Hindustan Petroleum Corporation Ltd

- 2009-10

DEVELOPMENTS IN THE ECONOMY AND THE OIL SECTOR

Indian economy is in a recovery mode. India’s GDP growth for 2009-10 was 7.4% ascompared to a growth rate of 6.7% in 2008-09. This growth level has been achieved despitelow GDP growth of 0.2% in agriculture sector in 2009-10. The growth in the manufacturingsector was 11% in 2009-10, a significant improvement from 3.2% in 2008-09. The servicessector grew by 8.5% in 2009-10 with financing, insurance, real estate and businessservices exhibiting a growth of about 10%.

Inflation increased sharply in the second half of the financial year. The WPI remainedsubdued in the first half of the financial year due to a high base of the previous year.As the base effect waned in the second half of the year, inflation as indicated by the WPIincreased sharply across all categories.

Exports and imports started turning around in October-November 2009 after contractingsharply due to global recession. However, for the full year 2009-10, exports and importsdeclined by 3.6% and 5.6% respectively. Capital flows have resumed on the back of globalrecovery and relatively buoyant economic prospects in the country. The Rupee appreciatedby about 13% against USD in 2009-10. India’s foreign exchange reserves increased byUSD 27 billion during 2009-10 to reach USD 279 billion at March end 2010.

The consumption of petroleum products in the country increased by 3.4% in 2009-10compared to 3.6% in 2008-09. The consumption of transportation fuels was quite robust.Petrol and diesel consumption increased by 14% and 9% respectively. Turnaround in theaviation sector was reflected in the revival of ATF sales. ATF consumption increased by4.6% in 2009-10 compared to a decline of 2.6% in 2008-09. Naphtha consumption declined by26% reflecting greater availability of natural gas. FO/LSHS sales also declined due toprice/substitution effect.

The recovery in the global economy has been stronger than expected. Recovery is rathertepid in many of the advanced countries but quite strong in most developing economies. IMFexpects the Indian economy to grow by 8.8% in 2010 and 8.4% in 2011. Inflation remains amajor source of concern in India. Oil price recovered sharply from the severe fallprecipitated by the financial crisis and has remained between USD 70 and USD 80 a barrelsince mid 2009. The near-term outlook for oil price depends on balance between increase indemand as recovery gains traction and the supply response from producer nations. A robustrecovery coupled with higher than expected oil demand would push prices up. On the supplyside, non-OPEC production, virtually stagnant since 2004, has started rising once again.OPEC’s production of NGLs and other liquids is also rising sharply.

PERFORMANCE PROFILE

Turnover of the Company for the year 2009-10 is Rs. 1,08,599 crores. The petroleumproduct sales (including exports) by the Company increased by 3.5% during the year 2009-10to reach 26.3 million tonnes. The Mumbai and Visakh refineries processed 15.76 milliontonnes of crude during the year. The combined GRM of the refineries was US $ 2.68 /bbl.The pipeline thruput increased to 11.95 million tonnes in 2009-10 from 10.58 milliontonnes in 2008-09.

The Profit after Tax increased by 126% to Rs.1,301 crores in 2009-10 from Rs. 575crores in the previous year. The higher PAT was achieved after absorbing an under-recoveryof Rs.1,225 crores on sales of sensitive petroleum products during the year. Thedepreciation charge was Rs.1,164 crores vis--vis Rs. 981 crores in 2008-09 largely dueto commissioning of the Euro IV fuel projects at Mumbai and Visakh refineries.

Interest cost in 2009-10 was reduced considerably to Rs. 904 crores from Rs. 2083crores in 2008-09 through judicious treasury management. High cost debts were retired andreplaced with low cost debt. Borrowings during the year were mainly through short termforeign currency loans and commercial paper. Long term loans were borrowed at competitiverates. The Corporation was also able to sell Oil Bonds amounting to Rs. 5,270 crores atoptimal levels to reduce the borrowings.

For the year 2009-10, HPCL has proposed a dividend of Rs. 12.00 per share, compared toRs. 5.25 per share in 2008-09. The dividend would result in a total payout of Rs. 473crores including dividend distribution tax.

The 2009-10 performance of the Corporation has qualified for ‘Excellent’rating in terms of the Memorandum of Understanding (MOU) signed with the Government ofIndia.

Mumbai Refinery

Mumbai Refinery (MR) achieved a crude throughput of 6.965 MMT in 2009-10 compared to6.651 MMT in the 2008-09. Capacity utilization during the year was 107%.

Performance Profile of MR

The refinery increased its distillate yields to 71.8% from 69.9% achieved in theprevious year through effective management of the crude mix and optimization of theoperational parameters to enhance the total distillate.

MR became the first Indian PSU refinery to commence production of BS IV specificationMS in January 2010 following the commissioning of its Green Fuels Emissions ControlProject (GFEC). The refinery also enhanced its capability to produce HSD to Euro-IIIspecifications. The Refinery also commissioned Integrated Effluent Treatment Plant (IETP)to comply with the stringent statutory environment guidelines. The Refinery switched overto Re-liquified Natural Gas (RLNG) firing in furnaces and captive power plant, reducingthe emissions as well as internal fuel costs. MR also started production of Viscositygrade (VG-10 and VG-30) asphalt and environment friendly Rubber Processing Oil (RPO) forexport to Japan. MR successfully commissioned Mounded Bullet Storage facilities in June2009 to facilitate safe storage of LPG and enhancing overall risk management in therefinery.

The Refinery signed agreement with US Trade Development Agency (USTDA) for Technicalassistance grant for developing a Feasibility Report for the Refinery Bottoms UpgradationProject and to train the personnel on Asset Integrity Management.

A world class modern Quality control laboratory, fully equipped with state-of-the-arttechnology and modern analytical equipment was commissioned this year, enhancing thequality control efforts of the Refinery.

MR is in the process of installing a new FCCU unit of 1.45 Million Metric Tonne perAnnum (MMTPA) capacity to augment the production of value added products like LPG, MS andHSD. The project is expected to be completed mechanically during second quarter of thecurrent year. A Lube Oil Upgradation Project is also being implemented in the Refinery toupgrade the 200 TMTPA Lube Oil Base stock (LOBS) quality to Group-II/III specifications.The Project is expected to be commissioned in the second quarter of the current year at acost of Rs. 1030 Crores.

Visakh Refinery

Visakh Refinery (VR) processed 8.797 MMT of crude in 2009-10, achieving a capacityutilization of 117%. The crude throughput of the Refinery in 2008-09 was 9.155 MMT. Thelower throughput in 2009-10 was mainly on account of planned turnaround, inspection of oneof the key units and interconnection of new and old cooling water system.

Performance Profile of VR

VR commissioned a new additional Pre Fractionating Drum (PFD) in October 2009. Theproject has been developed in-house and has increased throughput by 200 TMTPA.

VR commissioned Euro-III/IV MS production facilities under Clean Fuel Project andstarted supplying Euro III MS by September 2009 and Euro IV MS by January 2010. On theenergy conservation front, VR carried out online furnace cleaning using new technology ofsolid chemical spray resulting in stack temperatures sustaining crude thruput andincreased heater efficiencies. The Refinery successfully commissioned Mounded bulletstorage facilities in September 2009 to facilitate safe storage of LPG/ Propylene. VR alsocommissioned Bitumen Coastal Loading Facility and the first parcel of bitumen was exportedin September 2009. The Refinery started producing VG 10 bitumen grade from February 2010.

The Integrated Refinery Business Improvement Program initiated with the help of M/s.Shell Global Solutions International and Centre for High Technology is underimplementation in the Refinery and till date has provided benefits to the tune of US$13.89 million (20.14 cents/bbl).

Installation of Single Point Mooring (SPM) facilities to facilitate unloading of crudefrom VLCCs is underway at VR. The SPM will give an advantage in freight cost and reducewharfage charges thereby improving the refinery economics. The project facilities includea buoy in the sea for mooring the VLCC, a 48 diameter.4.2 Km sub-sea offshorepipeline & and 48 diameter, 1.5 Km onshore Pipeline . This onshore pipeline isproposed to be connected to the crude cavern storage intended to be installed by IndianStrategic Petroleum Reserves Limited (ISPRL) from where it will be pumped to the refinerycrude tanks using the existing 36 crude unloading line. Such an arrangement wouldobviate the need for additional crude storage tanks in the Refinery. The estimated cost ofthe project is Rs. 643.46 Crores. The project has been mechanically completed in May 2010and will be commissioned by September, 2010.

Other Projects

With the greater availability of natural gas and subsequent substitution of naphthawith gas, disposal of naphtha is a major challenge for both the refineries. Withcommissioning of mega Green Fuel Emission Control (GFEC) and Clean Fuel Project (CFP) atMR and VR respectively, the refineries are able to convert naphtha into MS production.Thus, the MS production capability has been increased significantly.

New Diesel Hydrotreater (DHT) Units are being installed in both the refineries, at acost of about 7000 crores to increase the capacity to produce Euro-IV grades of HSD. Theprojects are expected to be completed by August-September 2011.

HPCL has ventured into the Wind farm project to bridge the power demand and supply gapin an environmentally clean and affordable manner. The project commits to generate 100 MWin different phases. Under the first phase, a total of 25 MW capacity wind farms have beencommissioned in Rajasthan and Maharashtra. Another 25 MW capacity wind farm is underconstruction in Rajasthan and is expected to be ready by December 2010.

HPCL Refineries corporate R&D centre has initiated new collaborative projects withIITs at Chennai & Delhi in addition to the ongoing projects with IIT-Kanpur, IISc,Central Institute of Mining & Fuels Research (CIMFR) and GITAM University. Theprojects in the areas of monolithic reactors, development of ionic liquid catalysts, Biohydrogen production have been completed. New R&D projects have also been taken upduring the year for development of catalysts for production of hydrogen from methane anddevelopment of integrated photo-catalytic systems for efficient conversion in of CO2 tochemicals.

The Company is assessing the option of a new grassroots refinery on the West Coast ofIndia, especially in view of various constraints being experienced in the expansion/modernization of the Mumbai Refinery. A feasibility study has been commissioned for theproject and land is being identified.

Imports & Exports

The Company purchased 15.71 MMT of crude oil during the year, of this about 11.59 MMTwas imported. The Arab/Persian gulf region continued to be the major source of importedcrude accounting for nearly 80% of the imports. The balance crude imports were from theWest African and the Far East region.

The Company increased product procurement from domestic sources during the year. As aresult, product imports during 2009-10 were 987 TMT, significantly less than 2204 TMTimported in 2008-09. The resultant foreign currency savings were about US$ 699 Million(Rs. 3334 Crs.). Major products imported were Diesel (44%), LPG (40%) and MS (12 %).During the year, 1827 TMT of products valued at Rs. 4889 crores were exported registeringa growth of around 18% in volume terms.

Ship chartering activities picked up steam in the second year after commencement ofindependent chartering activities. During the year twenty seven fixtures were finalized atcompetitive rates for spot crude oil, term LPG and coastal movement of Lube Base Oils.Address Commission of approximately Rs. 5 crores were earned during the year from thisactivity.

MARKETING

Market sales (excluding exports & PSU sales) for the year 2009-10 were 24.39 MMTcompared with 23.83 MMT in 2008-09, a growth of 2.3 %.

Retail

Retail sales of MS by the Company increased by 13.3% in the year 2009-10 compared toIndustry (PSU) growth of 12.9%. HSD sales grew by 7.9% against Industry (PSU) growth of8.1%. HPCL retained its market share in MS and HSD (combined) during the year 2009-10.Auto LPG sales increased by about 30% for the year with addition of 34 Auto LPG Dispensingstations. Compressed Natural Gas (CNG) sales increased by 19.6% achieving a volume of146.2 TMT. ARB activities recorded a growth of 27% during the year. Use of technology toensure the operation of automated outlets under NANO (NO AUTOMATION NO OPERATION) programwill be a focus area in the coming year. Marketing participation of HPCL is proposed to beincreased with network expansion and efforts will be directed at becoming a market leaderat the district level.

Aviation

The full service domestic airlines continued to reel under financial crisis. The lowcost carriers, though, have been faring well. The sector witnessed signs of recoveryduring Q4FY10 with increasing passenger and cargo traffic, stabilization of airfares andincreased load factors due to route rationalization by the airlines. The ATF sales by theCompany increased by 9.1% compared to industry growth of 3.9%. The Company commands amarket share of 16.1% in the aviation sales.

In view of the recovery in the sector, the Company plans to continue its focus ongaining market share while balancing top-line and bottom-line. As substantial marketcoverage has been achieved by aggressive network expansion during the past two years, theSBU plans to sustain the image of being the most preferred supplier in the market.

Industrial & Consumer

Industrial & Consumer business line of the Company was adversely affected by lossof Naphtha/FO/LSHS volumes to natural gas due to considerable improvement in theavailability of the latter. Naphtha sales declined substantially while FO/LSHS sales wereaffected marginally. However, sales of other major products such as Bitumen, HSD, etcincreased.

HPC has identified Bunkering as potential area to make up for the drop insales especially of Furnace Oil in inland trade. During the year, the Corporation doubledstorage Capacity of FO-380 CST & HFHSD at Sewree terminal (Mumbai) from 7900 Kl to15800 Kl and dedicated the same for exclusive bunkering purpose. A 4.2 km bulk bitumenpipeline was commissioned from Visakh refinery to jetty and exports of bulk bitumen werecommenced with a consignment of 8.2 TMT to TIPCO Bangkok.

Lubes

The present size of the Indian Lubricant market is approx. 1500 TMTPA, comprising theautomotive segment of about 870 TMTPA and 630 TMTPA of the industrial and direct segment.The core and large sector industries like Railways, Collieries, State TransportUndertakings (STUs), Steel, Cement, Tyre, etc. account for around 50% of the industrialand direct market, and the balance is distributed across diverse sectors such as sugar,marine, fisheries, fertilizers, etc. Despite the slowdown and recessionary trend in theIndian Industry till 3^rd Quarter of the fiscal 2009-10, total Lubes sales of494 TMT were achieved during the year, comprising 215 TMT of Value Added Lubes and 279 TMTof Base Oils.

The trend of continuously upgrading product range in line with evolving consumer needsand specific customer requirements was continued during the year with support from R&Dgroup. Notable product additions during the year are:

• HP SAO (UG) for Gabriel with expected volume of 800 KL per annum

• Supreme Elasto 710 – low PAH rubber processing oil for use in Tyreindustry.

• Coning Oil for textile industry

As a part of Brand Building exercise new Television Commercials for HP Engine Oil &HP Milcy Turbo have been undertaken. HP Milcy Turbo Star Contest was conducted for Retailoutlets. Innovative SMS based Promotional Activity was carried out for HP Milcy Turbo. Atie-up was made with M/s. Adhar Retailing (Future Group Company) for extending reach inrural areas with initial supplies in Punjab. Twenty-three new Lube CFAs and Distributorswere commissioned during the year in unrepresented markets. Genuine Oil Agreements enteredinto with John Deere and Bajaj Auto.

Efforts for increasing revenue contribution from International Markets continued. ATechnology and Marketing tie-up was made with Idemitsu Kosan of Japan for Treated ResidueAromatic Extract (TRAE) with guaranteed upliftment of 30 TMTPA. The product for exportmarket has been named as Diana Process Oil SR – 28. A quantity of 1330 MT has beenexported to South Korea during the year.

LPG

HPCL surpassed its nearest competitor in overall LPG market share and achieved 26.1%market share during 2009-10. Total LPG Sales during the year were 3.26 MMT achieving agrowth of 9.4%. In the domestic segment, HPCL registered highest growth in the Industry.Market leadership was maintained in Non-Domestic (ND) Segment with 35% market share andyet another milestone of 400 TMT sales was crossed. HPCL commissioned highest ever 147 NewHP Gas Distributors and enrolled 25 lakhs new domestic customer equal to about 30% oftotal industry enrolment. With a view to developing infrastructure, HPCL commissioned a 44TMTPA bottling plant at Irumpanam, 3 x 500 MT mounded storage at Khapri and 2x1000 MTmounded storage at Bahadurgarh. A total of 3144 TMT LPG was bottled during the year with agrowth of 9% over historical. The Company achieved a thruput of 1.8 MMTPA at MLIF againsthistorical of 1.7 MMTPA.

To meet the future demand of LPG, work is in progress for new LPG Bottling Plants atBhatinda (Punjab), Hazira (Gujarat), Anantpur (Andhra Pradesh). Two new LPG Pipelines vizMangalore-Bangalore LPG Pipeline and Mahul-Uran-Chakan (Pune) are also proposed fortransportation of LPG.

HPCL introduced SMS/IVRS based refill booking service in Delhi, in line with Vision2015 of MOP&NG to create a differentiation through services in commodity market likeLPG. This IVR based refill booking system eliminates the human intervention in refillbookings. Suraksha Sanchetna, a unique and first of its kind mass communication programfor Safety in usage of LPG, has been successfully undertaken by LPG SBU tocreate public awareness on safety and conservation of LPG. LPG SBU has developed acomprehensive training module for distributors of weaker section under ProjectSaksham to impart training including behavioral and functional competencies of thedistributors so as to build relationships with all stakeholders resulting in efficient andprofitable distributorship operation.

To further increase penetration in rural areas as well as enhance availability of LPGin rural pockets, HPCL shall be aggressively taking up rural schemes HP Gas RasoiGhar and Rajiv Gandhi Gramin LPG Vitarak in line with MOP&NG Vision2015.

Operations and Distribution

During the year 2009-10, HPCL product storage & distribution facilities at depots& terminals handled a record volume of white oil, black oil & lube products forsupporting the highest ever sales of 11.3 MMT of HSD, 3.22 MMT of MS and 5.019 MMT ofother products including SKO, ATF, FO, Naphtha etc.

A number of key initiatives were undertaken for achieving & sustaining theoperational excellence in critical areas viz. safety & security, logistics, customerdelight, etc.

• Availability of BS-IV grade fuels was ensured at 13 cities across India fromApril 1, 2010 as per the Government directives.

• To enhance customer delight differentiated services such as assured productdeliveries within 2 hrs of reporting of trucks, prompt treatment on accountreconciliation, etc. were implemented

• Closing inventories of white oils were optimized to only 9.5 days cover againstthe norm of 12.5 days, reducing significant inventory holding costs.

• Procurement from domestic sources was increased thereby achieving a substantialcost reduction.

• Improved operational efficiency across all locations ensured several landmarkachievements, such as handling of 167 ocean tankers at Mundra terminal and loading of 109tank wagon rakes during a single month at Bahadurgarh terminal.

• Significant reduction of coastal losses in ocean tankers from (–0.31 %) to(– 0.26 %) during the year has resulted in a savings of Rs. 10.9 crores.

• Tank Farm Management System of product tanks was integrated with the ERP systemat 24 depots & terminals for reliable & seamless inventory management, IndentManagement System module for improved handling & execution of customer indents wasrolled out for all 95 locations, CCTV for enhanced security vigil have been installed at21 locations, Vehicle Monitoring System were installed in additional 4900 tank trucks, acritical tool in our Q & Q effort.

• Enhanced performance & monitoring on Safety & Security of POLinstallations will be the prime focus area for operations and distribution. In addition,aim will be to optimize inventory levels, reduce logistics costs, economize on operatingcost with higher productivity & efficiency and develop new infrastructure at strategiclocations to ensure better service to our end customers.

Projects & Pipelines

Guru Gobind Singh Refinery Product Evacuation Project (GGSRPEP): HPCL Mittal EnergyLtd. a JV company of HPCL is in the process of setting up a 9 MMTPA capacity grass rootrefinery near Bathinda, Punjab. The project is under implementation and is slated forcompletion by Dec 2010/ March 2011. HPCL has been entrusted with the responsibility ofevacuation of different products proposed to be produced by GGSR. Following cross countrypipelines are proposed to facilitate product evacuation:

• 30 km long, 10 diameter pipeline from Raman Mandi-Bathinda

• 250 kms long, 18 diameter pipeline from Raman Mandi – Bahadurgarh

Board approval for Rs. 605.40 Crores has been obtained for implementation of thispipeline project and the mechanical completion of pipelines are expected by December 2010.

Additional Product Tankages were commissioned during the year at Hazira Depot (2x 1200KL AG storage tanks), Devangunthi Terminal (4x5000 KL AG storage tanks) and Mathura depot(1x5000 KL AG storage tank) at a combined of about Rs. 24 crores.

Pipelines

Pipeline department achieved the highest ever total combined thruput of 11.95 MMT inVVSPL, MPSPL and MDPL against the target thruput of 10.0 MMT during the financial year2009-10. MDPL achieved record pipeline thruput of 4.79 MMT against the design capacity of5 MMT in the 2nd full year of operation itself. Lube Oil Pipeline achieved record thruputof 363.08 TMT during the year.

New projects/Future plans

A number of projects are envisaged / are under construction to expand distributioninfrastructure in line with growing demand. Some of the said projects are as under:

Bahadurgarh-Tikrikalan Pipeline: Laying of 2 nos. product pipelines for MS, HSD& SKO of 12 km long with 8/10 diameter from Bahadurgarh Terminal toTikrikalan Terminal at an estimated cost of Rs. 60 crores.

Tikrikalan Terminal: Construction of a new grass root Terminal with receipt facilitiesfrom Bahadurgarh-Tikrikalan Pipeline for handling MS, HSD, SKO & Ethanol at anestimated cost of Rs. 78.75 crores.

New Terminal at Bihta (Near Patna): Construction of a new grass root Depot for handlingWhite Oil (MS,HSD & SKO) & Black Oil (FO & Bitumen) including Wagon UnloadingSiding at an estimated cost of Rs. 142.50 crores.

Additional Tankage at MDPL Locations: Construction of additional tankages for MS, HSD& SKO with total tankage capacity of 99745 KL at Mundra, Ajmer, Jaipur, Rewari &Bahadurgarh to meet increasing demand/ flexibility of pipeline operations at an estimatedcost of Rs. 54.4 crores.

Resitement of Marketing Terminals at Vizag: HPCL has taken up the re-sitement ofmarketing terminals at Visakh to augment existing marketing infrastructure as well as tocreate additional space for Visakh refinery expansion projects. The marketing terminalsi.e. White Oil Terminal, Black Oil terminal and LPG Bottling and Marketing Plant are beingresited to an ideally suited location within VPT area at an estimated cost of about Rs.750 crores. Tankages in the White oil and Black Oil terminals are being more than doubled-from current 43,000KL to 94,000KL in the Black Oil terminal and from current 63,000KL to1,68,000 KL in the White Oil terminal. Black Oil terminal is scheduled to be commissionedin July 2010, White Oil terminal by June 2011 and LPG terminal and Bottling Plant byFebruary 2011.

Ennore Terminal Project: Allotment of 108 acres of land was obtained from the Ministryof Industry and Commerce in March 2009. Major portion of the compound wall, landdevelopment and stone column foundation works has been completed. Other activities such asconstruction of tankages and buildings, railway siding works and external pipeline layingworks have been awarded and are in progress. All important tenders have been floated andprocurement has been finalized for major items. The construction works are expected to becompleted by Feb. 2011.

R&D

Our R&D is well represented in technical bodies like BIS, SAE, IPSS, STLE, NLGI,TSI etc. with contributions ranging from review of specifications to drafting ofspecifications. Development of several new products in the automotive, industrial andgrease sectors is being taken up to meet the current stringent demands for OEM’s andother industry members including core sectors like Defence, mining, steel etc. Theproducts being developed will have approvals of OEM’s and major industry users.Collaborative projects will be taken up with various institutions like NIT, IIT, IndianInstitute of Petroleum, Dehradun, RDCIS, Ranchi, etc. for understanding the impacts ofvarious chemicals on different formulations as fundamental research. Environmentallyfavourable products for reduction of ground water pollution by developing biodegradableproducts and noise pollution by friction modified oils are proposed to be developed. Thecommitment for energy conservations will be met through development of energy efficientgear oils, spindle and slide way lubricants. Petroleum conservation is proposed to beachieved through high drain oils/greases in automotive and industrial sectors. Thecustomer education programmes are also being conducted through seminars and training tocustomer’s staff for quality monitoring, usage and storage.

QUALITY CONTROL (QC)

QC is aligned to fulfill the HP QC vision of ensuring delivery of quality productsconsistently to customers. QC Department obtained NABL accreditation for three more labsthis year (total 7 Nos so far) out of 39 Labs, which further enhances the trust of thepublic on HPCL’s products. The aim is to have NABL accreditation for all our labs inIndia. QC audits of locations will be stepped up for further improvements. The QC Officersare being trained to equip them with the best practices being followed. Current efforts ofspreading quality awareness among operating personnel in the locations will be augmented.

SAFETY, HEALTH & ENVIRONMENT

HPCL maintains high standards of safety, health and environment care at all itsoperating locations, always ensuring that increasing scale of operations has no negativeimpact on the standards of safety, health and environment. Established systems andprocedures are constantly revised for improvement to achieve higher standards of safety,occupational health and environment protection. All major locations of HPCL have wellequipped health care facilities / arrangements. Our major marketing locations have beenawarded ISO 14001, ISRS & OHSAS 18001 certifications. An initiative called ProjectAarogya has been started for creating awareness among employees about healthrelated issues.

EXPLORATION & PRODUCTION

HP-E&P portfolio of assets has been built and enhanced strategically byparticipating in competitive bid rounds. Till date, HPCL has interests in 19 nos. E&Pblocks in India, two blocks in Egypt and one each in Oman and Australia. All the blocksawarded during bid rounds are progressing well as per the approved work programs.

The main thrust of HP E&P is on balancing & consolidating the existingportfolio with minimal risk and increasing the value for shareholders.

In 2009-10, HPCL formed consortiums with well established E&P companies toparticipate in NELP-VIII, bidding round. HP E&P expenditure on existing blocks duringthe financial year was Rs. 245.7 crores to meet the requirements of minimum work programs.During the XI Plan period (2007 to 2012), an outlay of Rs. 2000 crores is proposed forupstream activities. An expenditure of Rs. 398 crores has been made till date. The balanceamount shall be utilized for acquisition of participating interest in discovered orappraisal stage assets overseas to enhance the value of the existing portfolio. Wellreputed & experienced advisors and internationally acclaimed consultants are assistingHPCL in assessing the real worth of assets available in India and overseas.

HPC plans to participate as leader of the consortium for bidding as an operator in NELPIX Bidding round and attain Operatorship. In its endeavour to meet the future challengesHPCL is focusing on the development of in house infrastructure, capabilities andcompetencies.

INFORMATION SYSTEMS

The Enterprise Resource Planning (ERP) system has been supporting main businessprocesses of the Corporation for over 3 years now. To get more benefit out of the system,various add on applications, which bolt on to the ERP system, have been put in place.

ERP system has made it possible to reduce the time taken for closing the quarterly,half yearly and annual accounts. Standardization of business processes in the system hasresulted in better management control. The system enables the decision makers at variouslevels in taking timely business decisions based on on line & accurate informationavailable from the system. Cost of operations can be tracked easily in the system whichhelps the managers in controlling them.

Effectiveness of the usage of the system would depend on the competency levels of theusers of the system. A comprehensive training schedule has been put in place to enhancethe user competencies. Close to 2000 man days of training have been provided during thelast year to the end users of the system covering the functional and operational areas ofthe system.

Information Systems Center: During the year, Information Systems Center (ISC) wasinaugurated at HITEC City, Hyderabad. ISC is spread over 1.3 acres with state-of-artfacilities that host 400+ servers that run various IT systems, Network & OperationsControl Center, Security Operations Center, Development Center & Training center. ISChas been made secure with Infrastructure facilities including Integrated BuildingManagement System with access controls, Very Early smoke detection system, waterless firesystems and leak detection system.

New Initiatives: Based on the foundation of the ERP system, a multitude of ITenabled solutions have been developed in the Corporation. ERP platform also enablesdevelopment of real time interfaces to the IT enabled systems of our various businesspartners. Various such new initiatives have been implemented and sustained effortscontinue to bring in more of these to reality.

An Indent Management System (IMS) has been implemented to streamline the prevalentindenting process. Dealers & customers are able to send indents by SMS. Facility forplacing indents through web-based customer portal has also been made available to ourinstitutional customers. The system has enabled stage-wise mapping of indents and itssubsequent progression in turn achieving an end to end solution with the desiredtransparency. Customer satisfaction tracking has become possible by various MIS reports onindent execution.

E-banking initiative has been expanded to cover all payments to outside partiesincluding vendors, contractors and employees. E-payment has been rolled out to alllocations, i.e. Zonal Offices, Refineries, Marketing & Corporate HQOs. Paymentinformation flows seamlessly as ERP server communicates directly with the bank serverswithout any manual intervention. E-payment is helping in bringing about transparency inthe payment process and also ensures timely payment to all vendors and employees.

HPCL has instituted on line fund transfer or e-collection in Sales process. Thisinitiative has enabled faster collection & hence better funds management.

In the area of procurement, e-tendering process has been implemented for crudeprocurement wherein suppliers of crude are able to submit their quotations on line in asecure way. System for on line vendor registration through the Internet has beenimplemented. Similarly the system of hosting of tenders on the internet has also beenimplemented.

A customer portal is being maintained which provides complete visibility to the directcustomers, dealers & distributors for their transactions with the Corporation.Similarly a portal for the transporters enables them to access information pertaining totheir transactions with the Corporation. A number of work flow based applications havebeen implemented for employee self service so as to speed up the process of benefitsadministration. Capital budgeting process for Non-plan projects as well as revenuebudgeting process has been captured in the system through workflow based application.

On HR front, two initiatives: Samavesh (meaning ‘Inclusion’: Personal,professional and cultural integration of new recruits) & Santushti (meaning‘Complete satisfaction’:e-enabled final settlement process for separatingemployees) have been implemented. Both these are electronic workflow processes andintegrate with ERP as well as other on line systems.

Communication Infrastructure: To enable users from across the Corporation’s450+ locations to access the various Systems and facilities redundant hybrid Wide AreaNetwork consisting of PSTN leased lines, MPLS circuits, VSATs, Radio Links and CDMA/GPRScircuits have been set up. Webcast facilities are being used effectively to communicateimportant messages & to cover major functions live to the employees at all thelocations. Video conferencing facilities between locations are being used to cut thetravel needs and thus also the costs involved.

An Information System Security Policy has been formulated to protect all theInformation Assets of the Corporation. All the Information Systems Assets like servers,networks and applications have been protected with state of art security systems whichinclude firewalls, host and network intrusion protection systems, antivirus solutions etc.

HUMAN RESOURCES

The Corporation recruited a total of 248 management employees and 112 non-managementemployees during the year through all- India open competition, campus recruitment andspecial recruitment drive.

Details of Recruitment during the year

With increased focus on training & development of employees, 13 new internalprograms were introduced during the year on various new areas such as security againstterrorism, competency based programs, problem solving, art of selling, communication,advanced IT skills in MS Office, customer relationship management etc.

At Mumbai Refinery, DAKSHATA – the unique training program forcontractors/ labours regarding statutory benefits under ESIC/ PF Acts, also health,hygiene & safety was designed and executed in house. A website was also launched forthe benefit of contractors for statutory compliance of labour law provisions. A total of743 Officers participated in the Competency Mapping & Development Centers Process andIndividual Development Plans were drawn up for each officer. Development progress wasreviewed for 636 officers by 55 Competency Development Review Committees held at zonallevels.

Technical Competency

Framework was developed for the Exploration & Production business unit. In the year2009-10, unique Reward & Recognition schemes were launched:

HP Gaurav: a scheme for recognizing outstanding performance by nonmanagement Employees. Out of numerous nominations, 80 non-management employees inMarketing Division were rewarded the award. Later the scheme was extended tonon-management employees in Refineries as well.

HP ICON: The People Manager Award was instituted to recognize Officersin Salary Grade E, F & G for their contribution and efforts towards inspiring higherteam performance, development of sub ordinates, entrenching HP Values etc. A final list of16 Winners amongst 94 Finalists was announced after a robust screening process.

These are in addition to the existing policy of Outstanding Achievers Awardsfor junior management employees. Through these initiatives, HR has taken a comprehensiveapproach towards enhancing employee morale and motivation at all levels.

With the defined aim of inculcating healthy lifestyles among employees, an informativemedium for health and wellness has been developed and deployed titled as Hale andHearty HPCL - the wellness portal. As part of the Special Component Plan/Tribal SubPlan & Welfare Plan for Weaker Sections, a total of ‘ 552.24 lakhs were spent onvarious initiatives pertaining to primary education, healthcare, income generationschemes, rehabilitation and other welfare projects.

The Industrial Relations climate during the year 2009-2010 continued to be harmoniousacross all locations. To enhance corporate governance, a Whistle Blower Policy wasadopted. Conduct, Discipline and Appeal rules applicable to Management Employees were alsoreviewed and amended.

OFFICIAL LANGUAGE IMPLEMENTATION

Official Language Implementation has been given utmost importance in the Corporation.During the year, various workshops and conferences were conducted forManagement/Non-Management to encourage Official language as also to rejuvenate theircapabilities of Official Language. New HP Blog category has been created in Hindi foremployees. The work done by HPCL during Town Official Language Implementation Committee(TOLIC) Discussion programs & inspections has been appreciated by the ParliamentaryCommittee on Official Language.

AWARDS RECEIVED

• PETROFED PROJECT MANAGEMENT AWARD in recognition of completing Mundra-DelhiPipeline Project.

• READER’s DIGEST TRUSTED BRAND AWARD

• GREENTECH FOUNDATION SAFETY SILVER/GOLD AWARD for excellence inSafety/Environment Standards to Hassan Terminal, Loni Terminal, Raiput LPG Plant, PatnaLPG Plant and MLIF.

• GOLDEN PEACOCK ENVIRONMENT MANAGEMENT AWARD by World Environment Foundation toMumbai Refinery, Loni LPG, TOP, Chakan LPG Plant, Salawas Depot for environmentalexcellence.

• LEADING HR LEADER AWARD, by Singapore HR Institute received for the Best HRPractices.

• SAIL HR EXCELLENCE AWARD for best HR Practices.

• PRIDE OF HR PROFESSIONAL AWARD by Asia Pacific HRD Congress.

• ORGANISATION WITH INNOVATIVE HR PRACTICES Award by Asia Pacific HRMCongress.

• CIO 100 AWARD by International Data Group for recognizing CIO’s andorganizations who in tough global conditions found ingenious business solutions with useof IT.

• OISD AWARD – First Rank awarded by MOP & NG for excellence in Safety atPOL / Terminal

• NDTV PROFIT – BUSINESS LEADERSHIP AWARD awarded by NDTV Profit forexcellence in business.

• MARKETING PROFESSIONAL OF THE YEAR AWARD awarded by The World Brand Congress forBrand Excellence and for contributing towards the growth of the organization.

• THE CMO COUNCIL MARKET LEADERSHIP AWARD awarded by CMO Council for excellence inthe Indian Retail Industry.

• CORPORATE GOVERNANCE AND CSR AWARD by Institute of Directors, for CorporateGovernance.

• CORPORATE GOVERNANCE NATIONAL QUALITY AWARD FOR SAFETY by Institute of Directorsfor National Quality.

• BEST GARDEN AWARD awarded by BMC & Tree Authority, Mumbai for excellentgarden at HPNE Housing Complex.

• BEST GARDEN AWARD awarded by Department of Horticulture, Government of Karnatakafor excellent garden at Hassan Terminal.

• RATNA AWARD awarded by NIPM for Best HR Practices.

• NIPM NATIONAL AWARD FOR BEST HR PRACTICES, by NIPM

• BUSINESS TODAY – BEST CFO AWARD.

CORPORATE GOVERNANCE

A separate segment on Corporate Governance forms part of this report. However, it wouldbe relevant to point out here that the Corporation is giving utmost importance tocompliance with Corporate Governance requirements including compliance of regulations,transparent management process, adherence to both internal and external value norms androbust grievance redressal mechanism.

GLOBAL COMPACT

HPCL is also a Member of the Global Compact Society of India which is the India Unit ofthe United Nation Global Compact, the largest voluntary corporate initiative in the world.It offers a unique platform to engage companies in responsible business behavior throughthe principles of Human Rights, Labour Standards, Environment norms and Ethical practices.In HPCL, all these areas receive constant attention of the management to ensure continuouscompliance.

OUTLOOK

As per the Economic Advisory Council to the Prime Minister the Indian economy wouldgrow at 8.5 per cent in 2010/11 and 9.0 per cent in 2011/12. Higher growth would meangreater demand for petroleum products. Inflation, however, remains a source of concern.This would influence the policy stance on oil pricing in the country. Global economicoutlook is highly uncertain given concerns about the sovereign debt risks and itsimplications. This would have implications for capital inflows in the country. EconomicAdvisory Council does not see any problem in financing the current account deficit giventhe expected level of capital inflows. Further, capital flows are not expected to pose anyproblem to the management of the exchange rate. Exchange rate variations will remainwithin an acceptable range.

Oil market outlook also remains uncertain in view of concerns about the strength ofglobal economic recovery. There is ample spare capacity along the oil supply chain andbarring unforeseen shocks, prices are expected to remain relatively stable.

HPCL-Mittal Energy Ltd. (HMEL)

HMEL is a joint venture between Hindustan Petroleum Corporation Limited and MittalEnergy Investments Pte Limited (MEI), Singapore, a L.N Mittal Group Company, forimplementation of 9 MMTPA Guru Gobind Singh Refinery, a greenfield refinery projectlocated at Bathinda, Punjab. Both partners hold 49% equity stake in HMEL and balance 2% isheld between IFCI Limited and State Bank of India.

Guru Gobind Singh Reifnery will be a zero bottoms, energy efficient, environmentalfriendly, high distillate yielding complex refinery that will produce clean fuels meetingEuro IV specifications. The configuration comprising of primary and secondary processunits viz. CDU/VDU, VGO/HDT, FCC, NCU/ISOM, HGU, DHDT, SRU, DCU and Polypropylenemanufacturing facilities translates into a high Nelson Complexity index which is one ofthe highest amongst all the present and proposed refineries in India. The refinery isdesigned to process heavy, sour, acidic crudes and would produce liquid products includingMS, HSD, SKO, ATF, LPG, Naphtha, Hexane and MTO and solid products includingPolypropylene, Pet Coke and Sulphur.

HPCL-Mittal Pipelines Ltd. (HMPL) is wholly owned subsidiary company of HMEL, forconstruction and operation of cross country crude pipeline and crude oil terminal facilityat Mundra.

The performance of the project during the year 2009-10 has been very encouraging withsignificant progress and surge in project activities. Both HMEL & HMPL, implementingthe refinery and pipeline component of the project respectively have achieved cumulativeactual progress of about 76% as of March 2010.

HPCL Biofuels Ltd. (HBL)

In line with Government’s policy on ethanol blending, a new wholly ownedsubsidiary company HPCL Biofuels Ltd. (HBL) has been incorporated on October 16, 2009 toproduce ethanol for blending into petrol.

HBL is in the process of setting up an integrated sugar plant (3500 TCPD capacity),ethanol plant (60 KLPD capacity) & co-gen power plant (20 MW capacity), one each atSugauli (in East Champaran District) and Lauriya (in West Champaran District) in the Stateof Bihar. Construction of the plants is in progress and commissioning is expected duringthe crushing season starting November 2010.

CREDA-HPCL Biofuel Ltd. (CHBL)

In pursuit of promoting alternate fuels, CREDA-HPCL Biofuel Ltd. (CHBL) wasincorporated on October 14, 2008 as a subsidiary company with equity shareholding of 74%by HPCL and 26% by Chhattisgarh State Renewable Energy Development Agency (CREDA). CHBL isto undertake cultivation of Jatropha plant, an energy crop used for production ofbio-diesel, on 15,000 hectares of land leased by the Government of Chhattisgarh.Production of bio-diesel and its blending with normal diesel will help in meeting thedomestic demand. HPCL will have the exclusive rights over production and marketing ofbiodiesel and bi-products from the produce.

CHBL has started acquisition of land for cultivation of jatropha and as of March 2010had acquired 2,507 hectares of land. The first produce of jatropha seeds is expectedduring 2011 season. Acquisition of balance land is in progress and the plantation on thesame will be undertaken in a phased manner over the next three to four years.

South Asia LPG Co. Pvt. Ltd. (SALPG)

SALPG, a Joint Venture Company with M/s.Total Gas and Power India (a wholly ownedsubsidiary of Total, France) commissioned an underground Cavern Storage of 60,000 MTcapacity and associated receiving & dispatch facilities at Visakhapatnam in December2007. SALPG Cavern is the first of its kind in South and South East Asia and ranks amongthe deepest Caverns in the World. The commercial operations commenced in January 2008.

During the Year 2009-10, SALPG received 620,502 MT of LPG into the Cavern through 65Vessels including 25 VLGCs (Very Large Gas Carriers). The Cavern cum Marine Terminalachieved 520,846 Safe Man hours since the commencement of commercial operations in January2008 without a Lost Time Accident. On a cumulative basis, 1.32 Million MT of LPG has beenreceived into the Cavern. This eased the product movement constraints across the Eastcoast and ensured smooth availability of LPG in the surrounding supply zones. SALPGachieved a turnover of Rs.103.91 crores and profits (PAT) of Rs. 42.81 crores during2009-10, an increase of 19% and 44% respectively over the previous year. SALPG implementedERP system during the year.

The company declared a maiden dividend of 50% for the year 2009-10.

Hindustan Colas Ltd. (HINCOL)

HINCOL is a joint venture company promoted by HPCL and Colas S.A. of France and wasincorporated on July 17, 1995. Net profit (PAT) of the company in 2009-10 grew by over 37%to Rs. 38.25 crores. The company achieved a turnover of Rs. 356.10 crores during 2009-10.

Bitumen handling facility at Haldia was established during the year. Allotment of landhas been obtained from Haldia Development Authority for setting up Emulsion and ModifiedBitumen Plant.

The company declared 40% dividend for 2009-10 against 15% for 2008-09.

Mangalore Refinery and Petrochemicals Ltd. (MRPL)

MRPL, with a capacity of 3 MMTPA, was commissioned in March 1996. The capacity of therefinery was enhanced to 9 MMTPA during 1999-2000. ONGC acquired the entire equity stakeof IRIL in MRPL on 03.03.2003 and also infused Rs. 600 crores into MRPL as additionalequity on 30.03.2003. The FIs/Lenders of MRPL converted Rs. 365 crores of debt into equityand Rs. 160 crores debt into Zero Coupon Bonds. Consequent to the above, HPC’s equitystands at 16.95% after which a fresh Shareholder Agreement dated March 3, 2003 was signedby HPCL with ONGC to take care of the interest of HPCL. HPCL and MRPL have been exchangingintermediate process streams between their refineries to supplement efforts to meet newenvironmental norms in respect of products like MS and HSD on mutually agreed terms.

The company maintained the dividend of 12% for the year 2009-10.

Prize Petroleum Company Ltd. (PPCL)

HPCL, in partnership with ICICI and HDFC, had formed this Joint Venture E & PCompany for participating in exploration and production of hydrocarbons. Prize PetroleumCompany Ltd (PPCL) was incorporated on October 28, 1998. PPCL is also providingconsultancy services related to E & P.

PPCL had signed Service Contract with ONGC for development of Hirapur Marginal Field inCambay Basin with 50% holding in the consortium. PPCL is operator for the field and M/s.Valdel Oil & Gas Private Ltd. is the Associate Contractor. During 2009-10, 37,486barrels of crude oil (cumulative production of 201,064 barrels since inception) has beenproduced. PPCL had also entered into a Production Sharing Contract (PSC) with 50%Participating Interest in Sanganpur Block as Joint Operator. During 2009-10, 1,576 barrelsof crude oil (cumulative production of 10,704 barrels from inception) has been produced.

In respect of onshore block SR-ONN-2004/1 awarded under NELP-VI at South Rewa in MadhyaPradesh, the exploration activities as per committed minimum work programme are inprogress. Gravity magnetic study has been completed. Seismic data acquisition job wasawarded to M/s. Geofizyka Torun, Poland. 1,144 GLKM of 2D data and about 8 Sq. Km of 3Ddata was acquired during the year. Processing and interpretation of seismic data job,awarded to CGG Veritas, Moscow, is in progress.

During the year, PPCL received Rs. 3.50 crores from HPCL towards call money of Rs. 0.70per cumulative convertible preference share on 5,00,00,000 8% cumulative convertiblepreference shares.

Petronet India Ltd. (PIL)

PIL was incorporated on May 26, 1997 as a joint venture company with 50% equity by oilPSUs and balance 50% taken by private companies/financial institutions. Special PurposeVehicles (SPVs) were floated by PIL with oil companies for implementing individualpipeline projects, viz, Petronet MHB, Petronet CCK and Petronet VK which are operatingcompanies.

Since oil companies have independent pipelines now, PIL has initiated action todisinvest its equity holding in individual JVs.

Petronet MHB Ltd. (PMHBL)

HPCL, along with Petronet India Limited (PIL) promoted Petronet MHB Limited (PMHBL) forconstruction of Mangalore-Hassan- Bangalore Pipeline at a cost of Rs. 667 Crores with debtequity ratio of 3:1. The joint venture company was incorporated on July 31, 1998.Initially PIL & HPCL each contributed 26% towards equity. ONGC joined as a strategicpartner in PMHBL by taking 23% equity in April 2003. Post debt restructuring of thecompany, the equity holding of HPCL & ONGC increased to 28.766% each. The Pipeline ismeeting the transportation needs between Mangalore-Hassan-Bangalore.

During 2009-10, PMHBL achieved 3% higher throughput at 2.527 MMT as compared to 2.452MMT in 2008-09. Revenue generated during 2009-10 was higher by 7% at Rs. 69.18 crores ascompared to Rs. 64.87 crores in the previous year.

Bhagyanagar Gas Ltd. (BGL)

BGL was incorporated on August 22, 2003 as a Joint Venture Company by GAIL and HPCL fordistribution and marketing of environmental friendly fuels (green fuels) viz. CNG and AutoLPG for use in the transportation, domestic, commercial and industrial sectors in theState of Andhra Pradesh.

During the year, a new CNG station was commissioned at Hyderabad, Meerpet. BGL is nowoperating 6 CNG dispensing stations in Vijayawada, 4 CNG dispensing stations in Hyderabadand 1 CNG dispensing station in Rajahmundry. During the year, BGL was successful inobtaining Authorisation from Petroleum & Natural Gas Regulatory Board (PNGRB) to carryon the City Gas Distribution (CGD) in the cities of Hyderabad and Vijayawada.

BGL is also operating 4 Auto LPG Outlets-3 in Hyderabad and 1 in Tirupati. BGL achievedsales of Rs. 36.04 crores during 2009-10, an increase of 2.06 % as compared to theprevious year.

The company is in the process of inducting strategic equity investors.

Aavantika Gas Ltd. (AGL)

AGL was incorporated on June 07, 2006 as a Joint Venture Company by GAIL and HPCL fordistribution and marketing of CNG and Auto LPG for use in the transportation, domestic,commercial and industrial sectors in the State of Madhya Pradesh.

AGL has been authorized by MOP&NG as well as PNGRB to carry City Gas Distribution(CGD) operations at Indore, Ujjain and Gwalior. AGL commenced commercial operations fromits Mother station at Indore and 5 Daughter stations (4 in Indore and 1 in Ujjain) in theyear 2008-09. CNG sales have grown by more than 12.5% (compounded monthly) and crossedmonthly sales of 4 lakh kgs in May 2010. AGL has also completed a pilot project forsupplying Piped Natural Gas to industrial customers at Indore.

AGL is at advanced stage of implementing a project for laying 40 km long Steel Pipelinegrid and for commencing 10 CNG stations in Indore. AGL is also in the process ofestablishing Mother Stations at Gwalior and Ujjain as well as dedicated CNG stations forcity bus services at Indore and Ujjain.

Cautionary Statement

Matters covered in the Management Discussion and Analysis Reports describing theCompany’s objectives, projections, estimates, expectations may be forwardlooking statements within the meaning of applicable securities laws and regulations.The actual performance could vary from those projected or implied. Important or unforeseenfactors that could make a difference to the Company’s operations includes economicconditions affecting demand / supply and price conditions in the domestic market in whichthe Company predominantly operates, changes in regulations and other incidental factors.