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Industry - Oil & Gas ; Opportunities


– L&T
~Nitin K. Banka
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Part I : The view from the outside

India – Statistics

GoI policies – NELP specific

E&P companies in India, scope & profitability


analysis

Punj Lloyd analysis


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Part II : Enhancing our capabilities


The OGSP Approach

Oil & Gas EPC Contracts

Modeling to enhance decision making

Business of rig building & providing exploration


services
Natural
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● Fourth level
1 BCM =
Gas
● Fifth level
0.90 MT
reserves:
ØOnshore

270
BCM
ØOffshore

Crude
785 Oil
reserves:
BCM
ØOnshore

357 MT
ØOffshore

368 MT
Ø India has
about 0.4% of
the world’s
proven
Production
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Fuel Unit 2003-04 2007-08


Crude Oil MT 33.37 34.117
Natural Gas BCM 31.962 32.274
Coal MT 361.25 430.85*
*2006-
Consumption 07

Fuel Unit 2003-04 2007-08

Crude Oil MT 121.84 156.1

Natural Gas BCM 30.906 34.328


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Demand in 2024-25

Oil 376.50 MT
Ø To remember: DEMAND bound to increase
till the petroleum
Gas products prices
142.715 BCMstay
subsidized in India
Ø IF GoI :

§ moves away from ad-hoc price revisions


movesfrom
Ø §Estimates to full cost
IBEF pricing
reports in end 2007
§ adopts targeted subsidy delivery mechanism
the demand increase may slow down
Ø Predictions as to how much of this demand would be met by

indigenous production (*i.e. : the demand –supply relative to


India) is ambiguous & different reports values do not match
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Our net import bill & the impact


2007-08
Total Imports 144.388 MT
Crude Oil imports 121.672 MT
Petroleum products imports 22.716 MT

Ø Petroleum products exports: 39.327 MT


Ø Net imports: 105.061 MT

Ø A HUGE bill: INR 241,539 Crores

Ø Our GDP: INR 4,693,602 Crores


Inadequate Price Increases…
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180%
300% Click to edit Master text styles increase
280% Second level
● Third level
260% 150%
● Fourth level increase
240%
● Fifth level
220%
200%
%

180%
160%
140% 23-30%
120% increase
100%
2004 2005 2006 2007 2008
Year
1% increase
Brent Crude Indian Crude basket Petrol
Diesel Kerosene LPG

Source:
IOCL
website
Inadequate and ad-hoc price revisions
Impact on Indian Economy
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High costs of inaction


Trebling of under recoveries from Rs 20146 crores to Rs 77123 crores in 3
years
Under recoveries of oil companies 51% of fiscal deficit

Government committed to reduce its gross fiscal deficit to 3 %


of GDP by 2009
Current GFD 4% of GDP (2007-08)

Total oil subsidies are already estimated as hovering around 2-


3% of GDP with oil prices at about 80$/bbl!
90-95% unaccounted for in budget - borne by oil companies as under-
recoveries

GFD adjusted with under-recoveries – 6% of GDP!!

Sources: Petroleum Planning and Analysis Cell and the Reserve bank of India
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q Current status of E&P in India

q GoI initiatives
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Second level
● Third level
Just over 60% of potential ● Fourth level
● Fifth level

in oil sector
has been explored so far..
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Second level
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Extensive ● Fourth level
● Fifth level

discoveries have
been made in the
recent years..
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Since 1993, 65 oil & gas


discoveries made
12
in India
Commercially established
ØOne can infer from this
about the quantum of
opportunities in the domestic
oil & gas EPC market 8 Ministry has approved
development plans

Ø L&T can start analyzing the 16 Appraised


approved development plans
Ø This will lead to a complete

domestic project market 11 Under commercial


vision evaluation

4 Development plans under


& scrutiny by DGH
~March’07

Ø Also lead to early vendor


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Second level
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● Fifth level

Source: IBEF report


New Exploration Licensing Policy:
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Salient features
Total exploration period shall: max. 7yrs. (4+3 OR 5+2)

Option to terminate the contract at the end of each of the two


exploration phases

•The development and production period: 20 yrs. ( extendable


upto 5 yrs or even more )

•Option to relinquish a minimum 25% of the original Contract


Area at the end of exploration Phase-I

•At the end of the 2nd commitment exploration phase, the


company shall relinquish all areas except those in which
hydrocarbons have been discovered
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The Government has in place a system of guarantees and/or penalties to
ensure compliance of the relinquishment provisions

Minimum Work Obligation: The companies shall be required to commit the


mandatory exploration work programme to be carried out as specified

Expenditure Obligation: No expenditure obligations would be prescribed.


However, a bank guarantee for 35% percentage if the expenditure related to
the agreed annual work programme would be required

Cost Recovery: The percentage of value of annual production of petroleum


expected to be allocated for recovery of costs should be indicated in the bid

Local Preference clause & technology transfer preference clause present


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Profit Petroleum: The sharing of profit petroleum at various tranches
shall be bid, based on a sliding scale tied to pre-tax multiples of
investment achieved and shall be specified in the contract
Valuation: The valuation of crude oil produced shall be based on the
international price of similar reference crude(s)

Domestic Supply: The contractor shall be required to sell 100% of the


company’s entitlement to crude oil and natural gas from the contract area
in the Domestic Market till India becomes self reliant.
Natural Gas: The contract will include separate provisions dealing
with commercial exploitation of associated and non-associated gas

Royalty: 12.5% (oil); 10% (gas) ; Deep water: 5% (7 yrs) & 10% later
Bidders are exempted from the payment of customs duty on all imports
for petroleum operations under the contract
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Tax holiday for first 7 yrs of production. As regards income tax,


provisions of Income-tax Act, 1961 shall apply later on (*34%
assumption)
Bonuses: There shall be no signature, discovery or production
bonus

Finalization of contract on the basis of model production sharing


contract (MPSC)
Option to amortize exploration and drilling expenditure over a
period of 10 years from first commercial production

Contribution to site restoration fund fully deductible in same year


for income tax
Liberal depreciation provisions, making companies eligible for
further tax adjustments
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NELP VI : Major winners

Deep water: (depths from 400 upto 2300


metres)
Ø ONGC : 12 with partners (mainly with
GSPC / HPCL / GAIL )
Ø RIL : 7 blocks (100%)
Ø SANTOS International : 2 blocks (100%)
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Shallow offshore (*Upto 400M Isobath) &


Onshore Blocks
12 ONGC, 6 OIL
Other winners include :
~ GSPC, Cairn, Petrogas, Geoglobal,
Prize petroleum – Jaypee, Adani –
Naftogaz, Essar etc.
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NELP VII: Major winners*


ONGC : 15 blocks in various partnerships
: 4 blocks entirely by itself
GSPC : 9 with ONGC (*2 deep water) & 1 with GAIL
BHP Billiton-GVK Infrastructure : 7 deep water blocks
HPCL-Mittal Energy: 1 block with ONGC
& 1 with OIL
Omkar Natural Resources, GeoGlobal Resources,
IOCL & Mercator Petroleum : 2 blocks each (100%)
Essar, RIL-BP (deep water) : 1 block each (*with
respective partners)

*Provisio
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American E&P companies: Not


interested ??

They want producing assets before they bid


for exploration licenses
They have projects all over the world, which
are competing projects, so any delay in
decision-making here can change their
priorities
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Windfall profits

When the price of oil goes up, there is a built-in


mechanism within the Production Sharing Contract
(PSC)
Takes care of the Government's interest in its share
of profit petroleum
The fiscal is in tranches of investment multiples. If
the prices are going up, the investment multiple
goes up.
It means that if the prices go up, the Government
earns the so-called windfall tax.
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Is that the drawback of the NELP


scheme?
Implies:
Ø Oil companies cannot earn huge profits, &
hence do not get that extra investment money
Ø At the time of signing the PSC, they know that
even if oil prices shoot up to $150/bbl, their pie
from profits may be as low as 10%

Ø Although present, the effect is not to be seen


since NELP VI / VII both got enough bids
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Tax holiday for gas ?

Mineral oil definition doesn't include gas


Bidders became apprehensive that gas will not
get a tax holiday, but holiday is actually present
(*after clarification)
In fact, it is more difficult to evacuate gas than oil
Besides, oil prices all over the world are defined,
gas prices are still demographically different
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Two main E&P players in


India
g SHARE OF EXPLORATION
ACREAGE : 53.92%

TOTAL AREA : 575,046.21 SQ. KMS.

SHARE OF EXPLORATION AGREAGE:


30.91%

TOTAL AREA: 329,684.00 SQ. KMS.

Other players : Oil India Limited, Cairn India, HPCL–MITTAL,


ESSAR OFFSHORE, BRITISH GAS, BG GROUP, SHELL etc
Reliance Industries Limited:
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Possible project tenders


Ø D4 block in KG Basin : The block MN-DWN-2003/1 appears to
be another large prospect on the basis of recent media reports and
the recent presentation by Niko. This 17,000 sq km, deep-water
block is located off the east coast in the Mahanadi basin. RIL has
85% stake and Niko has the balance 15%. According to Niko’s
annual report, the block contains play types similar to the natural
gas discoveries made in KG-D6 and NEC-25
Ø Cauvery basin block (where RIL had a large discovery recently)

KG-III-6 block (two oil finds in December 2005)


Ø GS-OSN-2000/1 (gas discovery in May 2007 – first in carbonate

reservoirs on west coast)


Ø Considering procurement of three deep-water rigs and one jack-

up rig. Another opportunity?


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E&P WILL REPLACE REFINING AS THE LARGEST EBIT CONTRIBUTOR FOR RIL

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RIL’s acreage ● Fourth level
● Fifth level
break-up 
Aker’s Dhirubhai – 1’:
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Contract study Aker + RIL


Oil production started: September 17th 2008
India’s first FPSO-vessel
MA(D6) field, KG basin. Dev. Area: 15 sq km
Oil & gas wells are in deep waters: 1200 m.
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Conversion of a tanker (owned by Conoco Philips) to an


FPSO. Estimated cost of refurbishment: US$300m
Time taken: 16 months
Vessel owner Aker Floating Production

Ø Oil production capacity: 60,000 bbl/day


Ø Oil storage: 1.3 million barrels
Ø Gas production capacity: 9 million scm/day

Leased to RIL for 10 years


Total cost: US $800M
10-year contract with Reliance: US $1.3 B
RIL has option to buy the FPSO at different stages during the
contract period
O&M separate contract with Aker Borgestad
AFP has purchased 2 more oil tankers for
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conversion to FPSOs
Considering buying a 3rd one
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(KG-D6), Bay of Bengal, India


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Second level
Largest Gas find in the ● Third level
world (2002) ● Fourth level

● Fifth level

The Reliance subsea field


layout.

Aker Kvaerner Subsea is


responsible for the complete
subsea production system
in a $400m EPC contract
D6 profitability analysis
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Oil recovery: 196mmbbl over 10 years (base case)


Published resource numbers as per Niko’s FY07 annual report are:
Best case original oil in place: 259mmbbl (121mmbbl recoverable)
High case original oil in place: 391mmbbl (255mmbbl recoverable)
Oil production
Initial rate of 25kbpd
Peak plateau rate of 60kbd achieved in 8 months
Plateau maintained forClick
eighttoyears
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Second level
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● Fourth level

● Fifth level
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Average well-head price: US$ 55 / bbl
Revenue cost recovery: max. 90%
Royalty rate: 5% for first 7 years, 10% for later years
Income tax: Tax holiday for first 7 years of commercial operations; 34% Income
tax after that
Operating costs: US$2.50 / bbl
Debt-equity: 70:30;cost of debt 8%;debt repayment: 8 yrs
Weighted average depreciation rate: 9%
DCF discount rate: 12% Click to edit Master text styles
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Net profit per barrel for first 7 years :
$55 / bbl received LESS
- $15.5 for recovering Capex
- $ 2.5 as operation costs
- $ 2.75 as royalty
- $ 0.00 as income tax
- $ 2.80 as cost of debt
- $ 0.12 as depreciation

Balance profit left : $ 31.33

Now even if investment multiple is over 2.5 % (*which it is not) :


i.e. 85 % of profit will go to the government.
We are left with $ 4.7 / bbl as final profit

After 7 years, I.T of 34 % would apply ; royalty would change to 10 %


& debt would have been re-payed (8th year) so no cost of debt applicable
Uncertainty: If company has to bear part of burden of subsidies, but there is
provision of fiscal stability in the contract
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Total gas recovery: 736.54 BCM /26 TCF (22 yrs.)


Rationale: Niko’s latest report:

Ø 2P reserves (18.8TCF) and best estimates of resources


(7.9TCF): 26.7TCF
Ø 3P reserves (27.2TCF) and high estimates of resources
(12.8TCF): 40TCF

Recovery estimates are just equal to disclosed 2P


reserves and resources, and 65% of disclosed 3P
reserves and resources
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Seller Price (US$/mmbtu) =
2.5 + (CP - 25)^0.15 + C
Ø CP: Cap of US $ 65 ; Floor of US $ 25
Ø C: Quoted by customers ; market discovered value of C has been taken at US$0.09/mmbtu
Ø Wellhead prcies based on this formula:

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Based on the above formula and long-term oil price of


US$55/bbl, the indicative wellhead price is US$4.38/mmbtu
The interested customer would bid for different volumes and
different prices. Approx total selling price: US $ 4.4/ mmbtu
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Ø Gas lifting cost: US$0.50/mmbtu


Ø Total revenue that can be expected

over 22
years : US$ 106.06b
Ø Cost of repaying debt: approx. US$

1.5b

34% income tax after 7 years : approx.


Ø

US$ 19b
Value points
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Even as explained that with IEA putting the price at $80 / bbl
(2009). Here, with lower oil prices the investment multiple also
reduces & hence the government gets lesser portion of the profits

The main orders were placed in a rising market, that also


indicates that capital expenditure was at par

Also, that oil produced under NELP is to be used to meet Indian


demand, offsetting the burden of oil imports. So no problem of
demand crisis
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ONGC’s total cost


ONGC’s total cost of producing oil :

Ø Inclusive of payment of royalty & all other taxes


: $33 / barrel
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BHP – Billiton : Profile & investment plans

BHP from Australia (BHP – Billiton HQ in the USA),


involved in E&P, development & marketing activities
all over the world

Is going strong on investments


Ø May continue being optimistic till oil falls to around
$35 / bbl
Ø Higher EBIT margins then others in the industry
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Geoglobal resources
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US publicly traded oil & gas company


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Involved in exploration activities in 57 ●
Fourth level
wells & carries a 2008-09 budget of ● Fifth level
$57.5 Million

Could definitely be a prospective client.


Makes good sense to keep track of the
company
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Santos International Operations

Australian company
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Market cap US$11 billion Second level
● Third level

● Fourth level
Involved in E&P activities ● Fifth level
world wide

Has entered India by


winning 2 blocks in NELP VI
(deep water blocks)

Although it also does


development work, could
be a prospective client
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Essar offshore

The Exploration and Production (E&P) business of the


company has participating interests in several
hydrocarbon blocks for exploration and production of
Oil & Gas.
This includes the Ratna and R-Series blocks on
Bombay High and an E&P block in Mehsana, Gujarat,
which has currently started commercial production.,
and two more E&P blocks in Assam, India
The overseas E&P assets include three onshore oil &
gas blocks in Madagascar-Africa, and one offshore
block each in Vietnam and Nigeria
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Second level
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● Fourth level

● Fifth level
GSPC : EBIT
indicates falling
profits as percentage
of revenue over a
period of 4 years
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Aban offshore

A major BSE listed oilfield exploration services provider in Asia. Owns 7


jack-ups, 2 drill ships & 1 semi submersible

Historic graph :
In 1 year : 90 % fall in share price compared to a
60 % fall in SENSEX
Indicative of the drastic fall in day rates of rig
contracts. One of the businesses to get affected first
by the volatility of crude prices is definitely that of providing
oil field services
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● Fifth level

Business model analysis


&
Oil & Gas projects specific
analysis
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Business model risk ?
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L&T: A very strong domestic player


Case Study: Punj Lloyd’s globally-oriented business model

Can a MORE global portfolio help to diversify & mitigate


risk?

Markets that have opened up recently include Mexico &


Vietnam.
Oil-rich Latin American countries like Venezuela also offer
good projects. With hectic oil and gas exploration
activities, the region is attractive. Another area of interest
to Punj Lloyd
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● Growing inorganically
2006: Acquisition of Singapore-based construction
company, Sembawang Engineers & Constructors (SEC)

SEC came with an order backlog of $1.9 billion


Deal valued at: $40 million (Rs 160 crore)

Opened up new markets such as China, UK and Iran


Deepened Punj Lloyd’s presence in South East Asia
PT Sempec (*a 100% subsidiary came along)
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PT Sempec, Indonesia
Ø Past experience
1,500 MT offshore oil & gas process deck and 1,000 MT 6-leg
jacket for Korea Development Company Poleng Project, Java Sea
1,200 MT offshore LPG refrigeration deck and 300 MT 4-leg
jacket and loading terminals, including subsea pipelines for
PetroChina Indonesia Betara Development Project, Sumatra
Offshore
2 other major onshore projects

ü This acquisition catapulted Punj Lloyd into the exclusive


club of EPC providers for marine oil & gas production
facilities : Won the precious US$ 290 valued Heera
redevelopment project. They are also executing an OIL
onshore project (*development of a gas field)
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Outsourcing of fabrication
The Wellhead Platforms form part of the Heera
Redevelopment Project

Kencana Petroleum's subsidiary, is doing the


fabrication of the 4 wellhead platforms

The contract includes fabrication and related services


for the wellhead platforms comprising decks, jackets,
piles and conductors.
PT Sempec : Financials
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Total assets : US$ 28,552,563


Total income : US$ 46,984,514
Profit before taxation : US$ 588,472
Profit after taxation : US$ 235,660

Inferences
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Pipavav Shipyard

Investment: Rs 350 crore

23% stake

Assures a firm footing in the offshore segment


with access to fabrication facilities for platforms
and rigs
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Punj Lloyd: Fabrication yard and equipment
maintenance facility – in South Kalimantan, Indonesia

Area : 45,000 square meters


Accessible by both river and road, the nearest airport 140
km.
The fabrication shop : Spread over 1,200 square meters
Capacity to pre-fabricate piping amounting to 48,000 inch
diameter
Storage area for stacking pipes and fittings for pre-
fabrication is 4,500sq.m
Mainly for the pipeline projects, nothing for platforms
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In the offshore pipeline projects they are one of the


leaders in India
J.V. with Saudi Prince in 2006 helped to bag several
EPC contracts for on-shore and offshore pipeline
projects
Numerous pipeline projects executed successfully
Plans to venture into markets such as Libya and
Yemen, where Western players tread more
cautiously. Stats reveal that these regions offer
better returns
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Simon Carves, a 100% subsidiary of SEC


based out of UK

Access to larger and more complex projects in the


refinery and petrochemical segments
Exposing the group to new sectors such as
pharmaceuticals, biotech, and nuclear power
plants
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June’2008 : Acquired a 74% stake in UK-based


Technodyne International, with specialisation in
large-scale cryogenic and high-pressure tanks.

Plans to get into commercial and naval shipbuilding


and repairs.

Pact with Singapore-based ST Kinetics for


manufacture of defence equipment in the country
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Essar Offshore Subsea

NO prior experience in offshore platforms


NO significant JVs / acquisitions for this
purpose
Very good experience in pipelines since 1983
Clientele includes ONGC & QP

Other marine experience in : JETTIES &


BREAKWATERS AND IN DREDGING & UNDERWATER
ROCK BLASTING
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Afcons Infrastructure

NO prior experience in offshore platforms


NO significant JVs / acquisitions for this purpose
Vast marine expereicne includes :
Jetties, submarine pipelines, corrorsion protection of
pilkes,
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PART II : ENHANCING OUR


CAPABILITIES

Ø THE OGSP APPROACH

Ø OIL & GAS EPC CONTRACTS

Ø MODELING TO ENHANCE DECISION MAKING

ØBUSINESS OF RIG BUILDING & PROVIDING


EXPLORATION SERVICES
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OGSP:
Increased Challenges, Increased Opportunities

Adopt a more global 50


project management 45
framework: 40 3 large
Oil &
Centralization drives Percentage 35
of projects Gas EPC
significant increases in exceeding
30 compani
either 25 es
project performance budget or Mega
20by
schedule
10% Projects
15
10
5
0
20% 35% 60% 80%
Percentage of functions
managed centrally
Source: Booz
Allen Hamilton
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Projects managed as a portfolio v/s individual


events

Risk management : Knowledge, supply-chain,


human resources
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Standardize design & target technological innovation

Revisit the nature of the relationship between the owner


& the contractor

A honeycomb model, of many small manufacturing


plants, may work better than a hub-and-spoke model
powered by one large factory
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Mitigating DLD risks via


oil & gas
EPC contracts
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Rationale for imposing delay liquidated


damages
Must be a genuine pre-estimate of the loss or damage
that the project company will suffer if the facility is
not completed by the target completion date
The genuine pre-estimate is determined by reference
to the time the contract was entered into
The EPC Contract must provide for the contractor to
be granted an extension of time when it is delayed by
the acts or omissions of the project company
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Access for the contractor to the feed stock and to a


receiving vessel to allow timely completion of
construction, commissioning and testing

Feed stock, product and by-product (such as


greenhouse emissions) specification requirements

Force majeure caused delays


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Dispute resolution provisions in cases of delay

Having a staged dispute resolution process that provides


for internal discussions and meetings aimed at resolving
the dispute prior to commencing action (either litigation or
arbitration)

Must make provision for the parties to seek urgent


interlocutory relief

If the provision does not include these exceptions it risks


being unenforceable
CFaR : Cash Flow at Risk
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Concept of Value at Risk (*VaR)


v/s
Concept of Cash Flow at Risk (*CFaR)

Can we make / use models that would enable us to take


decisions more rationally ?

It is not the intention to profess that subjectivity should be


completely taken out, but rather that subjective views
devoid of rational statistical analysis should not be
employed in making market forecasting decisions
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L&T requires commodities like copper, steel as raw materials


during the construction phase of platforms, jackets etc.

L&T is also to build rigs, will require loads of raw material


there too

An effective risk management policy requires an objective and


statistically sound methodology. Cash flow at risk is a tool that
can provide this methodology

It answers the most pressing question facing the company, i.e.


"what is the consensus opinion on the outcome of commodity
prices in future?"
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Basic analysis

Suppose, the objective of the hedge program is to keep the steel


costs margin (the steel cost as a percentage of the revenue) between
48% - 49%
If a future contract of carbon steel is : Rs. 40000 / ton
Now a CfaR model will be able to show that “the company should
hedge say 75% to 85% of steel required for the steel costs margin
to be maintained

Companies like Sungard specialize in providing such risk models


to non-financial companies
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Can be used by the procurement department / treasury during
budgeting purposes

Will provide confidence to the company's shareholders

It will offer assurance to the company's debtors that the


company has a sound process that will protect their
investments

It will reduce potential conflicts among management and give


them confidence in making these types of hedging decisions
May also be helpful in estimating future oil prices
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Risk of liquidity during OGSP projects:


• Modeling to ensure adequate liquidity during project

•Will assist an EPC contractor in forecasting cash flow in the


early stage of pre-tendering / planning phase & then the actual
incurred cost on the jobsite level, so that a more realistic cash
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out model can be built Second level
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● Fifth level
To make it simpler to field
engineers who are generally not
familiar with certain intricate
financial knowledge
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Opportunities v/s Risks analysis


in :
Ø Rig / FPSO Building
Ø Oilfield exploration services
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Conventional reserves increasingly beyond


the reach of private enterprises
Resource nationalism is a growing phenomenon in most countries
having substantial conventional reserves
This has led to limited access to conventional reserves for private
international oil companies
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Second level
National oil companies ●now
Thirdcontrol
level almost 2/3rd of the world’s
known conventional reserves
● Fourth level

However, the more efficient, private,


● Fifth levelinternational oil companies
have full access to only about 19% of the world’s reserves
compared to 85% in 1960

This lack of access to efficient operators means slower and less


efficient development of conventional reserves
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Deep-water: the emerging frontier for new


hydrocarbon resources
To increase oil & gas supplies, the hitherto untapped
40 DEEP WATER BLOCKS (*NELP VI & VII) 
deep-water is emerging
8 ECONOMICALLY as the new frontier
VIABLE DISCOVERIES
Aggregate world
(*ONLY 20% deep-water
SUCCESS resources are estimated at
RATE)
300b bbl – nearly one-fourth of the world’s current oil
reserves Click to edit Master text styles
Second level
Only 26% of deep-water resources have been
Third level

discovered and just 2.5%
Fourthare
● levelexploited
Fifthbasins
Currently, 13 deep-water ●level are being developed
world over, and deep-water capex is set to treble from
US$15b in 2002 to US$40b in 2010.
Of the total sedimentary area of 3.14m sq km, 1.35m sq
km (43%) is in deep-waters. ( INDIA )
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Rig / FPSO building

“Since exploration moves into deeper & more difficult


areas, providing advanced technology rigs to it’s clients,
should be L&T’s chief concern.”

The future areas of demand :


Ø Deep-water drilling rigs :

{ semi-submersibles & drill ships }

Ø FPSOs’

Ø Refurbishment of jack-up rigs


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Ø Low risk business when it comes Capex.


The main cost is that of acquiring technology
& buying land near a shore for the yard

Ø Approx. 70% of total US$ 360 – 420


Million cost is dependent on commodity
(*steel) prices either directly or indirectly
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Manufacturing of rigs
L&T (in Oman), plans to build :

Type of rig Estimated Cost


jack-up rigs $250 Million

semi-submersibles $400 Million

FPSOs $450 Million (*only topside)

~ As a first step, L&T has bagged an order from a UK-


company to refurbish a jack-up rig for $33.3 million. There is
a huge demand for refurbishment of jack up rigs because
the existing ones are at least 15 years old ~
~ Hull for FPSO would cost around $200 Million & would be
procured from outside ~
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• While oil prices were going down, in end August, UAE-
based Maritime Industrial Services Co. Ltd. Inc. reported
getting 3 jack-up rig refurbishment projects. Lamprell was
awarded a jack-up rig refurbishment project in November
• A refurbishment project generally takes about 6 months

to complete
• This increase is indicative of the growth in the rig

refurbishment market, with the majority of rigs today in


the region 25-30 years old
• Many clients also prefer a new-build, even at a higher

price, since the drilling technology and capability is


greatly enhanced over the older rigs
Ø
MFY Oman: Capability is to produce about 50,000
CNR

tons/ year of finished products

Although getting refurbishment projects may be


easier than new build ones, we must focus more on the
build new semi-submersible & FPSO market since
that is more profitable & a lot of value addition is
achieved for the long term

This will also help L&T to develop related deep –


water technologies & also aid in pre-qualifying for
future deep – water projects
Case study: ONGC
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Lack of deepwater rigs has hit ONGC’s drilling plans

No deep-sea drilling rig is available anywhere in the


world for hire before 2010. The lead time to build new
ones is 3 years

Envisaging an investment of over $5 billion to start


production from deepwater blocks in Krishna Godavari
basin by 2013

Earlier plans were to start production in 2012


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Study of companies & their


strategies would be beneficial

Hyundai Heavy Industries

Le Tourneau Technologies

Samsung Heavy Industries


Steel prices / sector
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March-April 2008 : Price of Long Products up by 40%


Price of Flat Products up by 25%
Measures taken: Withdrawal of import duty on all input materials
‘NIL’ CVED on TMT bars and structurals
Withdrawal of DEPB benefits on steel
Imposition of export duty on certain category of steel items
Domestic market price almost stable. 60-80% rise: International market
July-August 2008: International minus domestic prices ~ Rs.9,000 / ton
September 2008: International financial crisis: Scenario reversal
Sudden demand fall: Both markets
October 2008: International steel prices fall by ~ 40 – 50 %

October – November 2008: Export duty on almost all steel items withdrawn
DEPB benefits on steel has been reintroduced
5% import duty on steel introduced
Current domestic prices: Rs.40,000 – Rs.42,000 per ton for HR Coil
Rs.38,000 – Rs.39,000 per ton for TMT bars
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Landed price v/s imported price & even then there is a huge gap between
the two
Reports (*28th Nov.):
China steel sector
China offering steel at US$440 per ton
Domestic prices in India are ruling at almost US$700. So, the latest duty
would push import cost by just US$22 per ton
Important to plot using past data:
Ø Vendors rates v/s trends in steel prices*
Ø Vendor may be of another country & could be
affected differently
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The OGSP heads should maintain a good balance


between the sub-contractors / vendors in India &
abroad

If quality of Chinese steel finished products up to the


mark, some percent of requirement could be sourced
from them

Forward contract when economy is having a positive


outlook
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Oilfield exploration services

Very high Capex risk business. Recovery period analysis:


Jack – up rig : considering an average base day rate : US$
100,000
Investment to be made : US$ 250M
Lifetime w/o any sort of refurbishment : 23 yrsDebt : equity ratio
 70 : 30
Cost of debt : 6 %.Total debt : US$ 175M. Repayment period:
10yrs.
10 yrs. revenue : US$ 365 M
Yearly debt repayed : 17.5 M ( straight line method )
Cost of debt (average over 10yrs.) : approx. US$ 60 M
Maintenance costs : 4 % of capex / yr. : US$ 10 M / yr.
Hence, net profits excluding recovery of equity : US$ 30 M
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Cont’d
For the next 12 to 13 yrs. Annual profits of about US$ 26 M
can be expected
This calculation keeps day rate assumption at US $ 100,000
for a jack-up rig. But demand for jack-ups may decrease when
most of the shallow regions have been explored
For semi-submersibles & other deep water rigs, this is not a
drawback.
After say 10yrs there may be need to upgrade the rig due to
advances in technology, but then even the day rates would
increase
Also, rig usage is assumed to be 100%, which is not the case.
Ideally, it would be 80 – 85 % a medium demand market
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What is our competitor are doing ?


Punj Lloyd
Ø Going to acquire 4 onshore drilling rigs
Ø In the process of assembling a robust technical team for operating the same
Ø Delivery within 24 months
Ø Total cost: $85 Million

Other drawbacks could be :


Rapid advance in Coil Tubing Drilling technique
Market demand changes volatility
Ø Important to enter into contracts at the right time
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Falling oil prices.. Cheaper


exploration equipment ?
International players are seeing this as an
upside in these tough times
E&Y: 5% to15% correction in rig contracts

Indian exploration companies are not


rejoicing :
Ø ONGC’s rig contracts are set for renewal only
in 2009–10 as per their tender
Ø Reliance and Essar : Contracts are not
coming up for renewal in the near future
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One major risk: The market, i.e. past to present :


cyclical nature of the O&G (*especially rigs)
business

Now the business proposition will be very profitable if it


is intended for a long term (*more than 20 years)

So profits in such a business are generally calculated in a


15 to 20 year aggregate time frame. We should study
different analyses / theories regarding peak oil theories,
cyclical nature of O&G business etc.

Using these & some modeling as to when would be the


peak & trough in business a lot of strategic decisions can
be taken
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Other areas

R&D in coal bed methane EPC research or form a


JV
L&T Sapura – Since this is the first time L&T will
get into service providing business, we can use this to
enhance our understanding of the offshore services
business
SPAR platforms too have a good market. Analysis of
quantum of opportunity & profits compared to total
investments would prove beneficial
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Private equity in clean technology

In the US itself US $1 billion investment


in 2008
2 clean technology IPO's launched
successfully in this crisis
VC's not funding ventures other than
cleantech very easily
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Thank You’