Ladies and Gentlemen:
On behalf of your Company and my colleagues on the dais, I wish you all a very good morning and extend a warm welcome to each one of you to the 29th Annual General Meeting of your Company.
We have tried to ensure that the Company’s Annual Report should reach you well before the meeting. I trust all of you have received them. Therefore, with your permission, I take the Annual Report as read.
Financial Year 2012-13 has been a dismal year. At HOEC, we toiled during the year to implement production improvement programs comprising of work-over in existing wells and drilling multi-lateral well ‘Surya’ in PY-1, which had been conceived based on recommendation by the domain experts. Programs got executed safely, within time and under budget. Yet much to our dismay, the production yields from these programs have remained elusive during the year under review. A natural question which arises is why? Is it the unconventional granitic reservoir behavior marked by accelerated depletion or early water breakthrough on account of intermittent evacuation pattern of gas which impeded the yields? Honestly, the answer is not simple. It is the complex interplay of all the aforementioned elements of geology and physics, chemistry and consumption volatility, which seems to have contributed to lower than expected performance of PY-1.
Post the drilling of ‘Surya’ Well, we undertook the exercise for an independent assessment of reserves at the beginning of 2013. As per the independent reserves report, we have revised the PY-1 Total Proved Reserves, comprising of Developed and Undeveloped category, by nearly 35% of the original approved estimates, from 185 bcf to 120 bcf. This material event led us to recognize impairment loss of INR 5,720 Million as an exceptional item for the Financial Year 2012-13, consistent with the Accounting Standards.
Having discussed the background and reasoning pertaining to the exceptional item - recognition of the impairment loss relating to PY-1 in the Financial Statement - let me briefly take you through the financial results of the Company for the year 2012-13.
Your Company had a total income of INR 1,204 Million, around 29% less than the previous year, primarily on account of loss of production due to shutdown in PY-1 Field for 135 days due to end-user limitations. Behavior of the PY-1 reservoir characterized by water encroachment and accelerated depletion constrained us from any potential increase in the daily production rate, which otherwise could have partially compensated the revenue loss arising due to 135 days of production shutdown.
Though the total income registered a decline of 29% over the previous year, the decline in pre-tax cash from operations during the year was limited to 19% due to cost optimization initiatives including reduction of operating and corporate expenses. Thus the Company generated during the year pre-tax cash from operations, before working capital changes, of INR 698 Million.
During the year under review, depreciation and depletion charges were around INR 875 Million, an increase of INR 320 Million over the previous year. Despite the reduction in production, the depletion charge has registered an increase solely due to reduction in PY-1 Proved Reserves consequent to the reserves certification report.
Accordingly, on account of recognition of impairment loss as exceptional item and enhanced depletion charge, the Company reported Loss-Before-Tax of INR 5,939 Million.
Loss-After-Tax for the Company in fiscal year 2012-13 was INR 5,508 Million, compared to profit of INR 335 Million in the last fiscal.
We cannot but be disturbed by the financial results. Notwithstanding the headwinds, as a team we are singularly focused to turnaround the situation: through accretion of reserves, increasing production, and improving profitability. The Board has engaged a financial advisory firm to assist in evaluating various strategic business options.
While PY-1 has been in the spotlight, your Company has a portfolio of assets beyond PY-1. We are engaged in developing discoveries in our portfolio in an accelerated manner. Each of these discoveries is expected to contribute to the overall performance of the Company.
In this context, I now invite your attention to the operated and non-operated assets of your Company.
I dwelt on the criticalities associated with PY-1 Field in my introductory remarks. Clearly, there is no ‘band-aid’ solution to deal with sub-surface complexities in PY-1 as uncertainties on the producible reserves remain. Eni, the Promoter Group, with its global experience and technical expertise in conjunction with HOEC technical team, is undertaking a comprehensive geological and reservoir study aimed to address the performance challenges in PY-1 including defining the activation programme for ‘Surya’ Well, production profile for Proved Developed Reserves, production & investment profile for Proved Undeveloped Reserves. This Study is expected to be delivered to us by end of 2013. We shall tread with caution and implement the recommendations of the Study to monetize PY-1 residual gas reserves after careful consideration of risk-return equation.
In the context of PY-1, let me share a positive development which has finally actualised: the low pressure pipeline connecting PY-1 Terminal to alternate consumption centers have been operationalized by GAIL and gas supplies commenced at a rate of 7 million standard cubic feet per day. Though seemingly a baby step, this development shall allow PY-1 gas to be evacuated continuously thereby avoiding the historical pattern of shutting-in of wells frequently and even for extended periods of time. If you recall, we lost 135 days of production for the year under review on account of limitation of the single end user, which resulted not only in revenue loss during the period but also gravely affected the productivity potential of two of the existing wells and cessation of production from one well in PY-1.
Moving on to highlight a positive event, your Company, as Operator, has recently received the approval from the Ministry of Petroleum and Natural Gas and Directorate General of Hydrocarbons for the commerciality of the ‘Dirok’ Discovery in ‘Girujan’ reservoir located in Upper Assam with the mean Gas-Initially-In-Place (GIIP) of 254 billion cubic feet. As a next step, we are preparing a comprehensive Field Development Plan with the objective to bring the ‘First Gas’ to the market in an accelerated manner, subject to timely receipt of various regulatory approvals for the development phase. In our endeavor of preparing the Field Development Plan which involves constructing a static and dynamic reservoir model by integrating all the geotechnical data and front end engineering of the facilities, we are engaging with our promoters, Eni, and the Joint Venture Partners, OIL and IOC, for their inputs and suggestions. Considering the approval of the Plan by the Government as the zero date, we are targeting to put the Dirok Discovery on commercial production in less than 24 months.
We believe that the potential in Assam Block goes beyond the ‘Dirok’ Discovery in ‘Girujan’ reservoir. Aided by the Government policy of 2013 which allows exploration in development areas, the Consortium shall be defining the exploration programme to assess the presence and potential of hydrocarbons in the ‘Tipam’ and ‘Barail’ reservoirs, which are typically prolific producers in the Assam-Arakan Basin.
While it is not prudent to count the chickens before they hatch, one can reasonably expect that the economics and cash flows from our gas portfolio shall significantly improve once the revision to the gas price is effected to the satisfaction of all concerned.
We have been operating North Balol, Asjol and Pramoda Fields, all located in Cambay basin, in an incident free environment with a continued focus on cost to ensure profitability in these small sized fields.
Your Company, as Operator of RJ-ONN-2005/1 Block, has completed, within budget, the acquisition, processing and interpretation of 3D and High Resolution seismic data and generated prospect inventory for drilling exploratory wells. The Joint Venture Partners have unanimously approved the prospects prioritized for first stage exploratory drilling campaign, which can commence upon receipt of approvals from the Government authorities including Ministry of Defence and Ministry of Environment and Forests.
In RJ-ONN-2005/2 Block, which is also located in Jaisalmer basin, and wherein your Company holds non-operating interest, Oil India Limited, the Operator, is interpreting the 3D and High Resolution seismic data. Oil India, the Operator, has anticipated that it shall be seeking agreement on the exploratory well locations with the Joint Venture Partners shortly so as to prepare for commencement of drilling during the current fiscal year.
In non-operated asset PY-3 Field, restarting the production is the immediate priority and your Company is working proactively with all the Joint Venture Partners to achieve this objective. Operating Committee has technically reviewed the Comprehensive Full Field Development Plan. Operator is awaiting clarification from one of the Joint Venture Partners regarding the issue of cess and royalty, following which the Comprehensive Field Development Plan shall be submitted to DGH. Approval of the Plan by DGH shall pave the way for completing the tendering process for facilities and restarting the production from existing well, PD3S, at around 3,500 barrels per day by March 2014 as per the project schedule presented by the Operator. Drilling of additional producer wells shall be undertaken in the next Financial Year, with the consequent ramp up of Field production to 7,000 barrels per day.
In another non-operated asset namely CB-OS-1, located in Cambay basin, ONGC, the Operator, has submitted a revised Plan of Development for ‘Gulf A’ Discovery taking CRZ aspects into consideration and the same has been unanimously approved by the Operating Committee and recommended to the Management Committee for its authorization. As per the revised Plan of Development, the ‘First Oil’ from ‘Gulf A’ is expected by December 2015 with the initial Field production rate of around 9,000 barrels per day.
With respect to GN-ON-90/3 Block, located in Pranhita Godavari basin, the arbitral award, which was in favour of your Company, was challenged by the Government. However, the Government’s petition has been dismissed by the Hon’ble Delhi High Court. We now expect the Government to settle the aspect of PSC finalization soon.
Let me now briefly address the governance aspects, which your Company pursues in a proactive manner.
Board and its various Committees including Audit, Shareholders/Investors Grievance, met regularly during the year. Your Company not just adheres to the mandatory requirements under Clause 49 of the Listing Agreement with the Stock Exchanges but has also adopted voluntary guidelines issued by the Ministry of Corporate Affairs.
Your Company is committed towards Health, Safety, Environment and Social Responsibility. Our team maintained good HSE record as the year ended without any environmental incident, no oil spill incident, no fatality nor any lost time incident. However, we are by no means complacent and continuously striving to enhance our HSE systems, processes and practices.
With these words, I would like to take the opportunity to thank all our esteemed shareholders for their unwavering support, patience and guidance, especially during these times of trials and tribulations.
I would, on behalf of the members and the Board, like to express my gratitude for the support and co-operation received from the Ministry of Petroleum & Natural Gas, Directorate General of Hydrocarbons, Ministry of Defence, respective Governments of Gujarat, Tamil Nadu, Assam, Rajasthan, and Andhra Pradesh, Consortium Partners, Bankers and Eni Finance International. I thank all my colleagues on the Board for their constructive inputs and valuable guidance.
To conclude, let me quote Late Shri H.T. Parekh, our Founder Chairman, who aptly stated at the birth of your Company:
“The task of exploration is complex and journey tortuous. Glorious is the vision of development but those who are charged with the realization need to be imbibed with that vision as they steer along their path in spite of many impediments. There are no signposts on the road. Those who do the steering will be able to traverse the difficult terrain if they maintain faith in their mission.” For sure, HOEC team is committed and resolute to overcome the present challenges.
Thank you very much,
September 25, 2013
Note : All figures have been rounded off.