Understanding Petrochemical Business

MBA Program at UPES

Integrated B. Tech & MBA / MBA in Oil & Gas
Venue: UPES Dehradun
Nov 19-21,2011

SCHEDULE FOR THE DAY
Module 7A Business Practices
Module 7B Demand Supply And Pricing
Module 7C Business Cycles
BUSINESS PRACTICES
MODULE 7 A
INTERNATIONAL TRADE PRACTICES
DIRECT TRADING
CONTRACT
LONG TERM
BENCH MARKED
MEDIUM TERM, SHORT TERM
THROUGH MERCANTILE EXCHANGES
LME; NYMEX; SGX; HKMEx, uML, MCx, ..
SPOT
FUTURES
MAINLY FOR HEDGING

BUSINESS INTELLIGENCE AGENCIES
DATA ON TRADE VOLUMES AND SPOT /
CONTRACTS ARE COMPILED, ANALYSED AND
PUBLISHED - SUBSCRIPTION BASED ACCESS
PLATT
ARGUS MEDIA
lPS (ACCulLu 'uvln & CL1Z', CMAl)
ICIS
L1C. .
BUSINESS PROSPECTING
MARKET SURVEYS
DEMAND SUPPLY PROJECTIONS
GLOBAL BASIS
REGIONAL BASIS
DOMESTIC SCENARIO
PAST DATA
PRODUCTION
IMPORTS / EXPORTS
CAPACITY AVAILABLE
BUSINESS PROSPECTS
MARKET SURVEYS
PROJECTIONS
DEMAND PROJECTIONS
CONSUMER SECTOR ANALYSIS
GROWTH RATE MODEL
SUBSTITUTION ALTERNATES
SUPPLY PROJECTIONS
ANNOUNCED PLANS - NEW PROJECTS / EXPANSIONS / SHUT-
DOWNS
GROWTH RATE MODEL

BUSINESS PROSPECTS
PRICE PROJECTIONS
IDEAL SITUATION DOES NOT EXIST
PAST DATA ANALYSED THROUGH BENCH-MARKING
CRUDE OIL BENCHMARKING
ETHYLENE BENCHMARKING
NAPHTHA BENCHMARKING
PRICE MARGIN / RATIO
INTERNATIONAL TRADE - GEOPOLITICAL IMPACT


BUSINESS PROSPECTS
INTERNATIONAL PRICES TERMS AND
CONDITIONS - FOLLOW INCOTERMS
PRICE QUOTED
AT SALES POINT LOADED ONTO THE TRANSPORT
VESSEL - 'lLL-ON-8CAu'
uLLlvLLu A1 8u?L'S CCun1? C1 -
CFR - INCLUDING BASE COST AND FREIGHT
CIF - INCLUDING BASE COST, FREIGHT, INSURANCE
QUANTITY ISSUES - AT POINT OF LOADING
An? 1AnSl1 LCSSLS 1C 8u?L'S ACCCun1
BUSINESS PROSPECTS
SOME PRICING TERMINOLOGY
SPOT PRICES QUOTED FOR A PROMINENT PORT IN A REGION
NWE - Rotterdam
ME - Dubai
SEA - Singapore; Kuala Lumpur;
NEA - Japan
CMP - China Mainland Port / Shangai
USG - US Gulf Coast
LLc.
FREIGHT NETBACK
Adjusted for freight from point of supply / delivery to the respective port
ln 8uver's counLrv

INTERNATIONAL REGIONS
NWE Northwest Europe (N. France, Germany, France, Benelux)
Mediterranean Southern France, Spain, Italy
NE Asia Taiwan, Korea, Japan, China
SE Asia
Singapore, Philippines, Indonesia, Malaysia, Thailand,
Vietnam
West Asia Pakistan, India
East Asia NE Asia & SE Asia
GCC Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE
East Mediterranean Greece, Israel, Egypt, Syria, Jordan, Lebanon
FSU
Former Soviet Union: Russia, Ukraine, Belarus, Uzbekistan,
Kazakhstan
USG US Gulf
NWE Northwest Europe (N. France, Germany, France, Benelux)
BUSINESS PROSPECTS
DOMESTIC SCENARIO
INDUSTRY PROTECTION
TARIFFS
IMPORT / EXPORT BANS
INVESTMENT INCENTIVES
CONCESSIONS IN DOMESTIC TAXES & DUTIES
CASH SUBSIDIES
DEFERRED TARIFF PAYMENTS
STATE-GOVERNMENT INCENTIVES
BUSINESS PROSPECTS
PCPIRs
Government of India notified the Petroleum, Chemicals
and Petrochemical Investment Regions (PCPIR) policy in
April 2007 with an aim to develop global scale PCP industry
in an integrated and environment friendly manner through
synergies and value added manufacturing, research and
development.
A region with an area of around 250 square kilometer
having a processing area (manufacturing facilities),
associated logistics and other services and required
infrastructure; as also a nonprocess area comprising
residential and commercial infrastructure facilities.

Business prospects
Each PCPIR to have
a refinery/ petrochemical feedstock company
Internal infrastructure built and managed by a
Developer
External linkages by the Government of India and
the concerned State government.
PCPIRs IDENTIFIED
West Bengal PCPIR ; Gujarat PCPIR; Andhra
Pradesh PCPIR ; Orissa PCPIR ; Tamil Nadu PCPIR ;


Business prospects
DOMESTIC DATA
Production statistics
GOI - IIP
INDUSTRY ASSOCIATIONS
CPLMlCALS & L1CCPLMlCALS MAnulAC1uL'S
ASSOCIATION
Statutory taxes & duties
IMPORT TARIFF
EXCISE / CENVAT/MODVAT/GST
HARMONISED CODING
Inflation Statistics
WPI published by MoF

INDIRECT TAXES
HARMONISED CODING SYSTEM
21 SECTIONS
99 CHAPTERS - 2 DIGIT CODE
EACH CHAPTER
HEADING - 2 DIGIT
SUB-HEADING - 2 DIGIT
SIX DIGIT CODE
UNIFORM CODING INTERNATIONALLY
FOLLOWED
BUSINESS PROSPECTS
CUSTOMS TARIFF
EXCISE TARIFF (EXCISE/VAT/CENVAT/MODVAT) -
GST (GOODS AND SERVICES TAX)
FOR PETROLEUM & PETROCHEMICALS FOUR
CHAPTERS HAVE TO BE REFERRED
Chapter 27 : Mineral fuels, mineral oils and products
of their distillation; bituminous substances; mineral
waxes
Chapter 29 : Organic Chemicals
Chapter 39 : Plastics and articles thereof
Chapter 40 : Rubber and articles thereof


HARMONISED SYSTEM
27.07 Oils and other products of the distillation of high temperature coal tar;
similar products in which the weight of the aromatic constituents exceeds
that of the non-aromatic constituents
2707.10 - Benzole 35%
2707.20 -Toluole 35%
27.11 Petroleum gases and other gaseous hydrocarbons
- Liquefied:
2711.11 -- Natural gas 10%
2711.12 -- Propane 10%
27.14
Bitumen and asphalt, natural; bituminous or oil shale and
tar sands; asphaltites and asphaltic rocks

2714.10 - Bituminous or oil shale and tar sands 10%
2714.90 - Other 10%
CUSTOMS TARIFF
% OF
CENVAT
ADJ.
NET OF
CENVAT
A CIF 1250.00 1250.00
B ASSESABLE 101%
A
1262.50
C BASIC DUTY 5%
B
63.12 63.12
D CVD 10%
A+B
132.56 Y
E CESS CVD 3%
D
3.97 Y
F CESS CD 3%
C+D+E
5.99 5.99
G SAD 4%
B+C+D+E+F
58.73 Y
COST AT PORT INCL.
TARIFF
A+
(C TO G)
A+C+F
IMPORT PARITY PRICE
COMPONENTS
PRICE AT PORT INCLUDING TARIFF
CUSTOMS DOCUMENTATION FEE
CLEARING & HANDLING
TRANSPORTATION COST TO LOCATION
OTHER TAXES - CONSUMER ANGLE
SALES TAX
CENTRAL
STATE
GOODS AND SERVICES TAX
YET TO BE ENFORCED - LIKELY IN FISCAL 2102-
2013
PHILOSOPHY - TO HARMONISE TAXES AND
REMOVE CASCADING EFFECT
ORIGINAL PHILOSOPHY MODIFIED

RIL PRICELIST HDPE
1) 4% VAT AGAINST DAMAN & 5% VAT BOKHARPADA SALES.
2) FREIGHT SHALL BE CHARGED EXTRA.
Ex-Bokharpada Depot
HDPE TYPE BASIC
10.30%
Ex. Duty
CREDIT Cash Disc. CASH
E 52009 PRIME 73140 7533.42 80673 550 80123
B56003 PRIME 69540 7162.62 76703 550 76153
F46003 PRIME 68690 7075.07 75765 550 75215
F56003 PRIME 67890 6992.67 74883 550 74333
M60075 PRIME 70640 7275.92 77916 550 77366
L60075 PRIME 72140 7430.42 79570 550 79020
UE UTILITY 68340 7039.02 75379 550 74829
UM UTILITY 65840 6781.52 72622 550 72072
GAIL PRICE LIST HDPE
DAMAN
BASIC DISC LOC EXCISE EX-WKS
BM B52A003A 67130 575 1697 10688.60 75546.60
BM B63A003A 67130 575 1697 10688.60 75546.60
SHETG E45A003A 66660 575 1685 10613.12 75013.12
EXTR E52A003A 67970 575 1719 10823.40 76499.40
EXTR E52U003A 71750 575 1815 11430.53 80790.53
HM FILM F55HM0003A 68900 575 1742 10972.88 77555.88
IM HIGH I50A180A 64920 575 1641 10333.62 73037.62
IM LOW I60A080A 64960 575 1642 10340.05 73083.05
IM-L-UV I60U080A 66460 575 1680 10580.98 74785.98
PIPE (PE 80) P54A001A 72810 575 1842 11600.77 81993.77
RAFFIA W50A009A 68660 575 1736 10934.32 77283.32
MF W52A009A 68910 575 1743 10974.36 77566.36
MF W52ASR009A 69160 575 1749 11014.57 77850.57
LOGISTICS
MAIN TRANSPORTATION MODES
RAIL
LIQUID / LIQUIFIED --- TANKERS
SOLIDS --- CONTAINERS / WAGONS
ROAD
LIQUID / LIQUIFIED --- TANKERS
SOLIDS --- CONTAINERS / WAGONS
MARITIME
LIQUID / LIQUIFIED --- TANKERS
SOLIDS --- CONTAINERS
PIPELINE (LIQUID / LIQUIFIED PRODUCTS)

STORAGE
LIQUIDS AT AMBIENT CONDITIONS
TANKS
LOW VOLATILITY FIXED ROOF
HIGH VOLATILITY FLOATING ROOF
LIQUIFIED MATERIALS
PRESSURISED STORAGE
SPHERES
BULLETS
ATMOSPHERIC PRESSURE STORAGE
DOUBLE WALLED INSULATED TANKS WITH VAPOR
RECOVERY SYSTEM
STORAGE
SOLIDS
PACKING FORMATS
BAGS
GENERALLY 25kg
JUMBO BAGS 750 kg
STORAGE
PALLETISED FORMAT
STRCTURAL ARRANGEMENT TO BE MADE IF MULTI-
STACKING OF PALLETS NOT PERMISSIBLE

DEMAND SUPPLY FORECASTING
MODULE 7B
HDPE CAPACITY 2010 - 2011
Company Location Licensor
Capacity (2010-11)
Swing Dedicated
Reliance
Industries
Limited
Hazira, Gujarat
7
280 180
Nagothane, Maharashtra
1
220
Gandhar, Gujarat
3
220
GAIL
Auraiya, Uttar Pradesh
7
210
Auraiya, Uttar Pradesh
5
200
Haldia
Petrochemicals
Limited
Haldia, West Bengal
5
334
Haldia, West Bengal
4
368
Indian Oil
Corporation
Limited
Panipat, Haryana
6
350
Panipat, Haryana
2
300
1428 1234
HDPE - PROCESS LICENSORS
CODE LICENSOR / PROCESS
1 B.P Chemicals U.K / Gas Phase Fludized Bed
2 Basell Polyolefine GmbH Germany / Hostalen
3 Hoechst, Germany / Slurry
4 Lyondell Basell / Spherilene
5 Mitsui Japan / Slurry Process
6 Nova Chemicals, USA / Sclairtech
7 Novacor, Canada / Solution
HDPE PRODUCTION
Company 2006-07 2007-08 2008-09 2009-10 2010-11
Reliance Industries
Limited
377 345 343 495 445
GAIL 166 188 203 196 203
Haldia
Petrochemicals
Limited
415 441 396 165 390
Indian Oil
Corporation Limited
0 0 0 0 98
958 974 942 856 1,136
HDPE - CONSUMPTION
Year Production Import Export Consumption ACGR(%)
2006-07 958 113 200 871
14.2
2007-08 974 201 115 1059
2008-09 942 222 95 1069
2009-10 856 385 16 1225
2010-11 1,136 445 100 1481
HDPE - GRADEWISE CONSUMPTION
S. No. Grade 2000-01 2010-11
1 Raffia 175 310
2 HM/HDPE Films 128 350
3 Pipes 87 206
4 Monofilament 29 40
5 Blow Moulding 150 390
6 Injection Moulding 96 140
7 Misc. Applications 26 45
Total 691 1481
HDPE - OPERATING RATE HISTORY
2006-07 2007-08 2008-09 2009-10 2010-11
Overall Capacity 1,710 1,710 1,919 1,919 2,692
Overall Operating
Rate(%)
56 57 49 45 42
Overall Production 958 974 942 856 1,136
HDPE - FUTURE AVAILABILITY
Year
Existing Units Exp. Total
SWING DEDICATED S + D
1. 2 3 1. 2 3 1. 2 3
2010-11 1428 40 571 1234 48 592 2662 44 1164
2011-12 1428 40 571 1234 60 740 2762 50 1372
2013-14 1428 40 571 1334 95 1267 2762 67 1839
2019-20 2768 40 1107 1674 95 1590 4442 61 2698
2025-26 2768 40 1107 1674 95 1590 4442 61 2698
DEMAND SUPPLY GAP
Year Demand Supply
Surplus /
(-)Deficit
Year Demand Supply
Surplus /
(-)Deficit
2010-11 1,481 1,164 -317 2019-20 3,343 2,698 -646
2011-12 1,642 1,372 -271 2020-21 3,635 2,698 -938
2012-13 1,804 1,638 -165 2021-22 3,918 2,698 -1,221
2013-14 1,982 1,839 -144 2022-23 4,224 2,698 -1,526
2014-15 2,180 2,379 199 2023-24 4,554 2,698 -1,857
2015-16 2,397 2,498 100 2024-25 4,911 2,698 -2,214
2016-17 2,604 2,642 38 2025-26 5,297 2,698 -2,600
2017-18 2,830 2,698 -132
PRICE PROJECTION
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Price Forecast
BUSINESS CYCLES
MODULE 7C
BUSINESS CYCLES
ALMOST ALL BUSINESSES AFFECTED BY PRICES
AND DEMAND BEHAVIOUR CHRACTERISED BY
LONG RANGE (DECADES) AND / OR SHORT
RANGE DURATION (YEARS) CYCLES
WHY CYCLES
OPPORTUNITY
INVESTMENT RUSH
SUPPLY-DEMAND IMBALANCE
PROFITABILITY AFFECTED
DOWNTURN
BUSINESS CYCLES
Cycle/Wave Name Years
Kitchin 35 Inventory
Juglar 711 Fixed Investment
Kuznets 1525
Infrastructural
Investment
Kondratiev wave 4560 Technology Cycle
KNODRATIEV CYCLE
PETROCHEMICAL BUSINESS
Petrochemical industry is characterized by large plants
that take several years to build;
finally, they come to stream, together creating oversupply
and
thus the bottom of the cycle.
Mathematical models of the petrochemical industry
Define inherent technical structure linking chemical
industry formed by the large but linked number of
chemicals that are available on a commercial scale and by
the rigid feedstock, byproducts, and energy requirements
of these chemicals.
A TYPICAL CASE STUDY MIDEAST
SCENARIO
PETROCHEMICAL BUSINESS
Future chemical prices needed for planning are
predicted using three forecasting models:
simple time-series fitting and two causal models with
oil prices,
the second-order plus dead time transfer function and
autoregression with an exogenous variable models.
Oil prices for the causal models are first forecasted
under the concept of market
long cycles (K-waves) and short cycles (business
or Kitchin cycles) and then used to forecast
chemical prices.
INDUSTRY MODELLING
Deterministic Models
Assume that all parameters included in the model, for example, prices
and demand, are known with certainty.
Select the optimal technology paths for production of a given amount
of chemicals under an environmental or economic objective.
Assumed that a set of feedstocks is locally available in a limited
quantity
Several alternative processes technologically are accessible for
transforming feedstocks into final products
These technologies are characterized by technical coefficients of
consumption of raw materials, chemicals, utilities, labor, byproduct
production, and investment cost for different plant sizes and operation
and maintenance costs.
These technologies introduce intermediate chemicals, which are
produced and consumed in the system.
INDUSTRY MODELLING
Models with Uncertainty.
Models Proposed
Proposed for the chemical or petrochemical industry that
included uncertainty in formulating the model and not as a
final stage of the solution in sensitivity analysis.
Systems modelled
batch plants, small operations, or process networks considering
uncertainty in product demand only
Another model considering uncertainty in processing time, size,
and product demand
considering uncertainty in process reaction parameters
considering uncertainty in product demand and due dates.
INDUSTRY MODELLING
Models of continuous processes
System parameters, operating temperature,
reaction constants, and yields
Uncertain demand
Uncertain demand, plus supply and process yield
Supply
supply and prices.
FORECASTING
Time-Series Models
Use past time ordered sequences of observations of the
forecasted variable.
Time-series history of the variable being forecasted is used
in order to develop a model for predicting future values.
Then forecasts are made by extrapolating the fitted model
The extrapolation is based on the assumption that the
future will continue on the same basis as the past
Four types of patterns usually seen in the data series:
Horizontal
Seasonal
Cyclical
Trend
FORECASTING
The cyclical pattern is a difficult one to predict
because it does not repeat itself at constant intervals
of time and its duration is not uniform.
One of the useful tools in analyzing time-series data
of the cyclical nature is the Fourier analysis; it is
based on the concept that series can be
approximated by a sum of sinusoids, each at a
different frequency.
FORECASTING
Causal Models
Relate statistically the time series of dependent variable to one
or more other time series dependent variables over the same
time period.
If a logical correlation appears then a statistical model describing
this relationship can be constructed.
The most applied causal model is the regression model relating a
dependent variable to the independent variable(s) i.e. It is a
mathematical procedure formulating a relationship
Regression is more powerful than a subjective qualitative
estimate because it measures explicitly the apparent association
between variables over time, thus eliminating most of the
guesswork.
PRODUCT PRICING FORECAST MODEL
TIME SERIES
OIL PRICE FORECAST MODEL
TIME SERIES
PETROCHEMICAL PRICE MODEL
CAUSAL MODEL
ABS PRICE FORECAST