svogl oil gas energy ltd Management discussions

Annexure-VII

Global Economy Prospects

The world economy continues to grow at a modest pace. Growth of world gross product is projected at 2.8 per cent in 2015, accelerating to 3.1 per cent in 2016. The growth divergence between various regions is widening in 2015, owing to differing impacts from the recent decline in the prices of oil and other commodities, as well as country-specific factors. The short-term growth prospects of heavily commodity-dependent countries have worsened considerably. By contrast, commodity-importers are benefiting from the lower prices in the form of reduced inflationary, fiscal and balance-of-payment pressures. While the recovery in developed economies is improving, many countries still face considerable headwinds from the legacies of the global financial crisis. The overall subdued performance of the world economy in recent years has raised concerns of a "new normal" of lower growth. The broad-based weakness in investment worldwide not only holds back current growth, but also reduces potential growth in the future. The major downside risks to the baseline outlook are related to the impact of the upcoming monetary policy normalization in the United States, ongoing uncertainties in the euro area, potential spillovers from geopolitical conflicts, and persistent vulnerabilities in emerging economies. To mitigate these risks and ensure a return to strong, sustainable and balanced growth, a broad set of policy measures at the domestic, regional and global level is needed.

Indian Economic Prospects

After months of fogginess regarding India’s economic momentum, recent data suggest that the economy is starting to gather steam. Industrial production picked up pace in June and the trade deficit narrowed in July. In addition, both the manufacturing and services PMIs rose in July, with the latter returning to expansionary territory. Despite the largely positive economic news that emerged from India in the past month, results from the government’s ambitious reform agenda were less bright. On 13 August, policymakers concluded the latest parliamentary session without passing key legislation including the promising Goods and Services Tax (GST) reform. The bill is designed to replace all the varying indirect state taxes with a single GST and is praised as being more business friendly. In addition, the controversial land reform bill has been stalled and a touted plan to overhaul labor laws has yet to be released.

Outlook and Opportunities

The oil and gas sector is one of the six core industries in India. It is of strategic importance and plays a pivotal role in influencing decisions across other important spheres of the economy.

In 1997 98, the New Exploration Licensing Policy (NELP) was envisioned to deal with the ever-growing gap between demand and supply of gas in India. As per a recent report, the oil and gas industry in India is anticipated to be worth US$ 139,814.7 million by 2015. With India’s economic growth closely linked to energy demand, the need for oil and gas is projected to grow further, rendering the sector a fertile ground for investment.

To cater to the increasing demand, the Government of India has adopted several policies, including allowing 100 per cent foreign direct investment (FDI) in many segments of the sector, such as natural gas, petroleum products, and refineries, among others. The government’s participation has made the oil and gas sector in the country a better target of investment. Today, it attracts both domestic and foreign investment, as attested by the presence of Reliance Industries Ltd (RIL) and Cairn India.

Government Initiatives

• Some of the major initiatives taken by the Government of India to promote oil and gas sector are:

• India and Norway have discussed bilateral relationship between the two countries in the field of oil and natural gas and decided to extend cooperation in hydrocarbon exploration.

• To strengthen the countryRss energy security, oil diplomacy initiatives have been intensified through meaningful engagements with hydrocarbon rich countries.

• PAHAL - Direct Benefit Transfer for LPG consumer (DBTL) scheme launched in 54 districts on November 11, 2014 and expanded to rest of the country on January 1, 2015 will cover 15.3 crore active LPG consumers of the country.

• 24 x 7 LPG service via web launched to provide LPG consumers an integrated solution to carry out all services at one place, through MyLPG.in, from the comfort of their home.

• Special dispensation for North East Region: For incentivising exploration and production in North East Region, 40 per cent subsidy on gas price has been extended to private companies operating in the region, along with ONGC and OIL.

Road Ahead

By 2015-16, India’s demand for gas is set to touch 124 MTPA against a domestic supply of 33 MTPA and higher imports of 47.2 MTPA, leaving a shortage of 44 MTPA, as per projections by the Petroleum and Natural Gas Ministry of India. Moreover, Business Monitor International (BMI) predicts that India will account for 12.4 per cent of Asia-Pacific regional oil demand by 2015.

Internal control systems and their adequacy

Our internal management audit team periodically undertakes independent reviews of risks, controls, operations and procedures, identifying control and process gaps and recommending business solutions for risk mitigation. The Company runs in-house risk and misconduct management unit which supports management to assess, evaluate, strengthen and institutionalise value system from the standpoint of ethical business practices. With regular reporting mechanism, a stage gate system has been established. Complaints received under whistle-blower policy are evaluated on a regular basis.

The Audit Committee of the Board periodically reviews the company’s management audit reports, audit plans and recommendations of the auditors and managements’ responses to those recommendations. The Audit Committee met five times during the year.

Operational risks

Technology:

We have the latest drilling rigs with an average age of 5-6years. The change in technology is not a threat to drilling equipments.

However, in seismic Equipments though the equipments are not old & are in working condition, upgradation is needed by the Clients. Efforts are being made with the equipment Manufacturers to upgrade these equipments and as well as with the Clients to accept the equipments available in the country to save costly foreign exchange. Availability of imported spare parts & long delivery: Some of the equipments/parts have now been developed in India, as a substitute for imported items. However, for some critical items like top drive and blow out preventers (BOP). We have to be dependent on import.

Financial risks

Foreign Exchange Risk:

As all the equipments including Drilling Rigs & Seismic Equipments are imported from outside India, the exchange fluctuation has a major impact. Similarly, the lease rentals to the foreign subsidiaries and the cost of other imported additional equipments for repair etc, the exchange fluctuation has a major role in the cost structure.

To overcome this, the company has made out a strategy to bid all the tenders in US$. This will be a natural hedge for this risk.

Interest Rate Risk:

We were exposed to high interest rates earlier. Post formalisation of Corporate Debt Restructuring Proposal (CDR Proposal), risks associated with interest rate fluctuation have been substantially mitigated with fixing the interest rate regime on the term debts for a longer period.

We also have significant amount of foreign currency borrowings which are denominated in USD. We currently do not hedge our interest rate exposures. This will be mitigated through natural hedge.

Cautionary Statement

Statement in the management discussion and analysis describing the Company’s objectives, projections, estimates and expectations may be ‘forward looking statements’ within the meaning of applicable laws and regulations. Forward looking statements are identified in this report, by using the word Rsanticipates’, Rsbelieves’, Rsexpects’, similar expressions in such statements. Although we believe our expectations are based on reasonable assumptions, these forward looking statements may be influenced by numerous risks and uncertainties that could cause actual outcomes and results to be materially difference from those expressed or implied. Some of these risks and uncertainties have been discussed in the section on risks and concerns.