gujarat state petroleum corporation ltd Management discussions

GUJARAT STATE PETROLEUM CORPORATION LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS Financial Year 2009-10 was the time for most of the Countries, including the United States of America, to revisit their economic policies and take their economy on the path of recovery with the help of various stimulus packages. The overall economic scenario during the financial year 2009-10 has been that of recovery from the recession. The global economic recession that began in 2007 has had a profound impact on world energy demand in the near team and the same continued in 2009-10 also. For the world as a whole, primary energy consumption fell by 1.1 per cent in 2009, the first decline since 1982. Consumption in the industrialized countries of the OECD fell by 5 per cent - more than their decline in GDP. Global oil consumption declined by 1.2 million barrels per day (bpd), or 1.7 per cent, the largest decline since 1982. (Source: BP Statistical Review of World Energy, June 2010) However, Indias economy is set for GDP growth rate of above 8% as per RBIs First Quarter Review of Statement on Monitory Policy for the financial year 2010-11. Accordingly, the oil and gas sector will remain strong. In 2009, Indias consumption of natural gas was 51.9 BCM as against 41.0 BCM in 2008. Thus, increase in gas consumption in India in 2009 was 25.9% as compared to 2008 which is top most globally. However, India ranked as low as 15th in gas consumption globally in 2009. (Source: BP Statistical Review of World Energy, June 2010) Gas is currently a minor fuel in the overall energy mix in India, however, gas consumption is expected to grow at 4.2% per year on average from 2006 to 2030. (Source: Energy Information Administration, International Energy Outlook 2009, May 2009). As against the consumption of 51.9 BCM, India produced 39.3 BCM of natural gas in 2009 showing continued demandsupply gap in the natural gas sector which is met through import of LNG. The production of 39.3 BCM in 2009 showed an increase of 28.9% as against production of 30.5 BCM of natural gas in 2008. (Source: BP Statistical Review of World Energy, June 2010). As far as the state of Gujarat is concerned, the Industrial Policy of Gujarat has always focused on development of Energy Sector. Gujarat has always remained committed to establish itself as the Petro Capital of India. Gujarat, by far, is the most developed gas market in the country. Currently, Gujarat alone accounts for approximately 40% of total gas demand in the Country. Gas demand in Gujarat is likely to grow at a CAGR of 3.4% from 85 MMSCMD in financial year 2009-10 to 154 MMSCMD in financial year 2023. (Source: CRISIL report on Indian Gas Market Assessment, February 2010.) In light of the overall economic scenario as stated above, the performance of your Company in the area of Exploration and Production in the financial year under review has been analyzed as follows: Producing Assets: Oil and gas production volumes, which depend on the yield from our producing fields, have a significant impact on the Companys results of operations. Currently, all of our producing fields are within the Cambay basin, where we hold participating interests in 15 producing fields. The Cambay basin is a maturing resource province with declining production levels, especially of gas. The volume of production from oil and gas fields generally declines as reserves are depleted due to production. Our gas production volumes from producing fields in the Cambay basin was 33.9 BCF, 23.0 BCF, 16.0 BCF, 11.8 BCF and 8.6 BCF for the financial years 2006, 2007, 2008, 2009 and 2010 respectively. Our production volume for gas has been declining as a result of a decline in production volumes from the Hazira field. Our oil production volume was 36.9 MBbl, 211.8 MBbl, 264.5 MBbl, 310.0 MBbl and 403.3 MBbl for the financial years 2006, 2007, 2008, 2009 and 2010, respectively. Our production volume for oil has been increasing as a result of an increase in oil production from the Hazira field and the commencement of production from the Ahmedabad field. The Company also intends to continue exploration activities in our existing exploration blocks to discover new oil and gas reserves for development. Discoveries of oil and gas in the Sanand-Miroli and Ankleshwar blocks are currently under appraisal and declaration of commerciality and applications for various FDP approvals are currently in process. We intend to acquire discovered and producing blocks to balance our portfolio of exploration, developing and producing fields and blocks. We are currently exploring a total of 257,810 square kilometers. Our future production will be significantly dependent upon our success in acquiring producing assets or finding and developing additional reserves in a timely and cost effective manner. Assets under development: Our primary asset is our 80.0% participating interest in the KG block in the KG basin off the east coast of Andhra Pradesh, India, which includes the Deen Dayal field. As of March 31, 2010, our net entitlement of proved, proved plus probable and proved plus probable plus possible gas reserves for DDW were 644.8 BCF, 947.4 BCF and 1,089.0 BCF, respectively, and our net entitlement of proved, proved plus probable and proved plus probable plus possible condensate reserves for DDW were 10,101.1 MBbl, 18,319.2 MBbl and 25,177.3 MBbl, respectively. 98.1% of our proved plus probable gas reserves and 83.9% of our proved plus probable oil (including condensate) reserves are located in DDW. We expect to begin production from DDW in June 2012 and are currently in the process of executing the FDP for this block. The development of DDW involves significant engineering, drilling, procurement, construction, third-party and other risks. Our future production will be significantly dependent upon our success and timely execution of the FDP for DDW. Further, we also intend to drill additional appraisal wells within the Deen Dayal field in DDE, DDN and DDW Downthrown and, if successful, plan to achieve the declaration of commerciality for these fields, following which we will formulate FDPs for these fields. The Deen Dayal Field is a high temperature, high pressure (HTHP) tight and deep gas field with a complex structural/stratigraphic trap involving several separate fault blocks associated with rift geology. One fault block (DDW) has been approved for development, while several other discoveries require further appraisal and study before becoming part of a longer term plan for developing the greater field. The development strategy for Deen Dayal West consists of a Well Head Platform (WHP) bridge-linked to a Processing and Living Quarter Platform (PLQP). Forward Looking Statements: This report contains forward looking statements which address expectations or projections about the future, including but not limited to statements about the companys strategy for growth, product development, market position, expectations and financial results. The company can not guarantee that these assumptions and expectations are accurate or will be realized.