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The year 2012–13 was marked by challenging global economic environment. US showed signs of growth but continued to struggle with a low growth rate. European Union remained under the grip of the Sovereign debt crisis. Growth rate in advanced economies on the whole, slipped from 1.7 percent in 2011 to 1.2 percent in 2012. Emerging economies, which so far had shown resistance to the slide down, experienced broad based deceleration caused by weak external demand and domestic issues such as infrastructural bottlenecks and capacity constraints. Growth in emerging economies, as a whole, slowed down from 6.2 percent in 2011 to 4.9 percent in 2012. At home, our GDP growth fell to a decade low of 5 percent. The year was mired by concerns on macro–economic stability due to elevated Current Account Deficit, high fiscal deficit, and high inflation despite some decline. The slide in rupee further added to the concerns. Despite the all round drop in growth, it is expected that 2013 will see some consolidation in global growth. India's growth rate is also likely to improve before stepping up further in the later years.
On the global oil and gas sector front, while moderation in crude oil prices brought in some respite, they remained above the US$100/bbl mark and geo–political tensions continued to pose risks. During the year, significant gas discoveries were announced in East Africa. The unconventional oil and gas story that unfolded in US made steady progress. All these developments have opened up new vistas for the global energy sector. At home, while domestic crude oil production declined, refinery throughput and product consumption recorded strong growth of 7 percent and 4.9 percent respectively, leading to continued high oil imports. The benefit of lower crude oil prices was frittered away by the depreciating rupee. As regards gas, the declining domestic production constrained consumption, led to a fall in domestic gas consumption despite LNG imports. However, on the policy front, the year was marked by some decisive policy changes. Introduction of dual pricing policy for bulk and retail diesel in January 2013 and capping of subsidized LPG cylinders in September 2012 are likely to have their impact on the consumption pattern of these products. For marketing companies like us, these changes are symptomatic of increase in competition levels in the Indian petroleum products market.
In the backdrop of a mixed economic landscape, IndianOil continued to make significant strides, constrained only by external factors beyond its control. The Corporation recorded highest turnover of Rs. 414,909 crore growing by 11 percent on year–on–year basis. At 88th position in the Global Fortune 500 list of the worlds biggest corporations, it continued to be the highest ranking company from India. Net Profit rose to Rs. 5005 crore, registering a growth of 26.6 percent over the previous year. Refineries exceeded 100 percent capacity utilization for sixth consecutive year in a row, improved distillate yield to a record 78.1 percent and achieved the best levels of energy efficiency so far by recording the lowest MBN of 56.3 during the year. Domestic product sales scaled up to a record level of 68.76 MMT. A record level of 1910 new retail outlets were commissioned during the year with continued rural thrust in the form of the Kisan Seva Kendras (KSK). The total number of KSKs surpassed the 5000 mark. Product Pipeline throughput rose to 28.09 MMT. In the relatively new businesses, viz. petrochemicals and gas, the Corporation recorded highest ever sales and strong growth rates. The Corporation strengthened its market presence in the segment and emerged as the second largest petrochemicals player in the country. Its position in the gas market was further fortified with an eye on future growth. The E&P segment of the Corporation also showed progress with Niobrara Shale assets in the US, returning small but positive revenues and the Carabobo asset in Venezuela also showing first oil from first of its two wells.
The healthy financials achieved by the Corporation demonstrated the commitment of the Corporation to manage its challenges and stride forward on the path of growth. During the year, the Corporation reeled under the burden of over Rs. 85,000 crore of gross under–recoveries, which caused significant dent on its profitability in the form of borrowing cost. On top of this, the Corporation was also saddled with unmet under–recoveries of over Rs. 1000 crore (inclusive of uncompensated losses on MS sales). Despite the challenge of financing such high level of under–recoveries, the Corporation achieved excellent results in tying up competitive funding and became the first Indian Corporate to successfully price long–term bonds denominated in Singapore dollars (SGD), thereby opening a new window for Indian Corporates. Through this deal, the Corporation raised 400 million Singapore dollar loan at very competitive rates and was also felicitated by IFR Asia with the Indian Market Capital Deal of the Year 2012 award. Such efforts are a testimony of the Corporations commitment to emerge stronger from these challenging times.
The Corporation continues to be influenced by a host of external factors ranging from global economic and geo–political upheavals, inherently uncertain energy markets and closer home the uncertain compensation mechanism and interventions in the product pricing schedules. The Corporation has managed these challenges well during the year and is committed to deliver growth with sharp focus on operational efficiency and cost optimization. Some steps such as the commissioning of Integrated Crude Oil Handling Facilities at Paradip were taken during the year. This facility has enabled the Corporation to receive the entire crude oil requirement of Barauni, Haldia, Bongaingaon Refineries and the upcoming Paradip Refinery through Very Large Crude Carriers (VLCCs) and thereby reduce the supply chain input costs. An important lever in the pursuit of cost optimization is achieving reduction in cost of sourcing crude oil, the single largest component of cost. The Corporation has strategized to source and process cheaper and opportunity crude oil varieties. The endeavours so far have resulted in processing 53.3 percent of high sulphur crude oil in 2012–13 compared to 49.2 percent in 2011–12, as also enlargement of the crude oil basket to include high TAN and heavy crudes with API as low as 21O. Presently, the share of opportunity crudes (Heavy & High TAN) is about 13 percent and includes processing of Maya crude and heavy Rajasthan crude. This is targeted to be doubled to over 26 percent once Paradip Refinery is operational. Further, towards achievement of this objective, besides augmenting the capability of refineries to process such crude oils, investments are also being made for augmenting the capacity of major pipelines to transport heavy crudes.
In the marketing and distribution operations, cost optimization is directly linked to the efficiency of infrastructure. LPG transportation is an area where substantial expansion in the pipeline network is required for bringing cost efficiency. Presently, our Paradip–Haldia–Durgapur and Ennore–Trichy–Madurai LPG pipeline projects are under implementation. A number of other prospective LPG pipelines have also been identified, which are under study. Infrastructure rationalization to use the most efficient option and thrust on technology solutions such as automation to garner productivity gains and cost reduction is the key focus in the marketing segment. Towards this end, 1600 more retail outlets were automated during the year taking the total number of automated retail outlets to 4377. By 2016–17, the automation drive is set to encompass more than 12,500 outlets.
The Corporation already enjoys significant advantage in its present form in the Indian market. Its continued thrust on rural markets, which await shift from traditional to modern fuels presents significant growth opportunities. The Corporation's low–cost KSK model has emerged as a major strength towards meeting the energy requirements of the rural market. Between 2008–09 to 2012–13 sales through KSKs grew at a CAGR of over 30 percent resulting in almost three fold increase in sales. These developments provide handsome opportunities to the Corporation for continued and healthy growth.
With enhanced & intense focus on efficiency improvement and cost optimization, coupled with country wide reach of its refining and marketing network, the Corporation is set to emerge significantly stronger by harnessing hitherto untapped resplendent opportunities offered by growing Indian market.
The investment programme of the Corporation during the XII Plan period, captures some of these opportunities and envisages to undertake projects worth over Rs. 56,000 crore across the energy value chain. The currently under implementation 15 MMTPA refinery in Paradip has reached an advanced stage of completion. In addition, a number of other major projects such as Paradip–Raipur–Ranchi product pipeline, augmentation of Paradip–Haldia–Barauni pipeline, Paradip–Haldia–Durgapur pipeline, new marketing terminal at Paradip, LPG facilities at Paradip, debottlenecking of Salaya–Mathura Pipeline and FCC revamp at Mathura are at various stages of implementation.
Indian Petrochemicals market has high growth potential and has been growing at impressive rates. Consumption of Polyethylene (PE) is projected to scale up from 3kg/per person presently to 8kg/person in 2035 and Polypropylene consumption is projected more than triple from 2.2kg/person presently to 7kg/person in 2035. This presents significant opportunities in the Petrochemicals segment. The Corporation's Butadiene Extraction Unit and Butene–1 project at Panipat are under steady progress. The Corporation is also setting up country's first Styrene Butadiene Rubber (SBR) unit in Panipat, which has reached advanced stages of completion.
The increased global gas supplies and India's large energy appetite present sizeable growth opportunities in the Indian gas market as well. Gas demand in India is projected to grow at a CAGR of 4.2 percent (2010–2035) way above 1.6 percent CAGR for the world. The Corporation envisages tapping these opportunities. Work in regard to the upcoming LNG import terminal at Ennore is progressing steadily. Further, the Corporation is part of a consortium that has been awarded construction and operations of three cross–country natural gas pipelines. These gas pipelines would open windows for expansion of gas markets in the Country.
The recent breakthroughs in the global E&P sector are expected to boost the Corporation's aspirations in the E&P space. The Corporation has been aggressively scouting for suitable investment opportunities.
IndianOil is amongst the pioneers in recognizing the importance of innovation as a key differentiator. The Corporation's long held thrust on innovation through a concerted Research & Development effort is a major source of competitive advantage. IndianOil R&D has been expanding its scope to petrochemicals, solar energy and bio–energy as well. During the year, IndianOil R&D Centre commissioned India's first Integrated lignocellulosic biomass to ethanol pilot plant with the technological support from National Renewable Energy Laboratory of USA.
At IndianOil, we are committed to nurturing and developing our human resource asset, which we believe is a major source of value creation. In pursuit of this, a number of initiatives such as introduction of Leadership Centres/multi–rater feedback mechanism for measurement of performance in succession management and leadership management; employee engagement surveys etc. were implemented during the year. Going ahead, the challenge is to hone our human capital to meet the challenges of higher market competition levels and to develop skill sets for our new businesses.
Last but not the least, I would like to reassure all our shareholders that the Corporation is working relentlessly to tide over the various challenges that it is confronted with. Your continued support is a major driver for us and I would like to express our gratitude to each one of you for the trust you have reposed in your Corporation and promise you Corporation's enhanced performance.
R S Butola