Electricity is clearly a prerequisite for the economic growth which India badly needs. Now is a good time for the Government to ensure that the regulatory framework for project consents and clearances becomes more transparent and efficient, not least to address the low availability of coal, which is a serious problem. We believe that the Government should consider establishing a single "one stop shop" regulatory body, encompassing all central and state relevant ministries, with clear delegated powers to run the screening and approval processes for appropriate coal blocks to fuel critical energy, industrial and other projects.
There remain other distortions in the energy sector in India, particularly the continued heavy Government subsidy of energy and fuel prices for consumers. This applies equally to fuels such as diesel as to electricity where generation costs are being pushed up sharply because of higher prices for imported coal. These prices are not currently reflected in the prices set by state regulators for the customers of state electricity utilities.
The Indian government has made progress during the last six months to reduce heavy diesel price subsidies, increasing diesel prices by 14% in September. However, even after this, the Government said that at the public sector oil companies there was an under-recovery of diesel sale prices relative to cost of about Rs.9.82/litre as at mid October.
In our upstream exploration and production business, we continue to see slow progress in receiving approvals for our oil and gas blocks, including our Raniganj coal bed methane block in West Bengal, where we are still awaiting final ECIII environmental approval and gas sales price approval from the Indian Government. This is despite the high level of imports of oil and gas needed to meet demand in India.
Essar Energy continues to position itself to capitalise on India's growing energy demand .
Given demand growth for refined fuels, India is expected to have a shortfall of refining capacity by around FY2015-16, particularly in diesel, where we expect demand growth to continue at around 7-8% annually. Across Asia and Africa, demand for diesel is expected to continue to grow strongly. We believe that this, together with some delays to project execution and the closure of older, lower complexity and smaller refineries, implies a positive outlook for margins at the Vadinar refinery, given its scale and configuration post-expansion, with around 80% of output now comprising higher value middle and light distillates, principally diesel and jet fuel.
In the UK, we expect the Stanlow refinery to be increasingly advantaged as initiatives to improve margins begin to be delivered. These initiatives are in addition to Stanlow's existing advantages from its higher complexity and bias towards production of middle distillates such as diesel and jet fuel, both of which are structurally short in the UK and Europe. We continue to expect the closure of a number of smaller, less complex refineries in the region.
In power there remains a major shortage of power generation in India relative to demand, with peak deficits running at more than 10% of demand, according to India's Economic Survey, published in March 2012. These shortages are expected to increase over the next 3-5 years as supply continues to lag demand. Around one third of the Indian population still has no access to electricity, according to the 2011 national census. India is now targeting 85,000MW of new generation capacity to be built during its 12th Economic Plan running from 2012-17, with the objective of delivering GDP growth rates of around 9% per annum over the plan period.
Given the difficulty in obtaining the necessary consents and regulatory clearances to build power projects, develop sources of coal to fuel them and put in place the necessary funding, a clear advantage will exist for those such as Essar Energy who already have significant assets in place.
There are several constraints on growth, including inflation, high interest rates, and the fiscal and current account deficits.
Of these, controlling inflation is the Reserve Bank's key objective, with wholesale prices running 7.81% higher year on year in September against 7.55% in August, partly due to the diesel price increase. Although the trend is clearly downwards, high inflation limits the RBIs ability to cut interest rates, which have remained at 8% since a 0.5% reduction in April 2012.
Meanwhile, India continues to run a large trade deficit, with September showing an 11 month high excess of imports over exports of about US$18.1 billion, following a total deficit of US$185 billion during the fiscal year 2011-12. Foreign direct investment into India fell sharply to US$10.7 billion during April - August 2012 compared with US$19.6 billion in the same period in 2011.
The fiscal deficit is also high, with the Government now expecting the difference between government revenue and total expenditure to be around 5.3% of GDP in the current fiscal year, or over US$100 billion, and higher than its previous target of 5.1%. The high level of fuel subsidies continue to contribute to this.
Over the six month period to 30 September 2012, the rupee remained relatively weak against the US dollar, moving in a range between Rs.51.16 and Rs.57.12. This followed a decline during the previous 15 month period to 31 March 2012, when it weakened from Rs.45.39 to Rs.51.16 against the dollar. The rupee has recently traded at around Rs.54.60.
Although India's potential to return to its targeted gross domestic product (GDP) growth rates of 8-9% is clear, the economy is currently going through a difficult period generally, reflective of the issues which continue to impact the wider global economy.
Following a period of relative inaction, in September the Indian Government announced a number of economic reforms, including allowing foreign investors to have majority ownership of supermarkets and a reduction - although not elimination - of the subsidy for diesel prices.
These reforms came after GDP growth slowed to 5.5% in the first quarter of the 2012-13 fiscal year, compared with 8.3% growth a year earlier, and as the parliamentary elections due in 2014 draw nearer. The Index of Industrial Production saw growth decelerating sharply during the April to August period, with growth in the eight core infrastructure industries at 2.8%, against 5.5% in the same period the previous year.
Many observers feel that still more reforms are required to get India back to a higher growth path.
The Reserve Bank of India's quarterly survey of professional forecasters in July 2012, covering Q1 2012-13, showed a downwards revision of expectations for real GDP growth for the current fiscal year 2012-13 to 6.5% from 7.2% in their previous survey. Forecasts for agriculture remained unchanged at 3.0%, but those for industrial growth fell sharply to 4% from 6% in the previous quarter and services fell to 8% from 8.8%.
Naresh Nayyar, Essar Energy Chief Executive Officer, said: "We have made good progress during the half year to improve margins at both our Vadinar and Stanlow refineries. At Vadinar we are capitalising on our new, higher complexity units by selling large volumes of high value diesel into India and have resolved all outstanding sales tax and related funding issues. Stanlow delivered a very substantial increase in CP EBITDA on the back of a good operating performance and favourable market conditions. We have several further projects underway at Stanlow to deliver significant additional margin enhancements.
In power, we made good progress with the commissioning of the Salaya I and Vadinar P2 coal fired projects and now have 3,310MW of capacity operational, of which 2,110MW is our captive power plant which deliver more stable returns. At Mahan, we continue to face risks relating to short term coal supplies, but longer term, the development of the Mahan coal block will ensure that the Mahan Power plant is one of the lowest operational cost power plant in India.
The last six months has seen significant progress on our growth projects and the transition to becoming an operational energy business continues with the majority of our capex programme now complete. We are a very different company to the one that listed two and a half years ago with many of the key risks from that time now behind us. "
OIL AND GAS: Strong margin uplift at Vadinar and Stanlow · Vadinar: All refinery expansion units ramped up and stabilised: 20mmtpa capacity, 11.8 complexity · Vadinar: Current Price Gross Refinery Margins (CP GRM) averaged US$6.41/bbl in H1 FY13 against US$4.75/bbl (excluding sales tax benefit) in H1 FY12, rising to nearly US$11/bbl in September 2012 · Stanlow: CP GRM averaged US$8.03/bbl in H1 FY13 against US$3.1/bbl in first eight months of ownership. CP EBITDA2 at US$197.2 million in H1 FY13 against US$22.2 million in first eight months of ownership. Initiatives continue to deliver over US$3/bbl margin uplift within the next two years
POWER: Power generation capacity more than doubled since April 2012 · Coal-fired projects commissioned: Salaya I, 1,200MW and Vadinar P2 unit 1, 255MW during H1 FY13; Vadinar P2 unit 2, 255MW, commissioned post period-end. 3,310MW is now operational · Mahan coal block given stage 1 forest clearance, giving long term fuel security for Mahan I, 1,200MW
SALES TAX & FUNDING: Gujarat deferred sales tax agreement secured · Gujarat sales tax: two year repayment schedule agreed; no interest payable pre-17 January 2012 · Essar Oil Rs50 billion (c.US$949 million) sales tax standby facility secured · Exploring options to reduce interest costs for the group and extend debt repayment profile
ESSAR ENERGY INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2012
RESULTS FOR SIX MONTHS TO 30 SEPTEMBER 2012: · Group revenue up 97% to US$12.8bn (six months to 30 June 20111: US$6.5bn), primarily due to higher refining revenues in India from higher capacity and revenue due to the acquisition of Stanlow, UK · Group Current Price (CP) EBITDA2 of US$582.6 million in H1 FY13 (six months to 30 June 2011: US$198.6m), up 193% on H1 FY121, driven by increased refinery margins and throughput at Vadinar refinery and the contribution from Stanlow refinery offset by lower operational EBITDA2 from power · Loss before tax and loss after tax of US$282.8 million and US$200.8 million, respectively (six months to 30 June 2011: Profit of US$278.5 million and US$206.2 million, respectively), with increased operational EBITDA2 being offset by higher interest costs and depreciation due to the commissioning of the Vadinar refinery phase 1 and optimisation projects and Salaya I, increased foreign exchange losses and sales tax benefit not available in the current period
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