Mangalore Refinery and Petrochemicals Ltd. Refining Outlook & Risk Management by U.K. Basu, MD, MRPL

Refining Outlook and Risk Management - U.K. Basu2 Forecast on Energy Demand by type Source: EIA. DOE

Refining Outlook and Risk Management - U.K. Basu3 Petroleum Products: Supply & Demand Scenario Source : International Energy Outlook, EIA 2007

Refining Outlook and Risk Management - U.K. Basu4 Primary Energy-Forecast on India By 2030 India’s energy demand will increase by 204% of the current levels* With high real GDP growth rate of 8+%, the industrial demand for feedstock will grow considerably Growth in consumption driven by economic growth and the increasing transportation demand * Source: IEA statistics 2007 & EIA forecast

Refining Outlook and Risk Management - U.K. Basu5 Global Refining Global refining capacity ~87.9 million barrels per day in 2007, utilization rate ~85.9% USD 2,540 bn revenue generated by oil & gas sector in % revenues generated by refining & marketing sector Europe & US together accounted for ~55% of the refining and marketing revenues Source : BP

Refining Outlook and Risk Management - U.K. Basu6 Global Refinery capacity Source : BP Newer capacity additions are in Asia Pacific and Africa while other regions are almost stagnant Global capacity additions in : 600 MMTPA with surplus production of MMTPA (~50%) Asia’s share of global refining capacity to increase from 27% to 34% from 2006 to 2015

Refining Outlook and Risk Management - U.K. Basu7 Refining Capacity in India Source : MoP&NG India to contribute significantly to capacity additions – to add ~87 MMTAP between 2006 to 2012

Refining Outlook and Risk Management - U.K. Basu8 Petroleum Products: Supply & Demand in India India became a net exporter of products in At the end of XII plan capacity utilization is about 60% Source : MoP&NG

Refining Outlook and Risk Management - U.K. Basu9 Refinery Capacity Utilization Refinery IOC81.3%92.9%100.1% HPCL109.5%129.2% BPCL88.4%101.4%106.7% CPCL98.7%99.0%97.7% MRPL124.9%129.4%129.5% BRPL100.0%87.7%86.0% NRL71.1%83.3%85.7% RPL100.5%116.3%132.0% Essar0.0%16.8%63.1% Wtd. Avg - India 87.4%99.5%109.2% Source : MoP&NG

Refining Outlook and Risk Management - U.K. Basu10 Expansion Plans in India Total Capacity, MMTPA RefineryX plan (2007) XI plan (2012) XII plan (2017) IOC HPC BPC MRPL RPL3362 Essar Nagarjuna66 Total Source : MoP&NG As surplus products increases Coastal refineries will be forced to export more

Refining Outlook and Risk Management - U.K. Basu11 Present approach of Indian Refiners Indian refiners are adding complex units like HCU, DCU, High Severity FCC, Alkylation, Isomerization units in order to increase value addition and product grades All new projects typically have Nelson Complexity index ranging from The switch to cleaner fuels due to newer fuel specifications led to addition of huge hydrotreating capacities Many refiners are adding units to meet BS III/BS IV grade auto fuels from April The Auto Fuel Policy is driving investment in clean fuel technology. Current export of higher sulfur HSD to ME/SEA may undergo corresponding shift to low sulfur exports

Refining Outlook and Risk Management - U.K. Basu12 Environment Regulations Requires to meet the new emission standards as per Environment (Protection) Act Amendments Rules-08. Treated Effluent Norms ParameterConc, in mg/l pH6-8.5 Oil and grease5.0 BOD15 COD125 Suspended solids20 Phenols0.35 Sulphides0.5 CN Ammonia as N15 TKN40 FO/LSHS users shifting to NG to meet emission control norms, needing additional investment for disposal of above products. National Ambient Air quality Standards (NAAQS) –Industrial area ParameterStandard SO2120µg/m 3 NOx120µg/m 3 Suspended Particulate Matter (SPM) 500µg/m 3

Refining Outlook and Risk Management - U.K. Basu13 Global Refining Margins High refining margins in the last 3yrs due to –Tight balance of refining capacity & demand for refined products –High demand for light & middle distillates and limited availability of complex refining capacity Margins expected to remain high in the medium term (3-5years) with supply growth in Asia & Middle east being absorbed by demand growth in Asia and North America Source : BP

Refining Outlook and Risk Management - U.K. Basu14 Improve GRM - Strategies Move towards cheaper, heavy and sour crudes, and High TAN crudes Increase distillate yield Usage of LP tools for optimization, and GRM maximization,Low inventory Value added products like MX, Propylene, Petrochemicals Switch to Natural gas for Captive power generation, Process heating and Hydrogen production Energy, depreciation, spares, manpower and maintenance costs can be reduced by installing bigger capacities High capacity utilization. Depreciated old plants of smaller capacity can be converted/de-bottlenecked to reduce Energy, spares, manpower and maintenance costs Reduction of fuel and loss, proper steam and power management, constant drive towards energy conservation etc. Effective maintenance leading to reduction in down time, higher run length

Refining Outlook and Risk Management - U.K. Basu15 GRM of Indian Refineries Refinery HPCL-Mumbai HPCL-Vizag BPCL KRL IOC refineries CPCL BRPL MRPL RIL

Refining Outlook and Risk Management - U.K. Basu16 Expansion Options Bottoms upgrade –DCU with hydrotreating facilities –HCU once through with high severity FCC(petrochemical) –IGCC –RFCC with feed pretreatment Other products –Naphtha to petrochemicals –Kerosene fractions to LAB Product quality upgrade –Euro III & Euro IV –Coastal refineries to match variety of specs abroad

Refining Outlook and Risk Management - U.K. Basu17 Configuration of New Refineries Present Economic Size of a Refinery is ~15 MMTPA

Refining Outlook and Risk Management - U.K. Basu18 Downstream Integration

Refining Outlook and Risk Management - U.K. Basu19 Infrastructure back up Ports –Currently all 11 major ports are fully utilized. Further expansion plans have been taken up by some of the major ports –Medium ports also planning to extent the facilities for POL/Chemicals –SBMs being planned Pipelines –Critical in the sustainability of inland refineries –Total crude pipeline capacity: 25.2 MMTPA –Product pipeline capacity: MMTPA –Gas pipeline infrastructure being built by major players

Refining Outlook and Risk Management - U.K. Basu20 K-G Gas to Refineries Natural Gas reportedly available abundantly in Krishna-Godavari basin Many refineries, fertilizer and petrochemical and power plants are gearing up for the switchover to gas Use in Hydrogen manufacturing reduces the cost of production Higher yield of Hydrogen Freeing of Naphtha for Ethylene

Refining Outlook and Risk Management - U.K. Basu21 Foray into Petrochemicals In order to improve profitability diversification into petrochemicals become necessary Petrochemicals markets depends on demand of polymer which is strong and GDP dependent only Fuel prices are seasonal and show strongly regional and volatile trends beyond base margins Two major routes of Integration : Olefin from C3/C4/Light Naphtha, Aromatics from Heavy Naphtha As per CMAI study the growth of key petrochemicals in are as follows: –Ethylene : from 100 MMTPA to 177 MMTPA ( CAGR: 3.6%) –Propylene: from 64 MMTPA to 116 MMTPA ( CAGR: 3.8%) –Benzene : from 37 MMTPA to 57 MMTPA ( CAGR: 2.8%) –MX : CAGR : 10%

Refining Outlook and Risk Management - U.K. Basu22 Integrated Refinery & Petrochemicals Complex Olefins production –Light Naphtha cracking Ethylene & propylene to High Capex –Propane to Propylene Value addition to C3/C4 fractions High selectivity of process Hydrogen by-product Moderate capex –LDPE, HDPE, PP production integration Aromatics production –Heavy naphtha feed stock PX, PTA, Benzene Moderate Capex

Refining Outlook and Risk Management - U.K. Basu23 Advantages of Refinery Projects in India Domestic demand growth and trade parity pricing for domestic sales (high margins) Export potential No significant expansion in Europe and US due to stringent environmental regulations West cost refineries close to western markets High refining margins (eg RPL) will allow for competitive exports to North America Most Asian/ SEA countries are expected to have deficit of Petroleum products – export opportunity Integrated refining and petrochemical for value addition Tax exemptions to set up Export oriented units at SEZ.

Refining Outlook and Risk Management - U.K. Basu24 HR- Scenario Sustained availability of Knowledge workers Attrition of trained manpower from state run oil companies Huge demand in the E&P and refining side No. of quality institutes are being increased for imparting training/education – more IITs and NITs being set up by the Govt. Low industry awareness and attractiveness is still a concern- Finishing School concept being adapted Industry participation in supporting quality education needs further boost- more academic and industry tie-ups needed.

Refining Outlook and Risk Management - U.K. Basu25 Risk Management Five major types of risks –market risk (unexpected changes in interest rates, exchange rates, stock prices, or commodity prices) –credit/default risk –operational risk (equipment failure, major outage) –liquidity risk (inability to pay bills, inability to buy or sell commodities at quoted prices) –political risk (new regulations, specifications, restrictions) Oil and Gas industries are particularly susceptible to market risk—or more specifically, price risk—as a consequence of the extreme volatility of energy commodity prices

Refining Outlook and Risk Management - U.K. Basu26 Project Risks Crude oil supply constraints High cost of cement & steel Skilled Manpower shortage Too many projects chasing too few licensors, increasing the Engg cost EPC cost sky-rocketing due to over heated construction projects in the Industry Many projects are shelved due to cost escalation and resulting market dynamics

Refining Outlook and Risk Management - U.K. Basu27 Project Risks – Financing Perspective Risk profile of a large scale Oil & gas Project –Combination of high capital costs and low operating costs implies that financing costs are a very large proportion of the total –Long construction periods are most often combined with slow build up of revenue –Criticality of the project’s cash flow is the crucial element in the return to equity investors and in the security of the lenders (in the absence of public guarantees

Refining Outlook and Risk Management - U.K. Basu28 Risk Mitigation Crude price: –Hedging Domestic crude purchases and sale In Annual statement for the year RBI has permitted hedging of domestic crude purchases and sale of products to reduce the price risk. hedging on the basis of international prices based on physical underlying contracts linked to international prices. – Hedging of anticipated imports of crude oil Hedging allowed based on the basis of past performance up to 50% vol of actual imports during last year or 50% of average volume of imports during last 3 financial years whichever is higher

Refining Outlook and Risk Management - U.K. Basu29 Risk Mitigation Product Prices –Long term contracts to lock in margins over the market, reduces the volatility of margins –Niche products, and premium qualities –Export is particularly attractive to coastal refineries –Govt. to Govt. ( G2G) deals are favorable for PSU refineries ( e.g. MRPL’s supply contract with STC Mauritius)

Refining Outlook and Risk Management - U.K. Basu30 Hedging of refining margins to protect investments in new refinery –Project GRM based derivatives based on indexed crude and product prices for project financing. Reduce the uncertainties in the project returns Special contracts can be developed with the investment banks –A similar concept is being applied in utilities project based on ‘weather derivatives’ – such as wind derivatives, cooling day derivative etc. –Crack Spread Contracts, Crack spread options, Calendar Options- for stabilizing the revenue streams

Refining Outlook and Risk Management - U.K. Basu31 Summary To maintain high margins Indian Refiners are improving distillate yields Diversification into Aromatics and Olefin products become inevitable In 2010, excess product supply in India, by about 84 MMTPA, will have to be exported India has the potential to become a refining hub with matching infrastructure and HR environment Financial engineering is a key element in Project risk management

Refining Outlook and Risk Management - U.K. Basu32 THANK YOU