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Optimizing return on equity through treasury operations: a word from our leader - EY - India

Optimizing return on equity through treasury operations: Oil and gas E&P

Foreword: A word from our leader

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Increasing interest by Indian corporates in domestic and overseas exploration and production has created a new class of investors in oil and gas.

India is the fifth-largest consumer of energy and its energy demand is ever increasing.

With crude oil imports accounting for nearly 80% of the requirements and natural gas consumption rising by 25.9% during 2009, the focus of the oil and gas industry has turned to exploration and production. Increasing interest by Indian corporate entities in domestic and overseas exploration and production has created a new class of investors in oil and gas.

While this new class of investors scouts for inexpensive capital, traditional players with large surpluses are looking at judicious deployment opportunities to improve return on capital employed. As capital seeks out the optimal risk-return scenario, the omnipresent financial risks can prove to be an impediment to future growth prospects of the sector.

The role of the treasury in managing capital and cash flows as well as in managing financial risks has become increasingly important.

Traditionally, oil and gas companies have imbibed a philosophy that oil and gas price risk is manageable in the long run as economic upturns deliver higher returns per unit than cost of production. With recent increases in cost of production, the breakeven threshold for positive returns has increased.

Indian companies, which primarily use Indian rupee as their functional currency are faced with the question of what really constitutes currency risk as US$ denominated borrowings and US$ denominated costs are coupled with revenues in dollar terms from sale of oil and gas. Borrowing costs are critical to manage project returns.

Accordingly, the ability to borrow low-cost funds at fixed interest rates and in the currency that mitigates risk are the cornerstones of successful financial risk management. Managing surpluses until they are deployed into projects or repatriated to investor is equally critical to manage the return on equity.

This article addresses some of these treasury management issues facing corporate organizations in the oil and gas exploration and production space.

We also touch upon the treasury management strategy that companies may seek to adopt and the key success factors to implement the strategy.

We hope that you find this insightful and would like to hear from you for any new perspective and support you if you need any further assistance.

Hemal H Shah
Partner- Financial Services Risk Management
Advisory Group

*Refer to the attached PDF for source information.

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