Download - Cairn India Limited - Cairn Connect Dec 2011
COVER STORYCREATING WEALTH FOR THE NATION
QUANTIFYING SOCIALINVESTMENTS
CHALLENGES OF THE FUTURE
Dear Readers,
refuses to translate into production!
to explore and discover and the endless meetings at
barriers associated with the remoteness of location and
is our endeavour to reach out to people working across
more shall follow, we have kept the focus on macrotrends of the sector and then relating the same to our
discoveries would be favourable!
Do write back to us with articles/views, critical orotherwise at [email protected]
respective individuals and these views do not consult to
Editor’s Note
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18 H AND EN HV SIA RO FE NM YENT
14 C R ES RP PO ON RS AIB IL E S TY OCIAL
CONTENTS
Cairn India: Creating Wealth for theNation and Securing Energy
Cairn India and VedantaResources: FacingChallenges of theFuture
Drive to create O&Gworkforce of the future
Oil and Gas Companies:Socially Connected
2 COVER STORY
O
Volatile Oil Markets:Securing the Future
Quantifying Social Investments: IFCFinancial Valuation Tool and Cairn India
1
6 PERSPECTIVE
12 H U MAN RESOURCES
EALT T
O T
People, Process,Environment
20 SOCIAL MEDIA
SAFETY
EN
Cairn India:Creating Wealth for theNation and Securing Energy
It is a classic story of the David andthe Goliath. A young E&P companydaring to dream, having the visionand perseverance, was set to alter thebalance of domestic energy productionfor India, the largest democracy in theworld. Cairn has been unlocking valuethrough discovery and developmentof hydrocarbons in the sub-continentfor more than 15 years. We pioneereddeepwater drilling in India throughAnnapurna. Cairn also developed one
auction – Ravva, off the coast of AndhraPradesh. Currently we are contributing
domestic crude production through our
approximately 7%. The discovery of the
Mangala in 2004, the largest onshorehydrocarbon discovery in India since1985, changed the scope and the natureof the business. The enormity of thediscovery, the largest in that year globally
the league of organisations having a keyrole in the energy security hence futuregrowth trajectory of India. Three outof the seven landmark oil discoveriesmade in India between 2000 and 2005have been by Cairn and the joint venturepartners.
resource nationalisation amongstcountries and the emergence of the new
bill this year could reach $100 billion ifcrude prices hover in the range of $100-$120/barrel with uncertainties in supplyfrom the Middle East. This would not only
the country has experienced doubledigit growth in crude oil production for
2006-2007 the crude production growthwas 5.6% which dipped to 0.4%,-1.8%and 0.5% respectively in the last few
2011, the production by Cairn India andReliance led to a double digit growth indomestic crude oil production for the
“Seven Sisters” – the state run oil andto the 12th plan projects a growth rate
of 7% for commercial energy demand
C O V E R S T O R Y
2 2
3
RJ-ON-90/1
RAVVA
PR-OSN-2004/1
For more than a decade, Cairn has been undertaking pioneering activities
4
Currently we arecontributing more thana fifth of the country’sdomestic crude productionthrough our Rajasthanfields. This is helpingoffset India’s crude oilimport dependency byapproximately 7%.
for a GDP growth of 9%. This is onlypossible through a major supply side
management.
Cairn India has been a trailblazer in alot of areas in the oil and gas sector.Over the years the organisation hasbuilt an indigenous team with thecapability to execute projects across thewhole spectrum of the business - be itexploration, discovery, developmentand production. The team is capable of
executing projects with the scale of ourRajasthan development, maximise the
assets like Ravva (Andhra Pradesh),applying technology to transform fromgas to oil in Suvali, Gujarat and designto implementation of new lines of
continuously heated and insulatedpipeline from Rajasthan to Gujarat. Inour stage of transformational growthwith the pipeline operations bringing inthe desired scale, our safety standards
have been in the top quartile againstglobal benchmarks. Our terminal in
hydrocarbon facility, before connectingwith the market through our pipeline is a
maintained at half the global averagelast year. Responsibility and concern forthe environment has been integrated inour operation strategy be it the usageof environment friendly completion
environmental footprint or our well pad
design with horizontal deviated drillingto optimise usage of land and minimisedisruption. We have been creating valuethrough substantial contribution to thegovernment exchequer with royaltiespaid more than USD 1 billion, direct andindirect taxes of more than USD 1 billion,
government of greater than USD 5 billion
in foreign exchange due to reduced
The continuous growth in productionand its asset base has led to increasingvaluation of the company, which hasultimately enhanced shareholders wealth.The investor community and the marketshave also endorsed our initiatives tocreate value for our shareholders as aresult of which the market cap of the
company has nearly doubled from USD6bn to USD 12bn since IPO.
Cairn India with the help of its jointventure partners including ONGCcontinues to create value and wealthfor the nation and strive towards
5
imports.making the dream of India, an energy
independent country - a reality. As we
the organisation will keep working closelywith governments and communitiesacross the globe to develop faster, betterand more cost effective solutions for theenergy needs of growing economies thusenriching lives of the local populace.
30th Aug 2011 Price % chg since
NIFTY 5,001 28
*Cairn India IPO on 9th Jan 2007
The world of extractive industries has
been under a variety of pressures with a
seismic shift in terms of the way various
sectors like mining and oil & gas function.
The hard-hat world of oil, gas and mining
has become intrinsically linked to the
has helped democratise the sector in
markets post the 2008 downturn,
traditional instruments of trading and
hedging used by organisations have to
be conducted in a different light. On the
other hand, demand in both the sectors
continue to be stoked from emerging
markets in the east rather than the
western countries while the supply side
has been constrained due to multiple
reasons of geopolitical risks, resource
nationalism, complexity of development
projects and location of resources across
increasingly remote and unfamiliar
territory.
transformation in terms of cost pressures,
consolidations, and nature of business
as well as vertical integration, bringing
about a change in the way we do
business. While a lot of the public oil
and gas majors, even the big guns,
have been vertically integrated with
their presence across the chain from
upstream to downstream and/or
retailing, independent O&Gs have always
preferred a particular segment for their
on a global scale, competition is actually
increasing with the appearance of new
companies from emerging economies.
commercial manner, along with further
privatisations in OECD countries such
6 6
PERSPECTIVE
Cairn India and Vedanta Resources:
Facing Challenges of the Future
7
every step of the value chain (particularly
in the U.S.) have also added to global
competitive pressure. To differentiate
from new competition, international
marketing, technological capabilities
to explore and produce on the most
challenging frontiers and scale and scope
to invest in new forms of energy. In the
mining industry, there is the scramble
to secure supplies of scarce resources
and to gain greater control over prices of
production units in an age of increasing
cost pressures, while many end users of
mining products have also gained control
of upstream assets. Companies are also
looking at other ways of achieving their
integration objectives, such as combining
strategic investment and off-take or
partnership agreements to lower the
risk associated with integration, but still
investment in African Minerals with 20
year off-take arrangement.
Sectors like oil and gas and mining
continue to climb up the political priority
list and according to a recent poll of
global CEOs by PwC – stakeholder
management, sustainability issues, etc.
are the key concerns of management
changing economic and social priorities,
governments across the globe are
tightening their grip on national resources
and are revisiting royalties and taxation
policies. It is common knowledge that
Sovereign Wealth Funds (SWFs), initially
set up with oil money, heavily invests in
the sector but non-commodity based
SWFs are gradually increasing their
exposure in the mining industry in a bid
to diversify their investment portfolio.
Sectors like oil and gas and mining are continuing to climb up the politicalpriority list and according to a recent poll of global CEOs by PwC.
8
They also look for and leverage on the
under-valued resources. A key shift
has been the political overtones behind
SWF investments, with SWF route being
often used to lead the charge by foreign
government to secure national resources.
In such evolving times for both the
sectors, the acquisition of a majority stake
in Cairn India by Vedanta Resources plc
provides the perfect platform to build
the natural resource champion of the
resource champion” are some of the
energy philosophy and aspirations.
major to foray into oil and gas, while this
acquisition puzzled many. While about
gas, received in inheritance and built over
ore miner, inked a deal with Petrobras
and entered oil sector in 2007 to reduce
mining costs and currently holds stake in
more than 20 exploration blocks.
Vedanta has always shown an appetite
for strategic inorganic growth - acquiring
an asset and then scaling it up for
better returns, tending mostly towards
vertical integration in terms of takingsupply leadership to optimise the
performance of existing assets. Their
focus is on leveraging the low cost of
production, and in a lot of the acquired
assets, infusing them with new energy to
increase production by many multiples.
years and jump in revenue by 100 per
cent, while in Sesa Goa, the production
has gone up post acquisition by Vedanta,
by 115 per cent and the reserves by 75
per cent in three years. Its focus is on
organic and inorganic growth strategy for
bulk commodities and base metals.
In Cairn India, Vedanta Resources has
gained exposure to a new sector with
a top 20 non OECD E&P organisation.
Cairn India brings to the Vedanta stable
more than a decade of credibility with
pioneering efforts in the sector in the
sub-continent, landmark discoveries,
reputation for technological adaptability
and innovation, exploration success
records, appetite for growth and new
avenues of business (midstream) with
a measured risk approach, which has
more often than not borne fruits, project
execution and delivery skills, and sound
corporate responsibility practices with
In Vedanta Resources, Cairn India has
a majority shareholder and owner, who
ambitions across various segments of the
oil and gas business, spanning multiple
geographies and helping leverage
international markets.
top global oil and gas entity, offering
unique value added solutions to cater
to energy requirements of emerging
economies across the globe with a deep
footprint in only select markets - and
million tonne plus annual production
business in copper and zinc and more
than 2.6 million tone for aluminum while
more than doubling its iron ore output in
excess of 50 million tone - underscores
the growth momentum, which can be
achieved despite economic pressures and
geopolitical risks, hence being targeted
for the next couple of years. Stakeholder
management, corporate reputation,
and the ability to deliver in challenging
times will be the key to synergising and
creating a natural resources champion
entity for the future.
Vedanta is not the-
gas, received in inher-
9
Securing energy is perhaps the
most critical challenge for India in
maintaining its economic growth rate. It
encompasses both physical supply and
(International Energy Agency) four major
concerns - Availability;; Deliverability;;
Affordability and Sustainability.
dependence which was about 50% in the
over 75% of its crude oil requirements –creating serious concerns on the supply
security. Compounding the above
stability of the country with oil import
bill rising to approx. USD 100 billion in
2010-11.
The globalisation of economy in
the recent years has brought new
opportunities, more interdependence
along with larger group of risks.
International oil market in the current
world is affected by events ranging from
broad based macroeconomic picture;;
geo-politics;; weather to dynamics of
fundamentals supply/demand.
After recovering from the global
recessions, recent months have
witnessed several events like French
Strike;; Middle East North Africa (MENA)
Japanese Earthquake & Sovereign credit
crisis in US & Europe impacting the
international oil prices.
Oil prices rose to $125/bbl plus in April,
however receded subsequently due to
COMMODITY TRENDS
Volatile Oil Markets:Securing the FutureEnergy is pivotal to economic growth
and as India, country with GDP of over
economy and the fourth largest energy
consumer, marches into the league of
top economies in the world, the need for
energy, to secure the needs of current
as well as future generation, would grow
exponentially. As compared to US &
22 barrels & 9 barrels of oil a year, an
average Indian burns close to 1 barrel a
year – representing the fact that there
is substantial upside for improvement
economy expands.
10
11
the double dip recession fear looming
Reduction in growth forecast of US,
Europe & China (contributing 50% of
with high unemployment & weak
economic data is forcing authorities to
come up with more income generating
policies and get economies on a
meaningful growth trajectory.
Market uncertainty is evident from
the wide forecast of oil prices by
International participant going into next
year. While most research divisions
crude prices in 2012 due to tight supply
demand fundamentals, Citibank inits latest forecast has predicted $86/
year placing importance on the credit
events. Uncertainty & volatility of thismagnitude creates further challengesin ensuring a stable and secure energyatmosphere.
Ensuring supply security remains anextremely challenging task for theGovernment as dynamic
global environment
have a pro-founding impact on theeconomy and energy sector. In this
situation, increasing the domestic
production and reducing the import
reliance is an important element for
ensuring supply security.
which is now accounting for more
crude production, has contributed
security and bringing economic
to savings of foreign exchange and
is now responsible for the deliverycrude
production from its
operated assets
across the
country.
- Varun GujaralCommercial and New Business
12
Drive to create O&Gworkforce of the future
13
In recent days, the markets have
signalled concern about the economy.
and lagging economic indicators,
consumers, investors and businesses
are searching for some bright spot in
the market. Many believe that the oil
and gas industry, which has consistently
shown strength during this lengthy
economic downturn, has the potential
The industry, while shows promise,
is faced with its own challenges and
uncertainty. In addition to the existing
challenges relating to global energy
security, long term sustainability and the
uncertainty surrounding the investment
framework, the oil and gas industry
will face “new” challenges. Future
energy demand is expected to grow
substantially and the sector is in need of
massive investment – not just capital.
In order to meet the demand, the
industry will explore, develop and
produce oil and gas in increasingly
severe conditions. The ability to plan
and execute large-scale, complex
development projects requires a highly
yet professionals with the required skill-
set are a scarce commodity.
Over the last few decades, average age
of workforce in Indian upstream oil and
Whether one believes it is the result
of normally occurring competition,
attrition, aging or restructuring, one
theme permeates the current discussion
around human capital: how to develop,
deploy, and connect employees through
This issue has become particularly
workforce, combined with a diminishing
pipeline of new and experienced talent.
To guard against corporate brain drain,
companies need to formulate effective
strategies to attract and engage the
to help lift the economy if the right
energy policies are in place.generation is not all. It is also about
managing existing talent and developing
the periodic table of talent.
International Oil Companies (IOCs) are
facing a real challenge that may have an
impact on expansion and growth plans,
a challenge that requires commitment,
cooperation, investment and new
approaches in developing, managing and
retaining the talent pool.
There are many issues that call for an
their strategies in the face of slowing
NOCs and IOCs avoid ranging back and
forth between skill shortage and skill
and IOCs joining forces, learning lessons
The challenge facing NOCs and IOCs
sustainable long-term solutions to
manage workforce demographics, both
in boom and bust times.
Partnership between NOCs and IOCs
can contribute to addressing the
Collective collaboration and coordinated
cooperation between government,
academic and industry on the various
issues related to curricula, employment
and social policies, and programme
term than isolated initiatives.
environment operational challenges will
to develop skilled personnel, manage
costs and develop new technology. This
situation creates new challenges and new
uncertainty, but also new opportunities
for cooperation and partnership between
NOCs, IOCs and services companies,
to share risks, technology advances and
invest in R&D.
requires commitment,cooperation, investment
14
Quantifying Social Investments
IFC Financial ValuationTool and Cairn India
Discovering the past to create a better
business for extractive industry including
oil and gas. It is this dichotomy of
synergising the past with the future,
by adhering to regulatory frameworks,
balancing investor expectations
and striving to create value for all
stakeholders, dealing with the sentiments
which surround “national resource”,all this while operating in the most remote
of regions across countries with state of
the art technology.
Gaining the trust, cooperation and
partnerships of communities in thesefrontier regions often becomes a business
necessity to ensure uninterrupted
operations and business activities. Since
the riches of the subsurface are often
found in the poorest and most remote of
regions, organisations invest a sizeable
portion in distributing the fruits of
hydrocarbon development to the resident
communities, trying again to balance this
need for developing energy resources
with the pace of development of the
local communities.
of community engagement initiatives
is not often appreciated or understood
by companies. Oil and gas is a sector
which offers a myriad range of activities,
all seemingly disconnected but bound
around a common product – the crude oil
or the gas!
The range of activities range from the
or oil services company person on the rig
of summer, to a community engagement
or social responsibility specialist
implementing programmes in remote
regions, to the oil trader surrounded
attendant – seemingly diverse persons
united by the same product. The same
paradoxes are also prevalent in costs.
While most are aware of the almost
perpetual windfall gains in the oil
business, one overlooks the risk capital
deployed during exploration time running
into hundreds of thousands of dollars per
day in remote onshore or offshore areas!
Fraught with such inherent
contradictions, it is imperative to have
a strategic approach for designing andimplementing community development
programmes in order to ensure that they
deliver the desired results of community
support, mitigate risks, and help in the
unhindered growth of business.
15
the absence of any standardised
measurement matrix entails that the
impact of the social, environmental
and community investments cannot be
investment for social initiatives also posed
Not being able to maximise the full
potential/impact of the investment
Not being able to compare the
investments
Not being able to advocate,
communicate, support and justify theinvestments
Not being able to prioritise
investment options
initiatives
Awareness about such investmentswithin organisation and cross-
functional collaboration
Tinto are the organisations with whom
IFC collaborated extensively to come
up with the Sustainability Planning and
Financial Valuation Tool. The model was
piloted on a couple of projects like the
SMS programme initiated for farmers
in partnership with Reuters along
tangibly measured in business language.longest heated and insulated pipeline
in the world) and the mobile health van
programme in Rajasthan.
various problems like:-“Through this tool companies can
develop metrics to guide their community
investments and translate community
program outcomes into company value,
in terms that are understood by the
market – risk reduction, productivity
gains, savings, return on investment,
and enhanced reputation. An additional
incentive is that high-performing
environmental and social programs
are increasingly seen as a proxy for
effective business management.
According to Multilateral Investment
Guarantee Agency (MIGA), a World Bankpolitical risk insurer, they would reduce
insurance premiums for an operation thatdemonstrates rigorous risk management.”
Cairn along with Newmont and Rio
– Excerpt from IFC article on Valuing
Returns on Sustainability Investments.
in the organisation but also contributions
etc. to wholly participate in the
implementation of the tool.
The two basic concepts comprising the
tool are direct value creation and indirect
investments through community risk
mitigation which involved steering clear
of risks which could result in delay of
construction, production postponement,
planning, legal action, etc.
The process involves rigorous
stakeholder analysis, traditional
The tool has been designed in a way to
supplement the traditional discountedcost of manpower, etc.) while the latter
the quality of social investments
simulation (algorithms which utilise
repeated random samplings to compute
results) to arrive at a net value accruedto the company.
with Reuters involved providing crop
1616
advisory and marketing information
through the mobile phone for 10,000
farmers along the Cairn India pipeline
in Gujarat. This programme not only
helped maintain a continued relationship
with the farmers but ensured that the
communication was two way.
mobile phones inform the organisation
about breaches in pipeline security
with pilferage, leakage, sabotage or
other maintenance issues. So while the
SMS programme helped increase the
income of farmers through the price
advisory, the farmers were also able to
act as the pipeline reporting contact for
the company. So both the modes of
value creation and value protection was
security personnel.
cases of pipeline security were reported
by farmers, thus preventing sabotage,
leak, and damage to the pipeline,
cost of $2 million for the company.
The second project studied was one
which involved access to preventive and
curative healthcare – the mobile health17
van. The van operated and traveled
to 64 villages in and around the Cairn
project area in Rajasthan. The FV tool was
able to calculate and ascertain that this
the company as the alternative to setting
up 15 clinics to provide similar services tothe concerned population.
The farmers could also through their
Another key saving was in terms of
mandays for workers from the village.
With the van servicing the local village
populace, loss of manhours/days due to
illness of village workers were minimised
and made negligible.
The same FV tool could be applied
holistically to quantify the returns of
various other CSR programmes andprovide a direction to implement future
it also helped the company by providing
an effective replacement for pipeline
management support and commitment,
an attitude for cross-functional support
management, etc.) and developing
requisite expertise like value drive
StakeholderAnalysis
1
RiskQuantification
5
TraditionalInvestment
Analysis (MPV)2
Quality ofSustainabilityInvestment
6
+
+
+
+
Value Protection(Indirect benefit)
3
Monte CarloSimulation
7
Value Creation(Cost benefit
analysis)
4
Net Value toCompany FromSustainabilityInvestments
+
=
Source: IFC Article
18
People, Process, EnvironmentOil & Gas is considered to be an unsafe
at various stages can be a threat to thehealth and wellbeing of not just peopleworking on site, but also the communities
Good governance is the only way onecan ensure an economic climate whichis favourable not only to investments,but also well being and sustainabilityof people and environment that wecome in contact with. We, at Cairn, arecommitted to protecting the health,safety and wellbeing of people workingon our sites, people who come in contactwith our operations and the health andsustainability of environment that weoperate in. ‘
Our Corporate ResponsibilityManagement System (CRMS) lays downdetailed guidelines and procedures thatsupport the delivery of our commitment
values and our approach to business.
Respect: for people, communities, theenvironment, the rule oflaw and human rights;;
Relationships: we believe that buildingstrong, open and lasting relationshipswith our stakeholders is not merelya social responsibility but is vital toachieving our business goals;; and
Responsibility: We recognise ourresponsibility to ensure our actions donot harm people, the environment orsociety.
While we follow the highest level ofinternational codes and standards in our
upgrade them.
The nature of the work involves someinherent risks and facing challengingenvironments. We strive to make surethat everyone associated with our workgoes back home in the evening exactly
the way he/she arrives at the work in themorning. Our goal is to create a healthy,supportive working environment that canhelp reduce absenteeism due to fatalities.
comprehensive one, wherein all theprocess and procedures, to effectively
laid down. This system ensures thatthe policies are implemented acrossvarious activities through design,implementation, operations, monitoringand reporting as it is based on the
implementation in progress for theRajasthan operations.
We take precautions to avoid accidents orpollution incidents, and all our operationshave rigorous procedures, equipmentand emergency teams in place to
training is mandatory for all visitors to thesite to ensure their safety.
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Companies are increasingly becomingcautious about the issues concerningenvironmental protecting, including air,land and water quality.
Most of it is due to the heavy regulationsand compliances. These regulationscontinue to evolve. For example, the
(EPA) greenhouse gas reporting rule was
and production sector on November 8,2010 and requires companies to reporttheir 2011 greenhouse gas emissionsbeginning in March 2012.
We at Cairn have been committed tominimising the impact of our businesson the environment. We introducedstringent measures, from initial impactassessments to waste management, and,in the event of any unplanned incident,have put in place comprehensiveemergency response and oil spillcontingency plans.
Our approach to each new projectincludes undertaking PreliminaryEnvironmental Impact Assessments(PEIAs), Environmental ImpactAssessments (EIAs) and Social ImpactAssessments (SIAs), to minimise anypotential impacts of its activities
recognition from time to time. Thisyear, the Rajasthan operations won ninesafety awards in the 24th Mine SafetyAwards organised under the aegis of theDGMS, Rajasthan.
Environment
According to the ‘Ernst & Young
the climate debate will continue tocomplicate the strategic decision-making of oil and gas companies acrossthe industry.”Today, climate change and sustainabilityissues are a key component of corporateagenda. The stakeholders are asmuch interested and passionate aboutthese issues as they are about the
compensation.
SETY EN
Oil and Gas Companies:Socially Connected
Social networking is booming. Facebook
has become the most visited website on
Internet population visit social networking
or blogging sites.
Social networking is facilitating business
and personal relationships, with
individual sectors now starting to cotton
on to the potential of information sharing
via these channels.
Gartner predicts that by 2014, social
networking services will replace e-mail
as the primary vehicle for interpersonal
communications, including knowledge
and information management for 20
percent of business users.
AccordingtoastudybyMicrosoftand
Accenture,nearly75%ofoilandgas
professionalsseevalueinusingsocial
mediaandcollaborationtoolsat
technologyatacorporatelevel.Thestudy
whichsurveyed275professionalswithin
international,nationalandindependent
oilandgasandrelatedcompanies,found
thatsocialmediaandcollaboration
communications,
20
21
thesametime,halfofthosesurveyedsaid
theircompaniesprohibitorrestrictthe
useofmanyofthesepubliclyavailable
tools,suchasphoto-sharingandsocial
networkingsites.
networking sites, such as www.energy-
networks.net, www.oilandgascommunity.
com, www.hsee.co.uk and www.oilpals.
com. These are facilitating knowledge
and information management.
Energy is a highly regulated industry,
and its companies are required to make
information available to their work forces
manner. Cloud computing, public
instant messaging systems and internal
social networks allow for more cross-
changing face of technology.
technologyadoptionisprimarilyacompanies that are using social media
tools for other purposes. Chesapeake
Energy has successfully implemented
stream that posts current job openings,
interacts with followers and offerscareer advice to nearly 2000 people.
On the other hand, the oil and gas
industry itself boasts of various social
opportunity to communicate via social
networks to media, Gulf Coast residents
and businesses affected by the spill,
concerned citizens, and employees.
industry from social media is most likely
the increased productivity, thanks to
improved collaboration and knowledge-
sharing between workers. These
elements are important for driving
revenue, cutting costs and contributing
to the health and safety of workers (Oiland Gas Collaboration Survey 2009)
barriers while keeping up with the
industry.