MANAGEMENT DISCUSSION
1. INDUSTRY STRUCTURE AND DEVELOPMENTS
Foray into Oil and Gas Environmental Services:
Your Company has expanded its activities by entering into oil and natural gas
environmental services after altering its main objects contained in the Memorandum of
Association. Your Company has acquired 100% stake in an international company, Gemmia
Worldwide S.A., by issue of Global Depository Receipts. The main assets of Gemmia
Worldwide S.A., being 51% holding in Oil Tech Global Services (DBA), a group of companies
engaged in oil sludge treatment, reservoir cleaning services and oilfield and refinery
services and equipment sales to oil and gas companies with assets and operations in
Russia, Switzerland and beyond.
Oil Tech ("OT") is a group of companies controlled by Gemmia Worldwide S.A.
with assets in Russia specializing in processing & disposal of waste sludge from the
oil & gas industry. The company has also recently introduced a new service for the
automated cleaning of oil storage.
Crude oil lost due to past extraction practices and current inefficiencies and
accidents along the petroleum value chain in emerging economies are becoming unacceptable
due to increasingly stringent environmental regulations and the high price of oil. It is
estimated that in Russia alone, 200 million cubic meters of oily waste can be processed to
recover oil and eliminate the environmental hazards. Bringing proven technology to bear in
emerging markets from countries with long histories of environmental remediation offers
significant profit potential. Gemmia Worldwide has recognized this opportunity and moved
to capitalize on it.
Gemmia companies have established supplier relationships with leading Russian petroleum
companies, supplying a wide range of oilfield and refinery related equipment. On the back
of these supply relationships, environmental services business has been built.
Gemmia is well positioned to build a world class environmental services business
because:
• Russia is the largest oily waste market in the world, with an estimated 200
million cubic meters of sludge in place and a further production of 3.5 million cubic
meters per year.
• The highest levels of the Russian government have recently signaled that
environmental problems are to be dealt with and fines for pollution are expected to rise
3-4 times by 2016.
• The competition is highly fragmented in Russia with currently only 42 small
undercapitalized environmental services providers (compared to 3500 environmental services
providers in the United States)
• Gemmia has established supply relationships with large Russian petroleum
companies which provide an entry that competitors do not have.
• Gemmia operates a state of the art 150,000 metric ton oily wastes capacity
processing plant in Nefteyugansk, which is the first of at least 12 plants it intends to
build over the next five years.
• Gemmia has an exclusivity agreement for Russia with a U.S. company, Tarmac Intl,
the world’s leading supplier of LTDD technology.
• Gemmia have exclusive rights for Supermax automated tank cleaning technology for
all markets outside the US and Canada and will be soon manufacturing units with a
conservative estimate of building 12 units in place over the next five years.
Gemmia strikes business even outside Russia with a presence in Switzerland (a major
center of oil trading), India, Indonesia and soon in other countries.
The Company
Gemmia Worldwide S.A. owns 51% in each of a group of affiliated companies known as Oil
Tech Global Services (DBA) ("Oil Tech"). Oil Tech companies are engaged in the
petroleum service and supply sector in Russia providing:
o Environmental services for the petroleum industry
o Oilfield and refinery equipment supply
The remaining 49% in each of the Oil Tech companies is controlled by Oil Tech
management.
Vision and mission
Gemmias vision is to become a world class provider of environmental services to the
oil and gas industry focusing on high oil producing and consuming countries outside of the
highly competitive North American and European markets, while continuing to generate
significant cash flow from its oilfield equipment and services businesses.
Gemmias mission is to increase shareholder value by applying proven cleantech methods
to recover lost oil and energy currently polluting the environment and helping our clients
to meet increasing stringent environmental regulations.
History
Oil Tech was formed in 2008 to supply the Russian oilfield equipment supply sector
providing a wide range of equipment and services. In early 2010, Oil Tech management
spotted the opportunity to supply environmental services to the oil and gas companies with
whom Oil Tech had built supplier relationships. This resulted in the construction of a
state of the art oily waste processing plant supplying services to Rosneft
Yuganskneftegaz, with a second on order and advanced discussions with other customers
underway. In 2011, Oil Tech added automated tank cleaning and environmental consulting
services to their offerings.
Products and services
Environmental services for the petroleum industry
Gemmia provides environmental services to the petroleum industry including oily wastes
treatment, automated tank cleaning and environmental consulting services. Oily wastes
treatment includes oil recovery, drill cuttings treatment, sludge and oil contaminated
soil remediation. Gemmia is moving into treatment of special situation wastes such as
sulfuric acid tar sludge. Automated Storage Tank Cleaning recovers oil and remediates
sludge in storage tanks. Consulting services include: Environmental health and safety
(EHS) audits, Waste-management strategies design and implementation, Sustainability
programs adoption, Ecological infrastructure EPC services and Environmental research and
engineering.
Oily Waste Treatment
Gemmia employs a well tested oily wastes treatment method at its 150,000 metric ton
capacity plant in West Siberia at Nefteyugansk, Khanty-Mansi commissioned in February,
2011. Tarmac Int. Inc., one of the leading providers of recycling solutions supplied the
plant.
We have developed a mixed technology treatment train which maximizes versatility,
remediation efficiency, production capacity, processing speed, capex and opex. Our
treatment train uses of mechanical methods (thermochemically induced centrifuging) at the
pre-treatment stage and thermal methods (direct low temperature thermal desorption) at the
main stage.
Depending on the particular job conditions, the technology can be implemented either
on-site or off-site. In the latter case, specially designed vehicles are used to avoid
spills during transportation to the treatment site. The technology treats all types of
oily wastes (drill cuttings, liquid sludge, oil-contaminated soils). The essence of the
technology is described below.
Strategy and plans
Business strategy
In order to accomplish Gemmias mission to increase shareholder value by applying
proven cleantech methods to recover lost oil and energy currently polluting the
environment and helping our clients to meet increasing stringent environmental
regulations, your Company will implement the following 3x3 strategic plan over the next
five years.
1. Expand operations into three geographical areas:
1) Russia/FSU;
2) the Middle East North Africa (MENA) and
3) South and East Asia.
2. Develop three core Oil Waste Management practices:
1) Physico-Chemical/Thermal oil recovery and oil-contaminated soil remediation;
2) Automated Tank Cleaning and
3) Bioremediation
3. Invest in three strategic areas:
1) Cleantech Research & Development;
2) Related products and services and
3) People - strengthening our staff and advisors with experienced international
petroleum and environmental managers and engineers
4. Expand operations in three geographical areas
(a) Russia/Former Soviet Union - The Russian market alone is estimated to grow to USD
700 million per year over the next 3 years and up to USD 1.7 billion a year for 10 years.
(b) Asia - India, with the second largest proven oil reserves in the Asia-Pacific
region, is the fourth largest consumer of oil in the world. With its rapidly growing
economy and governments statement through the Ministry of Petroleum & Natural Gas
that "A very high priority is attached by the Government to conservation of petroleum
products in view of the need to reduce ever increasing gap between demand for and
indigenous supply of crude oil and petroleum products" we are confident that
opportunities exist for our Oil Waste Management services. And from a base in India we can
strike out into other Asian markets.
(c) Middle East North Africa (MENA) - The MENA market is estimated to be $10 billion
over the next 10 years. The Kuwait Oil Lakes project alone will generate $3.5 billion of
Oil Waste Management contracts over the next 10 years. We are currently working on
establishing a strategic partnership to participate in the Kuwait Oil Lakes tenders with a
preference for an Indian partner.
5. Develop Three Core Oil Waste Management practices
(a) Soil Remediation and Oil Recovery including oil-contaminated soil remediation, oily
sludge and drill cuttings treatment.
Gemmia is currently operating a mechanical/thermal soil remediation plant in
Nefteyugansk, West Siberia with a capacity of 150 000 MT per year which recovers up to 90%
of oil products, discharges solid material which is 99.99% clean and thermally destroys
the remaining contaminants with not more than 1ppm of dust released in the atmosphere.
Gemmia intends to launch 5 oily waste remediation plants in Russia by 2012 with 12 in
operation by 2015.
(b) Automated oil storage tank cleaning
Gemmias mobile unit which is mounted on two standard trailers with a 6-hour
mobilization time will soon be deployed and we have plans to begin manufacturing them.
Gemmia intends to have at least 12 mobile automatic tank cleaning units in operation by
2015.
(c) Bioremediation
Gemmia intends to add bioremediation services (essentially the use of microorganisms to
eat oil) for distribution throughout Russia and is investigating several bioremediation
products.
6. Investment in three high value areas
(a) Research & Development to identify and develop clean tech products and services
using the well established technical prowess of Indian and Russian scientists and
engineers.
(b) Adding related products and services. For example we are investigating a service to
eliminate pollution from the practice of burning the associated gas produced by oil wells
which uses the associated gas to run mini-power stations.
(c) Building a staff and advisory group of experienced oil and gas environmental
professionals.
Towards this, your Company has recently created an advisory council which includes:
Mr. P. N. Devarajan, a chemical engineer from I.I.T., Kharagpur with an experience of
approx 40 years who has worked in senior management positions in Merck, Sharp & Dhome
of India, Bombay Chemical & Plastics India Limited, Mettiar; Shriram Chemicals &
Fertilizers Ltd., Rajasthan. Devarajan was Chairman and Managing Director of Hindustan
Organic Chemicals Ltd (June 1977-June 1981) and Indian Drugs and Pharmaceuticals Limited
(June 1981 - June 1982).
Mr. J. Jayaraman, a first class M.Sc postgraduate from Benaras Hindu University who has
undergone Advance Management Programme organised by IIM, Ahmedabad for Public Sector
Senior Executives. He has an experience of 3 decades in Oil Sector. He has served in
various positions in Domestic Sales and International Trade including as Chief General
Manager for International Trade and Co-ordination of M/s. Indian Oil Corporation. He had
led Cochin refineries Ltd as its Chairman and Managing Director. He has also served as
Independent Director in BHEL / ONGC
Mr. Vladimir Bernstein, Member of the Board of Directors and Chair of the Strategy
Committee of Oil Tech Global Services, is a professional investor possessing a foreign
education and vast work experience in both Russia and the USA.
Mr. Bernstein holds a BS in Finance and Mathematics from the Wharton School, University
of Pennsylvania (1993), an MA from the Stanford Graduate School of Education (1998), and
an MBA from the Stanford Graduate School of Business (1998).
Mr. Bernstein is a former Managing Director and Chief Operating Officer of Icon Private
Equity fund, a CIS-focused private equity fund with over US$1 Billion under management
(2008-10). Mr. Bernstein led Icons investment projects in various sectors including
telecommunications, biotechnology and energy. Prior to Icon, Mr. Bernstein has served as a
partner in a Russian Technology venture fund established by Alfa Group (2003-07). Within
the Fund, he organized six investment deals and served on the Boards of Directors of those
companies. As a Fund partner, Mr. Bernstein ensured dynamic growth of its portfolio
companies, performed successful exit strategies for two deals and raised the next
investment rounds for his portfolio companies.
Prior to Russian Technology VC, Mr. Bernstein served as a member of the Supervisory
Board of Alfa Group, the largest Russian Private Consortium that owns numerous businesses
including TNK-BP, Vimpelcom, Alfa Bank, X5 and others (2001-03). Mr. Bernstein was a
Director for Strategic and Investment Planning at Alfa. He improved the effectiveness of
the Board of Directors’ activities by nominating independent directors to the Boards,
and by creating audit, strategic and compensation committees. Mr. Bernstein expanded the
investment planning function at Alfa Group by establishing criteria for evaluating and
approving investment projects, and also assessing their results.
While in the United States, Mr. Bernstein worked as a consultant in Bain & Company
in Boston (1993-96). During this time, Vladimir successfully performed 12 strategy
projects for large American companies. After receiving a MBA from Stanford Business
School, Vladimir helped create the Californian start-up AllAdvantage.com as a Director of
Business Development (1999-2001). Vladimir established the company’s office in New
York, and developed a sales network in the eastern part of the US.
On a base of cash flow generated from our current oil field services and supply
business and with capital raised from Indian and International investors we intend to
build Gemmia into a leading clean tech environmental services company.
2. OPPORTUNITIES AND THREATS
Opportunities
1. Low risk and high profit.
2. Virtually no competition in this business as there is space for everyone.
3. Growing environmental conscience all over the world and awareness of environmental
protection.
4. Expanding global market and energy needs.
5. Related diversification like cleaning reservoirs and working to remediate oil
contaminated soils is quite possible.
Threats
1. The high cost of environmental services some times over weigh the benefits and
sometimes it appears more economical to leave the sludge and waste as it is rather than
process and recycle it.
2. The risk to human life and facilities is very high due to climatic conditions and
work environment.
3. The volume of losses is significantly higher thro pipeline accidents while
transporting oil from one production location to another.
Having analyzed the SWOT, the management of your Company has been actively considering
plans and initiatives to address these using the BEAR principle which seeks as follows to:
• Build on strengths
• Exploit opportunities
• Avoid threats
• Resolve weaknesses
These initiatives shall help your Company to meet the competition successfully and grow
in the business.
3. RISKS AND CONCERNS:
Strengths
1. Visionary promoters with ambitious plan for entering into oil tech business with a
strong commitment for environmental protection and ethical practices.
2. Tie-up with a global Oil and Gas technology firm, specializing in innovative methods
to reduce the environmental impact of waste products from the oil and gas industries and
having a big market presence in Russia.
3. Professional management team with vast experience in the field.
4. Proven technology in hand.
Weaknesses
1. Slump in oil price.
2. Lack of long term funding for capital expenditure.
3. Technology inefficient for the cold climatic condition.
4. Governmental efforts to regulate the environmental protection is still very weak.
5. Markets for this business is globally restricted to a few countries.
4. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:
The Company has set up internal control systems and considering the volume of
operations they are fairly adequate.
5. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT,
INCLUDING NUMBER OF PEOPLE EMPLOYED:
During the year the company had recruited key managerial personnel, who would drive the
diversified activities of the company overseas trading and also the operations of its two
wholly owned subsidiaries. Relationship with its employees continues to remain cordial.
6. OUTLOOK
Your company’s plan of foraying into the new oil tech business as core business
activity contributes to the belief that your Company would be performing very well in
future.
Oil-bearing waste is a by-product of oil refinery and extraction processes, which is
generally difficult to manage due to its high hydrocarbon contents and viscosity - typical
oil sludge contains 10-60% crude oil, 30-90% water and 5-40% solid particles.
Russia being one of the world leaders in terms of oil production annually extracts
around 500 million tons of oil, representing 12% of the global total. The country is also
a leader in oily waste generation. The problem is that over the past 50 years, when the
oil industry was booming, the volumes of oily waste generation consistently exceeded the
volumes of its remediation, which to date has resulted in accumulation of nearly 200
million tons of oily waste. And even now, despite the increased attention to the problem
of oily waste remediation, the proportion of waste being recycled is not more than 2/3 of
newly generated waste.
The main sources of oil-bearing waste generation are oil production (drilling mud and
waste in testing and repairing wells), oil transportation (soil contamination in case of
accidents on pipelines), oil treatment and storage (sludge on the bottom of storage tanks
and containers). Since this waste is hazardous to the environment and difficult to
transport, it is costly to dispose and handle for the oil industry, driving a high demand
for services that are able to process oily sludge in an efficient matter. Furthermore,
oily waste remediation also recovers hydrocarbons that would otherwise be lost, generating
additional value for customers.
There exists a significant market for innovative oily waste remediation. As mentioned
above, in 2010 total oil-bearing wastes amounted to approximately 200 m m3, and this
figure is expected to grow by 1.5% annually. Apart from growing demand for oil and the
potential for cost reduction the market is driven by legislative changes.
Along with the global trend, the Russian state has begun to pay more attention to
environmental issues, actively applying economic incentives to oil companies, motivating
them to prevent dumping of the newly generated waste. To date, environmental fees for
dumping of oil-bearing waste roughly equal to US$ 50 per m3, with an expected growth rate
of 20% per year. Thus, the market has significant growth potential: The average
estimate–growth to US$ 700 million per year over the next 3 years and up to US$ 1.7
billion a year for 10 years. For comparison, API (American Petroleum Institute) today
estimates the market for oil-bearing waste in the United States at more than US$ 2 billion
a year, the United States being a smaller producer than Russia and supposedly applying
much stricter environmental controls and remediation technologies at oil & gas
producing sites.
Over the past three years, the dynamics of oily waste remediation market has been
positive. In many regions, not only the newly generated oily waste, but also the old
accumulated waste was recycled. According to the industry experts, remediation services
market shows average growth of around 14% per annum.
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