MANAGEMENT DISCUSSION AND ANALYSIS (Forming part of the Directors Report for the year ended 31.03.2015) Economic Overview The global economy growth registered a moderate rate of 3.4% during 2014-15 as compared to 3.0% in the brvious year ,with US registering stronger than expected economic performance while European countries and Japan delivered a mixed economic performance. The growth in China declined from 7.8% in 2013-14 to 7.4% in 2014-15 whereas ,India recorded a healthy growth rate in the same period. In spite of marginal reduction in growth rates , the developing economies contributed about 75% of global GDP growth. Further, the global GDP is expected to grow at 3.5% during 2015-16 as a result of lower oil prices and commodity prices that are likely to spur the increase in global consumption of goods including the advanced economies - United States, European countries and Japan. During the year 2015-16, US economy is projected to grow at 3.1% while European countries are expected to achieve a growth of 1.5%. In case of developing economies, the growth is estimated to be about 4.3% in 2015-16 with China's growth rate at 6.8% and India's growth rate at 7.5%. The Indian economy's expected healthy growth rate of 7.5% in 2015-16 reflects the impact of many focussed measures undertaken during the last one year by the Government to improve the business confidence and remove infrastructure bottlenecks in the country. The Index of Industrial Production (IIP) achieved a growth of 2.8% in 2014-15 with IIP for manufacturing and construction sectors recording growth rates of 2.3% and 4.8% respectively. Inflation has been brought under control as a result of lower petroleum products prices and commodity prices which have a cascading effect on cost of manufacturing goods . Lower crude oil prices have also contributed positively to reduce the Current Account Deficit and also reduced the amount of fuel subsidies paving the way for stronger financial position of the country. However, the foreign exchange rate has experienced volatility through most of the year consequent to many developments in global economic factors. Energy Scene The global energy sector has experienced significant changes during the brvious year with returning oil price volatility after a long gap and crude oil prices falling by more than 50% between July 2014 and end of March 2015. The major cause for the price decline is increase in oil production by US coupled with lower than expected demand for oil from developing countries. The primary energy consumption increased marginally at 0.8% during 2014-15 and is expected to increase at 1.4% from 2015 to 2035 with matching growth in production. In the global energy mix, oil continues to be the leading energy source, meeting two thirds of expected increase in future energy demand. Demand for Natural Gas, which is a cleaner fuel, and renewable sources of energy is expected to increase at higher rates than that of oil. The renewable sources of energy is projected to increase at 6.3% per annum till 2035 and it's share in the energy mix is likely to increase from 3% to 8% in the corresponding period. Reflecting the above trends, the global demand for oil is projected to increase by 19 mb/d and reach 111 mb/d by 2035, with China contributing a growth of 7 mb/d, followed by India with 4 mb/d and middle east with another 4 mb/d additional demand. In order to meet the increased demand , the oil production from US and southern /central American countries is likely to increase by 13 mb/d, mostly from un-conventional sources such as tight oil, Natural Gas Liquids, and oil sands. The substantial increase in oil production from American countries will result in movement of oil from West to East as compared to East to West in earlier years. Considering the possibility of US becoming self sufficient in Oil and Gas production, most of the oil from middle east is likely to move to Asian countries and may contribute to better energy security for them. Technological innovations and high crude oil prices are expected to increase oil production from un-conventional sources in future. India's dependence on imports to meet expanding energy needs continues in future with percentage of imports expected to touch 90% of the demand by 2035. During 2014-15, the country imported 189.4 Million Metric Tonnes (MMT) of crude, almost at the same level as in 2013-14. However , the cost of imports was lower at $112.7 billion as compared to $142.96 billion in the brvious year due to fall in crude oil prices as the average crude oil price of Indian basket of crudes had come down from $105.52/ barrel in April 2014 to $ 56.43 /bbl by end March 2015, as per data from Petroleum Planning & Analysis Cell. However , subsequently the oil price registered gains and has crossed the $65/bbl mark recently. It is also expected that the global oil prices are likely to increase gradually over the next few years. Refining Industry and Oil Market Developments The global oil consumption is projected to grow from the brsent level of about 92 Million Barrels per day (MBD) and reach 111 MBD by 2035. The demand for oil in India is expected to increase by about 100% from the current level of 3.846 mb/d to 7.846 mb/d by 2035, providing excellent growth opportunities for the Indian industry. Petroleum products consumption in India during 2014-15 had grown at a reasonably good rate of 4.2% as compared to 0.9% increase in the brvious year. The overall demand for petroleum products in India increased from 158.4 MMT in 2013-14 to 165 MMT in 2014-15. On the supply side, Indian Oil & Gas companies produced 220.74 MMT of petroleum products during 2014-15, marginally higher from 220.3 MMT in 2013-14. However, due to increased domestic consumption, export of petroleum products to other countries was lower at 63.66 MMT in 2014-15 as against 67.86 MMT in 2013-14. Indian refineries have processed 223.3 MMT of crude during 2014-15 as compared to 222.5 MMT in 2013-14, registering higher the capacity utilization, as there was no addition of refining capacity during the year. Opportunities and Challenges As per BP outlook 2035, the world population is estimated to grow by 1.6 billion in the next 20 years from the current level of 7.1 billion which , coupled with expected increase in income per person in future, will increase the need for energy. Infact, the demand for oil in India is projected to increase by more than 100% by 2035, to support the healthy economic growth and envisaged infrastructure development. The expected higher demand for oil products in India augurs well for the Indian Refining industry by providing an opportunity to expand the capacity to improve production of much needed petroleum products. Natural Gas being a cleaner fuel, the demand for it will increase at faster rate as compared to crude oil. However as adequate supply of NG is not available in the country, importing of LNG to meet the internal demand will become a necessity, especially in the light of recent reduction in international prices. To address the level of pollution in many parts of the country, the usage of CNG as fuel for automobiles is likely to increase in the coming years. CPCL has developed plans to utilize LNG as an internal fuel for refinery operations and also envisages to enter NG market. Resid upgradation project of CPCL will be completed in 2016 , which will produce about 6.5 lakh tonnes for pet-coke. CPCL will be entering into market to supply PetCoke directly to major cement industries in and around CPCL market fed region. CPCL strongly believes in sustainable development by reducing the energy foot-print through implementation of energy conservation schemes continuously, reducing the water consumption through close monitoring of steam consumption and a sound steam leaks management system and creating greater awareness among employees. These measures will also result in cost reduction and profitability improvement in the long term. During 2014-15, CPCL has achieved excellent physical performance though the financial performance was not in expected trajectory due to unexpected volatility in the crude oil price reduction during the year. However, the company has embarked on many new strategic initiatives to improve profitability that include identification of new crudes, reduction in crude inventory, improvement in operational reliability and energy conservation , with active participation employees and various communication strategies. Risks and Concerns CPCL's well defined Risk Management Policy Framework enables the company to identify the risks and develop necessary action plans to address the same effectively. These identified risks encompass wide fluctuations in crude oil prices, safety and security, infrastructure constraints and changes in auto-fuels specification to BS-IV by 2017. a) Wide fluctuations in crude oil prices The crude oil prices which was about $ 105.56 /bbl in April 2014 was declined to about $ 60/bbl in March 2015, a fall of more than 50% , that has affected the inventory valuations of the stand-alone refineries and impacted their profitability. Measures are taken to reduce the crude inventory and product inventory levels to reduce the impact and also to reduce working capital requirements which will result in lower interest costs. However, the crude oil prices are expected to increase during the year 2015-16. b) Safety and Security The nature of petroleum industry operations make it mandatory to observe the standard operating procedures and safety procedures with strict compliance and innovative methods to inculcate the culture of safety as part of working environment. CPCL has a robust safety management system in place including multi-level safety audit systems that ensure concerted efforts from all departments and multifunctional teams. In addition to periodical Internal Safety audits, External safety audits are undertaken to critically examine the adequacy of safety measures taken and ensure implementation of safety recommendations. The company is also implementing Rim Seal systems for better safety management of Tanks that will improve the safety environment inside the refineries. c) Infrastructure constraint The existing 30" crude pipeline of CPCL was laid in 1969 from Chennai Port to Manali Refinery.. Habitations have come up in this 7.5 km pipeline route, which has now become highly congested. CPCL solely depends on crude oil pipeline for its operations and in the event of any leakage in the old pipeline, Refinery operations will be impacted leading to non- availability of much needed petroleum products for public and Industrial Fuels for Downstream Companies. Considering the aging of the pipeline and vulnerability in case of any leakage (though efforts are being made to ensure safe operation of crude transport, and to improve safety aspects), CPCL has proposed to replace the existing crude oil pipeline with a New crude oil pipeline (17 km long) , to be laid in the service road of the new 100ft Ennore - Manali Road Improvement Project, with number of safety features including Leak Detection and Monitoring & Control Station. The approval from Ministry of Road Transport and Highways was received in April 2015 to initiate the project implementation works. d) Auto-Fuels Specification of BS-IV Government of India has announced a policy to introduce BS-IV auto-fuels in all parts of the country effective from 1.4.2017. Accordingly, CPCL has brpared a detailed plan to meet the new quality requirement and proposed to revamp DHDS unit with an estimated cost of about X 400 crore including the necessary infrastructure at CBR. Internal Control Systems and their Adequacy The Directors' Report has adequately dealt with this subject Financial Performance The Directors' Report has adequately dealt with this subject. Operational Performance The Directors' Report has adequately dealt with this subject. Material Developments and Human Resources / Industrial Relations The Directors' Report has adequately dealt with this subject. Cautionary Statement Statements in the Management's Discussion and Analysis, describing the Company's focal objectives, expectations or anticipations may be forward looking within the meaning of applicable securities, laws and regulations. Actual results may differ materially from the expectations. Important factors that could influence the Company's operations include global and domestic demand and supply conditions affecting selling prices of products, input availability and prices, changes in Government regulations / tax laws, economic developments within the country and factors such as litigation and industrial relations. |