Reach by Research
PRERANA 2012
Team Name: The Last Mohicans Institute: S.P. Jain Institute of Management & Research Name
Course
Prerana ID
Mobile
RK Dattu Saripalli
PGDM-Operations
pgp12.dattu@spjimr.org
PR122380
9930731896
Shri Harsh
PGDM-Operations
pgp12.shri@spjimr.org
PR123534
8956664218
Nilotpal Ray
PGDM-Operations
pgp12.nilotpal@spjimr.org
PR123604
9619369302
Reach by Research
SEZ as a Business Enabler
“SEZ policy is definitely sustainable for India. There is a limit to development that agriculture can achieve. For a jump in growth, industrialization is necessary. You have to make a choice between agriculture and industrialization.� ~ Nobel Laureate Prof Mohammed Yunus
1 SEZ as a Business Enabler
Acknowledgement
We would like to take this opportunity to extend our token of gratitude to:
Mr. Dunsten Miranda INM Material Manager Schlumberger Asia Services Limited Date of personal Interview: 4th October 2012 Mr. Vineet Sharma Director Oil Field Warehouse & Services (OWS) Date of personal Interview: 1st October 2012 Mr. Alok Kumar Ex - CEO TRANSOCEAN Express logistics, India Date of telephonic Interview: 1st October-2012
For their valuable insights in the field of Material Management in Special Economic Zone (SEZ) and its impact on the present business scenario in India.
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Contents i.
Executive summary..................................................................................................................4
1. Background ..............................................................................................................................6
2.
3.
1.1
Potential of Oil & Natural Gas reserves of India ...............................................7
1.2
Exploration & Production operations in India .................................................10
1.3
SEZ - History, Act and Benefits .........................................................................11
1.4
Material Management function involved in Oil & Gas service company .......13
1.5
Difficulties in the pre SEZ operational model ...................................................17
Research and Analysis ..........................................................................................................18 2.1
Current Material Management practises at Schlumberger INM ...................18
2.2
Activity flow of Imported & Re-exported items................................................20
2.3
Benefits of SEZ based Material Management to Oil & Gas companies .........26
Results & Discussion .............................................................................................................29 3.1
Benefits for Schlumberger using SEZ model ....................................................29
3.2
Opportunities for Schlumberger ........................................................................34
3.3
Future potential ....................................................................................................36
4.
Conclusion .............................................................................................................................38
5.
References ..............................................................................................................................39
6.
Appendix ................................................................................................................................42
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Charts Chart 1.1:
Time line of major developments in Oil & Gas sector ...................................................... 5
Chart 1.2:
Crude oil consumption by OECD & non-OECD countries ............................................... 6
Chart 1.3: Perceptual Map for viable areas of oil & gas exploration ................................................ 8 Chart 1.4:
India SEZ Growth Story .................................................................................................... 11
Chart 1.5: Pre SEZ material flow diagram ......................................................................................... 14 Chart 2.1:
Schlumberger flow of import & export ............................................................................. 17
Chart 2.2:
Schlumberger – Activity flow of imported items ............................................................. 19
Chart 2.3:
Schlumberger – Activity flow of Re-export/Export ......................................................... 20
Chart 2.4:
Schlumberger – Miscellaneous activity on the items under re-export ........................... 21
Chart 2.3: Post- SEZ Material flow diagram ..................................................................................... 22 Chart 3.1:
Network design to leverage the existing SEZ locations ................................................... 30
Chart 3.2: Planned E&P activities ...................................................................................................... 32
Tables Table 1.1:
India’s hydrocarbon potential .............................................................................................. 7
Table 3.1:
Working capital calculations .............................................................................................. 27
Table 3.2: Freight costs.......................................................................................................................... 28 Table 3.3:
Capacitated Warehouse Location (Network Optimization) ........................................... 31
Boxes Box i.1:
Comparison between conventional and SEZ way of Material Management ................... 4
Box 1.1:
India’s regulatory framework ............................................................................................... 9
Box 1.2:
History of legislations in India ............................................................................................ 11
Box 1.3:
Types of SEZ ........................................................................................................................ 12
Box 2.1:
Nuances of Schlumberger to SEZ based Material Management model ......................... 23
Box 2.2:
Benefits derived till date from Vishakhapatnam SEZ by OWS ...................................... 25
Box 2.3:
Operating Benefits of SEZ Based Material Management .............................................. 26
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Executive Summary SEZ as a Business Enabler  Cost saving of over $75 million in mobilization and demobilization for exploration activities in India.  16% increase in asset utilization by eliminating multiple import and export.  Lead time for tools and spares reduced from 45 days to as low as 72 hrs. And the potential goes much beyond this. The present impact of Special Economic Zone (SEZ) on Oil and Gas service industry is immense to be ignored by any company. The primary objective of an efficient Material Management System is to ensure that the material cost component in the overall cost of the product/service to be the least. SEZ helps in achieving this target by providing several benefits (Box i.1). Comparing Pre-SEZ and Post- SEZ model of material management for Oil and Gas service companies reflects advantages like 24 hours custom clearance, faster mobilization and de-mobilization of resources, reduction in breakdown time of tools (as SEZ offers maintenance services as well) and Quality Check (QC) done at SEZ saves double transportation and handling cost. Case study of Oil Field Warehouse & Services as discussed in the report reveals the true potential of cost saving that SEZ can result in. Based on study & analysis from primary and secondary research, the report has both qualitatively and quantitatively inferred that SEZ helps in reducing the working capital requirement by deferring the payment of import duty, sales, excise and service duties et al. Moreover, reduced re-export and import of tools results in increased resource utilization as it spends less time in travelling and more time on field. The report also proposes a network model of importing material to Vishakhapatnam port and using VSEZ (Vishakhapatnam SEZ) which will help in reducing the lead time and the cost of logistics. Considering the growth in Exploration and Production (E&P) activity in India, the potential saving through SEZ can be up to $ 150 million per annum. On the other hand, the SEZ model also poses risks like fear of exposure of tools to competitors, over dependency on 3rd party material management etc. The
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5 SEZ as a Business Enabler report provides a detailed background and explanation of above mentioned benefits, results and analysis of Material Management in SEZ. Comparison between conventional and SEZ way of Material Management CONVENTIONAL MATERIAL MANAGEMENT
SEZ ROLE IN MATERIAL MANAGEMENT
DUTY CHARGES
Duty paid for parts entering into India
Duty free import for parts into SEZ within India INVENTORY COST
Customs and Procedures result in higher inventory cost
Spares and parts brought to SEZ with less Customs & Procedures TRANSPORTATION COST
Transportation to manufacturing plant for MRP labelling.
MRP labelling done at SEZ saves transportation cost.
REJECTION COST
QC at manufacturing leads to higher reverse logistics cost defected parts parts.hi
QC at SEZ before duty payment reduces reverse logistics cost
DELIVERY TIME
Higher lead time due to limited stock of inventory for import duty levied.
More Stock as less working capital required. resulting in on time delivery.
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1 Background As per the indications of the Integrated Energy Policy of the Planning Commission, Government of India, energy demand in India is set to grow fourfold from 433 MTOE (Million Tons of Oil Equivalent) to around 1856 MTOE by 2032. However, till date, India has to depend on foreign inflow of oil to meet the ever-rising energy demand. In order to facilitate offshore oil & gas (O&G) exploration, the centre has come up with a phased auction of seabed plots allotted to both private and public players to encourage offshore drilling. Termed as the New Exploration Licensing Policy (NELP), this policy has so far awarded 320 exploration blocks from NELP I to NELP IX rounds (Chart 1.1). Before implementation of the New Exploration Licensing Policy (NELP) in 1999, a mere 11% of Indian sedimentary basins were under exploration, which has now increased extensively over the years. This, in turn, has resulted in an increase in hydrocarbon reserves equivalent to 600 million metric tonne. As a part of the NELP programme, firms are encouraged, via incentives, like tax exemptions on imports, low to moderate royalty rates, concessions for deep water blocks etc., to explore deep sea beds. Additionally, foreign direct investment (FDI) has been allowed up to hundred per cent in exploration (including offshore), refining (only private sector) and for retailing of petroleum products. Thus, gradually, the Indian oil sector is moving from a subsidy and price-controlled environment to a free market, and alongside, paving the way for initiatives in offshore logistics. Time line of major developments in Oil & Gas sector
NELP I - 1998 48 blocks offered
NELP III - 2002 27 blocks offered
NELP II - 2000 25 blocks offered
NELP V - 2005 20 blocks offered
NELP IV - 2003 24 blocks offered
NELP VII - 2007 57 blocks offered
NELP VI - 2006 55 blocks offered
NELP IX - 2012 34 blocks offered
NELP VIII - 2010 31 blocks offered
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7 SEZ as a Business Enabler
1.1 Potential of Oil & Natural Gas Reserves of India: India is the ninth largest crude oil importer and sixth largest consumer of oil in the world. The Oil and Gas sector of India contributes over 15 percent to the Gross Domestic Product (GDP) of the country. India has a total reserve of 1437 billion cubic meters of natural gas and 1201 million metric tonnes of crude oil as on 01 April 2010. The number of exploratory and development wells drilled in onshore and offshore areas during 2009-2010 timeframe was 428 (with a metreage of 1019 thousand meters) respectively. Further, oil consumption in India is projected to enhance by 4-5% per annum to 2015, indicating a demand of 4.01 mbpd by 2015. According to the forecasts of the Business Monitor International (BMI), India will account for 12.4% of oil demand of the Asia Pacific region by 2015, while satisfying 11.2% of the supply. According to Crisil Reports, Crude oil consumption by non-OECD countries will increase by 5.6 mbpd (million barrels per day) led by China, India and Saudi Arabia, while demand from OECD member countries will decline by 3.5 mbpd, due to shift to cleaner fuels and lower GDP growth (Chart 1.2). With world GDP expected to grow at a 4.2 per cent CAGR in the next 5 years, global crude oil demand is expected to increase at a CAGR of 0.9 per cent to 92 mbpd in 2016 from 88 mbpd in 2011. Crude oil consumption in OECD and non-OECD Countries
Source: www.crisilresearch.com
Chart: 1.2
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8 SEZ as a Business Enabler The Government of India has taken initiatives to boost investment by allowing 100 percent FDI in the Indian refineries. Moreover, 100 percent FDI is allowed for petroleum products and pipeline sector, natural gas and for infrastructure related to petroleum products marketing. In India crude oil & natural gas is produced both onshore and offshore (Table 1.1). Assam/Nagaland, Arunachal Pradesh, Gujarat, and Tamil Nadu/ Andhra Pradesh consist of the onshore oil reserves. Primarily, Oil and Natural Gas Commission (ONGC) and Oil India Limited (OIL) have the onshore field for crude oil production. Offshore production is done at Bombay High (off the coast of Mumbai) run by ONGC and Private/Joint Venture companies. For natural gas, onshore fields are at Assam, Tripura, Gujarat, Tamil Nadu, Andhra Pradesh and Rajasthan. Offshore production of natural gas takes place at the Western area of Bombay High. The following table shows the hydrocarbon potential (in million metric tonnes) for the main oil & gas basins of India as on 1st April 2011: Hydrocarbon Potential (Offshore basins)
Hydrocarbon Potential (Onshore basins) Upper Assam
3,180
Mumbai
9,190
Cambay
2,050
Deep water
7,000
Assam Arakan
1,860
Kerala Konkan
660
Krishna-Godavari
555
Kutch
550
Saurashtra Offshore
280
Cauvery
270
Andaman Nicobar
180
Mahanadi
100
Bengal
30
Krishna-Godavari
575
Cauvery
430
Rajasthan
380
Ganga Valley
230
Kutch
210
Bengal
160
Himalayan foreland
150
Mahanadi
45
Total
9,270
Total
18,815
Source: www.crisilresearch.com
Table: 1.1
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1.1.1 Perceptual Map for viable areas of oil & gas exploration With respect to the health of the sedimentary basins of India as stated in the previous section, the four major gold spots of oil & natural gas exploration can be demarcated as below (Chart 1.3):
Assam Basin
Index Category I Basin (Proven Commercial Productivity) Category II Basin (Potential Productivity) Source: www.dghindia.org
Chart: 1.3
Adding to the recent mega-scale oil and gas discoveries in the Rajasthan & the Krishna Godavari basins, India still has significant potential to discover new oil and gas basins. According to the
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10 SEZ as a Business Enabler reports of the Directorate General of Hydrocarbons, India, 78 percent of the country‟s sedimentary area is yet to be explored. Moreover, exploration and production spend in India has doubled from about US$ 2.5 billion in 2004–05 to about US$ 5 billion in 2007–08. With overall E&P spend expected to be in the range of US$ 90–110 billion in the next 7–10 years, a sustained demand will be created for oil field services like drilling rigs, offshore support vessels, tubular goods, seismic services, equipment for constructing process platforms, pipelines and collecting stations, as well as other surface facilities for transportation of oil and gas from wells to delivery points.
1.2 Exploration & production operations in India A good oil & gas regulatory regime addresses certain major regulatory issues in a satisfactory way: •
The right to monetize resources
•
Fiscal and contract stability
•
Enforceability of contract
A regulatory regime that fails on any one of these points puts its “investment favorability” at risk. The regulatory framework that is prevailing in India is as shown below (Box 1.1):
Constitution Petroleum Laws/ Regulation E & P Business Regimes
Concession
Joint Venture
Service Contract
Hybrid
PSC
PSC – Profit Sharing Contract Box: 1.1 PR122380
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11 SEZ as a Business Enabler The ease of doing business in India and the risks involved as compared to other countries can be seen from the graph plotted in Annexure – 1. The major inference from the report is: India is rated higher on the ease of doing business and lower in the risks involved with respect to the other competing countries. This was possible by a combination of policy easing and the incentives that the Government of India has provided by encouraging the development of Special Economic Zones (SEZ).
1.3 SEZ - History, Act and Benefits Special Economic Zone (SEZ) is a specifically demarcated duty-free geographical location within a country which has more free market oriented economic policies and flexible governmental measures when compared to the country where it is situated. In some countries, such a region is even treated as a deemed foreign territory (Eg. Hainan Province SEZ, China). An SEZ is a trade capacity developmental tool, with the goal of promoting rapid economic growth by using tax and business incentives designed to facilitate foreign investment and technology in forms of Exports and Imports. Today, there are approximately 3,000 SEZs operating in 120 countries, which account for over US$ 600 billion in exports and about 50 million jobs. By offering privileged terms, SEZs attract investment and foreign exchange, boost employment and spur the development of improved technologies and infrastructure, thus catering to a higher GDP growth.
1.3.1 Brief history of SEZ in India India was one of the first in Asia to design the Export Processing Zone (EPZ) model in promoting exports. Asia's first EPZ was set up in Kandla, Gujarat in 1965. The concept of SEZ was first introduced officially in the „Special Economic Zone Scheme‟ on April 2000 as a part of the Foreign Exchange Management Act (Data 1.1). The primary objective was to provide an internationally competitive environment for exports that would in turn pave the way for a healthy Foreign Exchange Market in India. However, in its initial form, the concept of SEZ was not able to inspire sufficient confidence in the investors due to persistent bureaucratic red tapes and ambiguous policy guidelines. Hence, to provide a stable economic environment for the promotion of export and import of goods & services in a quick, efficient and hassle-free manner, the Government of India enacted the SEZ Act, which received the assent of the President of
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12 SEZ as a Business Enabler India on June 23, 2005. The SEZ Act and the SEZ Rules, 2006 (“SEZ Rules”) were notified on February 10, 2006 (Chart 1.4). The SEZ Act gave a big push to exports and consequently to the Foreign Direct Investments in India. Historically it was considered to be one of the finest pieces of legislation that would represent the future of the Industry & Infrastructure development in India.
Foreign Trade & Exchange: History of legislations in India
The Foreign Trade Development & Regulation Act (1992)
The Foreign Exchange Management Act (1999)
• Enacted as a remedial measure of the Balance for Payment (BoP) Crisis of 1991. It stipulatd the development and regulation of Foreign Trade by facilitating imports into and augmenting exports from India.
• Enacted to consolidate and amend laws relating to Foreign Exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintainance of foreign exchange market in India
Special Economic Zone (SEZ) Act (2005)
• Enacted to provide legal framework for establishment of Special Economic Zones and also for units operating in such zones. Primary objectives are to generate smooth and hassle free economic activity, promotion of selected goods & services via exports or imports, investment from foreign & domestic sources and creation of employment opportunities.
Data: 1.1
India SEZ Growth Story Kandla SEZ (Gujarat) 1965
Cochin SEZ (Kerala) 1983
EPZ(Mumbai) 1973
Falta SEZ (West Bengal) 1984
Madras EPZ (Tamil Nadu) 1984
Visakhapatnam SEZ (Andhra Pradesh) 1989
Noida SEZ (Delhi NCR) 1985
SEZ Act 2005
SEZ Scheme 2000
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13 SEZ as a Business Enabler
Types of SEZ Oil & Gas SEZ (Dahej SEZ, Gujarat)
Sector Specific SEZ
Pharmaceuticals (Sanand, Ahmedabad)
Special Economic Zone (SEZ)
Multiproduct SEZ (Noida SEZ, Delhi NCR)
Apparel & Fashion (Mahindra SEZ, TN) Aviation (GMR Hyderabad, Andhra Pradesh) Port/Airport based SEZ
Free Trade Warehousing Zones (FTWZ), Mahape Industrial Estate, Navi Mumbai
Mundra Port SEZ (Gujarat)
Data: 1.2
1.4 Material Management functions involved in an Oil & Gas service company The prime objective of the Material Management system is to ensure that the material cost component in the overall cost of the product/service be the least. In order to achieve this, the control is exercised in the following fields which effectively form the core of any material management system. 1. Materials requirement Planning 2. Identifying in house / Purchasing 3. Logistics planning 4. Receiving, Inspection, and Dispatching 5. Material handling and Traffic 6. Value analysis, standardization and Variety reduction 7. Disposal of scrap, surplus, Material preservation.
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1. Materials requirement Planning Material requirement planning is the most critical function of any organization, as inventory of materials involves about 60% of the total investment of the organization. The profit earned depends mainly on asset utilization and reducing the inventory. This is extremely crucial for Oil & Gas service companies as their material costs are even higher and keeping excessive inventory will lead to locked in working capital. Material Management planning consists of the following discrete verticals: 2. Identifying In-house / Purchasing This step is about identification of the source of required material. Various options exist like in-house availablity at a different location or purchasing from an external vendor. 3. Logistics Planning This plays a crucial role in the present case as 90% of the materials used by the O&G service companies are imported. This portion is explained in detail in the next section. 4. Receiving, Inspection, and Despatching These functions include receiving at the destination port, document clearance, inspection, and discharge to the central warehouse. Distribution of materials requested by various work centres and other departments must be ascertained and its flow and continuity of supply must be maintained by the materials management department. Insufficient or zero inventories at times create the situations of stock-outs and leads to stoppage of production. 5. Material handling at the Store Proper stacking and tagging of the materials at the store facilitates easier identification of materials. Careful handling of the material is required to avoid any damages as these materials generally have a very long lead time due to constraint in the geographic availability. 6. Value analysis, standardization and variety reduction Standardization leads to better inventory management and control. If less number of varieties of inventories are available the type of inventory correspondingly reduces which leads to reduction in the total inventory carrying and ordering costs.
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Pre- SEZ Material flow diagram
Reverse Logistics: Rejection of spares and parts after import duty has been paid results in higher reverse logistics cost and operational hassles.
MRP Labelling: MRP Labelling for spares is not allowed at port, forcing spares and parts to be transported to be transported to warehouse
Entry Point: Duty paid for spares and parts entering in India
Custom Formalities: Custom formalities and procedure result in higher inventory carrying cost
QC Process: QC at warehouse may lead to rejection of parts.
Distribution:Distrib ution of spares and parts to various locations from central warehouse
Lead time:Tied up working capital that was spent on duty limits the amount of spares that can be stored, negatively affecting lead time of delivery
Chart: 1.5
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1.5 Difficulties in the pre SEZ operational model for Schlumberger:
1. The contractors import equipment and consumables, duty free under the Essential Certificate (EC), for their operations, but the imported equipment, consumables etc. have to be re-exported after the contract is over as per custom notification & EC. 2. The players pay hefty charges for the mobilization and demobilization of the tools and equipment which runs into millions of dollars. 3. Equipment & tools needs to be exported for repairs and maintenance to Dubai, Singapore. As facilities are not available in India to stock the spares duty free. 4. Multiple export and imports due to statutory requirement leads to high transportation costs. 5. The possibility of transit loss or damage to the equipment due to the frequent movement besides the time and costs involved in arranging and executing the logistics and necessary documentation. 6. The average lead time required to procure certain items are 45 days (on an average) which leads to enormous delays in case of stock outs. 7. Since custom clearance is needed before unloading, there are delays which results into high demurrage charges. This indirectly affects the vessel availability for further movement of materials often resulting in high idle times. 8. The tools & equipment spend more time in the transit because of the re-export clauses. This results into low tool utilization rates. 9. The documentation and custom clearing is very complicated and lot of effort goes into adhering to the paper work. Any mistake only delays the process. 10. Since Quality Checks (QC) can only be done after the custom clearance, this at times results in payment of duty for damaged parts.
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2 Research and Analysis 2.1 Current Material Management practises at Schlumberger INM This section provides brief inputs on the existing Material Management practices at Schlumberger INM Geo market. As the basic functions of the Material Management practises are same across the industries and geographies, this report focuses on the areas in which SEZ can play a major role.
2.1.1 Abbreviations and definitions: CLC - Country Logistics Centre EC – Essential Certificate DGH – Directorate general of Hydrocarbons SLS – Segment Logistics Specialist RA – Radioactive material TW – Technical write-up Flow charts (Chart 2.1) depicts the gross flow of imported and re-exported items at Schlumberger INM Geo market. In this, base location identifies the required material and sends a requisition for its import (Almost 90% of the tools & Equipment are imported). After identification of the availabilty of requested material (Either from SLB/its suppliers) it is transferred to the central hub. Frieght carriers ensure smooth movement of these material from origin port to destination port. After getting the import clearances the same is transferred to its base location. Here other acrivities of material management are taken care of (Example receipt, qualitycheck,stackingetc.)
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External Agencies (Suppliers / SLB)
Non- GOLD items (Segments)
GOLD - Hub Freight Carriers
Pre-Shipment Activity
Import Clearance Activity
Origin Port
Destination Port
Base Destination location
Material Receipt
Destination Point / Bunkers
Re-export procedure (if applicable)
Field Location
Base location
Importing port
Freight Forwarder
Exporting port
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2.2 Activity flow of Imported & Re-Exported items
Chart 2.2 shows all the activities involved in the forward logistics while Chart 2.3 depicts the reverse logistic activitie involved. The three main components of the forward logistics are The hub, Country logistics centre and segment logistics specialist. The steps involved in this are, importing segment identifies the need of the material and raises requistion for material. This order is verfied and if itâ€&#x;s a non duty free item then it is sent for EC approval. EC approval fecilitates green light for shipment. Then the order is communicated to the country logistics centre for necessary processing. Once it is transferred to the domestic port, it will wait for the custom clearances and after getting necessary approvals it is sent to bunkers/base location based on the sensitivity of the material. Then all the original documents, invoices are carefully archived which are very much essential in-case of a re-exportable item. Similarly in-case of a reexported item the exporting segment initiates the request. Then they will bid for the freight and make an export invoice. Then comes the process of custom clearance documentaation. After getting the necessary approvals from the destination location, the item will be transferred from the field to port and hand it over to freight forwarders. The last step would be to issue pre-alert to destination segment and all concerned parties to avoid any communication gap. Other miscellaneous activities include Reporting tools lost in hole / operations for which a consumption certificate from the DGH should be obtained. Request for EC validity extension, this has to be processed through the client and DGH, Request for block transfer for which necessary approvals from the Govt. agencies to be obtained. Some of the materials imported needs special attention and proper care has to be taken while handling them. Some of them are the explosives used in drilling, radioactive material that is used etc. They have to be stored as per the regulation and in a non-hazardous environment. Overall, the entire operation of material management poses highly complex situations and lot of planning needs to be put in because the lead times are very high.
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Schlumberger – Activity flow of imported items
20 SEZ as a Business Enabler
Segment sending /
6. Shipment and sending pre-alert
CLC - International
Importing Segment 1. Order Release
YES
3. Obtain Licences
SLS Is License required
NO YES
Is the item
NO
3. EC application processing
5. Green light for shipment
2 Order verification (Invoice verification)
External Agencies – CCA/ transportati on unkers 4. Obtain approval of EC
7.1. Issue WO to CCA 12. Send reminders to Segment on re-export bond
11. Obtaining and archiving Original documents, invoices.
7.1 Communicate incountry transportation requirements if required to CLC
10. Transferring material and documents to segments
CLC - Domestic
9.2 Transportation to base location / or to destination as per instruction from international team
8. Complete customs clearance
9.1. Transportation to base location / or
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21 SEZ as a Business Enabler
Importing Segment Receiving / HUB
Exporting Segment 1. Request for Re-export / Export
SLS
6. Issue Green light
2. Prepare check list and packing list
Schlumberger – Activity flow of Re-export/Export items External CLC - International Agencies – CCA/ transportation vendors / 3.1 Start bidding for freight if required
5. Request for Green light from destination location 7.1 Communicate to CCA 7.2 Communicate to CLC-domestics 10. Issue Pre-alert to destination segment and all concerned parties Chart: 2.3
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3.2 Prepare Reexport / Export Invoice and bank
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CLC Domestic
4. Custom clearance document preparation and keep ready Shipping bill registered at customs
9. CCA to transport item (if required), clear customs formality and hand over it to freight carriers
8. Transport items from field to origin port
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22 SEZ as a Business Enabler
Schlumberger – Miscellaneous activity on the items under Re-export bond
Exporting Segment
Reporting tools lost in hole / operations
Request for EC validity extension
Request for Block transfer
CLC - International
External Agencies – CCA/ transportation vendors / vendor for bunkers
Obtain Consumption certificate from DGH for lost tools
Processing EC validity extension through Client and DGH
Initiate applications process (letter, NOC etc.)
Get approval from Govt. agencies
Chart: 2.4
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Post- SEZ Material flow diagram
MRP Labelling: MRP Labelling for spares is allowed at SEZ. Saving on transportati tn cost manufacturing plant
Entry Point: Duty free import for spares and parts into SEZ.
QC Process: QC at SEZ befroe duty payment and total operational and procedural freedom for re-export from SEZ
Reverse Logistics: Rejection of spares and parts before duty payment reduces the cost of reverselogistics
Ability to Stock more: Working capital not tied in duty payment allows to keep extra stock and thus resulting on -time delivery on spares and parts.
Distribution:Distrib ution of spares and parts to operation sites directly from SEZ reduced cost of tranportation to and from manufactuirng plant or ware house.
Lead time: Reduction in lead time of delivery of spares and parts. Increasing resource utilization and reduces idle time on- rig site.
Chart: 2.5
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2.2.1 Nuances of Schlumberger to SEZ based Material Management model
Schlumberger
SEZ based model
In India all ports work between 10 AM to 6 As per the government regulations, an SEZ PM. So the custom clearance can only happen must work for 24 hours a day. So in the case of in these specified hours.
SEZ the movement of materials can start an hour after the document has been processed.
In case of the existing Schlumberger system, Since SEZ area is treated as a foreign territory, equipment and tools are brought in for de-mobilization
and
mobilization
can
specified time periods, after which they have to effectively be done by moving the material be re-exported to neighbouring countries and inside the SEZ. This saves lot of time, money re-imported when the need arises. This often in terms of logistics and damages in transit. results in high mobilization and demobilization costs and reduces tool utilization time. In case of damage or repair to any of the Few Material Management companies based components it has to travel back to Singapore, out of SEZ are now also offering the technical Dubai to get it rectified. This is majorly due to services for breakdown maintenance (Ex: Oil the lack of availability of skilled technical Field Warehouses & Services - “OWS�), the service.
tool down time can be reduced to great extent.
In this case, the material from the destination In this case the material is directly transported port goes to the central warehouse for quality to the SEZ area where the quality check takes checks and labelling purposes after which it is place and then it is transported to the site. This distributed to various workplaces. This results reduces the double handling and transportation in double handling of material which may also costs. lead to damage and additional transportation costs. Data: 2.1
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25 SEZ as a Business Enabler
2.3 Benefits of SEZ based material management to Oil & gas service companies With the case study of Oil Field Warehouse & Services (OWS) Company Oil Field Warehouse & Services (OWS), Head Office: - MIDC Mahape, Navi Mumbai. Inception Oil Field Warehouse & Services (OWS) was established in 2005 to cater to the growing demands of the Oil & Gas service industry in India. The Gap The rapidly growing exploration and production (E&P) activities in India has attracted more and more global operators and contractors to come to India. Thus all exploration related equipment and consumables are brought from outside the country and have to be returned back to the country of origin after completion of service. This leads to multiple re-imports increasing the possibility of in transit loss or damage to the equipment besides the time and costs involved in arranging and executing the logistics and necessary documentation. Solution With warehousing facilities within a Special Economic Zone (SEZ), OWS offers a unique ease of operation for its clients, eliminating the need for multiple re-imports of equipment as SEZ is deemed to be foreign territory for the purpose of trade operations, duties and tariffs thus saving the transportation costs of actually shipping it to a foreign land. 2.3.1 Services offered in an SEZ based material management model 
Single Point Service of picking up from any part of the world by sea or air, Gateway port custom procedures, all compliances, entry into SEZ, delivery to the ultimate destination using own transport that are fitted with GPS.

Leveraging on its core competence of logistics and material management, OWS ensures smooth operations for its clients and provides warehousing facilities within SEZ.
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26 SEZ as a Business Enabler
Benifits derived till date from Vishakapatnam SEZ by OWS
2.3.2 Benefits derived till date from Vishakhapatnam SEZ by OWS
Existing Oil & Gas service companies as customers to OWS: RIL,Schlumberger,BAKER HUGHES,Aker Solutions etc.
The tools utilisation is increased by 16% as now tools are available immediately and no more shuttling between countries India and foreign countries The emergencies of operators was met at short notice and in an cost effective manner
OWS has created employment in India as the repair and maintainence and up keep has started within the country itself
Able to keep all tools in a pool and offer to any client as per requirement.
the operators have saved US$49.5 million approx towards mob and remob charges which ultimately has reduced the cost recovery amount for the government of India. A wide range of tools are available in India thus the operators do not have to plan so long in advance for mobilisation and can be mobilised within 36 to 72 hours The only place in India where custom clearance can be done 24X7 visavis day time working at various ports Duty free imports from the year 2006 in which this became operational
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27 SEZ as a Business Enabler
Operating Benifits of SEZ Based Material Management
2.3.3 Operating Benefits of SEZ Based Material Management The contractors will always have big advantage over the competitors as they will offer tools ex-SEZ and will not charge Mob Demob costs. The contactors will offer their tools and equipment at short notice exSEZ and will save on time. Save on cost and time to send equipment overseas for repair and maintenance. Able to keep all tools in a pool and offer to any client as per requirement.
Sale on consignment basis, where contractors’ inventory gets blocked, can be reduced. Save on freight cost. Able to ship in bulk, store in SEZ and save on freight cost mostly by air for fragmented shipments. The contractor will be able to service their other operations in this part of the world like Bangladesh, Sri Lanka, Myanmar. Save on expired chemical stocks lying with operators under consignment sale. Contractor can offer facility to the Operators to check workable condition ofb the equipment in SEZ. Contractors can get single EC for a complete lot of material to be supplied to the Operator thus avoiding multiple EC cost. Small valued and weight shipments can be cleared in one lot. Green lighting of material can be done at any point of time. No need to wait for the Essentiality Certificate(EC) to be issued from DGH as EC will be required at the time of clearance from SEZ. Save on documentation for EC and block transfer as material can be issued directly to the Operator. Data: 2.3
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3 Results & Discussions 3.1 Benefits to Schlumberger using SEZ model
3.1.1 Reduction of tied-up working capital Working capital that is tied-up because of the early payment of customs duty (In the traditional model) is shown below (Table 3.1): Our assumptions in this model are 1. The monetary value of the tool & equipment that are imported in the beginning is USD 1, 00,000. 2. Material usage per month is as shown below. Here we have calculated the customs duty paid before actual usage of the material as percentage basis of the idle inventory. Monetary values/month Working capiital employed($) in importing material Material Usage value($) Idle materials ($)
1
2
3
100000
4
5
6
7
8
9
100000
10
11
12
100000
15000
15000
15000
15000
15000
25000
15000
15000
15000
15000
15000
25000
85000
70000
55000
40000
125000
100000
85000
70000
55000
40000
125000
100000
Tied up working 25500 capital in terms of customs duty (Assumed@30%) opportunity 425 cost($) Assumed@20% Opportunity cost lost($)
21000
16500
12000
37500
30000
25500
21000
16500
12000
37500
30000
350
275
200
625
500
425
350
275
200
625
500
4750
Table: 3.1
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29 SEZ as a Business Enabler 3. As it can be seen from the table we have assumed the custom duty on the material imported to be @ 30% and the profit margin of the company to be @ 20%. 4. An amount of $ 4750/$ 1,00,000/ One billing cycle can be saved by shifting the material management base to SEZ. Though there are many assumptions in this model, it gives a rough idea on the cost saving aspects of the working capital employed in the business. 3.1.2 Improvements in the tool utilization There is an impressive 16% improvement in the utilization of the tools for all the Oil & Gas service companies operating out of SEZ.
This is mainly possible because of the reduced
mobilization & de-mobilization periods because the movement to SEZ is treated as the transfer to foreign land. Other major factor which improves the utilization is the availability of technical service to correct the problems in the tools in-case of a break down. Better utilization of tools will reduce the overhead costs and helps in having a better bottom-line. 3.1.3 Stronger base in the more potential basins In the present model, Schlumberger operates primarily from the Mumbai port. Our study and analysis has revealed that it should also start actively looking at the Vishakhapatnam port. The strategic location of the VSEZ (Vizag SEZ) will help in a great way in reducing the costs of owning and operating a warehouse. Primary research revealed that majority of exports take place from Dubai or Singapore as the central hub. So, all the imports from Singapore and Indonesia can be routed to eastern port i.e. Vishakhapatnam.
Origin
Destination
Freight
Transit Time
Distance
Singapore
Vishakhapatnam
$1,680.13
4.74 Days
1,564.56 NM
Singapore
Mumbai
$2,268.66
6.40 Days
2,112.62 NM
Table: 3.2
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30 SEZ as a Business Enabler This strategy will help Schlumberger develop a strong base on the eastern coast, where 7 out of 8 newly discovered oil blocks are located. It ensures that the in land logistics cost of moving the material from the Mumbai warehouses to other locations such as Kakinada and Vishakhapatnam will be greatly reduced. Pictorial representation of the model that we are proposing is attached herewith. We tried comparing these two alternatives by taking the example of a simple 45 ft vessel which operates between Singapore – Vishakhapatnam and Singapore – Mumbai. There is significant saving in the freight paid if Schlumberger starts operating from the Vishakapatnam port and warehousing at the VSEZ. In-land logistic costs will only add to these savings. Alternative shipment route proposed
NM – Nautical Mile
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Box: 3.1.a
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31 SEZ as a Business Enabler 3.1.4 Network design to leverage the existing SEZ locations:
Operation site
Warehouse
Bombay high
MUNDRA SEZ
Baroda
Rajasthan VIZAG SEZ
Kakinada
Chart: 3.1
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32 SEZ as a Business Enabler 3.1.5 Capacitated Warehouse Location (Network Optimization) N = Number of potential ware house location. M = Number of operation or demand point. Dj = Annual demand operation site j. Ki = Capacity of warehouse i. Cij = Cost of material management from warehouse i to operation site j.(Costs include warehouse, inventory and transportation) For simplicity we have considered cost directly related to distance between warehouse and operation site. The excel model below (Table 3.3) shows the of distance of two SEZ namely VSEZ and Mundra SEZ from four operation sites of Bombay high, Baroda, Rajasthan Oil field and Kakinada. The aim of function is to minimize the distance travelled in transportation and hence minimizing cost. Constraint of warehouse capacity and demand at different operation sites are assumed.
SEZ MUNDRA VIZAG
Bombay 500 1100
SLB Operations Baroda Rajasthan 464 788 1160 1674
MUNDRA VIZAG
Bombay 200 200
Baroda 50 0
Rajasthan 250 0
400
50
250
Demand
Distance of each location from the two SEZ
Kakinada
Quantity distributed from each SEZ to different locations
Capacity 0 500 300 500 300
The problem is formulated as-
Assuming Capacity at Vizag SEZ Capacity of Mundra SEZ Requirement at Baroda Requirement at Bombay high Requirement at Kakinada Requirement at Rajasthan Minimize
Kakinada 2035 153
500 500
•
Minimize Subject to
50
• • •
∑ xij = Dj for j= 1,2….m as i varies ∑ xij <= Ki * yi for i= 1,2...n as j varies yi € { 1,0} and xij>= 0
400 300 250
Total distance travelled
∑ ∑ cij*xij
586100 Table: 3.3
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3.2 Opportunities for Schlumberger 3.2.1 Future growth as a business enhancer ONGC and Reliance have huge plans of expediting the exploration and production activities in India. The graph below show the scale of planned E&P activities.
600
200
500
150
400
100
Development
300
Development
Exploratory
200
Exploratory
50
100 0
0 Fy - 03
Fy - 09
Fy - 03
FY - 14
Cumulative drilling depth in Offshore India („000)
Fy - 09
FY - 14
Number of wells drilled in Offshore India Source
Report by Mantrana maritime Advisory presented in 2nd Annual Offshore India O&G summit
Chart: 3.2
With Increase in operation Schlumberger will require large imports of tools both consumable and non-consumables. Operations from SEZ can be major cost saving point. Areas of cost saving in material management lies in two distinct functions:
Logistics cost
Capital Tied up in stocks
Logistics cost are incurred to maintain flow of material from the supplier to production site. Logistics costs around 20 percent of the total expenditure. For a global Oil and Gas company the average production cost is around $10 per barrel. A company producing a million barrels of oil equivalent every day will spend around $ 3.5 billion in a year, with logistics cost ranging around
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34 SEZ as a Business Enabler $ 700 million. Proper material management through SEZ can reduce this cost by 15 percent which leads to a saving of $ 105 million per annum which is a significant amount. Safety stock is required to protect against unforeseen events. Excessive stock incurs high inventory carrying cost and tied up working capital. In operations the material stock held by O&G service companies varies from $ 1 billion to $ 2 billion, so a 10 percent reduction can release as much as $ 100 million, significantly reducing cost of capital. This reduction can be achieved if the inventory for certain players for few common consumable products is jointly maintained at the SEZ. 3.2.2 Risk and Challenges ď&#x201A;ˇ
Risk of tool exposure to competitors: Oil and gas service industry is a high technology dependent industry. A common SEZ which caters to different O&G service companies at the same time poses the risk of technology exposure of one competitor to other. Although the Oil and gas companies take sufficient measure to safeguard their technology through patents, the company would not like the competitor to even have a look at their tool. This can create apprehension in the minds of service companies against using SEZ warehouse facility. Risk Mitigation: SEZ operator ensures that spares and parts of competitors are stored in different warehouses. 24*7 security at the warehouses and entry only to the respective company employee is managed by the SEZ operator. Warehouses are under electronic surveillance to prevent any infringement.
ď&#x201A;ˇ
Excessive dependency of 3rd Party material Management: In case the company completely outsources its warehousing activities, it will be completely dependent on SEZ operator for providing the spares and parts. In case, the logistics system of SEZ operator fails, the complete project of Oil and gas Service Company faces the risk of coming to a standstill.
ď&#x201A;ˇ
Risk mitigation: Though the SEZ system of material management is useful on its face, completely doing way with the present model will pose huge risks to Schlumberger. So a hybrid model with an ideal mix of these two systems is developed by us. In this model:
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35 SEZ as a Business Enabler 1. First we will arrange the entire inventory based on the frequency of its use. So, there will be a list of materials with decreasing order of their usage. The upper half of this list is essentially fast moving, critical items. 2. Now another list based on the monetary value of the items is prepared. Now weights will be assigned to these two lists based on the criticality of the parameter used. We have given a weightage of 60% to the fast moving items list and 40% to the monetary vale based classification. Now the combined list which is made considering these weightages is final. 3. In this list the top 40% of the materials can be kept in the warehouses of Schlumberger (As they are critical) and the rest 60% can be offloaded to the contractor operating out of SEZ. Maximum benefit without running the business into risk is the prime objective of this model. Change in the legislations on import duty: There are different forms of free trade provisions in different countries based on its conditions. In India free trade zone are called SEZ and import duty is around 25 to 30 percent. India is ready to let go its tax revenue in order to promote business. In Middle East countries free trade zones are called FTZ. Here the import duty is around 5 percent. The country can afford to keep this low value of import duty due to high volumes of transactions. In US, the government does not want to lose on the import revenue and also wants to safe guard its market from foreign players. To set up a free trade zone in US, the population of that area should agree to forgo the tax benefits. Thus incase India changes its policy on the custom duty percentage (Effectively lowering it), then the benefits derived out of SEZ may look absurd. There are remote chances of such thing happening because the volume of activity in this part of the world is very low. 3.3 Future Potential of SEZ in O&G industry Unite and Rule: India still does have large SEZ. The biggest sector specific SEZ in India in 400 hectare. Increase in the size of SEZ to improve the benefits for O&G sector and enabling them to
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36 SEZ as a Business Enabler completely move out of ware house business. This will also help new players to enter the business due to reduction in fixed required develop their base in India. Also having large SEZ enables sharing of capacity by different players in E&P service. This will help in cost reduction by enabling lower working capital requirement and higher inventory turnover ratio. For example consider the case: Many consumables like Drill Bits are imported by operators on consignment basis. If used, the contractor is paid and balance bits have to be exported back to the vendor. Lot of unwanted inventory and space is build up at operator's place. With common SEZ facility, the vendor can supply the bits as and when ex-stock from SEZ and operator will not be required to carry vendor's inventory in their required shore base. The vendor can offer such bits kept in SEZ to other operators. Loss of opportunity due to bits not being available to others can be reduced.
Fabrication in SEZ: Growing Oil and gas exploration needs will need fabrication of huge structure on land and their transportation to desired locations. Currently these are fabricated overseas and brought in India which is highly cost intensive and time consuming and also highly risky in transit. SEZ can offer fabrication facility to such companies wanting to do business in India. Fabrication at SEZ offers few benefits like
No electricity duty
No excise duty
No sales tax
OWS has plans enter this role and provide basic fabrication facilities to its customers. OWS has invested 500 crore Rs to develop such a facility in nest 2-3 year efforts. The fabrication of goods can include assembly of large drilling and measuring tools. This will poses some challenge in developing the facility required to handle the oil and gas service tools. If SEZ can offer benefits of fabrication, the Indian SEZ can act as hub for all the neighbouring countries and also generate huge employment.
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4 Conclusion If we were to conclude our findings in a single statement, we probably would say â&#x20AC;&#x153;The potential of the SEZ as a business enabler is like a huge ocean unsailed, a new continent unexplored, a world of possibilities waiting to be released and channelled toward some great goodâ&#x20AC;? SEZ based Material Management will greatly help the small size players from world over who are keen to enter the rapidly growing Indian Oil & Gas sector. They can ply in Indian markets without worrying about the extra cost that they would incur otherwise in setting up their offices in India. Though this concept has helped in increasing the asset utilization and earnings of the existing companies, caution needs to be exercised in completely offloading the material Management services. Following PDCA (Plan, Do, Check, Act) model can help existing companies in progressively moving away from the conventional to SEZ based system. Try the plan on small scale basis. For example, giving only 25% of the scope of work. Ex: if the total warehousing space requirement is say 20000 Sqft, then only subcontracting 5000 Sqft of it.
1. Vishakhapatnam as a strategic hub to operate from SEZ in eastern parts.
2. Develop plan of action for offloading the job to 3rd party
Plan
Act
If there is a reduction in the overall costs, asset utilization time then replicate the model in other regions.
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SEZ Business model
Check
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Do
1. Evaluate the plan on various parameters like service time, safety of tools, overall costs etc.
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5 References •
Vinay R Sharma: Offshore World; October-November 2010; Vol 7 No. 6 (Infrastructure & Logistics): “Insight into Upstream & Downstream Hydrocarbon Industry”: Cover Story, pp: 10-16.
•
Jasleen Kaur: Cargo Connect, December 2011, Vol: III “International Oil & Gas Connector (Oil Fields Warehouse & Services: OWS)”; Cover Story, pp: 26-34.
•
Frewin Francis: LOG.India; September 2010, Vol: 4; “Eureka Moment”; Cover Story, pp: 37-42.
•
Indian Petroleum and Natural Gas Statistics (2010-11): Government of India, Ministry of Petroleum & Natural Gas, Economic Division, New Delhi, “Areawise deployment of deep drilling rigs , wells & metreage drilled by ONGC & OIL”, pp: 16-18.
•
Directorate General of Hydrocarbons (Under Ministry of Petroleum & Natural Gas, Govt. of India), “E&P Activities: Sedimentary Basins-Hydrocarbon Potential”, URL: „http://www.dghindia.org/SedimentaryBasins.aspx‟, accessed on 1st October 2012.
•
Crisil Limited: Industry Analysis: Crude Oil: Data & Statistics: Annexure: “Onland & Offshore Basins as on 1st April 2011”, URL: „https://www.crisilresearch.com/industryasync.jspx?serviceId=18&State=null#‟, accessed on 1st October 2012.
•
„The Special Economic Zones Act. 2005‟: Extraordinary: Part II, Section I; Ministry of Law & Justice (Legislative Department); Chapter VI: “Special Fiscal Provisions for
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39 SEZ as a Business Enabler Special Economic Zones”, pp: 24 URL:http://www.sezindia.nic.in/writereaddata/pdf/SEZ%20Act,%202005.pdf
accessed
on 2nd October 2012. •
„SEZ Rules incorporating amendments upto July 2012‟, published in Part II, Section 3, Subsection (I) of the Gazette of India Extraordinary, Dated 10th February 2006, Government of India, Ministry of Commerce & Industry: Chapter IV: “Terms & Conditions subject to which entrepreneur and developer shall be entitled to exemptions, drawbacks & concessions”, pp:26-36 URL: „http://www.sezindia.nic.in/writereaddata/rules/SEZ_Rules_July_2010.pdf‟, accessed on 2nd October 2012.
•
„List of Operational SEZ in India‟, URL: „http://www.sezindia.nic.in/writereaddata/pdf/ListofoperationalSEZs.pdf‟, accessed on 3rd October 2012.
•
„Material Management: A Goldmine for Upstream Oil & Gas‟ 2012, AT Kearney Report; AT Kearney Korea LCC “Material Management in Capital Projects”, pp: 5-8.
•
„Economies of Scale: How the Oil and Gas Industry cuts costs through replication‟, A report from the Economist Intelligence Unit,Sponsored by Oracle, 2011, The Economist: “Techniques of replication: supply chains, outsourcing, templates and management”, pp: 9-10.
•
„The Oil & Gas Industry Supply Chain for the Pittsburgh Regional Alliance „, Rev. July 2011, Taimerica Management Company, “The oil & gas supply chain”, pp: 6-10.
•
„Oil & Gas: Investment Opportunity‟: Sector Overview & Market Highlights; URL: „http://www.investindia.gov.in/?q=oil-and-gas-sector‟, accessed on 4th October 2012.
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40 SEZ as a Business Enabler •
„Special Economic Zones: An Indian Perspective‟, Nishith Desai Associates, April 2006; “Regulatory Framework: Setting up of an SEZ and an SEZ Unit”, pp: 3-5; URL: „http://www.nishithdesai.com/Research-Papers/SEZ-Final.pdf‟, accessed on 4th October 2012.
•
„Oil & Gas: Market & Opportunities‟; IBEF (India Brand Equity Foundation) Report: 2011, „Exploration & Production‟, pp: 9-11. URL: „http://www.ibef.org/download%5COil_Gas_210708.pdf „, accessed on 4th October 2012.
•
„Oil & Gas”; IBEF (India Brand Equity Foundation) Report: November 2011, „Indian Oil & Gas Sector: Upstream Segment, Midstream Segment, Downstream Segment‟; pp: 5. URL: „http://www.ibef.org/download/Oil_and_Gas50112.pdf‟, accessed on 5th October 2012.
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6 Appendix Area awarded : 2.15 Million Sq Km (68%) Total area awarded : 3.14 million Sq Km,
Nomination 26% Pre NELP 7%
NELP 67%
Comparative analysis of various types of agreements that are being awarded by Government of India: Type of agreements
Contractor
Government
Concession
All risk All reward
Reward is a function of production & price
Share in risk & reward
Share in risk & reward
Joint venture
All risk Service contract
No risk All reward
Hybrid
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Mixed
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42 SEZ as a Business Enabler Advantages of SEZ Act 2005 Legislations (Later SEZ Rules 2006) on the Schlumberger Business Model: Particulars
Section
Proposition
SEZ Rules 2006 In exercise of the powers conferred by section 55 of the Special Economic Zones Act, 2005 (28 of 2005), the Central Government promulgated the SEZ Rules, 2006 vide Gazette Notification No.GSR 54 (E) dated 10 February, 2006. Single Window Section 14 SEZ proposals approved by Clearance Board of Approval (BOA) at New Delhi. SEZ Units approved by Approval Committee headed by Development Commissioner locally. Administration Rule 20 Every Special Economic of SEZ Zone shall be under the administrative control of a Development Commissioner. Processing Area Section 6
Non-Processing Area
Section 6 [C]
Exemptions & Concessions (Central Government)
Section 7 & Section 26
Income Tax Exemption
Section 27 of SEZ & Section
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Area for activities of manufacturing of goods, or rendering Services and area exclusively for trading or warehousing purposes. Area for social purposes like Residential, Schools, Hotels, Hospitals as approved by BOA.The BOA shall decide on the size of such facilities and areas. Developers and Units Exempted from Customs Duty, Excise Duty, CST & Service Tax. 100% for first 5 years 50% for next 5 years
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Advantage on Schlumberger Business Model Will affect the present lead time for material procurement (45-50 days) bringing it substantially down to 7-10 days. Overall cost saving of approximately 35-40% of present ordering & procurement costs.
Single point of contact to resolve issues to ensure smooth functioning of business.
Warehousing operations & Material Management can be based out of these zones exclusively.
Tie ups with clients like ONGC or OIL to promote these activities and building a CSR Portfolio in India
Tangible amount of cost saving (20-25%) of present project cost by saving on Taxes & Tariffs
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43 SEZ as a Business Enabler (Central Government)
10AA of IT Act
Exemption form State Government
Concession to Contracts
Concession to Consumable Items
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Rule 10 & Rule 26
50% income on reinvestment for next 5 years
1) Exemption from the State and local taxes, levies and duties, including stamp duty, and taxes levied by local bodies on goods required for authorized operations by a Unit or Developer, and the goods sold by a Unit in the Domestic Tariff Areaexcept the goods procured from domestic tariff area and sold as it is. 2) Exemption from electricity duty or taxes on sale, of self generated or purchased electric power for use in the processing area of a Special Economic Zone; 3) Providing single point clearance system to theDeveloper and unit under the State Acts and rules. All Exemptions and concessions are allowed to Contractor appointed by a Developer or Co-developer. Effective duties leviable on Bond-cum-Legal Undertaking value shall be waivered on admission of such goods into the SEZ/FTWZ area.
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Material operations within the SEZ can be either partially or fully outsourced to third party agencies viz. OWS without affecting the profitability. Since 70-80% of the imported items of Schlumberger in India consists of consumables like explosives, fuels, chemicals etc, applicability of this clause can provide a cost saving of about 30% of the overall import costs.
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44 SEZ as a Business Enabler Transfer of goods
Rule 13
Rule 38
A Developer may export or Will have a direct cost saving transfer capital goods and on the 10-15% re-export of spares including capital goods for Schlumberger construction equipment that have become obsolete or surplus to another Developer, or Unit after obtaining the approval of the Specified Officer. The goods or services admitted into Special Economic Zone without payment of duty may be transferred or given on loan to a Unit.
Sub Contracting Rule 41 of Works
Part of production or any production process can be undertaken outside SEZ with prior permission of the Specified Officer.
Ease of sub-contracting operations to third party operators like OWS, Arshiya etc. to optimize resource utilization
Foreign Companies
Rule 19 (7)
Future Roadmap can be planned w.r.t. the applicability of this clause.
Exit from SEZ
Rule 74
Foreign companies can also set up manufacturing units as their branch operations in the Special Economic Zones in accordance with the provisions of Foreign Exchange Management Regulations, 2000 of RBI. The Unit may opt out of SEZ subject to payment of applicable duties on the imported or indigenous capital goods, raw materials, components, consumables, spares and finished goods in stock.
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Flexibility of positioning business units to more profitable locations and withdrawing operations from less profitable regions.
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