Political escalations, safety & security aspects & statutoryclearances which are discussed as under.
In 2012-13 Indian Rupee depreciated by around 6.31 % against US Dollar adverselyimpacting the Corporation's financials. Now in 2013-14 , till date the RupeeRs. s sharpfall is likely to have a major negative impact on the Petroleum sector as well as on standalone Refining companies like CPCL in particular considering their large crude oil importdependence and increased foreign currency borrowing cost.
The escalation of geo political unrest & tensions as witnessed during the yearunder review, pose the risk of adversely affecting the international crude oil prices andsmooth & timely supply of imported crude oil. Crude Supply risk may be caused due toany stressed geo political situation with the supplier nation, shipping route,non-availability of suitable Crude vessel etc.
Safety & Security
Considering the hazardous nature of processes involved in transportation, storage &refining crude oils, storage & handling of petroleum products, safety and security isa priority concern for all times and at all locations. Your Corporation is fully committedtowards compliance of all the guidelines with respect to Health-Safety- Environment andSecurity
The ban on Manali region for any new and expansion projects is also an area of concernsince it limits the possibility of expanding capacities of CPCL plants as well as thedownstream units that could provide opportunities for CPCL to increase production ofpetrochemical feed-stocks. The current level of CEPI in Manali industrial area is belowthe threshold level of 70. With the efforts being made by the industries to reducepollution levels further in Manali region and subsequent lifting of ban in future , muchneeded investments into this region can be realized.
Internal Control Systems And Their Adequacy
Your corporation remains committed to ensure an effective internal control environmentthat provides assurance on the efficiency of operations, optimum utilization & use ofresources, security of assets and accurate reporting of financial transactions. Internalaudit department functions under the supervision of the Audit Committee chaired by anIndependent Director. Your Corporation has a well established internal control reviewmechanism which assures effective internal control environment to the Audit Committee andBoard of Directors.
Your Corporation has a full fledged Internal Audit Department comprising of personneldrawn from various functions in order to monitor the operations of the Corporation throughregular extensive audits. Significant audit findings, internal audit reports and adequacyof internal control systems are periodically reviewed at various levels like ManagementAudit Committee and Audit Committee etc.
The Directors Report has adequately dealt with this subject.
The Directors Report has adequately dealt with this subject.
Material Developments and Human Resources / Industrial Relations
The Directors Report has adequately dealt with this subject.
Statements in the Managements Discussion and Analysis and DirectorRs. s Report,describing the Companys focal objectives, expectations or anticipations are forwardlooking statements & progressive within the meaning of applicable securities, laws andregulations. Actual results may differ materially from the expectations; those expressedor implied depending upon economic conditions, Government policies and other incidentalfactors. Important factors that could influence the Companys operations includeglobal and domestic demand and supply conditions affecting selling prices of products,input availability and prices, changes in Government regulations / tax laws, environmentalstipulations, economic developments within the country and factors such as litigation andindustrial relations.