On behalf of the Board of Directors of IndianOil, it is my pleasure to extend a very warm welcome to all of you to the 54th Annual General Meeting of your Corporation. Your continued support has been a major driver for us to deliver sustained performance and growth over the years. We are also thankful to you today for sparing your valuable time and being here to participate in this important Annual General Meeting. The notice for convening the meeting, the Directors' Report and the Annual Audited Accounts have been with you for some time, and with your permission, I take them as read.
Looking at the year 2011-12, the basic economic canvas in which the Corporation
was operating came under strain. The path taken by various economic indicators during
the year had repercussions on the business of your Corporation.
Global Economic Environment
The global economic environment continued to remain weak during the year 2012-13. In fact, the global economic growth slipped to 3.1 per cent in 2012 from 3.9 per cent in 2011. While the sovereign debt and unemployment problems continued in Europe, US and Japan witnessed mild acceleration in their growth. Growth rate in advanced economies on the whole, slipped from 1.7 per cent in 2011 to 1.2 per cent in 2012. A major setback to the global growth during the year was the broad based deceleration in the emerging economies group, which had hither-to been showing resistance to the slowdown. Growth in emerging economies slipped to 4.9 per cent in 2012 from 6.2 per cent in 2011. A weak external demand on one hand coupled with internal infrastructural bottlenecks and capacity constraints became overbearing for emerging economies, thus slackening their growth.
According to the IMF, while global growth is not expected to accelerate in the current year, however, it may see some consolidation. As per the latest update from IMF, world economic growth is projected to stay put at 3.1 percent in 2013, same as recorded in 2012. A major concern presently is the turmoil being faced by the Global Financial markets since late May 2013, owing to the over-reaction of the markets to the possible pull back of Quantitative easing by US Federal Reserve. Consequently, interest rates in the US have increased and US Dollar has appreciated sharply leading to flight of capital from emerging economies causing depreciation of their currencies. The experts believe that the present financial market turmoil may not prolong if the Governments tighten their belts in time to arrest the decline and slowdown in investments. In the medium and long term, however, consistent action on structural reforms across the globe remains critical for improvement of the global economic environment and restoring growth.
Indian Economic Scenario
For the Indian economy, the year was marked by slowing growth and concerns over macro-economic stability. GDP growth slipped to 5 per cent the lowest India has seen in over a decade. High oil, coal and gold imports coupled with decline in exports contributed significantly to the spiking of Current Account Deficit(CAD) from 4.2 per cent in 2011-12 to 6.7 per cent of GDP in Q3 of 2012-13. The year however closed with a CAD of 4.8 per cent of GDP through various abatement measures. The recent rampant depreciation of Rupee has further added to these concerns, especially on the CAD front.
The slowdown has largely been aggravated during the year on account of infrastructural bottlenecks, high interest rates, policy and procedure related hurdles coupled with delayed environmental and other administrative clearances. All this in the face of depressed global sentiments and already persisting poor investment climate within the country accentuated the problems. The only positive part of the year 2012-13 was that the inflation was largely restrained down to sub five percent , except for the food inflation.
The Q1 2013-14 GDP numbers have just been announced and they reflect that the growth has further slipped to 4.4 %. Although the difficulties of the last year do not seem to be abating, the Government believes that the growth should pickup considerably in Q3 and Q4 of 2013-14. The confidence of the Government is backed by the good monsoon that bodes well for the agricultural growth and a series of announcements made by the Government to improve the investment climate. Many of the experts endorse the optimism of the Government, yet the risks to the growth are extremely high.
It will take building of bi-partisan consensus amongst the political parties on certain reforms and structural issues if the growth is to accelerate at a fast pace. Further it requires Government’s own determination to take necessary measures such as simplification of Government procedures, rules, policies and lessening of the role of Government in the matters of business and controls.
Oil and Gas Sector
The year 2012-13 was marked by high volatility in prices which fluctuated from US$ 88.6/bbl to US$ 125.6/bbl and clocked an average of US$ 110.1/bbl for the year as a whole, down by US$ 4.5/bbl in comparison to the average of 2011-12. However, price movements continued to be marked by volatility and prices fluctuated in a wide range from US$ 88.6/bbl to US$ 125.6/bbl during 2012-13. Indian Oil Companies importing over 75 per cent of their crude oil requirements however could not benefit from the lower prices due to the weakening of the Rupee by 11.9%. Most of the oil and gas analysts believe that the oil prices will range between US$ 100 and 105 in 2013. However recent developments in the Middle-East, first in Egypt and Libya and lately in Syria pose significant risks to oil prices stability.
As for the refining sector, the negative economic sentiment and deepening concerns about global growth have been casting downward pressures on refining margins. There has been weakening of demand in developed markets but the emerging economies are expected to continue with robust growth in demand for petroleum products albeit at a lower rate than in the past years. The Indian petroleum products consumption remained at 4.9 per cent during 2012-13, marginally lower than 5 per cent recorded in 2011-12. However, there was deceleration in consumption growth in major transportation fuels category. HSD growth declined to 6.8 per cent from 7.8 per cent in 2011-12. MS growth was also marginally lower at 5 per cent vis-a-vis 5.6 per cent in previous year. ATF, recorded negative growth of 4.8 per cent in 2012-13 compared to a robust growth of 9 per cent in 2011-12, largely because of closure of one of the airlines, optimization resorted by others and general spurt in airline fares due to a host of reasons. LPG growth too declined from 7.1 per cent in 2011-12 to 1.6 per cent in 2012-13. A series of steps such as limiting subsidized LPG cylinders, small but steady increase in prices of HSD every month, coupled with deregulation of Bulk HSD prices etc. may have affected the growth; however the trend is largely symptomatic of general decline in the economy. Consumption of petroleum products however is expected to return to healthy levels in the long run, unmatched by most economies. This augers well for Indian oil & gas companies that are deeply entrenched in the Indian petro products market.
On the supply side, the domestic crude oil production saw a marginal fall from 38.09 MMT in 2011-12 to 37.86 MMT in 2012-13. The refinery throughput (production) and crude oil imports, remained largely unaffected.
Gas including LNG is expected to play a key role in the economy. However, the absence of a global gas market means significant divergence in regional gas prices. While in the US Natural gas prices (Henry-Hub) fell to an average of US$ 2.8/mmbtu in 2012 from US$ 4.0/mmbtu in 2011, Europe & Asia continued to suffer high gas prices ranging from US$ 11.5/mmbtu to US$ 16.6/mmbtu, with Asia bearing the higher prices. High prices have also adversely affected the affordability of Asian LNG buyers. From a long term perspective, the sector witnessed positive developments such as gas discoveries in East Africa, steady progress on the unconventional hydrocarbons production front and boom in the global LNG sector. All these developments have opened up new vistas for the global energy sector and point towards strong growth of the hydrocarbons sector. The domestic gas production in India was 40.7 bcm in 2012-13 compared to 47.5 bcm in 2011-12. Imported LNG at 14.8 bcm bridged the gap. With the significant discoveries made in East Africa and Canada reaching out to Asian markets including India, the supply side should look much more robust for the Indian gas demand. Right policy and pricing can unleash latent gas demand that can trigger the overall economic growth.
In spite of the challenges brought out above, your Corporation delivered robust performance. It recorded the highest turnover of Rs. 414,909 crore up by 11 per cent on year-on-year basis. At 88th position in the Global 'Fortune' 500 list, your Corporation was the only Indian company in the top 100 list. Your Corporation’s Net Profit rose to Rs. 5005 crore, registering a growth of 26.6 per cent over the previous year. Capacity utilization of the refineries at 54.56 MMT exceeded 100 per cent for sixth consecutive year in a row, distillate yield improved to a record 78.1 per cent and energy efficiency levels of the refineries recorded the best MBN of 56.3 during the year. Domestic product sales scaled to a level of 68.76 MMT. 1910 new retail outlets were set up during the year taking the total number of outlets to 22372 including over 5000 Kisan Seva Kendras, the exclusive presentation of your Corporation to the rural markets. Over 1600 retail outlets were automated during the year, taking the total automated outlets to 4377. Very soon we propose to automate all the outlets in 50 large cities. This again will be another unique offering of your Corporation to assure supply of quality and quantity of products through its outlets. The Pipelines Division of your Corporation moved highest ever throughput of 28.09 MMT of petroleum products, besides 47.40 MMT of crude oil. The petrochemicals segment recorded highest ever total (domestic plus exports) sales of 1.9 MMT and established itself as the second largest petrochemicals player in the country. The E&P segment is also shaping well and has earned small but first ever revenue from its Niobrara Shale assets in the US and Carabobo asset in Venezuela.
Strategy, Initiatives and Prospects
While, your Corporation fully recognizes the constraints and difficulties the Indian market is facing, it is also fully aware of the resplendent opportunities that the Indian oil and gas sector presents. The Indian petroleum products market is amongst the fastest growing markets in the world. India is projected as one of the front-runners of incremental global oil & energy demand over the long term. As India’s flagship Petroleum Company, your Corporation’s strategy is three-pronged, focus on expansion, raise the efficiency bar of the existing and new ventures, deepen and widen its presence in expanding Gas and Petrochemicals businesses, besides establishing a healthy portfolio in the upstream E&P segment. In this context, I am pleased to share with you that your Corporation has planned a well-laid out investment programme for the XII Plan period, envisaging projects worth over Rs. 56,000 crore across the energy value chain.
In the refining segment, continuous upgradation and expansion of the refineries to meet the changing product demand pattern and environmental norms is taking place. Another major initiative under consideration is to set-up a new state of the art grass-root refinery in a coastal location with world scale capacity having high complexity to cash on the opportunity to process cheaper crudes. The 15 MMTPA refinery project at Paradip, Orissa, presently under construction is slated for commissioning by the close of the current fiscal. It will also be a state of art refinery that will raise the overall performance indicators of the Corporation, including processing of high sulphur, heavy and high TAN crude oil to tap the opportunities presented by cheaper crude varieties.
Crude oil forms the single largest cost head for your Corporation. International crude oil prices continue to be high and volatile. Your Corporation is however, focussing on minimizing the costs in all areas under its control and choice. Besides improving its ability to source cheaper crude oils, the endeavours so far have resulted in processing 53.3 per cent in 2012-13 over 49.2 per cent in 2011-12 of high sulphur crude and further enlarging the crude basket to include high TAN and heavy crudes with API as low as 210. Presently, the share of opportunity crudes (Heavy & High TAN) is over 13 per cent and includes processing of Maya crude and heavy Rajasthan crude. This is targeted to be doubled to over 26 per cent once Paradip Refinery is operational. Supply chain optimization is seen as another area for achieving significant cost reductions. The commissioning of Integrated Crude Oil Handling Facilities at Paradip is one such step. This facility has enabled us 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 tap significant cost reduction.
Marketing & Distribution
Your Corporation is the established market leader in the downstream petroleum sector of the country. While the market size is set to increase, the competition levels in the market are also expected to rise. As a dominant marketer, while we have deep strengths through our existing network and presence in all markets, we are also very seriously mindful of the challenges that may seep in with the opening up of the markets. We believe it will only make us more efficient and competitive.
Technological solutions such as automation of infrastructure, loyalty building programmes, GPS enabled vehicle tracking systems, modernization of all dispensing units, improving Retail Visual Identities of retail outlets, imparting quality training to dealers and pump attendants, Infrastructure rationalization and retail network expansion in key demand and upcoming growth areas will continue to be the focus.
LPG is another market, which is set to witness fundamental changes on account of introduction of capping on subsidized cylinders, Aadhaar based direct benefit transfer scheme and consumer portability etc. The direct benefit transfer scheme launched in 20 districts has been a big success and plans are afoot to extend this to 35 more districts by September 2013. Bringing LPG transportation from road movement to pipeline network is another area of cost and product efficiency. Towards this end, presently, our Paradip‐Haldia‐Durgapur LPG pipeline and Ennore-Trichy-Madurai LPG pipeline projects are under implementation. A number of customer friendly initiatives have been taken in the recent months to make it more transparent and customer centric with the help of IT enabled solutions such as Transparency Portal, Web Based Indsoft and Emergency Service Care, etc.
Similar initiatives have been taken for other product lines as well.
Your Corporation has the largest crude and product pipeline network in the country, which is a major source of strength as it facilitates cost-effective and environment friendly transportation. Today, as the Corporation gears up to process more and more of heavier crudes, the pipelines will have to cater to carrying these heavier crudes. Towards this end, the Corporation has set up a crude blending facility in Vadinar during the year and is augmenting the capacity of two of its major pipelines to carry higher viscosity crude.
Natural gas pipelines are increasingly emerging as a new opportunity for the Corporation. At present, gas pipelines capacity in the country is low at 400 mmscmd, with major infrastructure confined to the North & Western part of the country. Having built its strong hold in the petroleum pipelines, it is aiming to establish a significant position in the national natural gas grid. Your Corporation in consortium with GSPL, BPCL and HPCL, is participating in setting up three gas pipelines from West and East to North.
Your Corporation is now the second largest player in the domestic petrochemical market. It recorded a growth of 23.9 per cent in domestic sales and reached the highest ever level of 1.8 MMT during the year. Petrochemical exports reached a new milestone of 108.6 TMT, recording a growth of 42.5 percent. Five new grades of Poly-ethylene/Polypropylene were developed in-house for niche application segments to deliver higher value proposition to customers.
The low per capita consumption of petrochemicals in the country coupled with the robust growth in consumption makes petrochemicals business ripe with opportunities. Your Corporation has sizeable investment plans in the Petrochemicals space. A major thrust is to enter the import substitution market. 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 implementation.
In the market for polymers, thrust is to enter niche & specialized markets. This requires significant R&D and product development efforts by the way of identifying potential molecules and streams. Your Corporation has set up necessary capabilities towards this end to derive higher value through development of various new grades and niche products.
Your Corporation’s gas business has been growing steadily and awaits moving on to the next level as the country presents huge opportunities in the gas segment. During the year, your Corporation's gas sales grew by 6.2 percent, reaching 1.83 MMT. Your Corporation envisages building its presence along the entire value chain of gas business in the country. Work in regard to the upcoming LNG import terminal at Ennore is progressing steadily. In addition to cross-country gas pipelines, another focus area of your Corporation is City Gas Distribution (CGD). The Corporation has adopted a consortium approach and is partnering with other players to build CGD networks across the geographical areas identified by PNGRB, the regulatory authority. Recently your Corporation’s consortium with Adani Gas has been given Letter of Authorisation for CGD in Allahabad & Chandigarh.
Exploration & Production
The global E&P prospects have revitalized over the last few years with opening up of new geographies with huge resources. Your Corporation’s E&P portfolio consists of 13 domestic and 10 overseas blocks. During the year, discoveries were reported in 2 overseas and 1 domestic well. In one of our operated domestic blocks, drilling of 1st exploratory well commenced and in the other operated block, interpretation of the acquired 3D seismic data is in progress to identify drilling locations. Further, during the year, your Corporation acquired 10 per cent working interest in producing shale oil condensate asset in USA along with Oil India Ltd. (OIL). It is the first unconventional hydrocarbon asset with production at a small level. Production was also recorded in the Carabobo Project-1 in Venezuela, with spudding of two producing wells. Looking ahead, your Corporation is scouting for suitable investment opportunities across the globe and with the experience gained and in-house capabilities developed so far, the Corporation is on much firmer ground to seize appropriate opportunities.
Your Corporation is focussed on developing quality green alternatives that not only substantially reduces dependence on fossil fuels but are also affordable and accessible by the majority of the population. Towards this end, your Corporation has successfully commissioned five wind energy generators in Andhra Pradesh, during the year taking its total wind power capacity to 48.3 MW. IndianOil's 5-MW solar photovoltaic plant in Rajasthan, which was commissioned last year is also delivering expected results.
Research & Development
Your Corporation places significant thrust on knowledge and research based growth. The year 2012-13 was quite successful for the Corporation's R&D Centre with 120 new formulations resulting in 43 OEM approvals including approval for a diesel engine oil, marine oil and transformer oil from reputed customers. A record number of 52 patent applications were filed during the year, while eight patents were granted. The Centre has stepped into petrochemicals, solar energy and bio-energy based research projects as well. During the year, the Centre commissioned India’s first integrated lignocellulosic biomass to ethanol pilot plant with the technological support from National Renewable Energy Laboratory of USA. Another breakthrough was achieved with the successful demonstration trial of co-processing of Jatropha oil along with diesel feed in DHDT unit of Corporation’s subsidiary CPCL’s refinery. This process by using the existing refinery infrastructure presents much better opportunities in comparison to the biodiesel trans-esterification plant options.
Your Corporation understands that sustainability and economic well-being go hand in hand. The ecological footprints of the Corporation are being constantly assessed. Eco-footprinting exercise was completed at 48 locations and energy audit was carried out in 28 locations. As a responsible Corporate citizen, your Corporation has documented its sustainable initiatives in the Business Responsibility Report, which is an integral section of the Annual Report.
Corporate Social Responsibility
Caring for the community has always been a cornerstone of your Corporation's operations and the Corporation has always tried to align its interests with national priorities. Your Corporation believes that inclusive growth can only be attained by developing symbiotic relationship between business and society. We remain committed to fulfil our responsibilities towards the community and the nation. Our flagship health initiative, Sachal Swasthya Sewa – mobile medical service, has proved to be a resounding success, catering to the primary medical needs of the rural poor in Andhra Pradesh and Uttar Pradesh. The expansion of the Cancer Hospital of the Tata Medical Centre, by addition of 250 beds to cater to the population in the eastern part of India was also one major initiative taken by your Corporation. Your Corporation is keen on continuing with initiatives that are aligned to the needs of the society and resonate with the Vision and CSR policy.
For your Corporation, human resource is its biggest asset. It is the people in an organization that make it different, performing and profitable. Assisting the human capital of IndianOil realise its full potential and harness that towards Corporation’s objectives is a philosophy that we cherish. A number of initiatives such as introduction of Leadership Centres, multi-rater feedback mechanism and employee engagement surveys etc. have enhanced and strengthened the resolve of IOCians to achieve their goals in the midst of challenges and this collective resolve of the IOCians makes us proud as an organization. Thanks again to our workforce, the industrial relations climate remained healthy and committed towards achieving high performance.
Maintaining highest standards of Corporate Governance has always been a priority for your Corporation. Our belief in ethics, transparency and dedication towards Vision and Values have stood us in good stead. A well-defined policy framework comprising Code of Conduct for Directors & Senior Management, for prevention of Insider Trading, Enterprise Risk Management, Integrity Pact, Whistle Blower Policy and Conduct, Discipline and Appeal Rules for employees has helped us effectively implement our Corporate Governance practices. In recognition of its unparalleled dedication towards maintaining its integrity and ethos, your Corporation has been recently adjudged as the winner of Excellence in Corporate Governance by The Institute of Company Secretaries of India and has also been conferred the Gold Trophy of the SCOPE Meritorious Award for Corporate Governance.
The Board of Directors would like to place on record its deep appreciation of the valuable services and dedicated efforts made by the IndianOil family in achieving the various milestones during the year 2012-13. The Board also wishes to thank the Government of India, particularly the Ministry of Petroleum and Natural Gas, and the various State Governments, Regulatory and Statutory authorities for their guidance and support.
The Board is also thankful to the Corporation's customers, bankers, investors, consultants, technology licensors, contractors, dealers, supplier and vendors for their continued support. The Board wishes to place on record its appreciation for the commendable performance and significant contributions made by Shri Anees Noorani, Smt. Sushama Nath, Dr. Indu Sahani, Professor Gautam Barua, Shri Michael Bastian, Shri N K Poddar and Shri Sudhir Bhargava during their tenure on the Board. The Board would also like to pay tribute to Prof. V.K.Bhalla who passed away on 6th August 2013 and acknowledge the significant contribution made by Prof. Bhalla during his tenure on the Board.
I now move the Annual Accounts for adoption.