Dear Colleague,
I would like to extend my greetings and best wishes to you for a very Happy and Prosperous New Year 2012. It is always with a sense of optimism that we welcome the New Year. It is the time when we look back at the year gone by with a sense of achievement and look forward with hope for the year ahead. I think the New Year is a good time to introspect and set the course for the year. The year 2011 too had a hand in shaping our lives – at work as well as at home – and our thoughts and aspirations in many ways. And all of us are richer by the experience.
The year 2011 saw the global economy slowing down in the wake of the euro-zone crisis. However, the robust domestic demand sustained India’s growth, albeit at a scaled down rate. The depreciating rupee, high crude oil prices and slower growth of exports caused by demand deceleration in the developed world have impacted the country’s trade deficit to rise to a very high level which will continue to pose challenges to the management of the economy. All this has had an adverse impact on our finances, as the reimbursement from the Govt., on account of under-recoveries in the sale of sensitive petroleum products, gets delayed causing our borrowings and interest payments to rise thus impairing our profitability.
While the above is a matter of serious concern we have to manage it effectively articulating with the Government and other stake holders. What should worry us more is not this externality but the internal value eroders that have to be checked and eliminated. This is a continuous exercise and it is only our agility and passion that can generate value. The more we show it, the more value we can create. If we look back at the year 2011 we have made quite a beginning in implementing some significant initiatives which will have a long-term impact on our profitability and competitive strength. I must complement all my colleagues who have displayed this passion in the workplace.
In this message I have tried to cover a few aspects of our performance during the year 2011, which coincides with close to one year of my being the Chairman of the company and also that of most of other colleagues on the Board. This report card is a team effort of the IndianOil family and endeavours to capture the strategic direction of the company. I have deliberately chosen the major issues that have the potential to impact us as a company over the medium and long-term.
1. In the area of refining, we have identified building of heavy crude oil processing capability as the next significant value generator. I am very happy to share with you that Director (Refineries) had set up a task force to work on this initiative. The work done by the task force has revealed that in the next 2-3 years, we should be able to build heavy crude oil processing capability equal to 30% of our total refining capacity, which is an achievement. However, this capability will be limited to processing heavy oils in the range of 26-28 deg API. What will have longer term beneficial impact is the ability to process 18-21 deg API crudes and those with high TAN. This is a challenge we have to face and overcome. This may also require significant investments but would be necessary to maintain our competitive strength. I am sure the Refineries team that will work on this, shall manage the challenge and show solutions.
2. The second issue is while we may build capability to process heavy crudes, do we have the ability to source the crudes cost effectively. Our crude sourcing team is engaged in expanding our crude oil basket by targeting heavier and cost-effective crudes. This process will have to go hand in hand with the initiatives of the Refineries team. As for expanding the basket five new crude grades have been added in the basket during the year. But the Team shall have to proactively engage to meet the challenge of sourcing heavier and cost-effective crudes while at the same time constantly expanding the crude basket.
3. One of the other initiatives is in the area of Supply Chain and logistics with a view to harness the potential savings through better management. Incidentally, the EC is presently considering a proposal whether to engage external Consultants as catalysts to help us improve our profit margins. For this certain advisory firms were shortlisted. Before making presentations to the Executive Committee, these firms interacted with a cross team of our executives. Based on the interaction and their other experiences, it was indicated to the EC that Supply Chain and Logistics management alone can deliver additional value of about USD1 per barrel. The details will have to be seen but suffice to say that the potential is huge. I am happy to share that the cross teams of in-house executives are focused on this initiative in-house and are working holistically to generate significant value in course of time.
As for the optimisation, a word of caution would be relevant on the sudden shutdowns and equipment failures which cause a serious blow to efforts on supply chain management and inventory levels. The M & I teams will have to measure up to higher standards to prevent this. Inventory management is another area of improvement under this initiative. I am happy to share that certain proactive measures resulted in reduction of crude oil inventory to 5.4 MMT. This is a new benchmark which the Refineries and optimization team will have to constantly adhere to. Stabilisation of SBM operations at Paradip that has been achieved during the year will also go a long way in saving on our logistics costs.
4. On the marketing side the results have been mixed. While we have lost market share in certain areas, certain initiatives launched by the marketing team during the year will help improve our competitive position in a sustained manner. For instance, automation of retail outlets has been speeded up with close to 2000 outlets already automated and another 800 outlets proposed to be automated by the end of FY 2011-12. More importantly, we have preponed our target of automating all outlets selling above 100 Kl per month to 2014-15. Ultimately all outlets will be automated with better technology. This action plan is separately being worked out. For achieving hundred percent automation, the marketing team has to put concerted efforts. This will require coming out of the Business-as-usual approach to a ‘Can Do, Will Do’ approach. I am sure the Engineering and Retail teams shall live up to this challenge.
Kisan Seva Kendras and Rajiv Gandhi Gramin LPG Yojana(RGGLY) were the two initiatives taken in the past. We have decided to further expand these initiatives. 800 KSKs, 3,000 RGGLY distributorships and 200 Gramin SERVO Stockists are expected to be commissioned by close of FY 2011-12. We have also planned to focus not only on rural areas but also upcoming towns, new urban growth centres and highways. They shall be an important focus of our action plan. I am happy to share that the efforts of the newly formed Highways group in the Marketing Division are likely to bear fruits in certain key segments shortly. Overtime, we expect the team to successfully cover other growth centres.
Another area with a high potential for saving costs is laying of a network of LPG pipelines. The relevant teams are working on this initiative which in future will generate significant value to the Corporate. The grid will be set up to feed high consumption urban areas. Nine new pipelines (5300 Kms length) handling 9.1 MMTPA of LPG are planned to cater to the needs of 63 bottling plants with an annual savings of about Rs. 750 crore. With this, the present pipeline capacity will increase to 11.6 MMTPA i.e. an increase of 350 percent with added safety benefits in bulk LPG transportation.
5. Petrochemicals operations have shown an improving trend in the recent months and once the shutdown is taken in early 2012, the operations should stabilize on a sustained basis. The challenge, however, is on producing cost-effectively. The Petchem marketing team is making their best efforts but on the whole is still grappling with the market dynamics. This continues to be a challenging area and we need to perhaps introduce some experience into the team and develop market intelligence and forecasting capabilities. Agreeably, these initiatives are yet to bring the results and we are allowing some more time to ourselves. Ultimately, the teams will have to overcome these challenges and show improved performance. In the mean time, a virtual Board kind of structure for the Petchem Business is being considered which may facilitate better cohesion and dynamism.
6. Feed for Ennore LNG receiving terminal is in progress. Efforts in sourcing LNG - which is the key to success are however, yet to bear results. I do hope that the gas team will rise to overcome these challenges. In the upstream business, our strategy continues to work with the upstream majors and build capability. Some initiatives are in progress but the environment is quite volatile therefore an optimal trade–off for the risk-reward will decide the course.
7. Human Resource is our biggest asset and we need to continuously work on aligning the business goals of ours with the individual goals of our employees. Last year, some initiatives had been undertaken towards this direction. To harness the expertise, experience and efficiencies available across the Divisions in different functional areas, we embarked on an organizational restructuring exercise. We had also undertaken an enterprise manpower study to develop a standard manpower dash-board for different operational units and administrative offices to optimize manpower. Succession management initiative was undertaken to review our leadership pipelines in the coming days. A revised Career Path Model, Transfer Policy and Corporate Promotion Policy are also likely to be finalized soon. In 2012, we have already planned the complete overhaul of our foreign training policy, which is aimed at inculcating a global mindset amongst our executives.
8. The R&D team has entered into a Memorandum of Agreement with the Department of Biotechnology (DBT), Government of India to set up a Centre for Advanced Research on Bio-energy. Breakthroughs are needed to replace oil with plant based fuels and hope lies on biotechnological interventions for the next generation of Biofuels. Creation of this centre is expected to accelerate our efforts in this crucial area.
Given that the above initiatives are minimum necessary imperatives for retaining IndianOil’s lead position in the industry in future as well, we shall have to proactively work together to realize them. This will happen only when all of us work with “Passion and mission” to generate value for each cent spent. Together, we stand committed to the IndianOil spirit that made us the industry leader in the past and shall guide us in the future.
I look forward to your response and feedback on the issues that I have addressed in this message on my email feedback2chairman@iocl.co.in.
My wife, Meera, joins me in wishing you all a year of health, happiness, peace and prosperity with your near and dear ones in 2012.
RS Butola
Chairman