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REPORT ON OIL AND GAS SECTOR

The Oil and Gas sector is one of the core sectors in the economy and contributes around 15% to the overall GDP. India is the world's fifth largest consumer of oil and gas and contributes around 4% to the overall world consumption of crude oil. According to the International Energy Agency (IEA), hydrocarbons(coal and oil) fulfil about 70% of the total energy requirements. Natural gas accounts for about 7% share. The oil consumption grew at a rate of around 4% CAGR of the last 5 years. Considering the fact that India produces only 1% of the oil of the world it has to rely on its energy needs through imports. It ranks 4th in the list of the largest importers of crude oil and this plays a very important role in the overall functioning of the economy. In natural gas the disparity between production and consumption is comparatively less as India is partially able to meet its natural gas demands through domestic production. Gross Production of Natural Gas in the country at 47.56 billion cubic metres during 2011-12 is 8.92% lower than the production of 52.22 billion cubic metres during 2010.11 whereas the consumption stood at 61.1 billion cubic metres down 1 % from the previous year. The increase in the imports and subsequently the import bill has led to an increase in focus by the government to bolster the upstream businesses in the Oil and Gas sector.

The New Exploration Licensing Policy (NELP)was introduced by the Government to increase the opportunities for the private players in the field of exploration and production and the same time to bolster the overall production by promoting increased participation from the public as well as the private sector. As a result of this 246 blocks were awarded under the eight bidding rounds (from 2001 to November 2010) and 68 oil and gas discoveries have been made so far in the NELP blocks. To accelerate exploratory activities for increasing the domestic oil and gas production , various measures are also being taken. These include Improving the recovery factor from existing major fields by implementing Enhanced Oil Recovery (EOR)/Improved Oil Recovery (IOR) schemes-in particular, exploring new areas, especially in deep waters and difficult frontier areas, as also the deeper layers of already producing fields; and developing newly discovered fields speedily and stepping up the use of new technologies for seismic surveys, work over, stimulation operations, drilling of wells etc. in producing areas. Moreover, to increase the investment in this sector , 100% FDI is permitted via competitive bidding. The petroleum and natural gas sector attracted US $ 3,152 million of FDI inflows from April 2000 to March 2011.

DEMAND DRIVERS IN THE OIL AND GAS SECTOR The


demand for Petroleum and Gas products in India has grown from 129MMT in 2007-08 to 147MMT in 2011-2012 at a healthy rate of 4.2% CAGR. This demand is expected to grow at a rate of 4.8 % to about 190 MMT in 2016-2017. This demand will be lead by Diesel as it constitutes more than 65% of the total fuel requirement as it is the preferred choice of fuel in transport , agriculture , power and industry sectors. The transport sector has the highest share of Diesel consumption followed by the agriculture sector where the tractors and other farm equipments consume the fuel. The other type of fuel that will drive the demand for crude oil is Petrol as it is the second most consumed fuel after Diesel. It is primarily used in private vehicles and it's consumption is expected to increase at a fast pace in near future. The recent developments related to the pricing of the Petrol has affected its consumption and sale of related products to a certain extent but in the long term it's demand is expected to be robust. The next in line is the Liquefied Petroleum Gas(LPG) that is used majorly as a domestic fuel. Its industrial use is somewhat limited. As the Government wants majority of the people to use LPG and kerosene as a domestic fuel therefore its demand looks robust in the long run. The other fuels that promise high future demand as Aviation Turbine Fuel(ATF),Kerosene Oil, PET coke, Lubes and Bitumen. The demand for Natural Gas is expected to increase at a rate of 19.5% CAGR(473 MMSCMD in 2016-217) in the next five years as a large number of Gas Fired Power plants are expected to be commissioned. The fertilizer industry would continue to be a major consumer of natural gas. Moreover , increased use of natural gas in public and private transport will increase its demand in the long term.

SUPPLY SIDE FACTORS


CURRENT OIL AND GAS RESERVES: According to the EIA, in 2011 India had approximately 5.7 billion barrels of proven oil reserves and 38 trillion cubic feet of natural gas. Large reserves are also present in the Bay of Bengal and Rajasthan(Cairn India has the largest on field site in India there). Of the 26 sedimentary basins only eight have been explored so far. With the introduction of NELP, there has been a significant increase in the number of exploration licences awarded . This will in the long term will increase the oil and gas availability. The diagram below explains this fact further.

The increased thrust provided to the upstream side of the Oil and Gas sector will lead to an increase in investments in the Exploration and Production business. A large number of foreign firms like BP, Cairn, etc have made significant investments in the upstream business and this will bode well for the entire industry.

EXPLORATION AND PRODUCTION OF OIL AND GAS:


According to the estimates provided in the 12th Five year Plan by the Planning Commission ,around 216.339 MMT crude oil will be produced in India. The Private/Joint venture Companies like Reliance-BP , Cairn India are expected to produce the majority of this figure(27.5MMT), whereas the State run companies like ONGC,OIL are expected to produce the rest The Natural Gas production will be about 340 BCM which is an increase of about 57.6% from the previous production. This increase is largely due to the discovery made by RIL in the Krishna Godavari Basin. The partnership of RIL with BP for the deep sea exploration will be beneficial for the sector as BP's expertise in deep sea exploration will help to locate more sources of oil and gas.

Large investments are also made in Shale Gas assets by Indian companies like RIL and ONGC Videsh Ltd. The shale gas is considered to be the next big source of energy and these investments are expected to reap rich benefits in the long term. A lot of emphasis is given by the Government to boost the E&P activities and increase the production of Oil and Gas in the country. Some of the important steps that are being taken or planned to be taken are: Focus on increasing exploration activities in logistically difficult areas through technical collaboration and hiring experts. Invest in advanced technologies that increase the efficiency of the E&P work. Focus on new areas like Coal Bed Methane and Shale Gas assets.

Major Players in the Oil and Gas Sector:


The Indian Oil and Gas sector is controlled by a few companies each in the upstream and the downstream industry. The major players in the Upstream industry are ONGC, OIL, Cairn, RIL etc. Out of these the State run companies control the majority market but at the time increased collaboration and Joint Ventures in the E&P business have started to shift the locus of share towards the centre.

Oil and Natural Gas Corporation Limited (ONGC) : is one of the largest Asia-based oil and gas exploration and production companies, and produces around 77% of India's crude oil(equivalent to around 30% of the country's total demand) and around 81% of its natural gas. Oil India Limited (OIL): is engaged in the business of exploration, development and production of crude oil and natural gas, transportation of crude oil and production of liquid petroleum gas. It has over 100,000 square kilometres of license areas for oil and gas exploration. Reliance Industries Limited(RIL): It is the largest private company in the country with interests in refining, petrochemicals and exploration. It has the largest refinery complex in the world with a capacity of 124000 barrels per day. Reliance is also a major player in the upstream business having exploration license in one of India's largest natural gas reserves, Krishna Godavari basin. Reliance has also made significant investments in the Shale Gas assets in the united States. Cairn India: Cairn India is one of the largest oil and gas exploration companies in the country having a market capitalization of $14 Billion . It produces 20% of the country's crude oil production.

Indian Oil Corporation: It is the largest public corporation ranked by revenue in India. It has interests in refining, petrochemicals and oil marketing. It operates the largest network of fuel pumps across the country numbering 20,575. It supplies cooking gas to over 66.8 million households through a network of 5,934 distributors. Hindustan Petroleum Corporation Limited:

It is a state owned corporation having interests in refining, petrochemicals and oil marketing. HPCL operates two major refineries[7] producing a wide variety of products and having a combined capacity of 14.8 MMTPA . Gas Authority of India Limited(GAIL): GAIL is the largest state-owned natural gas processing
and distribution company. It is India's principal gas transmission and marketing company. GAIL has also entered into petrochemicals business, telecom(internally),power and Liquefied Gas regasification.

REGULATORY FRAMEWORK
Since the Oil and Gas sector is directly related to the functioning of the economy therefore India's Oil and Gas sector is one of the most regulated sectors where most of the decisions are taken by the Government. The Government controls the right to allot the blocks for exploration and also controls the rate at which oil and gas are to be supplied in the country. It has a virtual monopoly in the distribution of fuel to the public which it does through state run oil marketing companies like IOCL,HPCL etc.. To make the common fuels like diesel, petrol, kerosene ,LPG affordable to the public, Government provides subsidies to the oil marketing firms so that the prices are kept within a certain limit. In India the upstream and downstream businesses are covered under Directorate of Hydrocarbons (DGH) and Petroleum & Natural Gas Regulatory Board (PNGRB) respectively. The DGH is responsible for promoting sound management of the oil and natural gas resources having a balanced regard for environment, safety, technological and economic aspects of the petroleum activity. It is also entrusted with several responsibilities like implementation of New Exploration Licensing Policy(NELP), matters concerning the Production Sharing Contracts for discovered fields and exploration blocks, promotion of investment in E&P Sector and monitoring of E&P activities including review of reservoir performance of producing fields. PNGRB is mandated to regulate the refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas excluding production of crude oil and natural gas so as and to ensure uninterrupted and adequate supply of petroleum, petroleum products and natural gas in all parts of the country. It is also responsible for protecting the interests of consumers and entities engaged in specified activities relating to petroleum, petroleum products and natural gas and promoting competition among various entities in the sector. It is responsible for the following tasks: Ensure the availability of resources at all times Monitor prices and transportation rates to check restrictive trade practices Ensure equitable distribution

Enforce retail service obligations for retail outlets and marketing service obligations for entities Maintain information data bank of activities relating to petroleum, petroleum products and natural gas Lay down technical standards for related activities in this sector

Since the sector is highly regulated and the Government provides subsidies in the form of reduced rates of fuel, the Oil Marketing Companies have to sell the fuel at a rate substantially lower than their refining cost. The under-recoveries borne by the OMC are compensated by the Government in the form of Oil Bonds, Cash Discounts and other means. The Government compensates the under-recoveries of the OMCs by enforcing some controls on the rates at which upstream companies like Oil India, ONGC etc sell their oil and gas.

In 2003-04, the subsidy sharing mechanism put in place by the Petroleum Ministry prescribed for onethird of the under-recoveries of OMCs to be borne by the upstream companies. At its peak in 2006-07, the upstream contribution rose to 41.5 per cent, and in 2010-11 it was 38.75 per cent. The most recent proposal by The Finance Ministry proposes to cap the subsidy sharing at $56/ barrel. This means that the upstream companies are expected to give a discount of $56/barrel to the OMC companies. Even after the subsidy sharing mechanism the OMCs are losing Rs 9.22/Litre on Diesel, Rs 31.60/litre on Kerosene ,Rs 481/Cylinder of LPG. Although the Government has deregulated the price of petrol and are planning to decontrol the diesel prices in a phased manner(Rs1/Litre hike every month for 10 months), the political pressure and public opposition will ensure that it will not be easy for the Government to proceed according to the plans. For the sustainability of the OMC firms and the allied businesses its imperative for the Government to take some action quickly.

BASIC COST STRUCTURE:

The basic cost structure of a Petrol/diesel is as follows: Price of Crude Oil: $100/barrel = 5500/158.76 = Rs34/litre Refining Cost = Rs 2/litre Transportation Cost and Dealer Commission = Rs7/Kg Therefore total cost = Rs40-43/Kg

The rest of the price is generally in the form of taxes levied by the central and the state governments.

The main factors that affect the profitability of the upstream and downstream firms: Crude Oil: Since it is the main raw material its price is the most important factor affecting the price.

Government Subsidy/Cess: Any form of Government control on the prices or imposition of taxes affects the profitability

Exchange Rates: The exchange rates at which the upstream companies purchase crude oil from abroad also affects the profitability.

Price Sharing contracts: Any form of Price Sharing Contract will affect the price as a part of production or profit has to be shared with the Government.

Transportation/Dealer Cost: The cost incurred in marketing the fuel also affects the profitability.

Operational Cost: The operational costs also affect the profitability and any improvements in the overall efficiency will increase the profits.

GROWTH OPPORTUNITIES IN OIL AND GAS SECTOR:

The per capita consumption of per barrel of crude oil per annum is 1 whereas in the China it is 2.7 and in USA it is 21.8.This clearly implies that the amount of growth that India can witness in Oil and Gas sector. But having said that it is essential for India to reduce its dependence on the import of crude oil if it has to reach such high levels. Therefore the opportunities for firms to carry on exploration work here is tremendous.

The NELP policy is a boon for the industry as a whole as it encourages increased participation from the players and thus increases the chance of new discoveries.

The new developments in the field of Shale gas, Coal Bed Methane(CBM) and other resources are crucial for India in the next decade. To fuel the next phase of growth partnerships with highly technical firms in the field of E&P should be formed .

The ever increasing consumption of Diesel, Petrol, Natural Gas will always provide a situation of High demand and low supply. This is good for the industry in the long term. There is a huge amount of latent demand for Natural gas as lot of people have started to use it as a substitute for diesel or petrol. Its increased use in industry as a fuel for generators and other purposes also provides opportunities for the entire industry.

KEY CHALLANGES:
Although FDI is allowed in the oil and gas sector, the amount of foreign investment that is present is still not sufficient to sustain the demand .The new firms are not willing to invest in this sector because of the high level of Government control.

The delays in getting the required approvals to start the E&P work is a hindrance for a lot of firms wanting to enter this business.

The quality of local talent available for such a complex industry is not enough and thus makes the whole process of E&P more challenging as expats have to be recruited and lot of teaching and learning has to be carried out.

The technology required for some of the complex exploration and drilling operations is still not present in India and thus makes it even more difficult to carry out the activity.

Issues like the one between RIL and the Government over the reduced output are unhealthy for the industry as the confidence is lost in carrying out operations smoothly.

The amount of subsidies received by state run oil marketing firms is a disadvantage for private OMC like Essar and Reliance which have closed their fuel stations for quite a long time now.

Ambiguity in the Subsidy-Sharing Mechanism makes it difficult for upstream firms to operate smoothly as lot of profit is eroded in the form of subsidies.

CONCLUSION:
The Oil and Gas sector is the backbone of any country. Being a rapidly growing economy India's energy requirements will grow at an unprecedented pace in the coming years. The need to increase the E&P activities is paramount as India is facing stiff competition from China for its share of the Energy pie. At the same time focus should also be on increasing the use of non renewable sources of energy as the current batch of Hydrocarbons cannot sustain the world energy requirement forever.

REFERENCES:
http://ppac.org.in/ http://www.ficci.com/ www.economictimes.com http://petroleum.nic.in/petstat.pdf www.dghindia.org www.cii.in www.pngrb.gov.in www.ril.com www.iocl.com