Fundamentals of Petroleum Refining-2-upes

Assignment – 2

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Fundamentals of Petroleum Refining

Section A

Write short notes on any four of the following

1.      Energy Optimization

2.      Venting and Flaring

3.      SCADA System

4.      Linear Programming Applications in Process Plant

5.      Enterprise Resource Planning

Section B

(Attempt any three)

1.      What are the areas of improvement in refining?

2.      Explain the various elements of operating cost of refinery.

3.      “Quantitative accountant and correct payment of duties on finished petroleum products is the focal area of the oil accounting section.” Elaborate this statement.

4.      Focus on key properties of Gasoline and Diesel blendstocks in brief.

Section C

(Attempt all questions. Every question carries 10 marks)

Read the case “MRPL & RPL - Analyzing Risk and Returns” and answer the following questions.

Case Study: MRPL & RPL - Analyzing Risk and Returns

Introduction

Mangalore Refinery and Petrochemicals Limited (MRPL) and Reliance Petroleum Limited (RPL) were the first two refineries established by the private sector in India.

In March 1992, MRPL brought out a public issue of shares, and in September 1993, RPL did the same. Both these refineries were established at a time when the administered pricing mechanism (APM) was in force. APM involved full government control over the oil and natural gas sector, where only four major government owned oil companies (IOC, HPCL, BPCL and IBP) had the right to directly market petroleum products. The government refineries were not able to meet the increasing demand for petroleum products. Hence, opening up of the oil and natural gas sector to private companies and dismantling APM were considered as methods for reducing the demand-supply gap of petroleum products.

When the Government of India (GOI) approved private sector participation in the oil refining and petroleum industry, a new investment opportunity was made available to Indian investors.

Those who invested in MRPL and RPL were optimistic about the returns on shares of both these companies since reputed leading business houses such as the Aditya Birla Group (ABG) and the Reliance Group promoted these refinery projects. Due to the dearth of oil company stocks promoted by the private sector, the shares of both these companies were lapped up by public investors and financial institutions. Both the public issues were heavily oversubscribed. However, few investment analysts expressed their reservations about investing in stand-alone refineries like MRPL and RPL since they felt that the financial performance of companies in the refining industry was completely dependent on the crude oil prices.

MRPL

MRPL was the first grassroot refinery set up by the private sector in India. The company, which was incorporated in March 1988, had received government approval in April 1991 for setting up a refinery in Mangalore in the state of Karnataka.

MRPL was set up as a joint venture between Hindustan Petroleum Corporation Limited4 (HPCL) and Indian Rayon and Industries Limited (IRIL), a part of the ABG. HPCL and IRIL each held a 37.8% equity stake in the joint venture while the rest was offered to the public. The MRPL project was planned to be set up in 1992 with a refining capacity of three million (mn) metric tonnes per annum (MMTPA) at an estimated cost of Rs.11.62 billion (bn). The project was partly financed through a public issue of 16% secured redeemable partly convertible debentures (PCDs) of Rs.135 amounting to Rs.5.82 bn and 17.5% secured redeemable non-convertible debentures of Rs.200 (with detachable equity warrants) amounting to Rs.5.60 bn.

The project ran into cost escalations and the plant was finally commissioned in March 1996 at a revised cost of Rs. 25.93 bn. In September 1999, MRPL increased the refining capacity of the plant to nine MMTPA.

The capacity expansion involved an additional cost of Rs. 37 bn. To ensure the continuous supply of crude for the refinery, MRPL entered into contracts with domestic as well as international crude oil producers. Initially, the sole rights for marketing MRPL's products were with HPCL, but in 2001, MRPL started direct marketing of its products by exporting fuel oil, aviation turbine fuel, motor spirit and naphtha.

RPL

RPL was the second grassroot refinery set up by the private sector in India after MRPL. RPL's plant was set up at Jamnagar in the state of Gujarat. It was promoted by the Reliance Group and was completely privately owned.

Financial Performance

MRPL

MRPL completed its first full year of operations in the financial year 1996-1997. The refinery operated at a capacity utilization of 93.5% during this period.

The company earned a net profit of Rs. 905 mn in the very first year of its operations. However, during the financial years 1999-2000, 2000-2001 and 2001-2002, MRPL suffered significant losses (Refer Table I for the financial results of MRPL). The company's debt to net worth ratio rose from 5.61 in the financial year 1999-00 to 7.88 in 2000-01, to as high as 16.13 in 2001-02. MRPL also witnessed an increase in the expenditure on raw materials mainly due to the increase in crude oil prices. This increase in cost resulted in a reduction in the company's margins. According to analysts, the dismantling of administered pricing mechanism was also expected to affect MRPL adversely, since its average cost of production was higher than that of other refineries.

The Stock Market Perspective

According to stock market analysts, the share price of a company usually provided a true reflection of the company's present and expected financial performance.

The stock price usually reflected various risks associated with the company, which could be broadly categorized as systematic and unsystematic risks.

An analysis of the stock price performance of MRPL and RPL would help investors analyze the quantum of returns offered to them and identify the extent of risks associated with these companies over a specified period of time.

The quarterly share prices of MRPL and RPL between 1996 and 2002 are provided in Table III to help measure the risks and returns of these two companies.

The Future Prospects

In August 2002, ABG announced that it would exit MRPL by selling its entire stake to the Oil and Natural Gas Corporation (ONGC) at a price of Rs. 2 per share.

According to Kumara Mangalam Birla, the chairman of ABG, one of the main reasons for exiting the joint venture was the poor financial performance of MRPL. According to analysts, purchasing an equity stake in MRPL would be a forward integration move for ONGC, which was in the business of oil exploration and production.

They also felt that by investing in the lucrative oil refining and marketing sector, ONGC would diversify risks in the oil exploration sector. Moreover, by investing Rs. 6 bn as equity as part of the financial restructuring of MRPL, ONGC would reduce its tax liability. In early 2002, RPL announced plans to merge with Reliance group's flagship company Reliance Industries Limited (RIL).

Source: http://www.icmrindia.org/casestudies/catalogue/Finance/MRPL%20&%20RPL%20-%20Analyzing%20Risk%20and%20Returns%20-%20Finance.htm

Questions:

1.      Give light on the financial performance of MRPL and RPL.

2.      Analyze the case facts in brief.

3.      Why the shares of both these refineries were oversubscribed by investors during their public issue? Though the financial performance of these companies was very different during the period 1999-2002.

4.      Study the reasons behind the contrasting financial results of both mentioned companies.

5. According to stock market analysts, “the share price of a company usually provided a true reflection of the company's present and expected financial performance.” Discuss.