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TERM PAPER ON

FAILURE OF
RELIANCE
PETROLEUM

SUBMITTED TO: SUBMITTED BY:


Mr. Prince Vohra Reg no. 11002347
Roll no. B39
ACKNOWLEDGEMENT

I am thankful to Mr. Prince Vohra who provided me with the opportunity and guided me in
successful completion of my term paper. Under her valuable guidance, constant interest and
encouragement, who have devoted their ever-precious time from their busy schedule and
helped me in completing the term paper.
Special, continual assistance while completing the term paper was provided by the friends. I
wish to acknowledge my special thanks to them for their help and cooperation in order to
complete this project.
I am also thankful to those who have helped me intellectually in preparation of this term
paper directly or indirectly. I am deeply indebted to the various sources of information from
relevant sites from internet and books.
TABLE OF CONTENTS

SR. NO. PARTICULARS PAGE NO.

1. About the company 4


2. Mission statement ,goals and company’s info 5-6
3. RIL’s SEZ refinery 7-8
4. Performance review 9
5. Review of literature 10-12
6. Objectives and opportunities 13
7. Advantages in India and growth strategy 14
8. Threats and shut down of retail outlets 15
9. Breaking up in 2006 16-17
10. Several risks in RPL 18
11. Abstraction of study 19
12. Conclusion 20
13. References 21-22
About the Company:
RELIANCE PETROLEUM LIMITED (RPL)

1991, Reliance industries set up a new subsidiary, Reliance Refineries Private Ltd. The
subsidiary later changed its name to Reliance Petroleum Limited, and in 1993 launched a
public offering, which at that time was India's largest ever IPO. Reliance continued to pioneer
financing channels in India. In 1993, for example, the company became the first Indian
company to raise capital on the foreign market, through a Global Depositary Receipt (GDR)
issue in Luxembourg. The company completed a second successful GDR issue in 1994. The
company used the new capital in part to expand its petrochemicals wing, building the world's
largest multi-feed cracker at the Hazira site. The company also added production plants for
monoethylene glycol, polyethylene, and purified terephthalic acid. The new units launched
production in 1998. Reliance's opportunity for entry into petroleum refining came in 1997,
when the Indian oil industry reached a state of near collapse. Unable to fund further
exploration operations, and lacking the capital to expand its existing production, the
government was forced to liberalize the sector. In that year, Reliance announced a plan to
build one of the world's largest and most modern petroleum refining complexes in Jamnagar,
Gujarat, at a cost of some $6 billion. The government agreed to the plan, and granted the
company the right to import petroleum directly, rather than going through Indian Oil, which
helped Reliance greatly drive down operating costs.
Constructed in record time, the Jamnagar site was commissioned in 1999. The site's
production capacity was double that of any other Indian refinery and ranked among the top
five in the world. The addition of the new facility also placed Reliance at the top rank of the
country's private-sector companies. In 2002, Reliance Petroleum was merged into Reliance
Industries, which then became one of the country's top three companies, including state-
owned entities.
Mission Statement
Refining Life Redefining Growth

Goal
To harness an emerging value creation opportunity in the global refining sector.

Company’s info
Employees: 12,540(in 2006-07)

Employee growth: 3.5%


India and Reliance Industries rely on each other. The company is India's largest
petrochemical firm and among the country's largest companies (along with the likes of Indian
Oil and the Tata Group). Oil refining and the manufacture of polyolefins (polyethylene,
polypropylene, PVC, etc.) account for nearly all of Reliance's sale

Principal Subsidiaries:
Reliance Industrial Investments and Holdings Ltd.; Reliance Infrastructure Limited; Reliance
Middle East DMCC (U.A.E.); Reliance Netherlands B.V.; Reliance Petroleum Limited;
Reliance Retail Limited; Reliance Strategic Investments Limited; Reliance UK Ltd. (50%);
Reliance Ventures Ltd.

Principal Competitors:
Indian Oil Corporation Ltd.; Hindustan Petroleum Corporation Ltd.; Bharat Petroleum
Corporation Ltd.; Indian Petrochemicals Corporation Ltd.; Mangalore Refinery and
Petrochemicals Ltd.; Kochi Refineries Ltd.; Chennai Petroleum Corporation Ltd.; Parker
Agrochem Exports Ltd.

Management:
It is headed by Dhirubhai Ambani’s son, Chairman Mukesh Ambani.
Promoters:

Reliance Industries Limited (RIL) owns 70.38% & Chevron India owns 5% of the equity
share capital.An offer in 2008 made to Chevron to increase its share in equity share capital
further by 5%.

Corporate rankings:

• It featured in the Fortune Global 500 list of ‘World's Largest Corporations' for the
fourth consecutive year.
• Ranked 269th in 2007 having moved up 73 places from last year.
• Featured as one of the world's Top 200 companies in terms of Profits.
• Featured among top 50 companies with the biggest increase in Revenues.
• In September,2008 it was the only Indian Company which was featured in forbes top
100 list.
RIL’s SEZ Refinery

RIL commissioned its new refinery in the SEZ at Jamnagar. This refinery has the capacity to
process 580,000 barrels of crude oil per stream day. The facility also has the capacity to
produce 0.9 million tonnes of polypropylene per annum. The new refinery is the sixth largest
in the world and has a Nelson Complexity Index of 14.0, making Jamnagar the largest and
most complex refinery site in the world. This refinery has more than 40 process units apart
from a large network of off sites, utilities and other Infrastructure facilities.

The SEZ refinery has a unique design and path breaking configuration with ‘Clean Fuels’
process plant. It is designed with high level of flexibility to change grades based on economy
and to capture margins based on market dynamics. The new SEZ refinery is the first refinery
in India to produce Euro-IV grades of gasoline and diesel. The refinery has been the first in
India to produce large number of US grade gasoline such as R-BOB, RFG, US conventional,
95 Oxy-free and Ultra Low Sulphur Diesel (10 PPM Sulphur) which are being supplied to the
US and European markets.

The new refinery has some of the world’s largest units:

• FCC with Rx Cat technology for maximum propylene production

• Coker – with most advance safety features.

• Alkylation plant (based on Sulphuric acidtechnology)

• Light Cycle Oil (LCO) hydrocracker

The refinery complex is designed for total water conservation. It has its own desalination
plant and carries out complete recycling of effluent with zero discharge. It has a state-of-the-
art centralised control centre, laboratory, fire station and a large green belt. The green belt has
been developed across the boundary of the refinery and has got 2.3 million trees and 0.8
million mangroves. It has over 1 million mango trees – probably the largest mango plantation
in Asia.

It has been an exemplary, historical and a flawless start-up of a chain of plants in a safe,
secure and an incident free manner. The activities were carried out in a seamless manner such
that not even a single day was lost between construction completion and commissioning of
the refinery. All units were commissioned in shortest possible time schedule in spite of the
tight interdependencies between various units.

The refinery attained a significant milestone by fully stabilizing the operations in a record
time. All its process units have successfully demonstrated their ability tooperate smoothly
and safely, producing high quality transportation fuels. All key processing units at the
refinery are operating at their peak design capacity. The refinery has successfully processed
more than 60 types of crude oils, including difficult crude oils within a few months of its
start-up, thus reflecting superior quality of assets and capabilities.

Viewed in the context of market conditions, this is a significant achievement and reflects
RIL’s ability to produce and place high quality, value-added products in a challenging market
environment.
Performance Review

The consolidation of Reliance Petroleum Limited’s refining assets with RIL’s existing
refinery in Jamnagar gives RIL a capacity of 1.24 MBPD, which is about 1.6% of the world’s
refining capacity.

What set RIL apart in the context of global refining is the complexity and the scale of its
refineries. The two Jamnagar refineries that RIL operates are not only among the largest in
the world, but also are the most complex, with an average complexity of more than 12.0 on
the Nelson Complexity Index. Following the merger, RIL now owns 25% of the world’s most
complex refining capacity and has become the world’s largest producer of ultra-clean fuels at
a single location.

To support India’s strong growth with a drop in global demand, RIL surrendered the Export
Orientated Unit (EOU) status for its 660,000 barrels per day refinery. This has maintained
high utilisation.

Since inception a decade ago, RIL has been able to outperform the benchmark Singapore
complex refining margin. Margins have been comparable with other complex refiners
globally and significantly higher than refiners in China, where margins are regulated by the
Government.

There are two ways in which RIL has been able to outperform the benchmark index. The
complexity of the Jamnagar refineries allows the Company to process heavy and sour crude
from all over the globe reducing its feed costs. RIL also has the ability to place products in
the markets of Europe, Asia and USA to generate the best margins.

RIL processed 60.9 million tonnes of crude and clocked an average utilisation of 98.3%,
significantly higher than the average utilisation rates for refineries globally. Exports of
refined products were at $ 20.9 billion. This accounted for 32.8 million tonnes of product as
compared to 22.6 million tonnes in the previous year.
REVIEW OF LITERATURE
,

Economic times: RIL executes approximately 14,000 retail outlets. Many of them are
bought from operating dealers and purchase PSUs (public sector units).RIL gained success in
very little time in petroleum retail market and hold over 14 % of the market shares. But after
sometimes they have to shut-down their petroleum retail outlets because of high rise in the
prices of crude oil, government stops providing subsidies which leads to further increase in
prices. Government also refuses to provide survival packages to the different refinery
companies. They have to sell their petrol and diesel at quite high prices as compared to
government prices. Sales volumes of RIL outlets fell significantly after the price increase.
About 50,000 customers switched to other dealers. Further difference in PSU and reliance
prices has affected the operations and consequent revenues of the company.

Article (04 October 2010) : Reliance started its commercial production of oil from the
wells of off the east coast in September 2008 with crude output of 34,041 barrels. But now
daily production is falling day by day. CNBC-TV18 reported also mentioned the meeting of
reliance with British petroleum to consider the factors that can help in exploring the capacity
of reliance.

Article: All the petrol pumps established by reliance with a huge investment of Rs. 5.000
crore were closed in March 2008 just because of increase in the prices of crude oil and more
prices as compared to PSU units. But the company is thinking to reopen the closed petrol
pumps again in joint venture with state owned retailers like IOC, BPCL and HPCL.The main
reason behind this joint venture is to jump the high crude prices and to share the subsidy
burden and secondly it cannot supply fuel from its Jamnagar refineries, as they have attained
100% EOU status. Meanwhile, Reliance has opened some outlets in Gujarat and Maharashtra
by buying fuel from MRPL and Essar. It will help them to resume their business again and to
earn revenues on the investments.
Digital Inspiration: With Crude touching the $ 110 mark, it obivious that Reliance cannot
sell the petroleum products at a discounted price. As the prices in India are regulated by the
Government, be it reliance or any other top class company cannot sell at a discounted price. It
makes sense for the company to close down the retail outlets. As PSU companies will not
increase the petrol prices as this is the Election year. Some resolution need to be found out by
Government and because as Reliance closing of so many petrol pumps it will create huge
unemployment in the country which will further create a serious problem. So reliance should
open their petrol pumps in rich areas as south Delhi and south Mumbai where customers with
BMW and Mercedes want pure oil for the engines of their cars. They do not want to have
contaminated oil. So they easily pay high prices for the good fuel for their cars.

Ashu Mittal (Ramnagar (Nainital)): According to him PSUs were not able to compete
with private players as reliance in petroleum sector because their quality was not up to them.
But government wanted to reduce its fiscal deficit so they stopped proving subsidies and
survivals to the private players. By denying support to private sector pumps, the government
is forcing consumers to buy from PSU pumps only, if he/she is to avail the subsidy. Thus the
advantage of subsidy is actually being snatched by Dealers of PSU pumps and the consumer
has to be satisfied with quality & quantity, whatever is delivered. If this way, the government
is not practicing restricted trade practices? The subsidies in fertilizer is given to all, whether
private or PSU. Why same principal is not applicable to petroleum products? Moreover by
closing the retail outlets by Reliance all its Dealers had become unemployed as the work they
were doing to earn their livings had also gone due to bad govt. policies. This is not a good act
by the Congress Govt. at the centre. People of this country are been forced to purchase bad
quality/quantity of fuel from PSU's in this 21st century. Government should do something to
motivate the private sector by bringing some policy to help private players in petro retail
sector.

NK Srivastava (Haridwar) : In the failure of reliance petroleum political leaders also


play a very important and active role as some of them are the members or owner of PSU
petrol pumps directly or indirectly. Many of the retail outlets of PSUs are owned by leaders
of political parties directly or indirectly. This could be one of the reasons for political parties,
not allowing level playing field to private sector retail outlets . The PSU pumps are not able
to face the competition with private sector pumps and thus fear loss of commission. By
denying support to private sector pumps , the government is forcing consumers to buy from
PSU pumps only ,if he/she is to avail the subsidy. Thus the advantage of subsidy is actually
being reaped by dealers of PSU pumps and the consumer has to be satisfied with quality &
quantity, whatever is delivered. If this way, the government is not practicing restricted trade
practices? The subsidies in fertilizer is given to all ,whether private or PSU. Why same
principal is not applicable to Petroleum products?
Curt s. on 04.02.08 : According to him rising prices should not be the main reason to shut
down the petroleum retail outlets. He does not consider the increasing prices for the
problems of reliance. According to him , on the contrary, most oil companies around the
world have achieved astonishingly high profits, measured in $billions, which were the highest
in the history. And we also need to consider the fact, that all these companies are global
corporations, which could create their balance sheets almost as they would have wished to
look like and that the real profit was even much higher.
Higher is the price of oil, higher is the absolute value of the commission – profit margin (not
the percentage – this remains the same, or even lower, but absolute-overall value).
We should not forget to mention, that there is also a substantial ‘income from financing’.
Reliance is a multi million business – economy of large numbers – large scale economy,
which is very different as any low scale retail business.
He think Reliance failed because of:
- bad strategic/corporate management and execution
- bad financial management (currency prediction/trading, daily deposit trading, financial
leveraging to lover overall costs)
- bad cost control
- maybe, even bad HR

Retail Reporter @ 8:33 AM: Reliance petroleum continue to sold its products at higher
cost as compared to HPCL and BPCL. By doing this retailers have the option of suspending
operations by getting a 12.5% PA return over investment on their deposits.RIL promised to
cover the differences in costs of reliance petroleum and government.
Objectives
• Study of the reliance petroleum.
• Analyze the different reasons of failure of the company.

Opportunities

By 2050, the world vehicle traffic is expected to triple and in two decades the air traffic is
expected to double. With this expected increase in demand by 80% for petroleum and other
products, the company is entering into the global market to prove itself. The present plant
under completion in Jamnagar is located in a SEZ, the plant is 100% export oriented.

Creating additional refining capacity of about 110 million tonnes per annum during the near
future will require an investment of over US $ 22 billion. With such phenomenal growth in
this sector, there is ample scope and opportunity for the transfer of technologies required and
export of capital goods, etc., to India. The technologies required will be for upgrading the
bottom of the barrel and to meet the predominant demand for middle distillates and also to
improve the quality of petroleum products to make them environment-friendly and globally
competitive. Most of the new refineries will be located on the coasts while the major centers
of demand for the petroleum products are in the inland locations, particularly in North/North-
West regions. Therefore, there are opportunities for building inland refineries in the country.
The refineries in the country are also allowed forward integration in the fields of
petrochemicals, etc., for better value-addition, which opens up another vast area for
investment. India has a strong commitment to pursue an energy policy which will take due
account of the environmental considerations. Accordingly, the country is adopting more
environmentally benign measures with regard to usage and quality of fuels. Lead phasing-out
& benzene reduction in gasoline, sulphur reduction and cetane improvement of diesel are
amongst the prominent measures that are under implementation/consideration. Such quality
upgradation of fuels will call for adopting latest/state-of-the-art technology requiring huge
investments of the order of US$ 2500 million by way of providing reformulated gasoline
producing units, hydrocrackers, hydro - treaters, hydrodesulphurisers, etc.

Advantages in India:

India has large reserve of trained and highly skilled manpower at a relatively much lower cost
compared with advanced countries. Further, with a large population base and a currently very
low per capita consumption of petroleum products, India is amongst the fast emerging
markets. The country has also acquired enough experience in the installation and efficient
operation of petroleum refineries in the last 35 years. It is, therefore, considered that the
operating cost will be low and the value-addition in Indian refineries will be of a very high
order and that the setting up of refineries in India for the domestic market as well as for
exports would be economically attractive.

Growth Strategy

The major elements of RPL's growth strategy for the future will be maximizing production
from existing assets, enhancing global competitiveness, entering the business of retail
marketing of petroleum products in India, investing in pipeline distribution infrastructure and
accessing global markets. RPL is the first Indian company to offer an opportunity to all
shareholders for participating in an international offering of its shares. Capital cost per barrel
produced is USD 10,000. When compared to the capital cost of other companies which is at
USD 25,000 is very less and is promising for the investors to give better returns.
Threats:
• Cyclical industry
• Huge gestation period
• Growing market
• No control over raw material
• Global exposure

Shut Down of Retail Outlets

• Surging crude prices: High crude prices led to weakening of product cracks and
refining margins across regions. The industry also witnessed a sharp reduction in
refining runs and operating rates in addition to prolonged maintenance shutdowns and
permanent closures. It also witnessed the highest ever annual decline in oil demand.

• Absence of government subsidies: Government stops providing subsidies to the


private crude oil players. This leads to rise in the prices of oil of private players .On
the other hand government provide some discounts on its own oil prices. So it became
impossible for the private players to compete with government lower rates.

• Kept out of the ambit of the government-sponsored survival package: It has become
unviable to transport fuel from depots to retail outlets as the throughput from retail
outlets has almost become zero.

• Differential between private and public companies kept widening: It is because of


oil bonds for state-owned oil marketing firms and discounts from upstream oil
companies.

• RIL sells petrol and diesel at between Rs 6 and Rs 14 more than PSUs: At present,
RIL sells petrol and diesel at between Rs 6 and Rs 14 more than PSUs. This drove
away customers, forcing the pumps to go dry.
Breaking Up in 2006
Dhirubhai Ambani died in 2002, and the Ambani brothers took over as heads of the company.
In that year, the company increased its dominance of the country's petrochemicals sector
through its acquisition of main private-sector rival Indian Petrochemicals Corporation. Also
in 2002, Reliance launched a diversification effort, targeting the telecommunications sector,
especially the fast-growing cellular phone market. Reliance set up its own phone service,
Reliance Info communication, in that year. Yet the petroleum industry remained the
company's major growth focus. In 1999, the Indian government auctioned off 25 blocks for
exploration; bids were given in the form of royalty percentage offers. Reliance won 12 of the
blocks and promptly set in place its own team of exploration experts, backed by oilfield
services from Halliburton and Schlumberger. Reliance's investment quickly paid off with the
discovery of natural gas reserves estimated at some 14 trillion cubic feet, the largest natural
gas field discovered in India in decades, in the Krishna-Godavari Basin in the Bay of Bengal.
In 2004, the company struck again, locating a new gas field in the Bay of Bengal, off the
Orissa Coast.
Buoyed by its successful exploration efforts, Reliance unveiled an ambitious expansion
program for the second half of the 2000s. The company's plans included a $6 billion
extension of the Jamnagar site, doubling it in size and making it the world's largest ans
complex refinery by 2009. The company also announced that it intended to spend $10 billion
on further oil exploration efforts, targeting the international market. In this way, the company
hoped to increase its production tenfold by the end of the century. At the other end of the
petroleum market, the company launched a $1.5 billion expansion of its Reliance gas station
chain, with the goal of 6,000 stations. The company also expanded internationally, becoming
the world's leading manufacturer of polyester yarn with the acquisition of Germany's Trevira.
In addition, the company boosted its telecommunications wing, acquiring U.K.-based FLAG
Telecom, an operator of a 50,000-kilometer underwater fiber-optic cable network.
In the meantime, rising tensions between Mukesh and Anil Ambani came to a head in late
2005, when a long-simmering disagreement over company strategy broke out into an open
and highly publicized feud. In the end, a truce was brokered by the brothers' mother, who
proposed a breakup of Reliance Industries into two roughly equal components. Mukesh
Ambani remained as head of the company's petroleum, petrochemical, and textiles
operations, and Anil Ambani regrouped the company's telecommunications, energy, capital
finance, and other operations into a new company.
The breakup of the company took place in 2006. As a result, Reliance Industries emerged as a
focused and highly integrated petroleum and petrochemicals challenger to the global
heavyweights.
Retain Underperform on RPL
Several risks in RPL

• Further weakening of refining margins after RPL start-up. RPL’s capacity is


large enough to add 1% to global diesel and gasoline supply at full capacity

• There is a risk that minimum alternate tax (MAT) may be imposed on units in special
economic zones (SEZ) like RPL. If done it will mean RPL will have to pay tax at 11%
despite the 5-year tax holiday. This will mean downside of 7- 8% to RPL’s FY10-
FY12E EPS

• Problems in stabilizing refinery. Track record of the Reliance group in


implementing and commissioning projects is impeccable but problems can
never be ruled out
Abstraction of study

Purpose: To properly examine the company, its earlier success, reasons for downfall,
threats and opportunities and finally break up of company.

Research Methodology: As it is a Secondary research, it involves the summery, collection


and synthesis of existing research where the data is collected from various websites of news
papers, reliance industry and previous research reports. So, secondary research saves lots of
time and money.

Findings: This study specifies the reasons of the failure of a reliance petroleum and
describes the impact of government policies on the company’s policies. It finds out reasons
why reliance petroleum failed despite of the strong positions of reliance industries in India.

Limitations: Research only covers the some aspects of the study. Another limitation is the
shortage of time to consider all the relevant topics of the study.
CONCLUSION

Reliance petroleum opened its own retail outlets with a huge investments of Rs 5000 crore at
various places across India. But suddenly it announced to close down all of its retail outlets.
The main reason behind this was the lack of support from government. Government of India
controls the prices of petrol and diesel in India. So, all the petroleum retail outlets have to sell
their petroleum products at discounted prices. Government provides subsidies to the Public
sector oil companies but it refused to provide subsidies to the reliance petroleum ltd. Even the
biggest of the companies cannot sell their products at discounted rates because it is not
possible to sell at losses at long term. So reliance petroleum had to close down its stores.
Though it tried to open them again by trying to make a deal with IOC, BPCL and HPCL but
the effort was not successful.
References

• http://www.scribd.com/doc/23835206/Reliance-petroleum

• http://www.scribd.com/doc/6655871/Reliance

• http://www.ril.com/html/business/refining_marketing.html

• http://www.metrojoint.com/blog_more/Reliance_Industries_to_shut_down_petrol_pu
mps/pid/28666/userid/34445

• http://www.domainb.com/companies/companies_r/Reliance_Industries/20101004_cru
de_production.html

• http://economictimes.indiatimes.com/Reliance_Industries_to_shut_its_retail_petrol_p
umps/articleshow/2896626.cms

• http://www.labnol.org/india/corporate/reliance-industries-faces-further-front-end-
failure-to-close-its-petroleum-retail-chain/2683/

• http://www.labnol.org/india/corporate/subsidy-burden-prompts-reliance-to-sell-
pumps-to-govt-oil-companies/7987/

• http://economictimes.indiatimes.com/News-by-Industry/RIL-may-sell-out-fuel-
pumps-to-IOC/articleshow/4269287.cms
• http://india.retailmantra.com/2006/09/ril-to-bail-to-out-reliance-petrol.html

• http://www.team-bhp.com/forum/shifting-gears/37419-reliance-shut-petrol-
pumps.html

• http://projectsmonitor.com/MonthlyArchive.asp?Month=1&Year=2008