Oil & Gas Analysis

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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 Gas reserves: ØOnshore 270 BCM ØOffshore Crude 785 Oil reserves: BCM ØOnshore 357 MT ØOffshore 368 MT

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India has about 0.4% of the world’s proven Ø

1 BCM = 0.90 MT

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

430.85*

MT

361.25

*200607

Consumption Fuel

Unit

2003-04 2007-08

Crude Oil

MT

121.84

Natural Gas BCM 30.906

156.1 34.328

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Demand in 2024-25

Oil

376.50 MT

To remember: DEMAND bound to increase till the petroleum products prices stay Gas 142.715 BCM subsidized in India Ø IF GoI : Ø

moves away from ad-hoc price revisions Ø §Estimates movesfrom to full cost pricing IBEF 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

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 Ø

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Inadequate Price Increases… Click to edit Master text styles Second level ● Third level ● Fourth level ● Fifth level

300% 280% 260% 240%

%

220%

180% increase 150% increase

200% 180% 160% 140%

23-30% increase

120% 100% 2004 Brent Crude Diesel

Source: IOCL website

2005

2006 2007 Year Indian Crude basket Petrol Kerosene LPG

2008

Inadequate and ad-hoc price revisions

1% increase

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Impact on Indian Economy 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 23% of GDP with oil prices at about 80$/bbl! 90-95% unaccounted for in budget - borne by oil companies as underrecoveries

GFD adjusted with under-recoveries – 6% of GDP!! Sources: Petroleum Planning and Analysis Cell and the Reserve bank of India

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Current status of E&P in India

q

GoI initiatives

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Just over 60% of potential in oil sector has been explored so far..

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Extensive discoveries have been made in the recent years..

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Since 1993, 65 oil & gas discoveries made in India 12 Commercially established

One can infer from this about the quantum of opportunities in the domestic oil & gas EPC market Ø

L&T can start analyzing the approved development plans Ø This will lead to a complete domestic project market vision Ø

&

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Ministry has approved development plans

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Appraised

11

Under commercial evaluation

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Development plans under scrutiny by DGH ~March’07

Ø

Also lead to early vendor

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Source: IBEF report

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New Exploration Licensing Policy: 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

Ø

Ø

Oil companies cannot earn huge profits, & hence do not get that extra investment money 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% 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

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Reliance Industries Limited: Possible project tenders

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 jackup rig. Another opportunity? Ø

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

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RIL’s acreage break-up 

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Aker’s Dhirubhai – 1’: 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 conversion to FPSOs CNR

Considering buying a 3rd one

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(KG-D6), Bay of Bengal, India Largest Gas find in the world (2002) The Reliance subsea field layout. Aker Kvaerner Subsea is responsible for the complete subsea production system in a $400m EPC contract

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D6 profitability analysis

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 edit Master text styles Second level ● Third level ● 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%

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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): Ø

26.7TCF

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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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:

Click to edit Master text styles Second level ● Third level ● Fourth level ● Fifth level 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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Click to edit Master text styles Second level ● Third level ● Fourth level ● Fifth level 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 Ø

34% income tax after 7 years : approx. US$ 19b Ø

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Value points

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

Ø

May continue being optimistic till oil falls to around $35 / bbl Higher EBIT margins then others in the industry

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Geoglobal resources US publicly traded oil & gas company

Click to edit Master text style Second level ● Third level 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 Market cap US$11 billion Involved in E&P activities 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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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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Business model analysis & Oil & Gas projects specific analysis

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Business model risk ?

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

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 Ø

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.

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PT Sempec : Financials 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 prefabrication 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

BUSINESS OF RIG BUILDING & PROVIDING EXPLORATION SERVICES Ø

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OGSP: Increased Challenges, Increased Opportunities Adopt a more global 50 project management 45 framework: 40 35 Centralization drives Percentage of projects 30 significant increases in exceeding either 25 project performance budget or

3 large Oil & Gas EPC compani es Mega Projects

20by schedule 10% 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

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CFaR : Cash Flow at Risk

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 Click to edit Master text styles out model can be built Second level •

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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 : Rig / FPSO Building Ø Oilfield exploration services Ø

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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 Click to edit Master text styles Second level National oil companies ●now control Third level almost 2/3rd of the world’s known conventional reserves ● Fourth level ● Fifth However, the more efficient, private, 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 as the new frontier 8 ECONOMICALLY VIABLE DISCOVERIES Aggregate world deep-water resources are estimated at (*ONLY 20% SUCCESS 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 ●

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Fifthbasins level are being developed Currently, 13 deep-water 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

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Low risk business when it comes Capex. The main cost is that of acquiring technology & buying land near a shore for the yard 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 UKcompany 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, UAEbased 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 tons/ year of finished products CNR

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

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Case study: ONGC 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

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Steel prices / sector

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

CNR

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

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In the process of assembling a robust technical team for operating the same

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Delivery within 24 months

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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

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ONGC’s rig contracts are set for renewal only in 2009–10 as per their tender 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

CNR

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’