Chennai Petroleum Corporation Ltd Management Discussions

An outline on global economy

The global economy is yet again at a highly uncertain moment, with the cumulative effects of the past three years notably, COVID-19 pandemic and Russias invasion of Ukraine manifesting in unforeseen ways. The global economy now appears to be poised for a gradual recovery from the powerful blows of these cumulative effects. The baseline forecast for growth is to fall from 3.4 percent in 2022 to 2.8 percent in 2023, before settling at 3.0 percent in 2024. Advanced economies are expected to see a pronounced growth slowdown, from 2.7 percent in 2022 to 1.3 percent in 2023. The slowdown is concentrated in advanced economies, especially the Euro and the United Kingdom, where growth is expected to fall to 0.7 percent and -0.4 percent, respectively, this year, before rebounding to 1.8 and 2.0 percent in 2024. Notably, emerging market and developing economies are already powering ahead in many avenues, with growth rates (fourth quarter over fourth quarter) jumping from 2.8 percent in 2022 to 4.5 percent in 2023.

Global inflation is set to fall from 8.8 percent in 2022 (annual average) to 6.6 percent in 2023 and 4.3 percent in 2024, which is above pre-pandemic (2017-19) levels of about

3.5 percent. The projected disinflation partly reflects the declining international fuel and nonfuel commodity prices due to weaker global demand.

Indian Economy - A review

The Indian economy, appears to have moved on after its encounter with the pandemic, staging a full recovery in FY22 ahead of many nations and positioning itself to ascend to the pre-pandemic growth path in FY23. Yet in the current year, India has also faced the challenge of reining in inflation that the European strife accentuated. Indias growth continues to be resilient despite some signs of moderation in growth. After hitting 6.6% in FY 2022-23, GDP growth is expected to slowdown in coming quarters, to 5.7% in FY 2023- 24, before rebounding to around 7% in FY 2024-25. IMF estimates India to be one of the top two fast-growing significant economies despite strong global headwinds and tighter domestic monetary policy. India is still expected to grow between

6.5 and 7.0 per cent, reflecting Indias underlying economic resilience and its ability to recoup, renew and re-energise the growth drivers of the economy.

The year FY23 has reinforced the countrys belief in its economic resilience so far. The economy has withstood the challenge of mitigating external imbalances caused by the Russia-Ukraine conflict without losing growth momentum in the process. Indias stock markets had a positive return

in CY22, unfazed by withdrawals by foreign portfolio investors. Indias inflation rate did not creep too far above its tolerance range compared to several advanced nations and regions. A relatively higher growth forecast among major economies, projected retail inflation only slightly higher than the tolerance limit, and an estimated current account deficit financeable with normal capital inflows and forex reserves large enough to finance close to a years imports are clear evidence of economic resilience amidst a global policy crisis. Strong consumption rebound, robust revenue collections, sustained capex in both the public and the private sector, growing employment levels in the urban as well as the rural areas, and targeted social security measures further underpin the prospects for economic and social stability and sustained growth.

Global Energy Scenario

Each energy crisis has echoes of the past, and the acute strains on markets today are drawing comparison with the most severe energy disruptions in modern energy history,

most notably the oil shocks of the 1970s. Then, as now, there were strong geopolitical drivers for the rise in prices, which led to high inflation and economic damage. Todays global energy crisis is significantly broader and more complex than those that of past. The shocks in the 1970s were about oil, and the task faced by policy makers was relatively clear to reduce dependence on oil, especially oil imports. By contrast, Ihe energy crisis today has multiple dimensions: natural gas, oil, coal, electricity, food security and climate. Therefore, the solutions are similarly all encompassing. Ultimately what is required is not just to diversify away from a single energy c< immodity, but to change the nature of the energy system itself, and to do so while maintaining the affordable, secure provision of energy services.

The world is in a critical decade for delivering a more secure, sustainable and affordable energy system - the potential for faster progress is enormous if strong action is taken immediately. Investments in clean electricity and electrification, along with expanded and modernised grids, offer clear and cost effective opportunities to cut emissions more rapidly while bringing electricity costs down from their current highs. Todays growth rates for deployment of solar PV, wind, EVs and batteries, if maintained, would lead to a much faster transformation than projected, although this would require supportive policies not just in the leading markets for these technologies but across the world. By 2030, if countries deliver on their climate pledges, every second car sold in the European Union, China and the United States would be electric driven.

The global energy sector is going through a fundamental iransformation. While moving towards net zero emissions brings clear and sustained security benefits, the process ol iransition also entails risks. As energy systems become more interconnected, complex and diverse, new security concerns are emerging alongside traditional energy security risks. The traditional watchwords for energy security notably the importance of diverse energy sources, supplies and routes remain as relevant as ever, but they are accentuated by new concerns and challenges.

The current energy crisis is reshaping previously well established demand trends. Industries exposed to global prices are facing real threats of rationing and are curbing their production. Consumers are adjusting their patterns ol energy use in response to high prices and, in some cases, emergency demand reduction campaigns. Policy responses vary, but in many instances they include determined efforts to accelerate clean energy investment. This means an even stronger push for renewables in the power sector and faster electrification of industrial processes, vehicles and heating. As many of the solutions to the current crisis coincide with those needed to meet global climate goals, the crisis may end up being seen in retrospect as marking a critical turning point in the drive for both energy security and emissions reductions. The future of global energy is hence dominated by four trends viz. declining role for hydrocarbons, rapid expansion in renewables, increasing electrification, and growing use of low-carbon hydrogen.

Trends in Oil demand as we transit towards cleaner fuel

Oil demand declines overthe outlook, driven by falling use in road transport as the efficiency of the vehicle fleet improves and the electrification of road vehicles accelerates. Even so, oil continues to play a major role in the global energy system for the next 15-20 years.

The demand plateaus over the next 10 years or so, before declining over the rest of the outlook till 2050. Oil continues to play a major role in the global energy system till 2040, with demand in the range of 70-90 mbpd in 2035 against a present demand of 100 mbpd in 2022. Decline in oil demand over the long term is the net effect of fuel economy and alternate fuels weighing over increased miles travelled demand. The gradual shift in the centre of gravity of global oil markets continues, only because the emerging economies share of global oil demand increasing from 55% in 2021 to around 70% in 2050.

India imports more than 85% of its crude oil reguirements, and oil demand is only expected to rise in the coming years. Paris-based International Energy Agency has projected the oil demand to increase from 4.7 million barrels per day (bpd) in 2021 to 6.7 million bpd by 2030.

An outlook on the other major sources of energy

The prospects for natural gas depend on the speed of the energy transition, with increasing demand in emerging economies as they grow and industrialize offset by the transition to lower carbon energy sources, led by the developed world. The recent energy shortages and price spikes highlight the importance of the transition away from hydrocarbons being orderly, such that the demand for hydrocarbons falls in line with available supplies. Natural declines in existing production sources mean there needs to be continuing upstream investment in oil and natural gas over the next 30 years. The global power system decarbonizes, led by the increasing dominance of wind and solar power. Wind and solar account for all or most of the growth in power generation, aided by continuing cost competitiveness and an increasing ability to integrate high proportions of these variable power sources into power systems. The growth in wind and solar requires a significant acceleration in the financing and building of new capacity. The use of modern bioenergy - modern solid biomass, biofuels and biomethane - grows rapidly, helping to decarbonize hard-to abate sectors and processes. Low-carbon hydrogen plays a critical role in decarbonizing the energy system, especially in hard to- abate processes and activities in industry and transport. This is dominated by green and blue hydrogen, with green hydrogen growing in importance over time. Hydrogen trade is a mix of regional pipelines transporting pure hydrogen and global seaborne trade in hydrogen derivatives. Carbon capture, use and storage plays a central role in enabling rapid decarbonization trajectories: capturing industrial process emissions, acting as a source of carbon dioxide removal, and abating emissions from the use of fossil fuels. A range of methods for carbon dioxide removal - including bioenergy combined with carbon capture and storage, natural climate solutions, and direct air carbon capture with storage - will be needed for the world to achieve a deep and rapid decarbonization.

A special note on Renewables

India is progressively becoming a favoured destination for investment in renewables. As per the Renewables 2022 Global Status Report, during the period 2014 -2021, total investment in renewables stood at US$ 78.1 billion in

India. Investment in renewable energy has been close to or higher than US$ 10 billion per year since 2016, except for a dip in 2020 due to various COVID-19 restrictions. Central Electricity Authority (CEA) has projected the optimal generation capacity mix to meet the peak electricity demand and electrical energy requirement for 2029-30. The estimate builds in improved efficiency and minimises the total system cost subject to various technical/financial constraints. The likely installed capacity by the end of 2029-30 is expected to be more than 800 GW of which non-fossil fuel would be more than 500 GW. CPCL has also extended its share in increasing

its renewable portfolio by setting up 915 KW solar PV panels at Manali premises. With this CPCLs renewable portfolio has increased to 18.8 MW including wind and solar projects at various locations.

Healthy balance sheets create opportunities for oil and gas

The oil industry is not new to supply disruptions and price volatility. Over the past seven years, the industry has seen several peaks and troughs, from above $100/bbl in 2014 to -$37/bbl in 2020. But the situation is unigue today. A confluence of several economic, geopolitical, trade, policy, and financial factors have exacerbated the issue of underinvestment and triggered a readjustment in the broader energy market. All three components of a balanced energy eguation —energy security, supply diversification, and low- carbon transition—are under severe pressure. The industry has followed the investor mandate for measured investment and financial discipline. In line with this, CPCL has also been thoughtfully investing in new projects like production of Pharma grade hexane, Group II / III LOBS projects and innovative projects like Catalytic Pyrolysis of plastic waste to value added products - A circular economy approach in collaboration with NT Madras.

Operational Excellence - A step ahead this time

Refiners are generally increasing focus on operational excellence by optimizing operating conditions in real time, while complying with stringent energy and environmental regulations. This is leading to innovative efforts by refineries to deliver on the promise by working with latest cutting- edge technology to sustain their competitive edge. While many technologies have been around for a long time, oil companies are targeting operational excellence as a means Lo improve operational efficiency. Business performances have successfully adopted cost reduction as an important strategy in their workflow. With the global economic recession and the constant fluctuations in oil prices, we consider that cost reduction strategy enables us to achieve the planned production quantities at a lower cost. Successful, cost-effective investment by CPCL into energy efficiency technologies and practices have aided in meeting the challenge of maintaining the output of a high-quality product while reducing production costs during FY 2022- 23. This is especially important, as energy efficient practices often include "additional" benefits, such as increasing the profitability of the company.

During the financial year 2022-23, your Company has achieved new heights of performance, both on physical and financial parameters and surpassed its past performance by setting up new benchmarks. CPCL surpassed the name plate capacity of 10.5 MMT and achieved highest ever crude throughput of 11.3 MMT and posted a highest ever turnover

of Rs.90,801 Crs. CPCL processed around 13% Russian crudes during FY 2022-23 and added a variety of new crudes like Tupi, Kole, Urals, Sokol and ESPO to its crude basket. Our energy performance indices w.r.t Fuel and Loss (9.06%), Ell (89.2%) and MBN (74.2) are complementing each other and are at their best-ever performance level on annual basis.

During the year CPCL successfully produced 39.7 MT of Missile fuel (JP-7 eguivalent) as part of AatmaNirbhar Bharat initiative and supplied to Defense Research and Development Organization (DRDO). CPCL also commenced the supply of Diesel to Sri Lanka in line with Gols initiative towards neighbouring country and despatched a maiden cargo of 40 TMT of Diesel, to Ceylon Petroleum Corporation Limited (CEYPETCO), Sri Lanka. New product Low Sulphur Heavy stock (LSHS Premium - 0.8 % Sulphur) was successfully produced for the first time. Product pipelines viz., Chennai Trichy Madurai Pipeline (CTMPL) & Chennai Bangalore Pipeline (CBPL) achieved the highest ever Tput of 3.0 MMT & 2.4 MMT respectively.

For the first time, CPCL exported 35 TMT Naphtha parcel co loaded with Paradip refinery during Jun 22. CPCL also exported 55 TMT parcel size of Naphtha directly from Chennai port with dual berthing operation for first time during Jul 22, which improved the export realization. CPCL dispatched 241 TMT of LOBS during the year, which is the highest ever during the last ten years. CPCL has stepped up its capacity utilisation to 108% to meet the demand surge in the market.

CBR 9 MMTPA Project

India has witnessed a spectacular growth in the refining sector over the years. From a deficit scenario in 2001, the country achieved self-sufficiency in Refining and today is a major exporter of Quality Petroleum Products. Today India is the global refining hub with refining capacity of 248.9 MMTPA and is the fourth largest in the world after the United States, China and Russia. There are total 23 refineries in the country, 18 in the Public Sector, 2 in the Joint Venture and 3 in the Private Sector well spread out geographically and inter-connected with cross country pipelines.

CPCL along with IOCL is setting up a new grass root refinery of 9 MMTPA capacity with petrochemical facilities at Nagapattinam, Tamil Nadu. The new refinery will be set up in an area of about 1300 acres, out of which 618 acres is already owned by CPCL and the balance land is under advanced stage of acquisition. This new refinery will produce Petrol and Diesel of Bharat Stage-VI specifications and Polypropylene as a value-added product. Joint Venture Company (JVC), Cauvery Basin Refinery & Petrochemicals Limited (CBRPL) was incorporated on 6^th Jan ‘23 with IOCL, CPCL & seed investors. The first Board meeting of the JV Company was held on 16^th Jan ‘23. Contract has been awarded to all 4 EPCM consultants. M/s KPMG was lined up as Owners

Project Management Consultant (OPMC). Engineering and Procurement activities are in progress. Tender for all Lump Sum Turn Key (LSTK) and Build Own & Operate (BOO) contracts are ready for Award and tenders for all critical equipment are already floated. Dismantling of the existing refinery has been completed. Site enabling works viz., Site grading, Construction power & Construction water works are in progress at site & the first consignment of foundation template for CDU/VDU column was received at project site on 24^th Nov 22. Digital Control Tower (DCT) for the project was inaugurated on 29^th Aug ‘22 at Corporate office for effective project monitoring. The DCT is capable of displaying discipline wise project progress, conducting project review meetings & collaboration with other third-party applications.

Risk Management Framework

CPCL has adopted a comprehensive risk management policy to avoid risk and provide value addition to the organisation and its related parties. It will protect and add value to the organization and its stakeholders through supporting the organizations objectives by improving decision making, planning and prioritization by comprehensive and structured understanding of business activity, volatility and project opportunity/threat. The Company is prone to certain inherent business risks. The components of risk management are defined by the companys business model and strategies, organizational structure, culture, risk category and dedicated resources. An effective risk management framework requires consistent processes for assessment, mitigation, monitoring and communication of risk issues across the organization. Essential to this process is its alignment with corporate direction and objectives, specifically, strategic planning and annual business planning processes. The risk methodology categorises risks as high, medium, low and risk at radar at multidisciplinary levels.

Various Risk envisaged at CPCL during the year 2022-23

High risk includes key factors influencing capacity utilisation like crude supply insecurity, disruption in port operations, number of unplanned shutdowns and completion of shutdowns within planned duration. Erosion in refinery margins can include any negative impact on a companys associated assets or funds. Erosion can be experienced with regard to profits, sales, or tangible assets, such as manufacturing eguipment. Erosion is often considered a general risk factor within an organizations cash management

system, as the losses may be slow and occurring overtime. Major KPIs such as variation in product mix, crude price fluctuation, variations in planned throughput, and volatile cracks may contribute to erosion in Refinery Margin. Any cost and time over run in planned projects is also considered as high risk as they will likely reduce the profit margins expected from the project implementation. Medium risks include data leakage, security risk, environmental risk and other Govt, policy decisions impacting the profitability and ability to do business. Low risk includes factors which are less likely related to continuous operation, like variations in interest rate, currency risk, and commodity risk. Risks on Radar includes statutory levies by tax authorities and other related liabilities.

The importance of safety in the oil and gas industry resonates through the best safety practices to assure a safe work environment. CPCL has been continuously striving to achieve highest standards of excellence in providing health care to its stakeholders by ensuring a safe work environment and effective monitoring of various hazards in the refinery. CPCL has been providing various training programs on having safe operations and have taken up numerous initiatives like conducting onsite and off-site mock drills as per Emergency Response and Disaster Management Plan, inculcate the culture of BBS, utilisation of inherent fire-retardant suits to safe guard from flash fires etc.

During the year, there were no instances of threat to safety and security of the installations.

Other information: The details regarding the Companys CSR programmes, Internal Control Systems and their Adeguacy, Financial Performance, Operational Performance & Human Resources / Industrial relations, Material Developments are adeguately dealt in the Directors Report.

Cautionary Statement: The information and statements in the Managements Discussion & Analysis regarding the objectives, expectations or anticipations may be forward- looking within the meaning of applicable securities laws and regulations. The actual results may differ materially from the expectations. The various critical factors that could influence the operations of the Company include global and domestic demand & supply conditions affecting the selling price of products, input availability and prices, changes in Government regulations/tax laws, economic developments within the country and factors such as litigation and industrial relations.