Reliance Natural Resources Ltd Management Discussions

RELIANCE NATURAL RESOURCES LIMITED ANNUAL REPORT 2008-2009 MANAGEMENT DISCUSSION AND ANALYSIS Forward Looking Statements: Statements in this Management Discussion and Analysis of Financial Condition and Results of Operation of the Company describing the Companys objectives, expectations or predictions may be forward looking within the meaning of applicable securities laws and regulations. Forward-looking statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realized. The Company assumes no responsibility to publicly amend, modify or revise forward-looking statements, on the basis of any subsequent developments, information or events. Actual results may differ materially from those expressed in the statement. Important factors that could influence the Companys operations include cost of fuel, levies by regulatory authority, changes in government regulations, tax laws, economic developments within and outside the country and such other factors. The financial statements are prepared under historical cost convention, on accrual basis of accounting, and in accordance with the provisions of the Companies Act, 1956 (the Act) and comply with the accounting standards notified under Section 211 (3C) of the Act read with the Companies (Accounting Standards) rules, 2006. The management of the Company accepts responsibility for the integrity and objectivity of these financial statements, as well as for various estimates and judgements used therein. These estimates and judgements relating to the financial statements have been made on a prudent and reasonable basis, in order that the financial statements reflect in a true and fair manner, the state of affairs and profits for the year. The following discussions on our financial condition and result of operations should be read together with our audited consolidated financial statements and the notes to these statements included in the Annual Report. Unless otherwise specified or the context otherwise requires, all references herein to we, us, our, the Company, Reliance, RNRL or Reliance Natural Resources are to Reliance Natural Resources Limited and / or its subsidiary and associates. Overall Review: The availability of quality and reliable power at competitive prices is the cornerstone of any modern economy, the driving force of industry and commerce. Critical to the generation of power is an uninterrupted supply of fuel, be it natural gas, coal or liquid fuels. In order to secure this end for the power plants of our group companies, the Company is focusing on all aspects of the energy value chain, including exploration and extraction, production and processing and transportation and distribution of coal, gas and liquid fuels. Industry Snapshots Oil & Gas: India is on the threshold of achieving a quantum jump in the oil and gas production in the light of the monetization of the major discoveries. Simultaneous announcement of the regulations for natural gas pipelines and city gas distribution by the Petroleum and Natural Gas Regulatory Board (PNGRB) under the PNGRB Act 2006, is expected to give a thrust to the gas pipeline transmission and distribution infrastructure in the country. The upcoming eighth round of New Exploration Licensing Policy (NELP) and fourth round of Coal Bed Methane (CBM) shows the governments commitment to faster exploration and monetization of Indias vast natural resources in order to check the budgeoning oil import bill. Indias energy sector and more specifically the gas segment, is poised to hit a new growth trajectory in the coming years. This would throw up multiple opportunities, not only across the gas value chain, but also in a number of end use industries like power, fertilizer and city gas distribution. RNRL, in its quest to emerge as a major fuel supply and management company, has set the ball rolling in a number of business areas across the gas value chain viz., exploration and production as well as gas transmission and supply. Opportunities and Challenges: Gas Value Chain Integration and Gas / Coal and Power Integration are two major strategies, on which the Company has set its eyes, thereby exploiting the key business opportunities which the energy industry provides. The sourcing and securing of primary energy sources is the key to success in power generation. In this light, our business portfolio focuses on activities related to Fuel Management, such as the exploration and production, sourcing and supply of fuel for some of mega power projects of the Anil Dhirubhai Ambani group of companies. Natural Gas: As per the Working Group report of the Ministry of Petroleum and Natural Gas, the demand for natural gas in the country is slated to increase from 197 million standard cubic meters per day (MMSCMD) in year 2008-09 to 279 MMSCMD in the next 4 years. In the light of the recent discoveries and emerging gas supply scenario, the unmet demand for gas of the fertilizer sector would be almost fully met whereas the unmet demand of the gas starved power sector would be met to an extent of about 50 per cent. The gas supplies would also provide a renewed thrust to the hitherto stagnant city gas distribution (CNG and Piped Natural Gas) sector. Business Review and Outlook: The Company is in the process of implementing strategies to capitalize on the huge available opportunities and has put in place a core team of business and technical experts for these business segments. In the first three years of operations, the Company has forayed into the oil, gas and coal sectors and has achieved significant milestones as documented below. Fields Milestones achieved by RNRL Exploration & Production: Coal Bed Methane * RNRL-led consortium has won 4 of the 10 Blocks offered through the international competitive bidding process under CBM-III. * RNRL-led consortium is now the second largest CBM player in India in terms of acreage. * Petroleum Exploration Licence (PEL) has been obtained for three blocks and the fourth is on the anvil. * All the exploratory surveys and studies have been completed and the drilling work is about to commence. Oil & Gas * Won one Block in Mizoram under the NELP VI round. * PEL has been obtained. Major pre-seismic surveys have been completed as per committed work programme. The aero-magnetic survey is about to commence, followed by the 2D seismic data acquisition survey. Natural Gas Business: Gas Agreements * On January 12, 2006, a Gas Supply Master Agreement (GSMA) was signed with Reliance Industries Limited (RIL). * The agreement is currently sub-judice. Natural Gas Pipeline * Reliance Fuel Resources Limited (RFRL), a wholly owned subsidiary of the Company has submitted an application to Ministry of Petroleum & Natural Gas (MoP&NG) and Petroleum and Natural Gas Regulatory Board (PNGRB) for grant of authorization to lay a gas pipeline from Kakinada to Dadri in Uttar Pradesh. * The pipeline will supply gas to the 7,480 MW Power plant at Dhirubhai Ambani Energy City (DAEC), Dadri. City Gas Distribution: * RFRL has also submitted applications to MoP&NG and PNGRB for grant of authorization for City Gas Distribution network for Mumbai, Delhi and the National Capital Region. Coal Supply * RNRL has entered in to freight contract for transportation of coal from Korba to Dahanu Thermal power station. * RNRL also supplies around five lakh metric tonnes of imported coal to Dahanu Thermal Power Station. Exploration & Production: The Company has ventured into the domestic oil and gas business through its acquisition of blocks in the bidding rounds initiated by the Government of India. Coal Bed Methane: * The 4 CBM blocks, won by RNRL-led Consortium in CBM III round, cover acreage of 3,251 sq kms, making it the second largest CBM player in India in terms of acreage. * The CBM blocks are located in Madhya Pradesh (one Block), Andhra Pradesh (one Block) and Rajasthan (two Blocks). * After signing the contracts for all four blocks with the Government of India on November 7, 2006, the Company has obtained PEL for three of the blocks in MP and Rajasthan. PEL is expected to be obtained for the other block in Andhra Pradesh during the first half of 2009-10. * The Company-led consortium has completed the EIA, geological and remote sensing studies in all the four blocks. The core hole drilling and testing is expected to commence in the first quarter of 2009-10. Block State A B C Name Barmer (4) Rajasthan 1,168 82.00 3.02 Barmer (5) Rajasthan 739 38.00 1.89 Kothagudem A.P. 735 57.20 2.62 Sohagpur M.P. 609 16.72 0.95 Total 3,251 193.92 8.48 A = Acreage (sq kms) B = Estimated CBM Reserves (BCM)* C = Plateau Production (MMSCM/D)** * Estimates by Directorate General of Hydrocarbons ** As estimated by our consultant GCA, Singapore and internal studies Oil & Gas: * RNRL-led consortium (RNRL, Reliance Infrastructure Limited, Geopetrol and NaftoGaz) won one oil and gas block in the state of Mizoram and received the letter of award on February 12, 2007. * The Company signed a contract with the Government of India on March 2, 2007 for exploration and production of Oil and Gas block having acreage of 3,619 Sq Kms. * PEL was notified by the Government of Mizoram on November 20, 2007. * The Company has completed environmental impact assessment studies, geochemical studies and geological studies in line with the work commitment. The Aero-Gravity and Magnetic studies is being taken up as an additional study to obtain further block data. This will be followed by the 2D Seismic Data Acquisition survey which is expected to commence during 2009-10. Acreage (sq kms): Block State A B C D Name MZ-ONN-2004/2 Mizoram 3,619 7.52 4.70 1.88 A = Acreage (sq Kms) B = Total estimated* Peak Production Rate (MMSCMD**) High C = Total estimated* Peak Production Rate (MMSCMD**) Medium D = Total estimated* Peak Production Rate (MMSCMD**) Low * Estimates by DGH ** MMSCMD - Million Standard Cubic Meter per day Natural Gas Business: Gas Agreements: * On January 12, 2006, RIL entered into a GSMA with the Company. * This Agreement is not in conformity with the scheme of arrangement, approved by the Bombay High Court on December 9, 2005 (Scheme), inter alia, providing for transfer of Gas Based Energy Undertaking of RIL to the Company. Consequently, the Company approached the Bombay High Court seeking implementation of the Scheme and the GSMA. The matter is currently sub- judice. Natural Gas Pipeline: * In May 2006, RFRL, a wholly owned subsidiary of the Company, submitted an application to MoP&NG for the grant of authorization to lay a gas pipeline from Kakinada to Dadri. The application was subsequently transferred to PNGRB in September 2007 which is under review. * This pipeline would supply gas to the 7,480 MW plant at DAEC, Dadri. City Gas Distribution: * The Company plans to establish city gas distribution networks for distributing piped gas to the consumers of Mumbai, Delhi and the National Capital Region. * RFRL had also submitted an application to MoP&NG seeking authorization for starting city gas distribution businesses in Mumbai and Delhi in May 2006 and in the National Capital Region in August 2006. The applications were subsequently transferred to PNGRB in September 2007 which is under review. Risks and Concerns: The main asset of the Gas Based Energy Undertaking, required to be vested in the Company pursuant to the Scheme of Arrangement between RIL and the Company (Scheme), is the supply of gas by RIL from its KGD 6 and other fields. The GSMA as unilaterally finalized by RIL and sough to be thrust upon the Company does not constitute a bankable gas supply arrangement and the matter is sub-judice. This has resulted in the Company being unable to conduct the gas supply operations envisaged under the Scheme. Continued non availability of a bankable gas supply arrangement may have a material adverse effect on the business, operations and financial condition of the Company The Company has entered into the exploration and production business in which success is determined by the discovery of hydrocarbons/gas. The Company is planning to enter into other business operations in future. Any failure by the Company to expand its business successfully may have a material adverse effect on the Companys business financial condition and results of operations. Adequacy of Internal Controls: The Company has an adequate system of management-supervised internal controls, which are aimed at achieving efficiency in operations, optimum utilization of resources, effective monitoring and compliance with all applicable laws. The Company ensures adherence to all internal control policies and procedures. A qualified and independent audit committee of the Board, comprising the independent directors reviews the adequacy of internal controls. Discussion on financial performance with respect to operational performance: The total income of the Company for the year ended March 31, 2009 was Rs 471.41 crore. The gross block of assets of the Company as at March 31, 2009 stood at Rs 470.20 crore and the Companys net worth was Rs 1,800 crore The Companys sales were derived mainly from fuel handling for the Reliance Anil Dhirubhai Ambani Group companies. Human Resources: The Company including its wholly owned subsidiaries have a very highly experienced and motivated team of 31 professionals as on March 31, 2009. The Company believes that it will manage to achieve substantial growth with a lean organization structure. The Companys human resource activities are focused on building talent to meet future challenges.