OIl and Gas

OIL AND GAS

Oil and Gas Industry in India is a 110 billion USD industry (as in March '2007). The India oil & gas demand ranks it sixth in the world. The oil and gas industry has been instrumental in fuelling the rapid growth of the Indian economy. The petroleum and natural gas sector which includes transportation, refining and marketing of petroleum products and gas constitutes over 15 per cent of the GDP.

OIL AND GAS INDUSTRY OVERVIEW

The oil and gas history in India dates back to 1867, with the discovery of oil deposits in Makum, near Margherita, Assam. The oil and gas sector in India has since witnessed the birth of numerous oil and gas companies. In India, the oil and gas industry jobs attract huge labour force. With the inset of bigger players into the oil & gas sector in India engaging in mass oil & gas production, the oil & gas prices have been revised although still in the unaffordable segment for many.

A rapid increase is also seen in the demand of oil & gas exploration and drilling equipment and services. The oil & gas fields both onshore and offshore provides mass employment opportunities and also contribute in a wholesome way in increasing the oil & gas reserves of India. Despite of new finds in oil & gas wells, increase in the drilling operations, advancement in oil extraction methods, pumps and machine and other equipments and technology, the costs have not come down. The oil & gas prices are still a matter of utmost concern for the Government of India.

OIL AND GAS REFINING IN INDIA

India oil refining capacity is the sixth largest in the world. India is soon emerging as a leading exporter of refined petroleum products in the world. India has around 6000 kms of product pipelines along with over 34,600 government of India (GOI) owned retail outlets. Oil refining is an industrial process of processing crude oil into petroleum products that have wider usage. The petroleum products obtained by oil refining are Gasoline or Petrol, Kerosene, Diesel, Fuel Oil, Asphalt, Paraffin Wax, Lubricating Oil, Liquefied Petroleum Gas (LPG) etc. These products by the oil & gas exploration and production companies in India have a wide market world over.

OIL AND GAS COMPANIES IN INDIA

Public Sector Undertakings (PSU's):
 ONGC - Oil & Natural Gas Corp (exploration and production)
 OIL - Oil India Limited (exploration & production)
 IOC - Indian Oil Corporation (refining & marketing)
 BPCL - Bharat Petroleum Corporation Ltd (refining and marketing)
 HPCL - Hindustan Petroleum (refining & marketing)
 GSPC - Gujarat State Petroleum Corp
Private Oil & Gas companies in India
 RIL - Reliance Industries Limited (Indian Oil & gas company)
 ESSAR (Indian Oil & Gas company)
 Cairns Energy India
 BG energy
 Niko (upstream exploration & production)
 Chevron Oil Limited
 Shell Oil
 BP
 Total (downstream exploration & production, chemicals)
An achievement that deserves mention here is that five of the Indian oil and gas companies are listed in Global Fortune 500.

SIZE AND COMPOSITION

The Indian Market Place
2.722 million bbl/day (2007 est.)
 Oil and Gas Industry in India is a 110 billion USD industry.
 Oil accounts for about 44% of India's primary energy consumption.
 The majority of India's oil reserves of roughly 4.7 billion barrels are located in Bombay High‚ Upper Assam, Cambay, Krishna-Godavari and Cauvery basins.
 The offshore Bombay High field is India's largest oil producing field, with production of 260,000 barrels per day (bbl/d).
 Petroleum exports have also emerged as the single largest foreign exchange earner, accounting for 17.24 per cent of the total exports in 2007-08.
 Growth continued in 2008-09 with the export of petroleum products touching US$ 23.63 billion during April-December 2008.
 In November 2008, the Cabinet Committee on Economic Affairs awarded 44 oil and gas exploration blocks under the seventh round of auction of the New Exploration Licensing Policy (NELP-VII). The overall number of blocks brought under exploration now exceeds 200.

Oil Consumption

Year Oil - consumption Rank Percent Change Date of Information
2003 2,130,000 8 2001 est.
2004 2,130,000 8 0.00 % 2001 est.
2005 2,130,000 8 0.00 % 2001 est.
2006 2,320,000 6 8.92 % 2003 est.
2007 2,450,000 6 5.60 % 2004 est.
2008 2,722,000 5 11.10 % 2007 est.

Foreign Direct Investment Regulations

Item Approval route General Conditions

Other than refining
Market Study & Formulation; investment/ financing; infrastructure for marketing in petroleum & natural gas
Automatic
Subject to sectoral policy

Refining PSU
FDI up to 26% in case of PSUs without involving any divestment or dilution of domestic equity in existing PSUs
Through Foreign Investment Promotion Board (FIPB)
Refining Private
FDI up to 100% in case of private companies
Automatic

GOVERNMENT INITIATIVES

The government has been taking many progressive measures to create a conducive policy and regulatory framework for attracting investments.
• Allowing 100 per cent foreign direct investment (FDI) in private refineries through automatic route and 26 per cent in government-owned refineries.
• Implementation of the NELP in 1997.
• Abolition of the administered pricing policy.
• 100 per cent FDI is also allowed in petroleum products, exploration, gas pipelines and marketing/retail through the automatic route.
• Vision-2015 for the oil sector which will focus on providing better services to customers covering four broad areas of LPG (liquefied petroleum gas), kerosene, auto fuels and compressed natural gas/piped natural gas.
•
PRODUCTION

Consumption
India's domestic demand for oil and gas is on the rise. As per the Ministry of Petroleum, demand for oil and gas is likely to increase from 176.40 million tonnes of oil equivalent (mmtoe) in 2007-08 to 233.58 mmtoe in 2011-12.
Global Refining Hub
India is emerging as the global hub for oil refining with capital costs lower by 25 to 50 per cent over other Asian countries.
Already, the fifth largest country in the world in terms of refining capacity, with a share of 3 per cent of the global capacity, India is likely to boost its refining capacity by 45 per cent or 65.3 mtpa (million tonne per annum) over the next five years, according to a Deutsche Bank report.
Retail Sector
Increase in automobile sales has led to significant investments being made to develop and expand the petroleum retail market. According to US-based consultancy Keystone, automobile sales are likely to grow to about 20 million a year by 2030 (from the present 1 million), making India the third largest automobile market in the world.
Consequently, state-run fuel retailers Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation together are planning to open 2,263 new petrol pumps in the country during the current fiscal, over and above the 35,068 pumps they already own.

Gas
Gas demand in India is dominated by the power and fertilizer sectors which account for 66 per cent of the current consumption. In 2006, the total gas demand was around 152 MSCMD. The gas demand is expected to increase to 320 MSCMD, according to a report by Ernst & Young. Significantly, the share of natural gas in the overall fuel mix is expected to increase from 8 per cent in 2006 to 20 per cent by 2025.
ONGC has struck oil and gas in three new blocks. The gas find at Krishna Godavari (K-G) basin off the Andhra coast could prove as rich as the Reliance Industries’ D-6 block, which, at its peak, is expected to double India’s current natural gas output. The other two discoveries included an oil find in Charada-3 offshore block in Cambay basin and oil and gas find in Matar in Vadodara district, both in Gujarat.


GLOBALIZATION AND THE OIL AND GAS INDUSTRY

Iran-Pakistan-India Gas Pipeline
The Iran–Pakistan–India gas pipeline, also known as the IPI pipeline or the Peace pipeline, is a proposed 2,775-kilometre pipeline to deliver natural gas from Iran to Pakistan and India. Iran, Pakistan and India had conceptualised the project in the 1990s to help boost peace and security in the region, besides mitigating the power crisis.
The pipeline would be supplied from the South Pars field. The initial capacity of the pipeline would be 22 bcm of natural gas per annum, which would be raised later to 55 bcm. It is expected to cost US$7.5 billion. The construction was to start in 2009 and the pipeline was expected to be completed in September 2012. India had agreed to give Pakistan a transit fee of $200 million per year, which is equivalent to $0.60 per million British thermal unit for allowing passage of the pipeline through that country.
However, the project faced bottlenecks and hitches on numerous occasions. India stopped negotiations on the project due to tension with Pakistan, although Iran repeatedly encouraged New Delhi to rejoin the process, according to the report.
The US also has long opposed the pipeline, taking the view that, efforts to isolate Iran must continue until Tehran gives up its nuclear program.

Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline project
This Asian Development Bank (ADB) sponsored project is likely to connect sources of supply, in Turkmenistan to sources of demand in Pakistan and India. The pipeline being considered will have a length of approximately 1680 kms (including 145 km in Turkmenistan, 735 km in Afghanistan and 800 km in Pakistan upto the India border) and a capacity of 90-100 mmscmd . Once again, while some headway has been made in discussions, issues regarding gas pricing, transit price and security of the pipeline in Pakistan, transmission tariffs etc. are to be decided.

Myanmar-India pipeline
A 1,575 km long pipeline connecting the Shwe field in the A-1 block in Myanmar, in which both ONGC Videsh and GAIL own a stake, was considered to bring gas to India, while passing through Bangladesh. However, not much progress has happened on this front in recent times.

Krishna Godavari Basin - Ambani Feud
Reliance, the largest private business conglomerate in India, discovered 7 trillion cubic feet of natural gas in the Krishna Godavari (KG) Basin, KG-DWN-98-3, or the KGD6 in October 2002.However, in 2005, the Reliance Group was split between Anil Ambani and Mukesh Ambani with Reliance Industries Limited (RIL) going to Mukesh Ambani and Reliance Natural Resources Limited (RNRL) to Anil Ambani . A family pact was made in 2005 in which RIL was to supply 28 million cubic meters of gas a day at $2.34 per million units to RNRL for 17 years. However, in September 2007, the Indian Government fixed a price of $ 4.2/mBtu. This decision was later reversed by the Bombay High Court, which ordered RIL to supply the gas as per the original agreement.
The ensuing dispute has led to a delay of extraction from the KG basin amounting to huge losses for the Indian Economy which,
The basin is likely to produce 120 million cubic metres per day (mcmd) of gas, four times the gas and 30% cheaper than the gas India would have received through the much-delayed Iran-Pakistan-India pipeline. India could easily save at least $20 billion off its surging oil import bill that crossed a whopping $80 billion last year. The Indian fertilizer industry which demands 41 mcmd of gas is currently receiving only 28 mcmd which can run at full capacity if the KG basin begins to flow. Also, it can add at least 10,000MW to India's power output which is more than half the country's current peak power deficit.
The dispute is impeding efforts by the government to harness India's natural gas reserves to help tide over its energy crunch. In the words of the leftist parties, India’s natural resources and its economy are being held hostage to the “benevolence and mercy” of private players. The matter now rests with the supreme court.

GOVERNMENT REGULATIONS

The Ministry of Petroleum and Natural Gas, Government of India is entrusted with the responsibility of exploration and production of oil and natural gas including the import of LNG, refining, marketing, distribution, import, export and conservation of petroleum products. Since methane is a significant constituent of natural gas, exploration and production of methane from oil and natural gas systems gets covered under regulation pertaining to them.
Regulations
 The Oilfields (Regulation and Development) Act, 1948
The Act was introduced on 8th September, 1948 and deals with regulation of oilfields and development of mineral oil resources. Among other things, it regulates the drilling, redrilling, deepening, shutting down, plugging and abandoning of oil-wells in an oilfield.
 Petroleum and Natural Gas Rules, 1959
(As amended from time to time)
Introduced in exercise of powers conferred by sections 5 and 6 of the Oilfields (Regulation and Development) Act, 1948 (53 of 1948) and in super-session of the Petroleum Concession Rules, 1949. It regulates the grant of exploration licenses and mining leases in respect of petroleum and natural gas, which belongs to Government, and for conservation and development thereof.
The rule regulates the exploration and mining of petroleum and natural gas.
 Petroleum & Natural Gas Regulatory Board Act, 2006
This Act provided for the establishment of Petroleum and Natural Gas Regulatory Board to regulate the refining, processing, storage and transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas excluding production of crude oil and natural gas so as to protect the interests of consumers and entities engaged in specified activities relating to petroleum, petroleum products and natural gas in all parts of the country and to promote competitive markets and for matters connected therewith.
The act regulates the refining, processing, storage and transportation and distribution of petroleum, petroleum products and natural gas
Policies
 Natural Gas Pipeline Policy, 2006

The Government of India notified the policy for development of natural gas pipelines and city or local natural gas distribution networks in India. The policy would promote investment from the public and private sectors in natural gas transmission. The pipeline policy provides for the regulator to set a ceiling rate for transportation charges. Companies will be free to offer rates at different levels as long as it is under the ceiling. The policy will cover cross-country pipeline operators and city gas distribution companies. The policy is being brought in as several investors have been awaiting a clear policy guideline in this regard. It would provide proper linkage between gas sources and market centres, along with inter-connectivity for regions, consumers and producers.


SWOT ANALYSIS

Strengths
 Booming Economy
 Refining Hub Weaknesses
 Crude price
 Subsidies to PSU’s
 Continuing government interference.

Opportunities
 NELP
 Equity Oil Threats
 Toxic Risk
 Explosive Risk
 Incomplete Projects/ Disputes


PRIVATIZATION

Private entrants into development of Oil Fields
The first phase of privatization in the oil and gas industry in India was marked by the opening of Indian Oil/ Gas fields for development to the private sector. However, development of fields was characterized by a comparative lack of business risk and was a cost intensive venture.
Disinvestment of PSUs
Under the policy regime of Arun Shourie, the champion of disinvestment in the NDA government, the oil and gas sector was considered a non strategic sector and hence was considered open to disinvestment.
However, major controversy surrounded the HPCL, BPCL disinvestment because, not only were these units running profitably but also because they belonged to the oil sector, a sector of strategic importance to the nation.
The government had taken the advice of the Advocate General, who believed that the disinvestment of government equity in the two entities did not require parliamentary sanction. The government then proceeded to disinvest the two companies. However this decision to sell the oil majors was challenged and Writ petitions were filed in public interest directly before the Supreme Court under Article 32 of the Constitution of India.
However, currently the Government of India holds 51.11% stake in HPCL and the rest is held by FIIs, OCBs, Banks, Mutual Funds, NRIs, employees and the public.

COMPETITIVE ANALYSIS

Competition in the oil and gas industry in India is mainly between the public and private companies. The following issues present a competitive analysis of the oil and gas industry.
Share in the industry
The below table gives the share of public and private companies in the various segments of the oil and gas industry:
Segments Public Sector (%) Private Sector (%)
Crude Oil Exploration & Production 86 14
Natural Gas Production 77 23
Refining 66 34
Marketing 98 2

The Public Company ONGC alone is involved in 78% of the activities pertaining to the exploration and production of oil and gas. OIL has nearly 9%. Whereas the private sector which includes Reliance, Cairn Energy, HOEC, Premier Oil, GSPC, etc. have only a 13% share.
The Petroleum and Natural Gas Regulatory Board (PNGRB)
PNGRB was constituted in 2007 as an autonomous body to regulate mid-stream and down stream businesses in the petroleum and gas sectors. The government was supposed to shift all major regulatory functions and powers to the Board in a phased manner. However, this has not happened as envisaged in the statute and policy. For example, section 16 of the PNGRB Act that empowers the Board to regulate the city gas distribution network is yet to be notified. The Directorate General of Hydrocarbons (DGH) still controls the upstream businesses and very little is left to the PNGRB. Thus, there is no free and fair market regulation in the oil and gas sector.

Subsidies
From time to time, the government has been criticised for the lack of transparency and absence of competitive neutrality. Ideally, the government should take necessary steps towards creation of level playing field among all the market players, be it public or private. However, 2008 the government provided subsidies only to the public sector companies for bridging the revenue gap caused by low prices. It adversely affected the business of private sector companies and resulted in shutting down of businesses. For example, Reliance Energy had to close down about 1,400 oil-marketing outlets across the country.

Price Determination

Administering of prices of petroleum products by the government requires careful attention. Often this deters new private and foreign entrants because the high cost of investment and production and the low pricing of products in the market leaves a very little margin of profit and at worst losses are incurred.

RIL vs. GAIL

GAIL has been a dominant player in the City Gas Distribution (CGD) segment.
This dominance has deterred private biggies like Reliance from capitalizing in this segment despite their huge capital investment potential.
However, Reliance Industries (RIL) and Gas Authority of India Limited (GAIL) India are close to signing a no-compete agreement for their CGD business. The two companies will separately bid for various cities but the winner will take the other partner on board for executing them.



RECOMMENDATIONS

The following are some recommendations for the oil and gas industry in India:

• The identified reserves of oil and gas in India are huge and the potential identified in some of the fields like the Krishna Godavari Basin and the Mahanadi Basin means that the prospects for the growth of the upstream sector remains bright. Further, the unidentified potential could be tapped with further rounds of exploration. In order to exploit the potential and identify new ones, the Government needs to make policies that will promote a level playing field which will encourage both domestic private players and foreign players to invest in India.

• A major clash of goals has been between providing subsidies to public companies and encouraging private investment. The price for end users should be regulated by taking various factors such as cost of supply and economic efficiency into account. If there is a further need for subsidy, it should be provided in a transparent and accountable manner in consultation with the Board. Otherwise, vested interests would continue to lobby for prices that are so low that cost of supply cannot be recovered. This would discourage private sector participation. A probable long term initiative to turn the pricing into a market determined factor is therefore a necessity.

• It is important for the government to take important steps that enables the PNGRB in playing a more proactive role in promoting fair competition in the market—the interests of various stakeholders should be balanced in order to create a level playing field among producers and between consumers and producers. The board should also express its views on contemporary issues in oil & gas sector affecting the level of competition. For example, the Board should not remain silent on the ongoing battle between the Ambani brothers regarding the pricing of the gas available from the KG-D6 fields . Though the issue is not under the direct control of the Board, it should intervene though media and public forums in the national and consumer interest.

• India today boasts of surplus refining capacity, with further large expansions planned. Most of the private sector refineries are focusing on the export market to a large extent. The total refining capacity in India as on January 1, 2009 stands at 177.97 million metric tonnes. With further liberalization by the government in the refining segment India could well be an important refining hub for the world.

• Also in recent years there has been a dramatic change in fuel retailing especially in the metros and big towns. Sale of non-fuel commodities through convenience stores, establishment of ATMs have changed the face of fuel retailing outlets. Currently this is very evident at the HPCL outlets with their ‘Club HP’ brand. However, other players need to catch up on this facet and more cities and towns should be added.

ROAD AHEAD

According to a recent CII-KPMG report India's energy sector will provide investment avenues worth US$ 120 billion-US$ 150 billion over the next five years. According to the Investment Commission of India, the total opportunity in the oil and gas sector is expected to reach US$ 35 billion to US$ 40 billion by 2012.