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Jon Chadwick Chairman Shell Malaysia

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30 Annual<br />

Report<br />

2002<br />

“Your Company is committed to<br />

the maximisation of shareholder<br />

value. I want to see our<br />

company’s Refinery as the most<br />

admired refinery in Asia, noted for<br />

its excellent performance. We<br />

have formulated an aggressive<br />

Business Plan, aimed at delivering<br />

this objective.<br />

Your company is on track.”<br />

<strong>Jon</strong> <strong>Chadwick</strong><br />

<strong>Chairman</strong> <strong>Shell</strong> <strong>Malaysia</strong>


<strong>Chairman</strong>’s Review<br />

On behalf of your Board of Directors, I am pleased to present<br />

the Annual Report of <strong>Shell</strong> Refining Company (Federation of<br />

Malaya) Berhad (“SRC”) for the year ended 31st December<br />

2002.<br />

Our Business Environment<br />

While the current conflict in the Middle East could negatively<br />

impact the world economy, it is nevertheless slowly recovering<br />

from its previous downturn and from the September 11, 2001<br />

tragedy.<br />

In their recent National Budget announcement, the<br />

Government introduced changes in fiscal and monetary<br />

policies to mitigate the impact on <strong>Malaysia</strong> of a slowing global<br />

economy. Additional measures have also been taken lately to<br />

boost the capital market in <strong>Malaysia</strong>. Based on the positive<br />

GDP growth in year 2001, your Board of Directors are confident<br />

that the domestic economy will continue to recover steadily.<br />

The positive GDP growth has had a positive impact on the<br />

demand for petroleum products. Domestic demand for<br />

petroleum products grew by 6.9% (+3.5% in 2001). The sales<br />

of automotive Gasoil substantially increased by 21.4%<br />

(-12.6% in 2001) and motor gasoline by 5.1% (+6.3% in 2001).<br />

In the industrial sector, industrial Gasoil sales dropped by 8.6%<br />

(+16.1% in 2001) and aviation fuel decreased by 5.5% (+2.9%<br />

in 2001). LPG sales has registered an increase of 0.9% (3.1%<br />

in 2001).<br />

Sales of petroleum products in <strong>Malaysia</strong><br />

(2001 & 2002)<br />

' 000 bbls<br />

80.000<br />

60.000<br />

40.000<br />

20.000<br />

0<br />

Retail Commercial LPG<br />

Sector<br />

2001<br />

2002<br />

However, refining margins which are dependent on market<br />

forces i.e. the relative movement of crude oil and product<br />

prices, remained under pressure as a consequence of<br />

continued refining capacity surpluses, and the volatility of both<br />

crude and product prices. The overhang in refining capacity<br />

will remain for some time obliging your company to vigorously<br />

pursue all efficiency gains.<br />

Throughout 2002, local crude prices moved quite steadily from<br />

approximately US$ 20 per barrel to US$ 32 per barrel. On the<br />

other hand, the movement of product prices (MOPS) have<br />

been more volatile, fluctuating widely between the range of<br />

US$ 19 per barrel to US$ 34 per barrel.<br />

USD/bbl<br />

USD/bbl<br />

Sales <strong>Malaysia</strong>n of petroleum Crude products Prices in 2002 <strong>Malaysia</strong><br />

(2001 & 2002)<br />

35.00<br />

30.00<br />

25.00<br />

20.00<br />

15.00<br />

10.00<br />

5.00<br />

0.00<br />

Sales of petroleum products in <strong>Malaysia</strong><br />

Product Prices (MOPS) 2002<br />

(2001 & 2002)<br />

40.00<br />

35.00<br />

30.00<br />

25.00<br />

20.00<br />

15.00<br />

10.00<br />

5.00<br />

0.00<br />

Jan-02<br />

Jan-02<br />

Feb-02<br />

Mar-02<br />

Apr-02<br />

Jan-02<br />

Feb-02<br />

Mar-02<br />

Apr-02<br />

May-02<br />

May-02<br />

Jun-02<br />

Jun-02<br />

Jun-02<br />

Jul-02<br />

Aug-02<br />

Sep-02<br />

Oct-02<br />

Jul-02<br />

Month<br />

Aug-02<br />

Our Production and Sales<br />

In June 2002, the refinery’s long residue catalytic cracker (LRCC<br />

Unit) successfully underwent its first major turnaround<br />

involving a complete shutdown of the unit in June to undertake<br />

statutory inspection as well as planned maintenance, repair<br />

and modifications. It is pleasing to highlight that the refinery<br />

continued to operate strongly throughout 2002 with a high<br />

level of availability. Plant availability remained in excess of<br />

97%, as in 2001. 39.3 million barrels of crude oil and condensate<br />

were processed during the year, reduced by 2% compared to<br />

2001.<br />

<strong>Malaysia</strong>n crudes and condensate continued to form 63% of<br />

the crude diet, with the remainder coming mostly from the<br />

Far East.<br />

Sales volumes reduced slightly from 43.5 million barrels in<br />

2001 to 41.4 million barrels in 2002, a reduction of some 5%.<br />

Consequently, the sales turnover also reduced by 3% from<br />

RM 4,601 million in 2001 to RM4,458 in 2002. The reduction in<br />

Annual 31<br />

Report<br />

2002<br />

Sep-02<br />

Oct-02<br />

Nov-02<br />

Nov-02<br />

Dec-02<br />

Nov-02<br />

Dec-02<br />

Tapis<br />

Labuan/Miri<br />

ULG97<br />

ULG92<br />

Kero<br />

Gas Oil


production and sales volumes were due to the LRCCU<br />

turnaround in June.<br />

Gasoil and gasoline continued to be the major products of<br />

the refinery, forming 70% of total production. Due to the<br />

shutdown of the bitumen production unit in late 2001, the<br />

refinery has since then, ceased to produce bitumen.<br />

million bbls<br />

32 Annual<br />

Report<br />

2002<br />

Sales Crude of petroleum and Feedstock products Processed in <strong>Malaysia</strong> -<br />

Sources (2001 of Supply & 2002) (2002)<br />

<strong>Malaysia</strong><br />

63%<br />

Sales of Refinery petroleum Intake products and Sales in <strong>Malaysia</strong><br />

(2001 (1996 & - 2002)<br />

46.0<br />

44.0<br />

42.0<br />

40.0<br />

38.0<br />

36.0<br />

Sales of petroleum Profits before products taxation in <strong>Malaysia</strong><br />

(2001 & 2002)<br />

RM millions<br />

200<br />

150<br />

100<br />

50<br />

1996 1997 1998 1999 2000 2001 2002<br />

124<br />

Middle East<br />

6% Far East<br />

31%<br />

77 74<br />

93<br />

157<br />

1996 1997 1998 1999 2000 2001 2002<br />

4<br />

198<br />

Total<br />

Intake<br />

Sales<br />

Our Financial Results<br />

The Board of Directors is pleased to report that your company<br />

achieved a turnaround in financial performance during the<br />

year, recording a net profit after tax of RM 152.93 million<br />

compared to a net loss after tax of RM 0.15 million in 2001.<br />

Inventory holding gains arising from the increase in crude oil<br />

prices at the end of the year were a key contributor to this<br />

performance. Even with the LRCCU’s major turnaround<br />

expenses incurred in the year, manufacturing expenses only<br />

increased by 4% due to your company’s relentless efforts in<br />

cost management. Declining interest rates during the year also<br />

caused borrowing costs to reduce substantially.<br />

Our Earnings Per Share and Dividend<br />

Earnings per share for 2002 were 50.98 sen compared to<br />

–0.05 sen in year 2001.<br />

I am pleased to announce that your Board of Directors is<br />

recommending a final dividend of 15 sen per RM 1 unit of<br />

stock, making a total gross dividend for the year of 18 sen per<br />

unit of stock for the reporting year. This is an increase over the<br />

previous year’s total gross dividend of 15 sen per unit of stock<br />

(i.e. 3 sen per unit of stock higher).<br />

Sales of petroleum Earnings products per sharein<br />

<strong>Malaysia</strong><br />

(2001 & 2002)<br />

Sen<br />

60<br />

50<br />

50.98<br />

40<br />

37.3<br />

37.2<br />

30<br />

24.5 24.8<br />

16.8<br />

20<br />

10<br />

0<br />

-10<br />

(0.05)<br />

1996 1997 1998 1999 2000 2001 2002<br />

Our Business Improvement Initiatives<br />

Sen per share<br />

To further improve product yield and to increase the efficiency<br />

of the refining process, we embarked on a Hydrocarbon<br />

Management Review (HMR). This initiative will continue in<br />

2003.<br />

The Refinery participated in a benchmarking exercise<br />

conducted by Solomon Associates (based in USA) in order to<br />

gauge our performance against all refineries worldwide. The<br />

key performance indicators used in this exercise were Non-<br />

Energy Cash Cost (NECC), Maintenance Index (MI),<br />

Operational Availability (OA), Corrected Energy and Loss (CEL)<br />

and <strong>Shell</strong> Manpower Index (SMI).<br />

The NECC target set for the Refinery establishes a strong<br />

stretch for SRC (being a relatively small capacity refinery) to<br />

drive cost performance. We have in place a cost management<br />

process which includes monthly reviews by the Management<br />

Team to help promote a cost focus culture across the<br />

organisation. We had a major achievement with regard to the<br />

OA target and this was made possible by the low unplanned<br />

shutdown of the main units and by the successful turnaround<br />

in June. On the other hand, a structural improvement will need<br />

to be done to achieve our CEL target. The Company also gave<br />

emphasis to a productivity improvement programme in order<br />

to improve the SMI result.


After the successful conclusion of the turnaround, the first<br />

cycle Vision, Mission and Objectives (VMO) were reviewed<br />

for realignment with the East Zone’s VMO. The 2003 Business<br />

Plan for the Company was finally formulated based on the six<br />

objectives identified.<br />

Our Commitment to Sustainable Development<br />

Your Company’s commitment to sustainable development is<br />

evident from the <strong>Shell</strong> General Business Principles and our<br />

commitment to the Health, Safety, Security and Environment<br />

(HSSE) Policy adopted by <strong>Shell</strong> companies worldwide. HSSE<br />

has always been the Company’s utmost priority and the<br />

refinery always approaches the management of these matters<br />

systematically by setting yearly targets and standards, and<br />

continuously measuring, appraising and reporting of<br />

performance against such targets.<br />

You will be proud to know that your Company won the “Best<br />

Environmental Reporting 2001” award from the “National<br />

Annual Corporate Report Award (NACRA)” organisation. <strong>Shell</strong><br />

<strong>Malaysia</strong> has also been awarded the “Best Environmental<br />

Report 2001”by the Association of Certified Chartered<br />

Accountants (ACCA).<br />

Our People<br />

Our people are our Company’s strength.<br />

We provide our people with good and safe conditions at work,<br />

competitive terms and conditions of service. We, actively<br />

promote their development, the best use of human talent and<br />

equal opportunity employment. Your Company also<br />

encourages the involvement of people in the planning and<br />

direction of their work. The refinery makes it a point to manage<br />

diversity and inclusiveness as a critical business activity. We<br />

respect cultural and personal differences.<br />

To ensure continuous improvement and excellence in the<br />

Company’s operations and to enable your Company to meet<br />

challenges in the future, emphasis has been placed on to the<br />

development of our people in order to upgrade their<br />

competencies and capabilities.<br />

Outlook for the Future<br />

The market scenario for the oil and gas sector will remain<br />

uncertain. Ongoing developments in the Middle East has<br />

caused the crude prices to remain volatile.<br />

The SRC Management<br />

Team.<br />

Your Company cannot rely on an improvement in refining<br />

margins - we believe a structural over capacity will remain for<br />

some time to come.<br />

Apart from enhanced health, safety, security and environment<br />

as well as people management , focus will be given to asset<br />

integrity, maximisation of margin and structural costs<br />

reduction. Only by aggresively pursuing further cost<br />

efficiencies will your company thrive.<br />

On behalf of the <strong>Shell</strong> Refining Company (Federation of<br />

Malaya) Berhad, I would like to thank the Board, Management,<br />

staff and contractors for their efforts during the last year. Their<br />

continuing commitment, high performance, and loyalty inspire<br />

our confidence in the future of your Company.<br />

<strong>Jon</strong> <strong>Chadwick</strong><br />

<strong>Chairman</strong><br />

Some members of our diverse, talented workforce.<br />

Annual<br />

Report<br />

2002<br />

33

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