Equity Research On Oil & Gas Sector

01/02/11 Equity Research on Oil & Gas Sector
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scribd.com/…/Equity-Research-on-Oil-… 1/35
Pricing for Oil and Natural Gas
The Administered Price Mechanism, which has been a feature of the oil industry in the
last fifty years, has been phased out. The dismantling of this mechanism began on 1 April
1998 and ended in 2002.
The APM was made up of a cost-plus pricing system for the producing companies and
cross-subsidization for the consumers. The Oil -Pool Account was to see to the interests
both producers
of and consumers. Subsidies have contributed to the severe liquidity
crunch faced by the oil companies. The new package accompanying the dismantling of
is directed
prices towards bringing greater transparency in subsidies, moving prices
towards their real costs, sending right market signals, at the same time not throwing the
small consumer to the wolves. Studies have shown, the dismantling of the APM will
result in an overall wholesale price-index inflation of 1.57% in five years on a cumulative
basis.
de-regulation
The of Natural Gas prices also began in a phased manner starting 1st
October 1999. The consumer price of gas at landfall points would be linked to the price
of a basket of LSHS/FO prices. Domestic gas prices are to move closer towards the inter-
fuel market determining pricing regime. The de-regulation of prices is to accompany

those of crude oil and petroleum products, to provide a rational market- related pricing
framework for end users.
The journey so far...
Event Year
Administered Price Mechanism introduced 1977
Oil sector opened up for private players 1991
Prices of Naphtha, FO, LSHS, bitumen and paraffin wax decontrolled 1998
Exports of petrol and diesel decanalized 1999
100% FDI in refining sector allowed 2000
Aviation turbine fuel price is dismantled in April 2001
APM is dismantled finally 2002
APM
Post
dismantling, private and foreign players are free to have their own retail
outlets.
Government of India has already given permission to Reliance, Essar Oil,
Numaligarh Refinery and ONGC to set up their own auto fuel retailing stations in India.
Some of the private retail outlets from these companies are expected by the end of 2004
and this will pose a challenge for the existing players. Infact the PSU marketing players
are awakening in the last year trying to change the faces of their retail outlets and offering
various schemes, one stop shopping, etc.
Production and consumption scenario
Fuel Use 1990 1996 2000 2005 2010 2015 2020 % of Annual Change
1995-2020
Oil Use in 1.2 1.7 1.8 2.2 2.7 3.2 3.8 3.6
MMBD
Natural Gas 0.4 0.7 1.5 2.3 3.3 4.5 5.9 9.4
Use in TCF
Major players
The leading players in the Indian oil industry are as follows:
• Indian Oil Corporation Ltd.

• Hindustan Petroleum Corporation Ltd.
• Bharat Petroleum Corporation Ltd.
• Oil and Natural Gas Corporation
• Kochi Refineries Ltd.
•
Reliance Petroleum Ltd.
one
If were to look at the oil sector, the business is divided into exploration and
production (E&P), refining and finally marketing. The major players in E&P are ONGC
and Oil India Limited (OIL). In case of refining, we have HPCL, BPCL, Reliance, IOC
and several other stand alone refineries like Kochi Refineries, Mangalore Refineries, etc.
On the marketing front there are four major companies HPCL, BPCL, IOC and IBP
Break-up of players on the basis of their activities
Companies
Activity
Involved
Exploration and
ONGC, OIL
Production
Refining and IOCL, BPCL,
Marketing HPCL
Marketing Alone IBP
Refining Alone MRL, KRL
In terms of ranking, ONGC is the market leader in upstream crude oil and gas production,
while IOCL is the market leader in marketing and refining of petroleum products.
10
Affect of higher oil prices on the global economy
Oil prices remain an important determinant of global economic performance. Overall, an

oil-price increase leads to a transfer of income from importing to exporting countries
through a shift in the terms of trade. The magnitude of the direct effect of a given price
increase
depends on the share of the cost of oil in national income, the degree of
dependence on imported oil and the ability of end-users to reduce their consumption and
switch away from oil. It also depends on the extent to which gas prices rise in response to
an oil-price increase, the gas-intensity of the economy and the impact of higher prices on
other forms of energy that compete with or, in the case of electricity, are generated from
oil and gas. Naturally, the bigger the oil-price increase and the longer higher prices are
sustained, the bigger the macroeconomic impact. For net oil-exporting countries, a price
increase directly increases real national income through higher export earnings, though
part of this gain would be later offset by losses from lower demand for exports generally
due to the economic recession suffered by trading partners. Adjustment effects, which
result from real wage, price and structural rigidities in the economy, add to the direct
income effect. Higher oil prices lead to inflation increased input costs, reduced non-oil
demand and lower investment in net oil importing countries. Tax revenues fall and the
deficit
budget increases, due to rigidities in government expenditure, which drives
interest rates up. Because of resistance to real declines in wages, an oil price increase
typically leads to upward pressure on nominal wage levels. Wage pressures together with
reduced demand tend to lead to higher unemployment, at least in the short term. These
effects are greater the more sudden and the more pronounced the price increase and are
magnified by the impact of higher prices on consumer and business confidence. An oil-
price increase also changes the balance of trade between countries and exchange rates.
oil-importing
Net countries normally experience deterioration in their balance of
payments, putting downward pressure on exchange rates. As a result, imports become

The
moreeconomic
expensive andless
and exports energy-policy response
valuable, leading to aincombination
to a drop of higher inflation, higher
real national income.
unemployment,
Without a change lower exchange
in central bankrates
and and lower realmonetary
government output also affectsthe
policies, thedollar
overall
mayimpact
tend
on the economy
to rise over thecountries’
as oil-producing longer term. Government
demand policy cannot eliminate
for dollar-denominated the adverse
international reserve
impacts described above but it can minimize them. Similarly, inappropriate policies can
worsen them. Overly contractionary monetary and fiscal policies to contain inflationary
assets grow.
pressures could exacerbate the recessionary income and unemployment effects. On the
other hand, expansionary monetary and fiscal policies may simply delay the fall in real
income necessitated by the increase in oil prices, stoke up inflationary pressures and
worsen
the
While themechanism
general impact of by
higher
whichprices in theaffect
oil prices long economic
run. performance is
generally well understood, the precise dynamics and magnitude of these effects especially
the adjustments to the shift in the terms of trade – are uncertain. Quantitative estimates of
the overall macroeconomic damage caused by past oil price shocks and the gains from
11
Equity Research on Oil & Gas Sector

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01/02/11 Equity Research on Oil & Gas Sector

Pricing for Oil and Natural Gas

fuel market determining pricing regime. The de-regulation of prices is to accompany

APM is dismantled finally 2002

Production and consumption scenario

The leading players in the Indian oil industry are as follows:

• Indian Oil Corporation Ltd.

Break-up of players on the basis of their activities

Affect of higher oil prices on the global economy

Oil prices remain an important determinant of global economic performance. Overall, an

payments, putting downward pressure on exchange rates. As a result, imports become

Equity Research on Oil & Gas Sector

Info and Rating

Share & Embed

More from this user

hunnyraheja left a comment

plzzz send it to hunnyraheja@gmail.com

anna2511 left a comment

hi.... i need this report. can u mail me this anna2511@gmail.com

ammi3048481 left a comment

can u send this project

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