Assignment – 2
For
Fundamentals
of Petroleum Refining
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Section A (20 Marks)
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 (30 marks)
(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 (50 marks)
(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).
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.
- 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.
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