Oil and gas equipment

industry in India
2 | Oil and gas equipment industry in India
Contents

Indian economic overview 4

Indian oil and gas industry 6

Thrust on increasing oil and gas activities to drive 10

demand for equipment used in the industry

Capital goods procurement by oil and gas industry 12

Key oil and gas related equipment 14

Tax related challenges faced by the capital 22

goods industry

Bridging the gap between domestic manufacturers 23
and end-user demand

Oil and gas equipment industry in India | 3

Chapter 1: Indian economic overview

Stable economic growth amid the
global slowdown
Since 2003, India’s economy has grown at an average of over
6% per annum, despite countries worldwide grappling with an
economic slowdown due to the global financial crisis. India’s
gross domestic product (GDP) grew at an average 6.9% over
FY09–13, compared to the world average of 2.9%1. Currently,
India is the 10th-largest economy worldwide and the third
largest by purchasing power parity (PPP)2.
Favourable demographics and recent government reforms are
expected to add to the country’s growth prospects over the
medium term, positioning it as the world’s fifth fastest-growing
economy by 2015. These reforms include raised foreign direct
investment (FDI) ceilings for the retail, airline, telecoms, and
insurance and defence sectors3.

Chart 1: Real GDP growth rate (% change)

15

10

0
2009 2010 2011 2012 2013 2014 2015
-5

-10
US Eurozone China India World

Source: World Economic Outlook database, April 2014, International Monetary Fund (IMF)

4 | Oil and gas equipment industry in India

India is ranked 19th by export volume, largely due to the rising
exports of merchandise goods4. During FY09–14, India’s
exports increased at a compound annual growth rate (CAGR) of
11% to US$312.6 billion5. Of the total merchandise exports in
FY14, petroleum products form a sizeable portion (20.1%).
Fossil fuels command a significant share of
India’s growing primary energy consumption
The rapid increase in economic activity in India, together with
the rising population, has resulted in greater consumption of
primary energy. Currently, India is the fourth-largest energy
consumer of the world. From 2009 to 2013, India’s primary
energy consumption increased at a CAGR of 5.3%, while global
consumption rose at a CAGR of 3%.
Low per capita consumption of oil and gas
Although India is one of the world’s largest consumers of oil
and gas, the country’s per capita oil and gas consumption is
low as compared to that in other economies. This indicates
the low availability and affordability of energy, particularly of
natural gas. In 2013, India’s per capita consumption of oil and
gas was 176.9 Kg of oil equivalent (kgoe), while the global
average was 1,011.4 kgoe. This indicates significant growth
potential in the sector, given the rising economic prosperity
and rising income levels7.
Chart 3: India’s per capita oil and gas
consumption vs. rest of the world

India’s primary energy mix is dominated by fossil fuels. Coal 80

% Share of oil & gas in energy mix

accounts for a 54.5% share, followed by oil and natural gas Russia
with another 29.5% and 7.8%, respectively. Hydroelectricity, 70
Japan US
renewable and nuclear energy contribute smaller portions Turkey
60 Brazil
(totalling 8.3%). The share of oil in the country’s primary energy Global South Korea
mix is almost at par with that in the global average (32.9%). 50
However, the share of natural gas in India is significantly lower
than that in the global average (23.7%), primarily due to supply- 40
India
side constraints6. 30
China
20

Chart 2: India’s exports (US$ billion) 10

350 0
0 1,000 2,000 3,000 4,000 5,000
300
kgoe
250
Source: BP Statistical Review of World Energy June 2014, World Bank
200 Population Data2013

150
100
50
0
FY09 FY10 FY11 FY12 FY13 FY14

Non-petroleum exports Petroleum exports

Source: Handbook of Statistics on Indian Economy,

Reserve Bank of India

Oil and gas equipment industry in India | 5

Chapter 2: Indian oil and gas industry:
focus on boosting domestic production,
developing midstream infrastructure and
expanding refining capacity
Upstream: Crude oil production trails
consumption
India’s oil and natural gas sector predominantly relies on its
national oil companies (NOCs). Oil and Natural Gas Corporation
(ONGC) holds the largest share of crude oil and natural gas
production. Oil India Limited (OIL), Cairn India and Reliance
Industries Limited (RIL) are other major oil- and gas-producing
companies in the country.
Heavy import dependence for crude oil
India’s dependence on oil imports has increased over the past
few years, along with the spike in consumption. Meanwhile,
domestic production remains stagnant, hampered by
limited exploration and declining production from existing
maturing fields. India currently imports around 76% of its oil
consumption.
Surplus refining capacity channelized
to exports
India has surplus refining capacity and is a net exporter of
petroleum products. Over the past few years, many companies
— private and NOCs — have expanded their refining capacities,
driven by the rising domestic consumption of petroleum
products and incentives granted by the Government of India
(GoI). Currently, the bulk of petroleum products of public sector
undertaking (PSU) refineries are sold in the domestic market,
Chart 4: Current and projected refining capacity share by company
Present capacity
7%
37% 56%
PSU Private players
Source: Refining capacity, MoPNG
6 | Oil and gas equipment industry in India
while private companies mainly cater to export demand. During
FY10–14, the country’s refining capacity grew at a CAGR
of 3.8% to 215 million metric tonnes per annum (MMTPA)8.
The total exports of petroleum products increased from 51.2
million metric tonnes (mmt) (US$30.7 billion) in FY10 to 67.9
mmt (US$60.7 billion) in FY149. The country currently has 22
refineries, of which 17 are in the public sector, 3 in the private
sector and 2 are JV refineries. NOCs account for the majority
(55.8%) of the country’s refining capacity, followed by private
players with a 37.2% share10.
Expansion of refining capacities to remain a
focus area
Refining companies are likely to continue to enhance their
crude processing capacity by upgrading existing facilities
and building greenfield refineries. During the Twelfth plan,
new refineries are likely to be commissioned by Indian Oil
Corporation Limited (Paradeep, 15 MMTPA). By the end of
FY17, the country’s cumulative refining capacity is projected
to increase to 310.9 MMTPA. Out of this, NOCs are likely to
account for 197.9 MMTPA11. Access to modern technology,
and research and development initiatives may become key
focus areas, given the rising global production of heavy
unconventional oils, coupled with the shift of consumers
towards modern fuels.
Projected capacity (FY17)
6%
36% 58%
JVs PSU Private players JVs
Augmenting the pipeline network for crude oil
and petroleum products
India’s refining companies have developed a wide oil pipeline
network, driven by the need to minimise transportation
costs (compared to those of railways and tankers), pilferage
and transit losses. India has a cumulative crude oil, liquefied
petroleum gas (LPG) and petroleum product pipeline network
of 23,823 km, indicating growth at a CAGR of 5% during
2009–2013. As of April 2013, petroleum products and crude
oil pipelines accounted for around 37% and 25% of the total
pipeline length, respectively. IOCL is the market leader in the
crude and petroleum product pipeline segment, accounting
for 46.5% share in total length. In terms of crude oil-carrying
capacity, ONGC accounts for around 42% share, followed by
IOCL with 29%. There are 31 petroleum product pipelines,
accounting for 83.5% share of total length and 95% of capacity.
The remaining network comprises four LPG pipelines, covering
2,316 km with 4.73 MMTPA capacity12.
Chart 5: Rising natural gas deficit
400.0
350.0
300.0
250.0
200.0
mmscmd
150.0
100.0
50.0
0.0
FY10 FY11
Demand
Source: PPAC, MoPNG
Significant gas deficit — supply trails demand
The country’s natural gas market is characterised by a
supply deficit, primarily due to low domestic production and
inadequate transmission and distribution infrastructure
On the other hand, demand for natural gas in India has
increased significantly, primarily from the power and fertilizers
sectors. It cumulatively accounted for more than 62% of gas
consumption in FY1313. Demand is also driven by the growing
use of natural gas in the city gas distribution (CGD) sector and
industrial sectors, such as refining and petrochemicals. Rising
concerns on carbon emission have added to demand for natural
gas. However, this demand is price sensitive, making for a
volatile period, as the industry is awaiting the Government’s
decision on revised pricing for domestic natural gas supplies.
70%
60%
50%
40%
30%
20%
10%
0%
FY12 FY13 FY14
Supply Deficit %
Oil and gas equipment industry in India | 7
Midstream: Developing infrastructure to meet
rising demand
Rise in LNG import capacity, focus on securing
LNG supplies
India’s dependence on liquefied natural gas (LNG) is increasing,
given the country’s limited domestic production to meet the
rising demand. LNG imports have increased from 8.9 MMTPA in
FY10 to 10.8 MMTPA in FY14, at a CAGR of 5%. Currently, LNG
import accounts for 28.3% of the total gas supply14.
The country’s LNG re-gasification capacity is expected to
increase from 18.6 MMTPA (excluding that in Kochi, which was
commissioned in August 2013) in FY14 to around 53 MMTPA
in FY17 on the back of the greenfield LNG terminals proposed
by private and public sector companies along the eastern and
western coast of India15.
Growing natural gas transmission network
Despite accounting for around 38% of the total pipeline
network, India’s gas transportation infrastructure has
historically remained inadequate due to the limited availability
of gas in the country and the regional concentration of
gas-producing fields and LNG import facilities (mostly in
western India). As of March 2014, India had a natural gas
transmission network of 15,340 km, with an aggregate
transmission capacity of 390 million standard cubic metres per
day (mmscmd). GAIL accounts for 70.7% of the total pipeline
network in India by length. PNGRB had also authorised GSPL
and Andhra Pradesh Gas Distribution Corporation Limited
to expand Mallavaram-Bhopal-Bhilwara-Vijaipur and build
Kakinada-Srikakulam gas pipeline16.

Table 1: Current and projected R-LNG capacity (in MMTPA)

LNG terminal Company name Current Projected (FY17)

Dahej Petronet LNG Limited 10 15

Hazira Shell Hazira 3.6 5
Dabhol GAIL India 5 5
Kochi Petronet LNG 5 5
Mundra Gujarat State Petroleum Company - 5
Ennore Petronet LNG Limited - 5
Kakinada Andhra LNG Private Limited - 5
Kakinada FSRU AP Gas Distribution Corporation and GAIL - 3.5
Pipavav Swan Energy - 4.5

Source: Indian Infrastructure, Volume 16, July 2014

8 | Oil and gas equipment industry in India

Penetration of pipelines to increase
The GoI and other stakeholders are encouraging investments to
strengthen the midstream segment and address the significant
unmet demand for gas. During the Twelfth plan, companies
are likely to invest INR841.8 billion for expanding their gas
pipeline network (including the CGD network). Around 90%
of this proposed investment will be used to expand the gas
transmission and distribution network17. Furthermore, the GoI
has announced plans to build additional 15,000 km of gas
pipelines to complete the construction of the gas grid via the
Public Private Partnership (PPP) route18.

Expanding CGD network

The use of natural gas in the residential, industrial and
commercial sectors is rising on the back of favourable
regulatory policies and cost benefits. The existing CGD network
extends to 90 cities and covers 47 geographical areas (GAs).
The network of distribution pipelines spans nearly 40,535 km.
The total number of compressed natural gas (CNG) stations in
the country has increased to 966 in FY14 from 617 in FY11, at
a CAGR of 11.9%19.

The Petroleum and Natural gas Regulatory Board (PNGRB)

plans to expand the CGD network through competitive bidding
in more than 300 GAs in a phased manner, depending on the
availability of natural gas. To expand the CGD network and
boost competition, PNGRB has introduced amendments to
existing bidding parameters in 2013 and 2014. It has also
authorised three GAs — Bhavnagar, Jamnagar and Jalandhar —
to go ahead with the third CGD round. In addition, it has invited
bids for developing CGD networks in 14 cities under the fourth
bidding round. Recently, the PNGRB has extended the bidding
deadline to September 2014 for the districts of Khammam,
Nalgonda and Rangareddy & Medak in Telangana; Shahjahanpur
in Uttar Pradesh; and Guna in Madhya Pradesh20.

The Indian Government has raised the share of allocated

domestic gas to 100% of the requirement for CNG (transport)
and PNG (domestic), up from the previous 80% mentioned
in the Gas Utilization Policy. With this, it plans to reduce
the dependence of CGD players on costlier RLNG, as well as
provide cheaper fuel to end consumers. Favourable policy
is likely to encourage investment in the CGD sector. This,
in turn, is expected to generate more opportunities for
equipment companies21.

Oil and gas equipment industry in India | 9

Chapter 3: Thrust on increasing oil
and gas activities to drive demand for
equipment used in the industry
Ageing infrastructure, a favourable regulatory
framework and de-control of petroleum
products price to drive investments; rising
business opportunities for oil and gas
equipment manufacturers
The GoI has taken many initiatives for attracting investment
to boost domestic output and strengthen the relative
infrastructure. These efforts are likely to create several
opportunities for oilfield services, EPC companies and capital
goods companies.
• Favourable regulatory framework: The Government
has allowed 100% FDI in upstream and private sector
refining projects. In addition, FDI limit for public sector
refining projects has been raised to 49%22. Additionally,
the Indian Government has enacted various policies such
as New Exploration Licensing Policy (NELP), coal bed
methane (CBM), shale gas and Petroleum, Chemicals
and Petrochemical Investment Regions (PCPIR) policy to
encourage investments across the industry’s value chain.
• Ageing infrastructure: Several assets in the oil and gas
segment are over 30 years old. Hence, oil companies are
undertaking large projects for the redevelopment and
revamp of these assets23.
• De-controlling of product prices: The GoI has
taken various measures to increase the investment
attractiveness of the oil and gas sector; these include:
Table 2: Planned capex for the eleventh plan period (INR billion)
Sector Upstream
Target 1,509.3
Expenditure 1,938.7
Source: MoPNG via working group report on petroleum and natural gas for the twelfth plan, November 2011
1 “Eleventh Five Year Plan: Volume III,” Planning Commission of India website, http://planningcommission.nic.in/plans/planbody.html, accessed 29 March 2009
10 | Oil and gas equipment industry in India
• he complete deregulation of petrol prices: It has
T
also allowed an INR0.5/liter monthly price hike for
diesel (expected to be deregulated in the next few
months) and has capped the number of subsidized
domestic cylinders to 12 per household per year.
These decisions are expected to reduce subsidies on
petroleum products and, in turn, help oil companies
(HPCL, BPCL, and IOCL) reduce their losses and free
up capital for investments and expansions24.
Capital outlays in the Twelfth Five-Year Plan
During the Eleventh Plan period (2007–2012), domestic
players exceeded the planned capital expenditure outlay.
They invested INR2,751.6 billion, 120% of the planned target
of INR2,289.9 billion. The upstream sector, which had the
highest share in the planned capital expenditure, recorded
approximately 129% of the planned target. This resulted in
more than anticipated oil and gas reserves accretion. The
downstream sector achieved around 104% of its planned
outlay target, primarily due to large investments made by
IOCL, accounting for 51% of the total expenditure.
During the Twelfth Plan period (2012–17), an outlay of INR3.4
trillion has been envisaged by Indian NOCs for the upstream
and downstream sectors1. The upstream sector is expected to
account for more than INR1.8 trillion of this. The majority of
the amount will be spent on conducting drilling and developing
exploration and production wells. PSUs are expected to spend
approximately INR1.5 trillion on capacity augmentations in
the refining and marketing space. Private players such as RIL
and Essar Oil are also spending significant capital on their
capacity additions.
Downstream Petrochemicals Engineering Total
631.0 147.3 1.5 2,289.9
653.5 157.5 1.8 2,751.6
Capital spending of INR1.2 trillion is projected across the Chart 6: Projected investment by Indian oil and
natural gas value chain during the Twelfth Plan period. gas companies during FY15-FY17
Investments worth INR439 billion are projected for capacity (in INR billion)
augmentation in gas transmission pipelines. The balance
is projected for new capacity additions in LNG terminals ONGC
(INR313 billion) and the expansion of the CGD network
(INR403 billion)25. RIL
Table 3: Planned capital outlay in natural gas value chain
during twelfth plan period (INR billion) IOCL

City gas
LNG Gas transmission BPCL
distribution Total
terminals pipelines
infrastructure
313 439 403 1,154 CAIRN
Source: MoPNG via working group report on petroleum and natural gas for
the twelfth plan, November 2011 HPCL

Planned capital investment by major Indian oil OIL

and gas companies
GAIL
Given the rise in demand for oil and gas, the gap between
their demand and supply from indigenous sources is likely to
0.0 200.0 400.0 600.0 800.0 1000.0
widen over years. Nevertheless, Indian oil and gas companies
have been investing across the value chain to bridge the rising
Source: MoPNG via working group report on petroleum and natural gas
gap. During FY15–17, oil and gas companies (including NOCs for the twelfth plan; companies’ sources; broker reports
and private companies) plan to invest around INR2.8 trillion
across the value chain. Out of this, ONGC accounts for 34.2%
of the total investment, followed by RIL with 28.4%. On a
segment level, upstream accounts for 56.8% share, followed by
downstream with 42.6%.

Oil and gas equipment industry in India | 11

 Chapter 4: Capital goods procurement by
the oil and gas industry

Overview of the oil and gas equipment Chart 7: Global oilfield services and equipment Ch
industry, by value chain spending split (2011) sp

Oil and gas equipment players manufacture and sell equipment 8%

used across the oil and gas value chain in exploration, 18%
production and distribution. The industry consists of large, mid- 11%
3%
size and small companies offering services such as construction
4%
and engineering, as well as manufacturing equipment.
18%
Oil and gas equipment can be primarily divided into three 21%
segments, namely, upstream, midstream and downstream,
12% 5%
based on their presence and use across the value chain. The
scope of the upstream segment generally ends at the last
choke valve of the christmas tree arrangement on a wellhead,
including in processes such as exploration, drilling and well Equipment Manufacturing Drilling Related Services O
completion. The midstream segment comprises activities Logistics Completion & Stimulation R
such as wellhead processing and the transportation of oil. The
Seismic Infrastructure S
downstream segment is conventionally considered to consist
of oil refining, gas processing, distribution and marketing. For Contract Drilling Production and maintenance
Sou
the purpose of this report, we have clubbed midstream and Formation Evaluation
downstream equipment.
Source: Morgan Stanley OFS Teach-in Report 2012
Global oilfield and gas services and equipment
industry break-up
Globally, equipment manufacturing for the upstream segment
Chart 7: Global
accounts oilfield
for ~18% services
of oilfield servicesand
and equipment
equipment spend. Chart 8: Global oilfield equipment spending
spending split (2011)
Within equipment spend, oil country tubular goods (OCTG) and split (2011)
rig equipment account for ~63% share by value26.
8%
18% 8%
11% 9%
3% 33%
4%
20%
18%
21%
12% 5% 30%

Equipment Manufacturing Drilling Related Services Oil country tubular goods Service company equipment
Logistics Completion & Stimulation Rig equipment Surface production equipment
Seismic Infrastructure Subsea production equipment
Contract Drilling Production and maintenance
Source: Morgan Stanley OFS Teach-in Report 2012
Formation Evaluation

Source: Morgan Stanley OFS Teach-in Report 2012

12 | Oil and gas equipment industry in India

Table 4: Key equipment manufacturers by segment in India

Sector Key equipment Key manufacturers

Upstream OCTG, rig equipment, drill bits, centrifugal
pumps, gas lift equipment, downhole tools,
swivel joints, valves, flanges, X-mas tree, etc.
Downstream* Separators, pressure vessels, boilers, storage
vessels, columns, heat exchangers, air coolers,
storage tanks and separator internals
*includes midstream equipment
BHEL, Larsen & Toubro, Thermax, Jindal Pipe, United Drilling,
Deep Industries, Sara Sae, Interdrill, BOTIL, Parveen Industries,
Akers Solutions, Emerson, Weir
BHEL, Larsen & Toubro, Godrej and Boyce, Alfa Laval, Thermax,
Vijay Tank and Vessel, ISGEC Heavy Engineering, Kevin
Enterprises, Chemtrols, Alstom India, Doosan

Increasing presence of global players in India 5.2 Generating interest from private equity players

Increasing interest of global players: With FDI of up to 100%

Date Target Investor
permitted via the automatic route (through RBI), foreign
companies are looking to invest in the market by setting up 29/10/2012 M.E Energy Helix Investments
manufacturing bases or by forming alliances with Indian
22/08/2012 INOX India Ltd. Standard Chartered PE
players. Further demand aggregation and the increased
adoption of policies promoting local manufacturing have 25/08/2011 Sara SAE Pvt. Ltd. Multiples Private Equity
attracted many global players such as Alstom, Alfa Lava, GE,
Source: Merger Market
Honeywell and Emerson to set up base in India. As a result,
the country has seen strong FDI equity inflow in the capital
In the next section, we have elaborated on key oil and gas
goods industry.
related equipment segments such as process plant equipment,
boilers, valves and pipes and their respective market
Table 5: Key deals in the Oil and gas related equipment sector
positioning in India.
in the last five years
5.1 Investments by strategic players The oil and gas industry is the largest end-user market
for the process plant equipment industry. Process plant
Date Target Acquirer equipment finds wide application in refineries and gas
processing plants in critical processes such as phase
24/09/2013 Virgo Valves & Emerson separation, oil processing and storage, gas processing, and
Controls oil and gas metering and transport.
31/01/2013 LNV Technology Huaxin (Hong Kong) On the other hand, pumps, valves and steel pipes form an
Intl.
integral part of both upstream and downstream equipment.
03/03/2012 Alfa Laval (India) Alfa Laval AB These are used extensively for transporting crude oil from
29/02/2012 Spetech Plant Bilfinger SE oilfields to refineries, as well as in marketing and distribution.
Equipments Key process plant equipment used in the oil and gas
11/01/2012 ISGEC Heavy Hitachi Zosen industry:
Engineering (Facilities) Corporation
• Pressure vessel
20/09/2011 Hightemp Furnaces Dowa Holdings Co
• Cryogenic storage tank
09/07/2011 Nile Limited (Pressure De Dietrich Process
Vessel Division) Systems • Columns
31/03/2011 Fisher Sanmar Emerson
• Boilers
30/01/2011 AE&E Chennai Works Doosan Heavy
Industries
02/09/2010 BDK Engineering The Weir Group Plc
Industries
Source: Merger Market

Oil and gas equipment industry in India | 13

Chapter 5: Key oil and gas related
equipment

Process plant equipment overview
• Major process plant equipment include pressure
vessels, storage tanks, columns, towers, crystallizer,
heat exchangers, evaporators and furnace. These find
application across a wide spectrum, including oil and gas,
refinery, chemical, petrochemical, energy, fertilizer, paper
and pulp, sugar, cement and dairy.
• The process plant equipment market in India was valued
at INR163,450 million in 2011. Production amounted
to INR198,610 million in 2012. It is expected to touch
INR350,000 million by 2017, growing at a CAGR
of ~12%27.
• The market is fragmented, with more than 200 companies
manufacturing process plant equipment across India. Close
to 65% of these are small and mid-size enterprises28.
• This sector employs 128,000 persons directly and
240,000 persons indirectly29.
Exports and imports (process plant equipment)
Exports: The process plant equipment market in India was
valued at INR31,940 million in 2011, by exports. It is expected
to be worth INR87,500 million by 2017, growing at a CAGR of
18.3% during this period beginning in 201230. In recent years,
India has enjoyed large demand for process plant equipment
from foreign developing countries as a result of the increasing
capabilities of domestic manufacturers. As far as domestic
consumption is concerned, the process plant equipment
industry is one of the most self-reliant sub-sectors within the
capital goods sector, with domestic procurement accounting
for ~91% of the demand31. However, in terms of their share
in exports at the global level, Indian manufacturers are yet
to catch up with their peers from developed countries. Indian
players account for a meagre 0.5% of total global exports32.
Imports: The process plant equipment market in India
was valued at INR18,040 million in 2012, by imports. It is
expected to be worth INR38,680 million by 2017, growing
at a CAGR of ~16.5% during this period 33. Imports are
gaining market share over domestic manufacturers, which
is evident from the fact that the 6-year CAGR of imports
during 2005–2011 at 17% outgrew the domestic average
of 12%. Import content is approximately 10% of standard
machinery and 25%–30% of hi-tech equipment for process
plant machinery34.

Chart 9: Process plant equipment market in India 2005–2017

INR million
CAGR 05-11: 11.9% CAGR 12-17: 11.0%
4,00,000
3,50,000 CAGR 05-11: 12.5% CAGR 12-17: 12.0%
3,00,000
2,50,000
2,00,000
1,50,000
1,00,000
50,000
-

Market Size Production

Source: Report of the Working Group on Capital Goods & Engineering Sector for the 12th Five Year Plan

14 | Oil and gas equipment industry in India

 Chart 10: Process plant equipment market in India – imports and exports 2005–2017

INR million
CAGR 05-11: 16.5% CAGR 12-17: 16.5%
1,00,000
90,000 CAGR 05-11: 18.3% CAGR 12-17: 18.3%
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
-

Import Export

Source: Report of the Working Group on Capital Goods & Engineering Sector for the 12th Five Year Plan

Chart 11: Share of Indian manufacturers Market growth drivers:

in global exports within Process Plant
Equipment (2010) • Increasing growth in the end-user segment (especially oil
and gas)
0.5%
• Growth in process plant equipment is highly correlated
with that in the oil and gas sector, since it is a major
10.7% consumer of process plant equipment. With growing
demand for petroleum products, oil and gas players
8.8% are expected to further add refining capacity. This
would drive demand for process plant equipment.
50.4% • Investments in the Indian upstream and downstream
17.1% segments are on the rise

• During FY15–17, oil and gas companies (including

NOCs and private companies) plan to invest around
10.0%
INR2.8 trillion across the value chain. Out of this,
ONGC accounts for 34.2% share, followed by RIL with
2.5% 28.4%35 .
India USA Japan ROW
• Strong manufacturing capability leading to higher export
China Germany Korea potential

• Domestic manufacturers have gained the requisite

Source: “Capital Goods in India Call for action,” Confederation of
Indian Industry, http://cii.in/PublicationDetail
capability to execute end-to-end large projects. They
are now equipped to provide equipment of the highest
quality and in compliance with global standards, thus
leading to huge export potential.

Oil and gas equipment industry in India | 15

• Indian manufacturers present across the value chain
• The process equipment industry has evolved
considerably over the last few years. Indian players are
now able to cater to the varied needs of customers,
ranging from design and engineering at the back-
end to erection and commissioning at the front end,
while competing with global majors for engineering,
procurement and commissioning contracts.
• Favourable policies and strong investment pipeline
by PSU
• Increased initiatives by the GoI, such as to permitting
100% FDI in the capital goods and engineering
sectors and strong investment plans by PSUs to add
refining capacity, would drive demand for Oil and
gas equipment. By the end of FY17, the country’s
cumulative refining capacity is projected to increase to
310.9 MMTPA. Out of this, NOCs are likely to account
for 197.9 MMTPA36.
Key challenges
• Limited R&D in developing new and critical process
equipment
• There is a technological gap between domestic and
foreign manufacturers. This is leading to an increase
in imports, as demand from end-user segments for
next-generation products has considerably evolved
over time.
• High dependence on imports of old process plant equipment
• Companies are increasingly using refurbished
imported process plant equipment, primarily because
it is cost effective compared to procuring new
equipment. Old machinery can be imported without
minimal restriction on age and quality benchmarks,
resulting in losses for domestic manufacturers.
Shortage of capital and high interest rate differential
• CAGR 11-
• Being a capital-intensive industry, players are
unable to source financing to execute large-size
projects, primarily due to high interest rates. Also,
the high interest rate differential is leading to higher
financial costs, thus increasing delivery cycle time for
equipment. This is detrimental for the industry.
16 | Oil and gas equipment industry in India
• High dependence on overseas process licensors
• In the absence of a systematic technology transfer
policy and limited proprietary know-how on process
technology, domestic manufacturers are dependent
on global players to manufacture next-generation
products.
• Logistics and infrastructure to support the industry
• Another major problem is weak support infrastructure,
which leads to severe transportation issues, such as
high risk in transporting large equipment. This leads to
further increase in costs.
Boiler industry overview
• The boiler market (includes boiler used in electrical and
other industries) in India was valued at INR195,000 million
in 2012. It is expected to grow at a CAGR of 9.3% and
15.1% to be worth INR290,000 million and INR585,000
million by 2017 and 2022, respectively37.
• Based on investment estimates and capacity addition
targets, domestic demand for Boiler, Turbine & Generator
(BTG) is anticipated between INR1,250,000 million and
INR1,500,000 million by 202238.
• The boiler export and import market was valued at
INR11,209 million and INR16,000 million as of 2012,
after having grown at a CAGR of ~15% and 4%, respectively
during 2008–201239.
Chart 12: Boiler market in India (2011-2022)
INR million
7,00,000 CAGR 17-
22: 15.1%
6,00,000
5,00,000 17: 9.3%
4,00,000
3,00,000
2,00,000
1,00,000
-
FY11 FY17 FY22
Source: Indian Electrical Equipment Industry Mission Plan 2012-2022,
CEA, EY Analysis
 Chart 13: Boiler market in India — export and import (2008–2012)
INR million
CAGR 14.8%
25,000
CAGR 3.8%

20,000

15,000

10,000

5,000

-
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Export Import

Source: IEEMA - Indian Electrical Equipment Industry Under-Utilisation of Capacity; Reasons and Remedy Thereof

Key players Table 6: Investments/JVs between local manufacturers and

global players
• The boiler industry is fragmented by the number of
manufacturers. About 675 manufacturers make BTG sets, Manufacturing
Player Technology Partner
with over 90% of them being SMEs40. capacity (MW)
• BHEL is the Indian market leader in boiler manufacturing, Boiler
with over 60% share and an installed base of
120,000 MW41. BHEL 20,000 Alstom (France)
• Other players include L&T, Thermax, Gammon, BGR and L&T - MHI 4,000 Mitsubishi Heavy
Alstom. (Japan)
Thermax - 3,000 Babcock & Wilcox (US)
• Amid a favourable demand outlook, various domestic
Babcock
OEMs have collaborated with global players to acquire new
technology and, thereby, meet growing demand from the Ansaldo 1,000 Ansaldo (Italy)
(Gammon)
local end-user industry.
BGR - Hitachi 4,000 Hitachi (Japan)
Source: CII – Capabilities, Opportunities and Challenges in BTG Industry –
CII Sep 2013

Oil and gas equipment industry in India | 17

Market growth drivers
• High demand in end-user segments
• The boiler market is expected to derive growth from
the demand arising from the rapidly expanding end-
user segments, such as the oil and gas equipment
industry and the electrical generation equipment
market.
• Strong inflow of investments from foreign players
• The boiler industry has witnessed significant
investment from foreign players. These players are
setting up joint manufacturing facilities in India to
benefit from the India growth story.
• Favourable government policy to help drive growth
• Domestic OEMs (including JVs) are expected to benefit
significantly from the GoI’s efforts to encourage the
bulk tendering of super-critical units for projects
being developed by NTPC and DVC. The only eligibility
clause for bidders is that they need to have mandatory
domestic manufacturing presence and a valid
technology transfer arrangement.
Key challenges
• Significant competition from low-cost Chinese and
foreign manufactures, and limited new technology with
domestic players
• Increasing demand for technologically advanced
products such as super-critical boilers is expected
to account for 60% of the market, as per the Twelfth
Five-Year Plan. This has helped global players capture
a dominant share, as domestic players are not able to
step up. This is compounded by the cost differential
between Chinese and domestic manufacturers, mainly
due to disadvantages faced by domestic Industry,
as well as subsidies/incentives provided to Chinese
manufacturers by its Government.
• Shortage of raw material and price volatility
• Raw material constitutes the majority of product cost
(~70%–75%) in the BTG industry42. Thus, constraint
on the availability of a certain grade of steel and
volatility in pricing are leading to lower margins for the
domestic industry and poor quality.
18 | Oil and gas equipment industry in India
• Import of re-manufactured and second-hand goods
• The import of refurbished equipment is increasing
due to the cost advantages offered by them over the
procurement of newly manufactured goods.
• Lack of proper support infrastructure
• Congestion on ports and transportation issues via
both roadways and rail are leading to higher costs and
increased delivery time.
Valve industry overview
• The valve market in India was valued at INR117,129
million in 2012. It is expected to be worth INR194,648
million by 2016, growing at a CAGR of 13.54%43.
• The Indian industrial valve market is fragmented, with the
unorganized sector contributing ~40% of the market44.
• Oil and gas accounts for ~47% of the valves market, with
valves forming an integral part of the upstream equipment
and downstream distribution network45.
• Large-size complex choke valves are extensively used in
the exploration and production of oil. Hence, domestic
manufacturers need to improve their technological
capabilities to be able to address demand for complex
valves from the oil and gas sector.
Chart 14: Valve market in India 2012–16
INR million
2,50,000
2,00,000
1,50,000
1,00,000
50,000
-
2012 2013 2014 2015 2016
Revenue
Source: TechNavio (Pumps, Valves, and Compressors Market in India
2012 – 2016); Fx rate: USD 1 = INR60.553
 Chart 15: Industrial valve market in India, by Chart 16: Vendor market share in the industrial
end-user segmentation (FY13) valve industry in India (FY13)

12.5%

10.5%
9.7%
23.8%
10.8%

55.8% 7.0%
14.3%
26.1%
3.7%
14.6% 3.0%
2.9%
2.8%
2.6%

O&G upstream Power Audco India Microfinish

O&G midstream Petrochemicals, chemicals, Emerson (Including Virgo) MIL

and fertilizers Tyco IL
O&G downstream Others BDK Weir Others
NSSL

Source: Tata Strategic Management: Indian Pumps and Industrial Valves Source: Tata Strategic Management: Indian Pumps and Industrial Valves
Market (Pumps, Valves & Process Equipment Expo, 2013) Market (Pumps, Valves & Process Equipment Expo, 2013)

Key players Market drivers and key trends

• More than 350 companies operate in the Indian industrial
valves market. Audco India Limited, Tyco, Emerson, BDK
Weir, MIL, NSSL, Microfinish are among the key players46.
• L&T-owned Audco India is the market leader in the Indian
valve industry, with ~12.5% market share as of FY1347.
• Large-size complex valves such as choke valves or
christmas tree valves are primarily imported due to the
limited capabilities of domestic players. In addition, foreign
players are increasingly interested in entering the Indian
valve market. Domestic players are looking to leverage
their technical expertise to meet the diversifying end-
user demand, as well as to gain access to cost-effective
manufacturing capabilities.
• Strong growth outlook in end-user segments to
drive demand
• The performance of the valves industry is directly
correlated to that of end-use sectors such as power,
and oil and gas. Given the increasing adoption of
pipelines for transportation and the expanding
downstream network, valves demand is expected
to grow.
•  uring the Twelfth Five-Year Plan, companies
D
are likely to invest INR841.8 billion (including
in the CGD network) to expand their oil and gas
pipeline network48.
• Process plant modernisation to drive demand for
customised valves

• With the increasing complexity of plants and process

equipment, technologically advance players that have
the ability to customise valves would be in demand.

Oil and gas equipment industry in India | 19

Key challenges • India remained a net exporter of steel pipes and
tubes over FY09–13, with net exports amounting to
• Critical and complex valves are primarily imported
~INR59,600 million during FY 2013; however, imports
• Due to low R&D spend and limited advanced of steel pipes and tubes increased at a CAGR of ~7.3%
manufacturing capabilities, domestic manufacturers higher than the export CAGR of ~2.5% over the period
are unable to meet demand for critical large-size FY2009-1352.
complex valves that are predominantly used in the
upstream oil and gas sector, including choke valves or
Christmas tree valves. Chart 17: Projected steel pipe and tube
production (‘000 tonnes)
Pipe industry overview
'000 tonnes
• Oil and gas is the largest end user of steel pipes and 9,000
tubes, with pipeline being the major mode of transport
for petroleum, oil and lubricant products. In 2011, ~46% 8,500
of petroleum, oil and lubricant products were transported 8,000
through pipelines. The percentage is expected to increase
7,500
to ~53% in 201749.
7,000
• The increasing use of pipelines in oil and gas directly
translates into higher demand for steel pipes. Crude 6,500
oil, gas and product pipelines have grown at a CAGR of FY13 FY14 FY15 FY16
~10.5%, 11.7% and ~4.7% over 2008–2012, respectively.
Source: D&B research, 2013
Steel pipe commands the largest share in the oil and gas
sector, primarily because of its high pressure resistance
properties50.

• Production for steel pipes and tubes is estimated to have

grown at a CAGR of ~7.2% over FY 2009–13 to 7.52
million tonnes. Domestic consumption is estimated to have
increased to 6.19 million tonnes for the corresponding
period. Steel pipes and tube production is expected to grow
by a CAGR of 5% over the next 3 years51.

Chart 18: Steel pipe and tube turnover - export and import (FY09 - FY13)

INR billion
CAGR 7.3%
200

150 CAGR 2.5%

100

50

0
FY09 FY10 FY11 FY12 FY13
Imports Exports

Source: India trade HS Codes Considered: 7303, 7304, 7305, 7306, D&B research

20 | Oil and gas equipment industry in India

Table 7: Summary of incremental pipeline additions under the
Twelfth Five-Year Plan

Length Capacity Capex

Year
(Kms.) (MMTPA) (INR Billion)
2012 - 13 1878 18.9 41.66
2013 - 14 410 2.7 2.00
2014 - 15 664 4.2 13.98
2015 - 16 2645 9.1 32.66
Source: Ministry of Petroleum & Gas (Working Group Report 12th five year plan)

Key players
• The steel pipes and tubes industry is characterised by
the presence of a large number of players, with the five
key players accounting for ~34% of market share, by
production, during FY1253.

• The key pipe manufacturers in India, by product offered,

include:

• Seamless pipes: Maharashtra Seamless, Jindal Saw,

BHEL, Remi Metals, ISMT ltd. Ratnamani

• HSAW / LSAW: Jindal Saw, Welspun, Man Industries

• ERW: Maharashtra Seamless, Jindal Pipes, BHEL,

Surya Roshni, Welspun

Growth drivers
• Strong pipeline additions planned and increasing end-
mile connectivity

• Increasing end-mile connectivity in the distribution

of oil and gas and the construction of new pipelines
to gather crude oil from new drilling sites situated at
a large distance from refining plants are expected to
drive demand for steel pipes.

• Lower losses and transmission cost savings

• The increasing use of pipeline would help lower

transmission costs and plug leakages from wastage
and spilling during road or rail transportation. This
would lead to better efficiency.

Oil and gas equipment industry in India | 21

Chapter 6: Tax-related challenges in the
capital goods industry

Indirect taxation
The capital goods industry is being subjected to various indirect taxes, depending on the source of procurement. An overview of the
various indirect taxes applicable on the procurement of capital goods have been provided in the below table.

Tax Taxing Authority Applicable on Headline tax rate overall

country basis
General effective
Customs duty Central Government Import of goods into India
Customs duty - 23.55%
Excise duty Central Government Manufacture of goods in India 10.30%
Varies from state to
Value Added Tax (VAT) State Government Sale of goods within the state state; generally ranges
between 4% and 15%
2% or VAT rate
applicable on the goods
Central Sales Tax (CST) Central Government Inter-state sale of goods in the state where the
movement of goods
commences
State government/ Entry of goods in a state/local Varies state wise; ranges
Entry tax/local bodies tax (LBT)
local authority area for consumption/sale 0.1%–30%

The GoI has provided various exemptions/concessional rate of
duties on the import and indigenous procurement of capital
goods. Exemptions/con rate are available depending on the
goods imported or procured indigenously.
The key exemptions/concessional rate of duties available in oil
and gas industry have been provided below.
• Project Import Scheme: A project can be registered with
the relevant authorities under the Project Import Scheme
and, thereafter, imports for the project can be made at a
concessional rate.
• Free Trade Agreements (FTA): India has entered FTAs with
various countries. Specified goods from such countries can
be imported at a concessional rate of customs duty, subject
to the fulfilment of certain conditions.
• Exemption from customs duty: Subject to the fulfilment
of certain conditions, exemption from customs duty is
available on the import of specified goods to be used for
specific oil and gas exploration and exploitation projects.
Indirect tax issues
Apart from being subject to high tax rates, the oil and gas
industry encounters various issues in the procurement of
capital goods, as follows:
• Indirect taxes paid by oil and gas companies are available
as credit to them for being set off against output tax
liabilities. However, authorities have been consistently
disputing tax credit on the construction of immovable
structures.
• Moreover, due to the non-availability of inter-sectoral
credits (i.e., adjustment of excise duty and service tax
credit with VAT and vice versa), indirect taxes paid by
the oil and gas industry results in credit retention for
companies if they do not have an output tax liability
within the same sector (e.g., midstream sector companies
transporting oil and gas do not have any output VAT
liability. Accordingly, VAT paid on the procurement of
capital goods is a cost for them).

• Concessional rate of customs duty: A concessional rate of

customs duty has been provided on the import of specified
goods for setting up a crude petroleum refinery.

22 | Oil and gas equipment industry in India

Chapter 7: Bridging the gap between
domestic manufacturers and
end-user demand
Establishing a level-playing field for domestic manufacturers Export promotion by offering financial support and credit lines
and encouraging domestic procurement
• Export promotion and enhanced marketing would help
• The Government is looking to create a level-playing field enable domestic manufacturers to capture an increasing
between domestic oil and gas equipment manufacturers share in the export market. To rationalize credit costs and
and their global counterparts by improving the tax, help domestic manufacturer bag new overseas projects,
duty and regulatory structure. Furthermore, to facilitate the Government could provide additional support by
technology transfer and promote domestic manufacturing, establishing dedicated funds. Another major push to
regulatory mechanisms could be modified to stipulate exports would come from offering export incentives such
the minimum value addition limit for large-value imports as preferential tax treatment and reduction in custom
within a systematic technology transfer agreement on duties for export-oriented goods.
an Indian company in the form of a JV. Other incentives
such as allowing higher depreciation and tax holidays for
companies using equipment manufactured in India or
setting up production base in India could help encourage
domestic procurement.

Strengthen policy against the import of second-hand equipment

• Regulatory measures such as strict safety guidelines

and energy-efficiency requirements could be enforced to
strengthen the policy against the import of second-hand
equipment. This is leading to loss of business for domestic
manufacturers.

Establishment of industry clusters to help drive cost savings

for domestic players

• Establishing industry clusters with common manufacturing

facilities, dedicated R&D, new product development and
testing facilities could help achieve cost savings. Clusters
will help establish an efficient supply chain, lower logistic
costs, bring manufacturing efficiency through focus and
mass manufacturing, and facilitate easy availability of a
skilled labour pool. Clusters formation will also lead to the
consolidation of manufacturing in the vicinity of suppliers,
since they will encompass all the players present in the
value chain ranging from a component manufacturing
SME to large integrated end-equipment manufacturer.
This will ensure better cooperation among manufacturers,
thus reducing lead time and assisting in new product
development as per the evolving needs of end-user
sectors.

Oil and gas equipment industry in India | 23

24 | Oil and gas equipment industry in India
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Oil and gas equipment industry in India | 27

Notes

28 | Oil and gas equipment industry in India

Notes

Oil and gas equipment industry in India | 29

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Nirlon Knowledge Park
Off. Western Express Highway
Goregaon (E)
Mumbai - 400 063
Tel: + 91 22 6192 0000
Fax: + 91 22 6192 3000
NCR
Golf View Corporate Tower B
Near DLF Golf Course
Sector 42
Gurgaon - 122002
Tel: + 91 124 464 4000
Fax: + 91 124 464 4050
10th Floor, Tower D&E
Cyber Green, DLF Phase-3,
Gurgaon 12202 Haryana
Tel: + 91 124 671 4400
Randhir Kochhar
Partner, Transaction Advisory Services
Email: randhir.kochhar@in.ey.com
Oil and gas equipment industry in India |
6th floor, HT House
18-20 Kasturba Gandhi Marg
New Delhi - 110 001
Tel: + 91 11 4363 3000 
Fax: + 91 11 4363 3200
4th & 5th Floor, Plot No 2B,
Tower 2, Sector 126,
NOIDA 201 304
Gautam Budh Nagar, U.P.
India
Tel: + 91 120 671 7000
Fax: + 91 120 671 7171
Pune
C-401, 4th floor
Panchshil Tech Park
Yerwada
(Near Don Bosco School)
Pune - 411 006
Tel: + 91 20 6603 6000
Fax: + 91 20 6601 5900
31
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