pricing structure
TRANSCRIPT
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z
Pricing Structure of Petroleum
Products
The project has been mentored by Mr. Lokesh Chabbra, Head Finace, Delhi andguided by Mr. Prasun Garg, Manager Finance Delhi.
6/16/2011HPCLGautam Jain
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DECLARATION
It is hereby declared that, this project is being submitted as a partial fulfillment
of the Post-Graduate Program in Masters of Business Administration (Full Time)
under Faculty of Management Studies, University of Delhi & has been
exclusively designed and prepared by me. It has not been submitted to any
other institute or organization except Hindustan Petroleum Corporation of
India, New Delhi. It has also not been published elsewhere.
Gautam Jain
FMS, Delhi
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ACKNOWLEDGEMENT
Sometimes words fall short to show gratitude, the same happened with meduring this project. The immense help and support received from HPCL
overwhelmed me during the project.
It was a great opportunity for me to work with HPCL, pioneers in the field of Oil
and Gas. I am extremely grateful to the entire team of HPCL at Scope Minar,
New Delhi who have shared their expertise and knowledge with me and
without whom the completion of this project would have been virtually
impossible.
I would like to express my deepest gratitude and sincere thanks to all those
who have guided, encouraged or supported me in one way or another
throughout the whole course of my project.
I express my sincere thanks to my guide, Mr. Prasun Garg, Manager Finance,
for imparting their knowledge to me, and for his continuous and conscientious
guidance & attention. I would like to thank Mr. Lokesh Chabbra, Head
Finance, Northern region who gave me an opportunity to become a part of this
important and interesting project.
In the end, a sincere thanks to everyone else professionally involved in my
internship. I believe my eight weeks tenure at HPCL was a very vividexperience that gave me a feel of the corporate culture.
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Contents
Contents ........................................................................................................................ 5
RESEARCH METHODOLOGY:.......................................................................................... 6
PRIMARY OBJECTIVES:................................................................................................ 6
SCOPE OF THE STUDY: ................................................................................................ 7
DATA COLLECTION: ..................................................................................................... 7
LIMITATIONS: .............................................................................................................. 7
INTRODUCTION TO GLOBAL OIL AND GAS SECTOR ....................................................... 8
ENERGY SOURCES ......................................................................................................... 8
OIL & NATURAL GAS AS AN ENERGY SOURCE ................................................................ 9
Role of Oil & Gas in India's Energy Mix: .................................................................... 11
COMPANY OVERVIEW ................................................................................................... 14
MISSION AND VISION OF HPCL .................................................................................. 15
PERFORMANCE PROFILE OF HPCL ............................................................................. 16
Products & Services .................................................................................................. 17
JOINT VENTURES OF HPCL ........................................................................................ 18
REFINERIES OF HPCL ................................................................................................ 19
NEW PROJECTS ......................................................................................................... 19
Corporate Social Responsibility ................................................................................ 22
INDIAN PETROLEUM SECTOR ....................................................................................... 27
MAJOR PLAYERS IN MARKET ..................................................................................... 29
MAJOR UPSTREAM PLAYERS ..................................................................................... 29
KEY PLAYERS IN THE INDIAN OIL AND GAS SECTOR ................................................... 30
COMPANY OVERVIEW ................................................................................................... 34
PERFORMANCE PROFILE OF HPCL ................................................................................ 35
REFINERIES OF HPCL ................................................................................................ 38
CAPACITY OF REFINERIES ......................................................................................... 39
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SCOPE OF THE STUDY:
.
DATA COLLECTION:
Primary Data: Primary data was collected through direct interaction with the
company’s finance and accounts department. If needed
schedule/questionnaires would be devised to get the information on all the
relevant areas of the study such as receivable management, inventory
management, management of cash etc.
Secondary Data: The secondary sources comprise Annual Reports of the firm,
other journals and periodicals. Also I have referred some websites, the list of
which is given in the bibliography.
LIMITATIONS:
Time is definitely the main constraint. Time was not sufficient enough to
assess all processes and policies of an organization of the stature of
HPCL.
Inadequacy of required data is another constraint.
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INTRODUCTION TO GLOBAL OIL AND GAS SECTOR
ENERGY SOURCES
Fossil Fuels: Fossil fuels such as Oil, Coal and Gas continue to dominate the
world energy scenario. However these resources are limited in nature and
significant uncertainty exists regarding their reserves. Political considerations
over the security of supplies, environmental concerns related to global
warming and sustainability will move the world's energy consumption away
from fossil fuels. The concept of peak oil shows that we have used about half
of the available petroleum resources, and predicts a decrease of production. Agovernment led move away from fossil fuels would most likely create
economic pressure through carbon emissions trading and green taxation.
Some countries are taking action as a result of the Kyoto Protocol, and further
steps in this direction are proposed.
Nuclear Power: Resources and technology do not constrain the capacity of
nuclear power to contribute to meeting the energy demand for the 21st
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century. However, political and environmental concerns about nuclear safety
and radioactive waste do constraint it.
Renewable Energy Sources: These include energy derived from Solar, Wind,
Hydro, Wave and Tidal, Geothermal, Biomass sources. However, technologies
to harness these sources are only now being adapted and are yet to reach the
efficiency and effectiveness achieved by conventional fuel engines and cells.
OIL & NATURAL GAS AS AN ENERGY SOURCE
For hundreds of years, oil and natural gas has been known as a very useful
substance. The Chinese discovered a very long time ago that the energy in oil
and natural gas could be harnessed, and used to heat water. In the early days
of the oil and natural gas industry, the oil and gas was mainly used to light
streetlamps, and the occasional house. However, with much improvedrce: EIA Statisticsure 2
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distribution channels and technological advancements, oil and natural gas is
being used in ways never thought possible. There are so many different
applications for this fossil fuel that it is hard to provide an exhaustive list of
everything it is used for. And no doubt, new uses are being discovered all the
time. Oil and natural gas has many applications, commercially, in your home,
in industry, and even in the transportation sector! While the uses described
here are not exhaustive, they may help to show just how many things oil and
natural gas can do.
Natural gas is used across all sectors, in varying amounts. The industrial sector
accounts for the greatest proportion of natural gas use in India, with the
residential sector consuming the second greatest quantity of natural gas. Oncebrought from underground, the oil and natural gas is refined to remove
impurities like water, other gases, sand and other compounds.
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GLOBAL ENERGY SCENARIO
PRIMARY ENERGY RESOURCES IN INDIA (%)
Role of Oil & Gas in India's Energy Mix:
The importance of oil in India can be gauged from the fact that it accounts for
36 percent of the Primary Energy Mix in India. Taken with natural gas, this
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percentage rises to 45 percent. However, the proportion of natural gas is
approximately one-third that of the world average, once again indicating the
potential for rapid growth. It may be noted in this context, that a heavy
reliance on coal in India is not optimal, given that coal is a far more polluting
fossil fuel as compared to natural gas.
INDIA - ESTIMATED FUEL MIX BY 2020 (%) (Fig 3)
MARKET SEGMENTATION
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Segmentation I
63.00%
21.40%
6.40%
6.00%3.10%
Refining and marketing
Exploration and production
Chemicals
Gas and power
Other
Segmentation II
45.30%
37.10%
11.00%
6.60%
Europe
United States
Rest of the World
Asia-Pacific
MARKET SHARE
Market Share
15.70%
15.50%
11.30%
8.60%
48.90%
Royal Dutch Shell plc
ExxonMobil Corp.
BP plc
Chevron Texaco
Corporation
Other
.
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COMPANY OVERVIEW
HPCL is a Fortune 500 company, with an annual turnover of Rs. 1,08,599 Crores
and sales/income from operations of Rs 1,14,889 Crores (US$ 25,306 Millions) during
FY 2009-10, having about 20% Marketing share in India and a strong market
infrastructure. HPCL operates 2 major refineries producing a wide variety of
petroleum fuels & specialties, one in Mumbai (West Coast) of 6.5 Million Metric
Tonnes Per Annum (MMTPA) capacity and the other in Vishakhapatnam, (East
Coast) with a capacity of 8.3 MMTPA. HPCL holds an equity stake of 16.95% in
Mangalore Refinery & Petrochemicals Limited, a state-of-the-art refinery at Mangalore
with a capacity of 9 MMTPA. In addition, HPCL is constructing a refinery at Bhatinda, in
the state of Punjab, as a Joint venture with Mittal Energy Investments Pte. Ltd.
o HPCL also owns and operates the largest Lube Refinery in the country
producing Lube Base Oils of international standards, with a capacity
of 335 TMT. This Lube Refinery accounts for over 40% of the India's
total Lube Base Oil production.
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o HPCL's vast marketing network consists of 13 Zonal offices in major cities
and 101 Regional Offices facilitated by a Supply & Distribution infrastructure
comprising Terminals, Pipeline networks, Aviation Service Stations, LPG Bottling
Plants, Inland Relay Depots & Retail Outlets, Lube and LPG Distributorships.
HPCL, over the years, has moved from strength to strength on all fronts. Therefining capacity steadily increased from 5.5 MMTPA in 1984/85 to 14.8
MMTPA presently. On the financial front, the turnover grew from Rs. 2687
Crores in 1984-85 to an impressive Rs 1, 16,428 Crores in FY 2008-09.
MISSION AND VISION OF HPCL
MISSION
"HPCL, along with its joint ventures, will be a fully integrated company in the
Hydrocarbons sector of exploration and production, refining and marketing;
Focusing on enhancement of productivity, quality and profitability; caring for
customers and employees; caring for environment protection and culturalheritage.
It will also attain scale dimensions by diversifying into other energy related
Fields and by taking up transnational operations."
VISION
To be a World Class Energy Company known for caring and delighting the
customers with high quality products and innovative services across domestic
and international markets with aggressive growth and delivering superior
financial performance. The Company will be a model of excellence in meeting
social commitment, environment, health and safety norms and in employee
welfare and relations
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PERFORMANCE PROFILE OF HPCL
o FINANCIAL
2009-2010 2005-2006
SALES 114,888.63 76,920.26
GROSS PROFIT 4,193.18 1,151.21
DEPREICIATION 1,164.40 690.23
INTEREST 903.75 175.88
TAX (includingdiffered tax)
823.61 (131.91)
PROVISION FOR FBT 0.05 11.38
NET PROFIT 1,301.37 405.63
DIVIDEND 406.35 101.80
TAX ON DISTRIBUTED
PROFIT
67.49 14.28
RETAINED EARNINGS 827.53 289.55
SOURCE: 58 ANNUAL REPORT OF HPCL
o WHAT CORPORATION OWES
2009-2010 2005-2006
GROSS FIXED ASSETS 24,988.37 13,479.25
DEPRECIATION 9,681.70 6,141.85
NET FIXED ASSETS 15,306.67 7,337.40
CAPITAL WORK IN
PROGRESS
3,887.59 2,363.88
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INVESTMENTS : JVC 2,623.83 825.76
OTHERS 8,763.39 3,201.88
NET CURRENT
ASSETS
4,086.83 3,055.09
DEFFERD TAX
LIABILITY
(1,807.97) (1,384.44)
TOTAL 32,860.34 15,399.57
2009-2010 2005-2006
NET WORTH 11,557.97 8,735.74
SHARE CAPITAL 339.71 338.94
SHARE FORFEITURE (0.70) -
RESERVES 11,218.96 8,396.80
BORROWINGS 21,302.37 6,663.83
TOTAL 32,860.34 15,399.57
SOURCE: 58 ANNUAL REPORT OF HPCL
This data shows that overall sales of the company are increased from Rs.
76,920.26 crores (2005-2006) to Rs. 114,888.63 (2009-2010), the gross profit
of the company increased from Rs. 1,151.21 crores (2005-2006) to Rs.
4,193.18 (2009-2010) and the overall net profit of the company is increased
from Rs. 405.63 (2005-2006) to Rs. 1,301.37 (2009-2010) so this shows that
there is a 220.8% of increase in net profit but the overall net worth of the
company is increased from Rs. 8,735.74 (2005-2006) to Rs. 11,557.97 (2009-
2010).
Products & Services
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• Refineries
• Aviation
• Bulk Fuels & Specialities
• International trade
• LPG - HP GAS• Lubes - HP LUBES
• Retail
• Exploration & Production
• Joint Ventures
• Alternate Energy
JOINT VENTURES OF HPCL
In an effort to fulfill its vision and achieve its objectives, HPCL has formulated
plans for expansion, diversification and internal development
Crude Refining and Marketing of finished Petroleum products is the
core area of the Corporation. Opportunities are also being explored to access new
revenue streams, and augment downstream businesses. Accordingly, HPCL has
ventured in Upstream activities (Exploration and Production) and piped gas
distribution in major cities
1 HPCL-Mittal Energy Ltd. (HMEL)
2 Hindustan Colas (HINCOL)
3 Prize Petroleum Company Limited
4 South Asia LPG Co Pvt. Ltd. ( SALPG)
5 Bhagyanagar Gas Limited (BGL)
6 Aavantika Gas Limited
7 Petronet India Limited (PIL)
8 Petronet MHB Limited (PMHBL)
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9 Mangalore Refineries and Petrochemicals Limited (MRPL)
10CREDA-HPCL Biofuel Limited (CHBL)
11Sushrut Hospital and Research Centre
REFINERIES OF HPCL
Without refining, the rich resources of crude petroleum of nature would remain
latent. Value-added products from crude petroleum like petrol, diesel,
kerosene, liquefied petroleum gas, naphtha and many more products would
not be available for growth and development of a nation.
HPCL refineries upgrade the crude petroleum into many value-added products
and over 300 grades of lubricants, specialties and greases. The Lubricating
Oils Refinery set up at Mumbai is largest lube refinery in India. It produces
superior quality lube base oils.
The offsite product handling facilities of refineries at Mumbai and
Vishakhapatnam has been automated. Projects have been implemented and
facilities upgraded to produce green fuels like unleaded petrol and low sulphur
diesel. and Euro III & Euro IV works are in progress . The refineries have been
benchmarked by an international agency for various performance parameters.
Numerous awards have been bestowed on both the refineries in recognition of
the efforts in the field of energy conservation, environment and safety.
CAPACITY OF REFINERIES
1 MUMBAI REFINERY : 6.5 million metric tons per annum (MMTPA) capacity
2 VISAKH REFINERY : 8.3 million metric tons per annum (MMTPA) capacity
NEW PROJECTS
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Identification and implementation of projects
for process improvement, performance,
safety and environment related concerns are
ongoing processes. The following newprojects have been undertaken by Mumbai
and Visakh Refineries to upgrade the
facilities to meet the product demand :
Facilities for Euro-III & IV grade Gasoline: Both Refineries have
executed Green Fuels & Emission Control Project (GFECP) at
Mumbai Refinery and Clean Fuel Project at Visakh Refinery to
produce Euro-III/IV gasoline with capability to produce Euro-IV MS.Apart from meeting MS quality stipulations, the project also enabled
to upgrade Naphtha to Gasoline which is a value added product.
New FCCU project at Mumbai Refinery: In order to enhance the
production of value added products like LPG, MS and HSD, the
refinery is installing a new FCCU of 1.4 MMTPA capacity, which will
increase the FCCU processing capacity from the existing level of 1
MMTPA to 2.4 MMTPA. The project is expected to be completed by
the 2nd qtr of 2010-11.
Environmental facilities: Environmental facilities are being
upgraded in both the Refineries by installing Integrated Effluent
Treatment Plants to comply with air pollution limits set forth by
Pollution Control Board.
Bottom Up-gradation Projects: Mumbai Refinery has undertaken
Feasibility Study of “Solvent Deasphlating Unit (SDA)” by using the
proprietary technology “Residuum Oil Supercritical Extraction
(ROSE)”. Setting up of this plant is expected to enhance the
recovery of valuable oil from the heavier fraction of the crude (VTB).
Similarly Visakh Refinery has also planned to implement the
Delayed Coker Unit (DCU) Projects for bottom up gradation.
LOBS Project: Mumbai refinery produces various grades of LOBS
with sulphur above 300 ppm and saturates below 90%, which fall
under API Gr-I category. To meet the increased demand of the same
LOBS quality in the domestic market including the API Gr-II/III
category the capacity is being uplifted. The project will help HPCL to
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keep its market share of LOBS intact. The project is expected to be
completed by June 2010.
MR/VR DHT: Both Refineries are setting up DHT projects to
upgrade / produce the Euro-III / IV HSD and projects are expected to
be completed mechanically by Sept 2011. The Environmental
Clearance for DHT Projects for both the refineries, Mumbai
Refinery and Visakh Refinery has been obtained.
The Environmental Statement for the FY 2009-10 has been
submitted to Andhra Pradesh Pollution Control Board (APPCB). View
the Compliance Status of Environmental Clearance Stipulations for
DHT VR Project.
Single Point Mooring (SPM) Project at Visakh
Refinery: Visakh Refinery putting up SPM project to facilitate
unloading of large crude parcels of the size of around 300,000
Metric Tonnes from Very Large Crude Carriers (VLCCs). The VLCCs
cannot be berthed in the existing crude receiving jetties due to
draught restrictions. The installation of SPM will reduce the freight
cost and wharf age charges and thus will improve the economics of
the Refinery. The Environmental Clearance for this project has been
obtained. View status of Compliance of Stipulated EC Conditions.
The offshore and onshore installation work of the project has been
completed. The Environmental Statement for the financial year
(FY2009-10) has also been submitted to the Andhra Pradesh
Pollution Control Board (APPCB) .
Modernization Project for Mounded Storage System for
LPG /Propylene at Visakh Refinery: Visakh Refinery is executing
the Mounded storage system for LPG and Propylene in place of
existing LPG /Propylene Horton spheres. This is a risk mitigation
project and undertaken following the recommendations by theexternal safety agencies, viz., High Power steering Committee
August, 1998, 4th Round ESA - September, 1999 etc. The Mounded
storage of LPG has proved to be safer compared to above ground
storage vessels since it provides intrinsically passive and safe
environment and eliminates the possibility of Boiling Liquid
Expanding Vapor Explosion (BLEVE) phenomenon. The approved
project cost is Rs. 124 Crores.
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Corporate Social Responsibility
Environment
Mission & SHE policy
Mission
To have safe, healthy and pollution free environment in and around all our refineries,
plants, facilities and other premises at all times; instill awareness in these areas,
including relevant laws, in all employees, families and the communities in which they
carry out the activities.
Environment Policy
The Corporation is committed to conduct its operation in such a manner as
compatible with environment and economic development of the community. Its aim is
to create an awareness and respect for the environment, stressing on every
employee’s involvement in environmental improvement by ensuring healthy
operating practices, philosophy and training.
Health Policy
To provide a structured program to look after and promote the health of vital “Human
Resource”, essential for productivity and effectiveness of the Corporation.
Safety Policy
As an integral part of its business, HPCL believes that no work or service or activity is
so important or urgent that safety be overlooked or compromised. Safety of the
employees and public, protection of their as well as Corporation’s assets shall be
paramount. Corporation considers that safety is one of the important tools to enhance
productivity and to reduce national losses. The Corporation will constantly Endeavour
to achieve and maintain high standards of Safety in its operations.
BEYOND BUSINESS CORPORATE SOCIAL
RESPONSIBILITY
Promising whatever it takes to make a difference:
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HPCL is committed to create a positive impact on the society and contribute to
socio economic development including measures for improving the quality of
life of underprivileged classes of the society. Since its inception, HPCL has tried
to follow Corporate Social Responsibility in the true sense. This sense of responsibility comes from a feeling that not every achievement of the
company is reflected in its balance sheets. The relevance that a company
achieves by virtue of its socio-economic participation surpasses the profit and
loss measurements by far. In this respect HPCL has proceeded in the truly
corporate manner, planning investments in social causes methodically,
executing the various steps with utmost care and securing distinctive
developments for the poor and the downtrodden masses. HPCL has provided
sustained value for the above mentioned investments all the time and has
contributed to the living standards of underprivileged masses.
A compact booklet: "Bringing Smiles (2008-09)" provides details of HPCL's
various CSR activities during FY 2008-09. "Bringing Smiles (2009-10)" contains
details of CSR activities undertaken by HPCL during the FY-2009-10.
When it comes to social contribution our country never lacked goodwill among
corporate citizens but competent contributors were never in good numbers as
far as management and execution skills are concerned. HPCL has surely paved
the way in the right direction with exemplary contributions. HPCL's initiatives
have created value in the following diverse ways –
1. HPCL's initiatives have made notable differences in fields as diverse aseducation, infrastructure, welfare measures, health and hygiene,vocational training & employment generation, training in self-reliance,amenities for the sufferers of natural disasters and environmentalprotection. The most commendable feature of the support is that HPCLhas taken innovative measures to infuse self reliance in masses to
secure long lasting improvements.
2. HPCL has categorized different projects of social relevance according tonational and regional significance. The investment has been madeaccording to solid result oriented plans with every detail of the prospecttaken into consideration.
3. The funds for different CSR projects have been consistently allocated ina transparent manner. HPCL follows an allocation process based on
complete evaluation and benchmark standardization.
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4. A Foundation has been established to take up projects of Nationalsignificance. This initiative has helped to identify the impacts of projectskeeping national interest in mind.
5. HPCL has set exemplary organizational competency in carrying outcomplex and demanding projects. The implementation process issupported by adequate checks and balances including reporting,assessment and appraisal by world class professionals.
HPCL took its first step in this direction during the year 1985-86 with a modest
budget allocation of Rs.18 Lakhs for undertaking various welfare activities for
the benefit of SC/STs and other weaker sections of the Society under the
Special Component Plan/Tribal Sub-Plan and Welfare Plan for Weaker Sections.Later the corporation expanded the scope and allotment of such projects in
manifolds to uphold its "Socially Responsible Corporate citizen" Image and to
address the huge welfare expectation which the society was increasingly
resting on the corporation. Budget for the CSR projects subsequently rose
every year and larger portions of underprivileged masses were gradually
incorporated into the schemes. The corporation went beyond the parameters
of the SC/ST Component Plan to extend support. The fund has been arranged
by virtue of a policy decision to allocate certain percentage of the net profit for
each financial year to Component Plan and CSR activities and to operate the
CSR policy on Triple Bottom Line principle i.e. Economic, Social & Environment.
The Expenditure for the year 2005-06 stands at a whopping Rs.7 crores for SCP
projects and Rs. 8 crores for other CSR projects.
An "HPCL Foundation" is being set up to finance the CSR projects and also
monitor implementation of distinct schemes like AIDS prevention, vocational
training for unemployed youth, education of rural children, computer training,
healthcare facilities, etc.
Corporate Social Responsibility Initiatives touching lives :
The following CSR Initiatives have placed HPCL in a league of its own.
Swavalamban:
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The objective of this programme is to provide free Vocational Training to
beneficiaries from low income group households. HPCL and CII have joined
hands along with M/s City & Guilds to impart training to youths and change
them into able professionals.
Navjyot:
This project aims at increasing the health index of children who have been
unfortunately displaced from slums. The project currently accommodates 3100
slum children from Bawana Resettlement Colony and imparts health care
services. Navjyot India Foundation is the official partner in the project.
Unnati:
The objective of this initiative is to provide Computer training to 3000 students
at Visakhapatnam through NIIT Limited.
Nanhi Kali:
The project is an initiative towards Supporting the Girl Child. Corporation has
provided Sponsorship of the quality school education of 498 renewals of Nanhi
Kalis and additional 1400 Nanhi Kalis from various Govt. Schools from
Mehboobnagar Dist. and Paderu region in Andhra Pradesh in collaboration withM/s KC Mahindra Education Trust.
Muskan:
This project ponders into the welfare of 100 underprivileged children, many of
them living in footpaths by providing shelter at Tuglakabad and Jahangipuri in
Delhi. Education, meals, clothing, health care, vocational training etc. are
provided for them through HPCL's operating partner M/s Prayas Juvenile Aid
Centre (JAC) Society.
Suraksha:
This is an initiative towards prevention of HIV/AIDS through training/lectures
and distribution of condoms to truckers at Highway Retail Outlets. The project
operating partner is Organization for Socially Economic and Rural Development
(OSERD).
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Global Warming:
Under this project, approximately 20000 school children are being educated on
causes of Global Warming at Delhi, Goa and Mumbai through our operatingpartner CSRL (Centre for Social Responsibility & Leadership).
A Corporate approach towards development:
The current projects bear the mark of a well thought of corporate mindset .To
summarise HPCL's approach towards social welfare we have to mention the
following points-
1. Strategic approach to every issue is the key to HPCL's success.
2. HPCL has meticulously secured the input-output-outcomebalance.
3. HPCL has underlined the social problems accurately and hastaken result oriented initiatives.
4. The advanced planning regarding allocation of resource andcorrect evaluation of performance against benchmark haverepresented organizational competence.
The success of HPCL lies in the maintenance of social responsibilities amid profit
driven and competitive business environment. Apart from directly contributing to the
betterment of weaker sections of the society, HPCL has been associated with
healthcare, education, environmental protection, agricultural development, rural
reconstruction, water supply development etc. It can be said that the corporation hastouched lives qualitatively acting as a corporate social ambassador. HPCL has always
seen itself as a contributing participant in India's overall development. The
corporation has stood the test of time being true to citizen's expectations.
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INDIAN PETROLEUM SECTOR
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Natural gas
distribution
Downstream Sector
Upstream Sector
Oil & Gas
Exploration
ONGC, OIL, RIL
Indian Petroleum Sector
IOC, BPCL, HPCL, ONGC, RIL,
CPCL, BRPL, KRL, NRL, MRPL
GAIL
Refining &
Marketing
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MAJOR PLAYERS IN MARKET
MAJOR UPSTREAM PLAYERS
GSPC RIL
OILHOEC
ONGC
Cairn
British
Gas
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KEY PLAYERS IN THE INDIAN OIL AND GAS SECTOR
Company
Fortun
e 500Rank
Profile
105
• India’s largest company by sales (Turnover
: USD 37bn)
• India’s flagship Downstream company –
Along with subsidiaries accounts for 47%
of Petroleum market share among Public
Sector Oil Companies, 41% of National
refining capacity and 51% downstream
pipeline capacity
• Operates the largest and widest network of
petrol and diesel stations in the country
264
• India’s largest private sector company on
all major financial parameters
• Presence in Upstream, midstream and
downstream segment
287
• PSU engaged in refining and marketing of
petroleum products
• Have two subsidiary companies – Kochi
Refineries Ltd. And Numaligarh RefineriesLimited
• Refining Capacity – 24.5 MT (16.25% of
India’s refining capacity)
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311
• Another mega Public sector company with
focus on refining and marketing
• Turnover of about US$ 17 Billion
• Accounts for about 10% of India’s total
refining capacity
335
• India’s Flagship E & P Company
• Accounts for 77% of crude oil and 81% of
natural gas produced in India
• Venturing into downstream refining and
marketing
OPPORTUNITIES FOR INDIA
1. Strategic location
• Nearness to the premier crude oil and gas supply market (Middle East)
• Geographical Proximity to the major petroleum product importers – China
and
Japan
2. Well Developed Maritime infrastructure
3. Government policies conducive to the growth of the sector – tax holidays,
Special Economic
Zones for Petroleum products
4. Availability of experienced manpower at lesser costs –Cost advantage
5. Existence of hi-tech indigenous EPC Companies – lower construction periods
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6. Large domestic market
• Anchor customer of the various petroleum products
• Possibility of achieving economies of scale
Significant Business Opportunities for foreign players
Upstrea
m
• NELP rounds and Open acreage system
(Opportunities for providers of services –
platforms, rigs, Offshore vessels etc.)
• Redevelopment of existing fields to improve
recovery factor
• Offer of CBM blocks through Competitive bidding
route.
• Natural gas hydrate programme
• Underground coal gasification
• Coal to oil conversion
Midstrea
m/
Downstre
am
• Refining – Expansion of existing capacities, setting
up of new refineries, acquiring stakes in these
refineries
• Ethanol and Biodiesel production – cultivation of
Sugarcane and Jatropha
• Petroleum marketing – setting up of retail outlets,
new product pipelines.
• LNG imports
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• Setting up of LNG Regasification terminals.
• Offshore Transshipment (Single Buoy Mooring)
•
Laying of cross country gas grid and transnationalgas pipelines
• City Gas Distribution including laying of CGD and
CNG networks
Initiatives to attract Foreign Direct Investment
Exploration
& Production
• Up to 100% FDI through automatic route
• Through incorporated/ unincorporated
• Joint ventures or directly
Refining
• Up to 100% FDI if set up as a private
Indian company
• Up to 26% in case of state owned
companies
Marketing • Up to 100% FDI through automatic route
Product Pipelines • Up to 100% FDI through automatic route
Natural Gas/ LNG
pipelines
• Up to 100% FDI allowed
• Approval required from Foreign Investment
Promotion Board
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COMPANY OVERVIEW
HPCL is a Fortune 500 company, with an annual turnover of Rs. 1,08,599 Crores
and sales/income from operations of Rs 1,14,889 Crores (US$ 25,306 Millions) during
FY 2009-10, having about 20% Marketing share in India and a strong market
infrastructure. HPCL operates 2 major refineries producing a wide variety of
petroleum fuels & specialties, one in Mumbai (West Coast) of 6.5 Million Metric
Tonnes Per Annum (MMTPA) capacity and the other in Vishakhapatnam, (East
Coast) with a capacity of 8.3 MMTPA. HPCL holds an equity stake of 16.95% inMangalore Refinery & Petrochemicals Limited, a state-of-the-art refinery at Mangalore
with a capacity of 9 MMTPA. In addition, HPCL is constructing a refinery at Bhatinda, in
the state of Punjab, as a Joint venture with Mittal Energy Investments Pte. Ltd.
o HPCL also owns and operates the largest Lube Refinery in the country
producing Lube Base Oils of international standards, with a capacity
of 335 TMT. This Lube Refinery accounts for over 40% of the India's
total Lube Base Oil production.
o HPCL's vast marketing network consists of 13 Zonal offices in major cities
and 101 Regional Offices facilitated by a Supply & Distribution infrastructure
comprising Terminals, Pipeline networks, Aviation Service Stations, LPG Bottling
Plants, Inland Relay Depots & Retail Outlets, Lube and LPG Distributorships.
HPCL, over the years, has moved from strength to strength on all fronts. The
refining capacity steadily increased from 5.5 MMTPA in 1984/85 to 14.8
MMTPA presently. On the financial front, the turnover grew from Rs. 2687
Crores in 1984-85 to an impressive Rs 1, 16,428 Crores in FY 2008-09.
MISSION AND VISION OF HPCL
MISSION
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"HPCL, along with its joint ventures, will be a fully integrated company in the
Hydrocarbons sector of exploration and production, refining and marketing;
Focusing on enhancement of productivity, quality and profitability; caring for
customers and employees; caring for environment protection and cultural
heritage.
It will also attain scale dimensions by diversifying into other energy related
Fields and by taking up transnational operations."
VISION
To be a World Class Energy Company known for caring and delighting the
customers with high quality products and innovative services across domestic
and international markets with aggressive growth and delivering superior
financial performance. The Company will be a model of excellence in meeting
social commitment, environment, health and safety norms and in employee
welfare and relations
PERFORMANCE PROFILE OF HPCL
o FINANCIAL
2009-2010 2005-2006
SALES 114,888.63 76,920.26
GROSS PROFIT 4,193.18 1,151.21
DEPREICIATION 1,164.40 690.23
INTEREST 903.75 175.88
TAX (including
differed tax)
823.61 (131.91)
PROVISION FOR FBT 0.05 11.38
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NET PROFIT 1,301.37 405.63
DIVIDEND 406.35 101.80
TAX ON DISTRIBUTED
PROFIT
67.49 14.28
RETAINED EARNINGS 827.53 289.55
SOURCE: 58 ANNUAL REPORT OF HPCL
o WHAT CORPORATION OWES
2009-2010 2005-2006
GROSS FIXED ASSETS 24,988.37 13,479.25
DEPRECIATION 9,681.70 6,141.85
NET FIXED ASSETS 15,306.67 7,337.40
CAPITAL WORK IN
PROGRESS
3,887.59 2,363.88
INVESTMENTS : JVC 2,623.83 825.76
OTHERS 8,763.39 3,201.88
NET CURRENT
ASSETS
4,086.83 3,055.09
DEFFERD TAX
LIABILITY
(1,807.97) (1,384.44)
TOTAL 32,860.34 15,399.57
2009-2010 2005-2006
NET WORTH 11,557.97 8,735.74
SHARE CAPITAL 339.71 338.94
SHARE FORFEITURE (0.70) -
RESERVES 11,218.96 8,396.80
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BORROWINGS 21,302.37 6,663.83
TOTAL 32,860.34 15,399.57
SOURCE: 58 ANNUAL REPORT OF HPCL
This data shows that overall sales of the company are increased from Rs.
76,920.26 crores (2005-2006) to Rs. 114,888.63 (2009-2010), the gross profit
of the company increased from Rs. 1,151.21 crores (2005-2006) to Rs.
4,193.18 (2009-2010) and the overall net profit of the company is increased
from Rs. 405.63 (2005-2006) to Rs. 1,301.37 (2009-2010) so this shows that
there is a 220.8% of increase in net profit but the overall net worth of the
company is increased from Rs. 8,735.74 (2005-2006) to Rs. 11,557.97 (2009-
2010).
Products & Services
• Refineries
• Aviation
• Bulk Fuels & Specialities
• International trade
• LPG - HP GAS
• Lubes - HP LUBES
• Retail
• Exploration & Production
• Joint Ventures
• Alternate Energy
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JOINT VENTURES OF HPCL
In an effort to fulfill its vision and achieve its objectives, HPCL has formulated
plans for expansion, diversification and internal development
Crude Refining and Marketing of finished Petroleum products is the
core area of the Corporation. Opportunities are also being explored to access new
revenue streams, and augment downstream businesses. Accordingly, HPCL has
ventured in Upstream activities (Exploration and Production) and piped gas
distribution in major cities
12HPCL-Mittal Energy Ltd. (HMEL)
13Hindustan Colas (HINCOL)
14Prize Petroleum Company Limited
15South Asia LPG Co Pvt. Ltd. ( SALPG)
16Bhagyanagar Gas Limited (BGL)
17Aavantika Gas Limited
18Petronet India Limited (PIL)
19Petronet MHB Limited (PMHBL)
20Mangalore Refineries and Petrochemicals Limited (MRPL)
21CREDA-HPCL Biofuel Limited (CHBL)
22Sushrut Hospital and Research Centre
REFINERIES OF HPCL
Without refining, the rich resources of crude petroleum of nature would remain
latent. Value-added products from crude petroleum like petrol, diesel,
kerosene, liquefied petroleum gas, naphtha and many more products would
not be available for growth and development of a nation.
HPCL refineries upgrade the crude petroleum into many value-added products
and over 300 grades of lubricants, specialties and greases. The Lubricating
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Oils Refinery set up at Mumbai is largest lube refinery in India. It produces
superior quality lube base oils.
The offsite product handling facilities of refineries at Mumbai andVishakhapatnam has been automated. Projects have been implemented and
facilities upgraded to produce green fuels like unleaded petrol and low sulphur
diesel. and Euro III & Euro IV works are in progress . The refineries have been
benchmarked by an international agency for various performance parameters.
Numerous awards have been bestowed on both the refineries in recognition of
the efforts in the field of energy conservation, environment and safety.
CAPACITY OF REFINERIES
3 MUMBAI REFINERY : 6.5 million metric tons per annum (MMTPA) capacity
4 VISAKH REFINERY : 8.3 million metric tons per annum (MMTPA) capacity
NEW PROJECTS
Identification and implementation of projects
for process improvement, performance,
safety and environment related concerns are
ongoing processes. The following new
projects have been undertaken by Mumbai
and Visakh Refineries to upgrade the
facilities to meet the product demand :
Facilities for Euro-III & IV grade Gasoline: Both Refineries have
executed Green Fuels & Emission Control Project (GFECP) at
Mumbai Refinery and Clean Fuel Project at Visakh Refinery to
produce Euro-III/IV gasoline with capability to produce Euro-IV MS.
Apart from meeting MS quality stipulations, the project also enabled
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to upgrade Naphtha to Gasoline which is a value added product.
New FCCU project at Mumbai Refinery: In order to enhance the
production of value added products like LPG, MS and HSD, the
refinery is installing a new FCCU of 1.4 MMTPA capacity, which will
increase the FCCU processing capacity from the existing level of 1
MMTPA to 2.4 MMTPA. The project is expected to be completed by
the 2nd qtr of 2010-11.
Environmental facilities: Environmental facilities are being
upgraded in both the Refineries by installing Integrated Effluent
Treatment Plants to comply with air pollution limits set forth by
Pollution Control Board.
Bottom Up-gradation Projects: Mumbai Refinery has undertakenFeasibility Study of “Solvent Deasphlating Unit (SDA)” by using the
proprietary technology “Residuum Oil Supercritical Extraction
(ROSE)”. Setting up of this plant is expected to enhance the
recovery of valuable oil from the heavier fraction of the crude (VTB).
Similarly Visakh Refinery has also planned to implement the
Delayed Coker Unit (DCU) Projects for bottom up gradation.
LOBS Project: Mumbai refinery produces various grades of LOBS
with sulphur above 300 ppm and saturates below 90%, which fallunder API Gr-I category. To meet the increased demand of the same
LOBS quality in the domestic market including the API Gr-II/III
category the capacity is being uplifted. The project will help HPCL to
keep its market share of LOBS intact. The project is expected to be
completed by June 2010.
MR/VR DHT: Both Refineries are setting up DHT projects to
upgrade / produce the Euro-III / IV HSD and projects are expected to
be completed mechanically by Sept 2011. The Environmental
Clearance for DHT Projects for both the refineries, Mumbai
Refinery and Visakh Refinery has been obtained.
The Environmental Statement for the FY 2009-10 has been
submitted to Andhra Pradesh Pollution Control Board (APPCB). View
the Compliance Status of Environmental Clearance Stipulations for
DHT VR Project.
Single Point Mooring (SPM) Project at Visakh
Refinery: Visakh Refinery putting up SPM project to facilitate
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unloading of large crude parcels of the size of around 300,000
Metric Tonnes from Very Large Crude Carriers (VLCCs). The VLCCs
cannot be berthed in the existing crude receiving jetties due to
draught restrictions. The installation of SPM will reduce the freight
cost and wharf age charges and thus will improve the economics of
the Refinery. The Environmental Clearance for this project has been
obtained. View status of Compliance of Stipulated EC Conditions.
The offshore and onshore installation work of the project has been
completed. The Environmental Statement for the financial year
(FY2009-10) has also been submitted to the Andhra Pradesh
Pollution Control Board (APPCB) .
Modernization Project for Mounded Storage System for
LPG /Propylene at Visakh Refinery: Visakh Refinery is executingthe Mounded storage system for LPG and Propylene in place of
existing LPG /Propylene Horton spheres. This is a risk mitigation
project and undertaken following the recommendations by the
external safety agencies, viz., High Power steering Committee
August, 1998, 4th Round ESA - September, 1999 etc. The Mounded
storage of LPG has proved to be safer compared to above ground
storage vessels since it provides intrinsically passive and safe
environment and eliminates the possibility of Boiling Liquid
Expanding Vapor Explosion (BLEVE) phenomenon. The approved
project cost is Rs. 124 Crores.
Corporate Social Responsibility
Environment
Mission & SHE policy
Mission
To have safe, healthy and pollution free environment in and around all our refineries,
plants, facilities and other premises at all times; instill awareness in these areas,
including relevant laws, in all employees, families and the communities in which they
carry out the activities.
Environment Policy
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The Corporation is committed to conduct its operation in such a manner as
compatible with environment and economic development of the community. Its aim is
to create an awareness and respect for the environment, stressing on every
employee’s involvement in environmental improvement by ensuring healthy
operating practices, philosophy and training.
Health Policy
To provide a structured program to look after and promote the health of vital “Human
Resource”, essential for productivity and effectiveness of the Corporation.
Safety Policy
As an integral part of its business, HPCL believes that no work or service or activity is
so important or urgent that safety be overlooked or compromised. Safety of the
employees and public, protection of their as well as Corporation’s assets shall be
paramount. Corporation considers that safety is one of the important tools to enhance
productivity and to reduce national losses. The Corporation will constantly Endeavour
to achieve and maintain high standards of Safety in its operations.
BEYOND BUSINESS CORPORATE SOCIAL
RESPONSIBILITY
Promising whatever it takes to make a difference:
HPCL is committed to create a positive impact on the society and contribute to
socio economic development including measures for improving the quality of
life of underprivileged classes of the society. Since its inception, HPCL has tried
to follow Corporate Social Responsibility in the true sense. This sense of responsibility comes from a feeling that not every achievement of the
company is reflected in its balance sheets. The relevance that a company
achieves by virtue of its socio-economic participation surpasses the profit and
loss measurements by far. In this respect HPCL has proceeded in the truly
corporate manner, planning investments in social causes methodically,
executing the various steps with utmost care and securing distinctive
developments for the poor and the downtrodden masses. HPCL has provided
sustained value for the above mentioned investments all the time and has
contributed to the living standards of underprivileged masses.
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A compact booklet: "Bringing Smiles (2008-09)" provides details of HPCL's
various CSR activities during FY 2008-09. "Bringing Smiles (2009-10)" contains
details of CSR activities undertaken by HPCL during the FY-2009-10.
When it comes to social contribution our country never lacked goodwill among
corporate citizens but competent contributors were never in good numbers as
far as management and execution skills are concerned. HPCL has surely paved
the way in the right direction with exemplary contributions. HPCL's initiatives
have created value in the following diverse ways –
6. HPCL's initiatives have made notable differences in fields as diverse aseducation, infrastructure, welfare measures, health and hygiene,
vocational training & employment generation, training in self-reliance,amenities for the sufferers of natural disasters and environmentalprotection. The most commendable feature of the support is that HPCLhas taken innovative measures to infuse self reliance in masses tosecure long lasting improvements.
7. HPCL has categorized different projects of social relevance according tonational and regional significance. The investment has been madeaccording to solid result oriented plans with every detail of the prospecttaken into consideration.
8. The funds for different CSR projects have been consistently allocated ina transparent manner. HPCL follows an allocation process based oncomplete evaluation and benchmark standardization.
9. A Foundation has been established to take up projects of Nationalsignificance. This initiative has helped to identify the impacts of projectskeeping national interest in mind.
10. HPCL has set exemplary organizational competency in carrying outcomplex and demanding projects. The implementation process issupported by adequate checks and balances including reporting,assessment and appraisal by world class professionals.
HPCL took its first step in this direction during the year 1985-86 with a modest
budget allocation of Rs.18 Lakhs for undertaking various welfare activities for
the benefit of SC/STs and other weaker sections of the Society under the
Special Component Plan/Tribal Sub-Plan and Welfare Plan for Weaker Sections.
Later the corporation expanded the scope and allotment of such projects in
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manifolds to uphold its "Socially Responsible Corporate citizen" Image and to
address the huge welfare expectation which the society was increasingly
resting on the corporation. Budget for the CSR projects subsequently rose
every year and larger portions of underprivileged masses were gradually
incorporated into the schemes. The corporation went beyond the parameters
of the SC/ST Component Plan to extend support. The fund has been arranged
by virtue of a policy decision to allocate certain percentage of the net profit for
each financial year to Component Plan and CSR activities and to operate the
CSR policy on Triple Bottom Line principle i.e. Economic, Social & Environment.
The Expenditure for the year 2005-06 stands at a whopping Rs.7 crores for SCP
projects and Rs. 8 crores for other CSR projects.
An "HPCL Foundation" is being set up to finance the CSR projects and also
monitor implementation of distinct schemes like AIDS prevention, vocationaltraining for unemployed youth, education of rural children, computer training,
healthcare facilities, etc.
Corporate Social Responsibility Initiatives touching lives :
The following CSR Initiatives have placed HPCL in a league of its own.
Swavalamban:
The objective of this programme is to provide free Vocational Training to
beneficiaries from low income group households. HPCL and CII have joined
hands along with M/s City & Guilds to impart training to youths and change
them into able professionals.
Navjyot:
This project aims at increasing the health index of children who have been
unfortunately displaced from slums. The project currently accommodates 3100
slum children from Bawana Resettlement Colony and imparts health care
services. Navjyot India Foundation is the official partner in the project.
Unnati:
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The objective of this initiative is to provide Computer training to 3000 students
at Visakhapatnam through NIIT Limited.
Nanhi Kali:
The project is an initiative towards Supporting the Girl Child. Corporation hasprovided Sponsorship of the quality school education of 498 renewals of Nanhi
Kalis and additional 1400 Nanhi Kalis from various Govt. Schools from
Mehboobnagar Dist. and Paderu region in Andhra Pradesh in collaboration with
M/s KC Mahindra Education Trust.
Muskan:
This project ponders into the welfare of 100 underprivileged children, many of
them living in footpaths by providing shelter at Tuglakabad and Jahangipuri inDelhi. Education, meals, clothing, health care, vocational training etc. are
provided for them through HPCL's operating partner M/s Prayas Juvenile Aid
Centre (JAC) Society.
Suraksha:
This is an initiative towards prevention of HIV/AIDS through training/lectures
and distribution of condoms to truckers at Highway Retail Outlets. The project
operating partner is Organization for Socially Economic and Rural Development
(OSERD).
Global Warming:
Under this project, approximately 20000 school children are being educated on
causes of Global Warming at Delhi, Goa and Mumbai through our operating
partner CSRL (Centre for Social Responsibility & Leadership).
A Corporate approach towards development:
The current projects bear the mark of a well thought of corporate mindset .To
summarise HPCL's approach towards social welfare we have to mention the
following points-
5. Strategic approach to every issue is the key to HPCL's success.
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6. HPCL has meticulously secured the input-output-outcomebalance.
7. HPCL has underlined the social problems accurately and has
taken result oriented initiatives.
8. The advanced planning regarding allocation of resource andcorrect evaluation of performance against benchmark haverepresented organizational competence.
The success of HPCL lies in the maintenance of social responsibilities amid profit
driven and competitive business environment. Apart from directly contributing to the
betterment of weaker sections of the society, HPCL has been associated with
healthcare, education, environmental protection, agricultural development, ruralreconstruction, water supply development etc. It can be said that the corporation has
touched lives qualitatively acting as a corporate social ambassador. HPCL has always
seen itself as a contributing participant in India's overall development. The
corporation has stood the test of time being true to citizen's expectations.
Evolution of Pricing in Petroleum Industry
Historical Perspective
The development of petrol-retail sector in India has witnessed three distinct
phases:
• Period of dominance of multinational companies
• Advent of public sector, its growth in co-existence with these
transnational companies
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• Marketing by the wholly government-owned companies and the
fulfillment of socio-economic objectives
At the time of the independence, the marketing and retailing of petroleum
products was in the hands of the private companies like Catlex, Esso, Shell etc.
Later the government gradually exercised control through public sector
companies. The second phase started with actions taken in pursuance of the
Industrial Policy Resolution, 1956 to promote growth of the vital petroleum
sector under the state control. Eventually, IOC was formed in 1959, IBP was
acquired in 1970 and HPC came into existence in 1974 and BPC in 1976.
In the third phase, the experience gained by the government during thesecond phase and the socio- economic factors encouraged it to go ahead for
acquiring the assets of all multinational companies operating in the country. In
1981, the entire oil industry was truly in the government fold.
A new era of planned development in consonance with national priorities under
the overall direction of the government thus began in the oil sector. From the
state of the cutthroat competition in marketing and distribution, the PSUs had
to quickly adapt to the changed scenario. The assets of the oil company interms of infrastructure facilities were now the national assets. The important
area of concern was their optimum utilization.
Administered Price Mechanism
The country has traditionally operated under an Administered Pricing
Mechanism for petroleum products. This system is based on the retention price
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concept under which the oil refineries, oil marketing companies and the
pipelines are compensated for operating costs and are assured a return of 12%
post-tax on networth. Under this concept, a fixed level of profitability for the oil
companies is ensured subject to their achieving their specified capacity
utilisation. Upstream companies, namely ONGC,oil and GAIL, are also under
retention price concept and are assured a fixed return.
The administered pricing pilicy of petroleum products ensures that products
used by the vulnerable sections of the society, like kerosene, or products used
as feedstocks for production of fertilizer, like naphtha, may be sold at
subsidized prices.
Gradually, the Government of India is moving away from the administered
pricing regime to market-determined, tariff-based pricing. Free imports are
permitted for almost all petroleum products except petrol and diesel. Free
imports are permitted for almost all petroleum products except petrol and
diesel. Free marketing of imported kerosene, LPG and lubricants by private
parties is permitted. It is contemplated that in a phased manner, all
administered price products will be taken out of the administered pricing
regime and the system will be replaced by a progressive tariff regime in order
to provide a level playing field for new investments in a free and competitive
market
Up to 1939, there were no controls whatsoever on the pricing of the petroleum
products. Between 1939 and 1948, the oil companies themselves maintained
pool accounts for major products without any intervention by the government.
In 1948, an attempt was made to regulate prices through Valued Stock
account procedure. Under this procedure realization of oil companies was
restricted to the import parity price of finished goods, plus excise duties/local
taxes/ dealer margins and agreed marketing margins of each of the refineries.
Any excess realization was surrendered to the Government.
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Administered Pricing Policy for Petroleum products
The pricing of petroleum products in India is governed by the administered
pricing mechanism based on accepted recommendations of oil pricingcommittee appointed from time to time.
Principles followed to carry out pricing through APM: Fixation of selling price of
petroleum products is done under the APM of government of India \. The
criteria followed for fixation are:
• Products which are essential for common man are priced under APM
• High volume products should be administered under the pricing system
in overall public interest
• Petroleum products are divided into the following categories for the
purpose of APM:
The categories are :-
1. Formula Products (viz. MS, HSD, SKO, etc) are the products whose
basic ceiling selling prices are fixed.
2. Other products (Benzene, toluene, lubes, etc) whose prices are
determined by market forces or through negotiations between oil
companies and bulk industry consumers.
• Each refinery/pipeline/marketing function is considered separate pricing
centre
• The administered pricing concept is based on the retention concept
which ensures a return on capital employed. Capital employed,
comprising of net worth and borrowings. Return is allowed at 12% net of
tax on net worth at actual interest rates on borrowings.
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• Operating cost is allowed on normative basis. Variations for major factors
like long term settlement with employees (LTS). Government levies, etc
are compensated separately.
• Returns at the prescribed levels are available to the oil companies if they
achieve the prescribed parameters, viz.
1. Production pattern
2. Sales
3. Fuel and Loss
4. Normative working capital
5. Operating Cost
• The crude oil cost forms a bulk of total cost is insulated from the
fluctuations of international prices by means of a pool accounts
mechanism so that the net cost to the refinery is independent of whether
it is processing imported or indigenous crudes.
Primary Pricing Point
For the purpose of uniformity in consumer pricing (excluding freight and local
levies), pricing points have been fixed for petroleum products. Each pricing
point has an assingned pricing zone. The producer’s location (refinery) is fixedat primary point. The price of petroleum products (controlled) at all primary
points will be uniform. The price at locations within the pricing zone assigned
to a pricing point will be the ex-storage point price plus cost of transportation
to that location. Currently all the refineries are primary pricing points for
controlled products.
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Secondary Pricing Point
While ex-storage will be the price at a primary point, the price at secondary
pricing point will be arrived at the element of transportation cost there on a
predetermined basis. Secondary pricing points are the depots attached to
particular refinery.
Import Parity System
The APM continued through 1970s, 1980s and 1990s. But the explosive growth
in the late 1990s required the government to call for funds from private and
international investors. The ability of oil companies to generate investable
surpluses was reduced considerably by the APM which allowed returns on the
depreciated net fixed assets. Accordingly, the Government, in 1995, set up an
industry study group to prepare the blue print of the deregulation and tariff
reforms required in the oil sector. The report of this Study Group formed the
main input for the strategic Planning Group on Restructuring of Indian oil
Industry otherwise known as the “R” group headed by the , then Secretary
P&NG, Dr. Vijay Kellar. The “R” group submitted its report in September, 1996,
recommending dismantling of the APM for the following reasons:-
• Cost Plus compensation did not provide strong incentive for cost
reduction thereby breeding inefficiencies.
• Absence of internationally competitive petroleum sector in the context of global economy.
• With the entry of private sector, gold plating of the costs would be
encouraged.
• Wide distortion in consumer prices due to subsidies/ cross subsidies.
• Adverse impact on oil companies due to huge deficits in Oil Pool
Accounts as price revision was not timely.
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The Group’s recommendations were approved by the Government in principle
in September, 1997 and further action was started. The Government appointed
an “Expert Technical Group (ETG)” to study the phasing and tariff structure of
the oil sector. The recommendations of this group were notified in November,
1997. The ETG headed by Mr. Nirmal Singh, Joint Secretary Refineries,
MOP&NG recommended the following:-
• There should be a phased deregulation of the sector spread over a
period of four to five year, culminating in total deregulation by 1.4.2002
•
The first phase should encompass full deregulation of upstream/refineries and partial deregulation of marketing sectors,
• The customs tariff, structure, which provided for a negative duty
protection needs to be amended so as to attract investments to the
sector.
• Changes in tariff structure may be done over the transition phase,
keeping in mind the equilibrium to be maintained between the
Governments’ revenue needs, necessity to keep consumers prices low
and the need to increase the profitability of the companies.
• Subsidies should be phases out gradually to within acceptable limits
which will be provided through budget.
• In the end, on deregulation, the duties should be so positioned that the
tariff protection becomes 25% of the value addition while the
Government revenue is maintained.
Accordingly in the first phase, effective 1.4.1998, the APM was dismantled for
the upstream and refining sector and a partial deregulation took place for the
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marketing sector. Subsequently, effective 1.4.2002, the Government
announced complete dismantling of APM.
The dismantling of APM gave rise to establishment of import parity mechanism
for calculation of petroleum prices.
Import Parity is a pricing policy adopted by suppliers of a good for their sales
to domestic customers; according to which price is set at the opportunity cost
of a unit of an imported substituted good. As such, price is set equal to the
world price converted into exchange rated plus any transport, tariff and other
costs the customer would bear if importing.
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A VIABLE AND SUSTAINABLE SYSTEM OF PRICING OF
PETROLEUM PRODUCTS
PETROL
Petrol is largely an item of final consumption. Its price, therefore, has a
very small impact on inflation due to forward linkages. The average
annual use of petrol per vehicle is given in the following table
Average Annual Consumption of Fuel by Class of Vehicles
Type
of
Average
DistanceCovered
Fuel
Efficiency
Litres/Vehicle/ Year
MonthlyFuel
Cost atprice on
Two Wheelers
(Petrol)
6300
(10000)
73.0 86 320
ThreeWheelers
35000
(40000)
34.0 1,029 3835
Cars 8000 13.5 593 2210
Cars 8000 14.0 571 1566
MPV 7800 8.7 897 2461
Bus 55000 4.1 13,415 36,802
Heavy Trucks 55000 3.6 15,278 41,913
Light Trucks 20000 4.5 4,415 12,112
.
Source: ’Residential and Transport Energy use in India: Past Trend and Future Outlook’ by Ernest
Orlando Lawrence Berkeley National Laboratory, USA, January 2009
Figures in parentheses are estimates for Delhi, taken from the report of CPCB (2000)
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• A two-wheeler consumes, on an average, 86 litres of petrol per year, for
which the owner spends Rs. 320 per month (Rs. 510 in Delhi). The fuel
expenditure of car owners is much larger at Rs. 2210 per month (Rs.
4140 in Delhi). Motorized vehicle owners are largely well-off persons
belonging to the upper two/three deciles of the population. There is no
reason to subsidize this class of consumers.
• Full price pass-through at US $ 80/bbl will increase the retail price of
petrol by around Rs.7/litre. The additional expenditure of a two-wheeler
owner would be only Rs. 50 per month (all-India average). Even for two-
wheeler owners in Metro Cities who drive more (around 10000KM per year),
the increase on fuel expenditure will be around Rs. 80 per month. Even if the crude price increases to $120 compared to the present price of around
$70/barrel, the retail outlet price of petrol, assuming the current tax regime,
will increase by Rs. 23/litre (i.e., Rs.20/litre on the basis of rise in indicative
selling price of petrol from $70/bbl to $120/bbl of crude price + Rs.3/litre on
account of the current price being below the estimated indicative selling
price) and the additional expenditure , assuming no reduction in use, will be
around Rs.160/month on a two-wheeler user and less than Rs. 1000/month on
a private automobile user (at all-India level).
• If higher petrol prices lead to less driving, more fuel efficient vehicles
and an efficiency increase by 20%, the additional cost would be that much
less.
• The Group believes that the cost increases can be borne by motorized
vehicle owners and recommends that petrol prices should be market-
determined both at the refinery gate and retail levels.
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TAXATION
At present there is zero custom duty on crude oil, domestic LPG and PDS
kerosene; 2.5 percent custom duty on Motor Spirit and diesel and 5 percent
custom duty on other petroleum products. The excise duty on domestic LPG
and PDS kerosene has already been reduced to zero. The basic excise duty on
Motor Spirit and Diesel (other than branded) has also been reduced to Rs.13.35 per litre on Motor Spirit and Rs. 3.60 per litre on diesel. The Group has
already recommended an additional excise duty on diesel-driven vehicle
corresponding to the differential tax in the form of higher excise on petrol
consumed by average petrol-driven car, which will act as the equaliser. There
is also the cascading impact of taxes such as entry tax/octroi imposed by
State Governments on crude oil, petrol and diesel. Almost 20 percent of the
price build up of petroleum products is attributed to state taxes. This needs
to be rationalised in order to achieve faster adaptation of domestic price of
petrol and diesel to international crude price.
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RECOMMENDATIONS:•
India’s imports of oil are increasing. Our import dependence hasreached 80 per cent and is likely to keep growing. At the same time 2008 saw
an unprecedented rise in oil price on the world market. Oil price volatility has
also increased. Though future oil prices are difficult to predict, they are
generally expected to rise. Given our increasing dependence on imports,
domestic prices of petroleum products have to reflect the international prices.
• The Government has not permitted public sector oil marketing
companies to pass global prices to domestic consumers. We have examinedthe impact of the formula-based prescriptive pricing of major petroleum
products devised by the Government from time to time, particularly since
2002. The present system of price control on petrol and diesel in particular
has resulted in major imbalances in the consumption pattern of petroleum
products in the country, and has put undue stress on finances of the PSU oil
marketing companies as well as of the Government. It has also led to
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withdrawal of private sector oil marketing companies from the market. This
has affected competition in the domestic petroleum product market.
• The petrol is largely an item of final consumption. An analysis of the
trend of petrol consumption by the automobile owners reveals that increase
in prices of petrol