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    • Indian Oil & Gas April Sector Coverage 2008Epitome Global ServicesEpitome Global Services Pvt. Ltd. India: 7th Floor, "A" Wing, Prism Towers, Mindspace, Goregaon (West), Mumbai 400 062Tel: +91 22 4001 6600 Fax: +91 22 4001 6666Epitome Global Services, Inc. USA: Rockefeller Center,1230 Avenue of the Americas, 7th Floor, New York, NY 10020Tel: +1 212 618 6365, Fax: +1 212 618 6309
    • Sector Coverage Indian Oil & Gas April 2008 Table of Contents 1. Executive Summary ........................................................................................2 2. Introduction ......................................................................................................4 3. Historical Background ....................................................................................5 4. Importance of Oil & Gas in the Economy .................................................6 5. India’s Energy Position ..................................................................................9 6. Industry Structure: Overview ...................................................................15 7. Regulatory / Government body structure .............................................28 8. Michel Porter Analysis .................................................................................29 9. Critical Success Factors ...............................................................................30 10. Recent Trends & Budget Impact ............................................................33 11. Investment opportunities and current status of the project........38 12. Mergers & Acquisitions .............................................................................39 13. Conclusion .....................................................................................................40 14. Profile of Major Players .............................................................................41Sector Coverage 1
    • Indian Sector Report - April 2008 1. Executive Summary Indian economy has been growing at a very fast pace and is one of the fastest growing economies of the world. It is expected to play a remarkable role in global oil and gas industry. India has emerged as the seventh largest importer of crude oil in the world and fifth largest consumer of petroleum products. India’s oil demand has consistently been far in excess of its domestic production. 66 per cent of its demand for oil is met through imports from Middle East and the balance from other countries. The dependence on oil imports is expected to increase in the future. India’s production has increased at an annualized rate of 1.73 per cent during 2000-2006 which is lowest among BRIC Nations and during the same period its consumption has increased by 3.31 per cent which is higher than BRIC nations except China. This sector is the major contributor to the government revenue contributing 15.18 per cent through excise and custom duty. Petroleum exports have emerged as the single largest foreign exchange earner growing at a rate of 67 per cent. Net export of petroleum products has grown by 78 per cent and 32.6 per cent in terms of quantity and value respectively during 2004-2007. The growth continues in the new fiscal with export of petroleum products touching US$19.7 billion during April- December 2007. Oil accounts for approximately 31 per cent of India’s total import bill. India’s crude oil import as a percentage of total import has increased from 26.82 per cent in FY2000 to 30.84 per cent in FY2007. But due to sharp rise in oil prices import has increased by 348 per cent in absolute terms. Oil import as a per cent of India’s GDP has increased significantly from 3.94 per cent to 6.92 per cent during 2002- 03 to 2006-07 India is fifth largest country in the world in terms of refining capacity and emerging as a global refining hub because of proximity advantages. It also enjoys competitive cost advantages; with capital costs lower as much as 25 to 50 per cent over the other Asian countries. It is well placed to take advantage of the expected global refining capacity deficit of around 112mtpa by 2010. But refining margins can take a hit because of the capacity additions by the end of FY2008- 2009. India is sixth largest energy consumer in the world and is one of the world’s fastest growing energy consumers. With a target GDP growth of 7-8 per cent and an estimated elasticity of 0.80, energy requirement is expected to grow at 5.6-6.4 per cent. The energy consumption matrix in India is dominated by coal, followed by Oil and natural Gas. This pattern is in contrast to the World Energy Consumption Matrix, which is dominated by oil and gas. But over the years consumption of oil has increased in comparison to coal.Sector Coverage 2
    • Indian Sector Report - April 2008 Exploration and Production sector has been given “infrastructure” status which provides a seven year tax holiday. But this sector carries a high degree of uncertainty and hence a high amount of risk because of high initial investment and long gestation period Because of high international prices bottom line of the downstream companies took a hit. Additionally, government also compensated the public sector companies only by issuing oil bonds, due to which Reliance- a private player is shutting down approximately 1400 retail outlet by the end of April 2008. IOC has also put his decision on hold to open new 800 retail outlet due to increasing international crude oil prices. With international oil prices moving northward and no change in retail selling prices, profitability of downstream companies are falling down. Industry made a loss of Rs 77,000 crores on account of under-recovery in FY07-08. According to oil marketing companies, under-recoveries are expected to be around Rs 180,000 crores in FY08-09. Government is issuing bonds to compensate downstream companies and has also asked upstream companies to share a part of under- recoveries of the downstream companies. The share of Natural Gas was around 8 per cent in India’s energy mix and is expected to increase substantially to 20 per cent by 2025. The total proven reserves of Natural Gas in India at the end of 2003 was 1055 billion cubic meters (bcm) in 2007. At this production level, India’s reserves are likely to last around 33 years, that is, nearly double than the 17.5 years estimated for oil reserves. An expanding economy with its concomitant increase in energy demand is likely to throw open huge investment opportunities in oil and gas industry. The Indian Government has earmarked US$12.77 billion for E&P and US$7.88 billion for the downstream sector under the Tenth Five Year Plan. It is also planning to expand the exploration licensing area from 44 per cent of the Indian sedimentary basin in 2007 to 80 per cent by 2011-12 and 100 per cent by 2015.Sector Coverage 3
    • Indian Sector Report - April 2008 2. Introduction The Oil & Gas sector has been adding fuel to the robust growth of the Indian economy. India has emerged as the seventh largest importer and fifth largest consumer of the petroleum products. India has very limited energy resources to suffice the requirements of its more than one billion population. This makes India a very important player in the international oil and gas market. The crude prices have been heading northward since a long period of time along with the competition to acquire petroleum reserves among the major economies across the world. Energy security has become crucial for the policy makers across the world, which is reflected in their foreign policies. Despite of the slow implementation of reforms and mixed responses from the foreign and local investors, the sector is able to grow at healthy pace. Per Capita Primary Energy Consumption Oil, gas, hydroelectricity, (Mn Btu) nuclear power and coal are Brazil 50.1 majorconstituentsof China 51.4conventionally used primary energy. Solar power and India 14.8 winds are two majorly used Russia212.2 sources of non-conventional Japan177.0energy. The Indian oil and gas sector constitutes 46 per United States340.5 cent of total conventional Asia & Oceania 41.0 primaryenergy World Total71.8consumption, which is lower than the world average of 62Source: EIA per cent. The per capita total primary energy consumption in India is 14.8 million Btu as compared to world average of 71.8 million Btu and Asia Oceania average of 41.0 million Btu. This indicates huge potential growth31 per cent of Indiasas a result ofbill and Oil accounts for approximately for demand in India total import comparatively contributes over 20 per cent to the exchequer through customs and excise taxes. higher growth rate of consumption than the world average and continuously increasingand gas sector has an insignificant share of less than The oil andin Indias oil share of oil and gas in primary energy consumption. 1 per cent gas sector gained importance on account of its multiple and widely used reserve andas worlds oil and gas production, approximately 0.5 per cent of proved application compared to 3 per cent in petro product consumption. Historically, the sector has round about other primary energy sources. remained highly controlled by the government. However, later on to some extent the pricing of auto gas was deregulated in April 2002 and private sector players were allowed to operate in retailing of petroleum products.Sector Coverage 4
    • Indian Sector Report - April 2008 3. Historical Background The history of Indias oil industry dates back to 1867, with the first discovery of oil deposits in Assam. However commercially significant amount of oil was discovered only in 1889 in Digboi, Assam. Until 1947, there were no clear policies with respect to overseeing the domestic oil industry. However, after independence from British Colonial rule, new Indian Government became involved in the industry in multiple ways, be it in establishing Government-owned companies or regulating the retail price of oil. In 1954, from the backing of the Geological Survey of India, the Government founded the Oil and Natural Gas Commission (ONGC). In 1959, ONGC became an oil exploration company and the Government also established Oil India Limited (OIL). In 1962 the Government established the Guwahati Refinery to process or refine the resources after extraction, and the India Oil Corporation Limited (IOC) was born. Of Indias 17 refineries, IOC owns seven of the facilities, maintaining a 41 per cent market share in the refining space. India’s local oil production, in relation to its production in the 1950s and 1960s got a terrific boost in 1974, when ONGC discovered Bombay High, an offshore oil field, off India’s west coast. Bombay High significantly increased India’s oil production. For example, in 1989, Bombay Highs contribution was 65 per cent of the country’s total output of 34 million tons. Discovery of this oil field and the consequent increase in oil production motivated fresh explorations; with the belief that other such oil fields could be found. Many offshore explorations like those in Gujarat, Andhra Pradesh, Assam and Tamil Nadu have shown significant potential. Considerable quantities of natural gas were found in various offshore locations by Gas Authority of India Ltd. (GAIL). This helped in satisfying India’s increasing demand for natural gas as fuel and to supply feedstock to fertilizer and petrochemical plants. In addition, a pipeline spanning 1,700 kilometers across India was built in the 1990s for the transportation of natural gas.Sector Coverage 5
    • Indian Sector Report - April 2008 4. Importance of Oil & Gas in the Economy The oil and gas combined together contribute about 50 per cent of the world energy demand. Both oil and gas would play a significant role in the global primary energy supply. Not only oil and gas sector has important role in any economy but it also drives the economy. Economy gets thousands of everyday products, from medicines to plastics to fibers for clothing and of course, gasoline, diesel and jet fuel for transportation. Moreover, there are no affordable substitutes for most of the products we get from oil. It is important to know that global competition for oil resources will continue to increase. Every day more oil-consuming nations are striking deals with oil exporting nations to guarantee future supplies. These are more than just economic ties. It contributes to foreign exchange reserves through exports, for exporting countries like OPEC. Supply disruptions of oil and gas can create inflation, output loss, recession, energy crisis, downtrend in GDP rate, currency fluctuation and so many problems. In the Indian context, the oil and gas sector has attained importance in several ways: Oil import witnessed a considerable growth in the current decade India has become seventh largest importer of crude oil in the world in 2005 from ninth place in last decade. The country is one of the fastest growing economies in the world and is playing a very important role in global energy market. India is considered to be one of the major contributors in recent hike in crude oil prices from below US$30 level in 2004 to current US$118 levels. India’s oil import has increased from 1.36 million barrels per day in 2000 to 1.73 million barrels per day in 2006, i.e. at annualized growth rate of 4.16 per cent which was the second highest among the top ten oil importers in the world after China. Top World Oil Net Importers, 2006 Annualized Oil Import Growth, (Million Barrels/ Day) 2000-2006 United States 12.36 United States 2.52% Japan 5.03 Japan -1.12% China 3.43 China 15.85% Germany 2.51 -0.72% Germany S. Korea 2.16 S. Korea 0.27% France 1.89 France -0.22% India 1.73 India 4.16% Italy 1.57 Itly -1.54% Spain 1.56 Spain 1.71% Taiwan 0.94 Source: EIA Taiwan 1.26% Source: EIASector Coverage 6
    • Indian Sector Report - April 2008 Strong growth in GDP resulted into rise in oil import India’s crude oil import as a percentage of total import has increased from 26.82 per cent in FY2000 to 30.84 per cent in FY2007 i.e. increase of just 4 per cent. But due to sharp rise in oil prices, import of oil has increased by 348 per cent in absolute terms. Oil import as a per cent of India’s GDP has increased significantly from 3.94 per cent to 6.92 per cent during 2002-03 to 2006-07. 10150 35% 40000 8% Indias Total Import vs. Crude Import GDP Gr owth & Oil Import 8150 Rs. Billion 30% 6150 30000 6% 4150 25% 20000 4% 2150 150 20% 10000 2% 2000 2001 2002 2003 2004 2005 2006 2007 2002-03 2003-04 2004-05 2005-06 2006-07 Indias Total Import Oil Import Oil as % of total import GDP at current price (Factor cost) Oil import as a % of GDP (Current price) Domestic oil production- comparatively very low India accounts for only 1 per cent of total world oil and gas production. India produced 0.85 million barrels per day in 2006Annualized Oil Production Growth, as compared to world2000-2006 productionof84.59 5.81%Brazil million barrels per day. This demonstrates huge Russia6.26% demand supply gap in energystrivenation. 1.73%IndiaIndia’s oil production has increased at annualized China2.18%growth rate of 1.73 per cent during 2000 to 2006, which was lowest USA -1.39% Japan 2.34% Source: EIA among BRIC countries but higher than USA and Europe -3.75% Europe.Sector Coverage 7
    • Indian Sector Report - April 2008 Oil consumption growing at a healthy pace India consumed about 3 per cent of total Annualized oil consumption growth, worldoilandgas 2000-2006 consumption.IndiaBrazil0.38% consumed 2.56 million Russia1.75% barrels of oil per day as India3.31%comparedtoworld consumption of 84.77 7.19%China million barrels per day USA0.82% in 2006. India’s oil consumptionhasEurope0.53% A major source of revenues to the Government Oil contributed 15.18 per cent of total tax at annualized increased revenue to central and state exchequer Japan -1.05% through excise and custom duty in 2007. Oil contributed 49.22 per cent of total growth rate of 3.31 per excise and 16.23 per cent of total custom duty in 2007. Excise and custom duty from oil has increased at a Source:EIA14.56 per cent and 15.67 per cent respectively CAGR of cent which was higher during 2002 to 2007. than USA, Europe, Japan, and BRIC nations except China during 2000 to 2006. Petroleum subsidy as a percentage of total subsidies has reduced to 5.21 per cent in 2007 from 12 per cent in 2002, which was substituted by oil bond of government of India. The energy sector has an influence on the inflationary trend in India as energy prices constitute 14.2 per cent weightage in the wholesale price index. Approximately 38 per cent of ports and 7 per cent railway traffic are comprised of petroleum sector cargo.Sector Coverage 8
    • Indian Sector Report - April 2008 5. India’s Energy Position India’s per capita energy consumption is relatively very low According to the world standards, India’s current level of energy consumption is very low. For the year 2004-05, the total energy consumption for India was 572 MTOE (Million tons oil Per Capita Electricity Consumption equivalent) and the per (KWH) capita consumption at China 1585 531 Kgoe (Kilograms With a target GDP India 457oil equivalent) South Korea 7391 growth rate of 7-8 per cent and an estimated Japan 8076 elasticityof0.80, energy requirement is USA 13338 expected to grow at OECD 8204 5.6-6.4 per cent. This would mean a four-fold World Avg 2516 increased in India’s Source: IEA energyrequirement over the next 25 years. India’s Current Energy Basket While India is well-endowed in coal, 71 per cent of its oil needs are met by imports. The below graph represent only primary energy sources that are commercially exploited. Rural India is predominantly dependent on traditional fuel sources like firewood, animal drug and biomass, estimated at around 143 Mtoe per annum or approximately 44 per cent of total primary energy use. Indias composition of energy sources and usage Worlds Primary Energy Sources Indias Primary Energy Sources (%) (%) Gas, 23 Hydro, 6 Oil, 36 Gas, 9 Nuclear, 6 Hydro, 2 Nuclear, 2 Oil, 37 Coal, 28 Coal, 51 Source: Planning Commission of India, 2006Sector Coverage 9
    • Indian Sector Report - April 2008 Future Energy Requirements and Supply Options Estimated energy reserves Given the present growth rate of 5 per cent in coal ResourcesUnitReserves production, India’s extractable Coal - ExtractableMtoe13,489 reserves would be exhausted OilMtoe786 in 45 years, and hence there Gas - including coal bed Mtoe1,866is a greater need to look at methane sustainable and cleaner fuels. Uranium - metalTonnes 61,000 Recentdiscoverieshold Thorium - metalTonnes 225,000 promiseforIndia’sgas HydelMW150,000 Different scenarios developed both on supply-side are detailed as follows: reservesandcoalbed methane. On the nuclear front, ■ Energy efficiency in end-use: Efficient energy used in industry, lighting, Source: Planning Commission of India, 2006 home appliances etc. could possibly lower the energy needs by 142 MTOE in advanced technology needs to 2031-32 (7.5 per cent of total requirement) be infused before being put for commercial use. Renewable energy especially wind and solar power is expected to grow rapidly and supplement the short term Increase of railway’s share in freight: Presently, most of the freight traffic ■ requirements. Over the longer share it is expected to gain increasesimportance as is carried by roads. If the term, of railways in freight strategic from the a sustainable fuel that would help build by 2031-32, there would be an estimated current 32 per cent to 50 per cent self-reliance in energy sources. The table details the estimated energy reserves in the(1.8 per cent of total requirement) energy saving of 34 MTOE in 2031-32 country. ■ Increase in transportation efficiency: Use of mass transport and by efficient utilization of vehicles, it is estimated that up to 81 MTOE of energy by can be saved by 2032. (4.3 per cent of total requirement) ■ Efficiencies in thermal power generation: Increase in thermal generation efficiency from present 31 per cent to 38-40 per cent through use of super critical boiler technologies could lead to savings of 111 MTOE in 2031-32 (5.8 per cent of the total energy requirements). Together, there is a potential to save up to 351 MTOE by 2032 (19 per cent of the total energy requirements).Sector Coverage 10
    • Indian Sector Report - April 2008 On the supply side, the following options are envisaged: ■ Fully exploiting India’s potential of 150,000 MW from current level of 32,326 MW ■ Successful development of Fast Breeder Reactor (FBR) technology and Advanced Heavy WaterReactor (AHWR) will scale up nuclear generation ■ Development of Natural Gas sources (indigenous, pipeline import or LNG) for power generation ■ Development of renewable energy sources (solar power, bio-diesel and wind energy) ■ The range of utilization of different fuels in 2032, as compared to current levels is shown below. Comparison of energy utilization in 2031-32 with present market trend Energy Consumption Scenario Utilization in 2031-32 Current Utilization Resources (MTOE) (MTOE) Oil 350-486 119 Natural Gas (including CBM) 104-150 29 Coal 632-1022 167 Hydro 13-35 7 Nuclear 76-98 5 Solar 1200 <1 Wind 10 <1 Fuel wood 620 140 Ethanol 10 <1 Bio diesel 20 <1 Source: Planning Commission of India, 2006 India is the sixth largest India vs. World energy consumption energy consumer in the 60 matrix world and is one of the 50 56 world’sfastestgrowing 40 energyconsumers.The 38 energy consumption matrix 30 30 in India is dominated by coal, 20 24 25 followed by oil and natural 10 8 72 64 gas.Whilethispattern 0 Oil Nat ural Gas Coal Nuclear energy Hydro elect ricit y contrast with the World World India Energy Consumption Matrix, Source: India Hydrocarbon Vision 2025 which is dominated by oil and gas, it is important to noteSector Coverage 11
    • Indian Sector Report - April 2008 that the consumption of oil and gas has been growing over the years in India, in comparison with coal. The eleventh five year plan of India estimates that the consumption of oil will increase at the rate of 3.7 per cent annually, faster than the projected annual growth rate of 2 per cent for the world. Projections up to 2025 show an exponential growth in the demand for Gas. Indian Government has earmarked US$12.77 billion for Exploration & Production and US$7.88 billion for the downstream sector under the Tenth Five Year Plan. The India Hydrocarbon Vision 2025 has committed investments of US$49.96 billion and US$29.02 billion for the refining and marketing sectors respectively. India Energy Consumption India Energy Consumption Matrix Matrix 2005 2025 Natural Gas, Nuclear Oil, 26% Natural Nuclear 54% Energy, Gas, Energy, 1% 20% 2% Hydel, Oil, 8% Coal, 4% Coal, Hydel, 33% 1% 51% Source: India Hydrocarbon Vision 2025 Oil Production & Demand India’s demand for oil has 400 Oil Production & Demandconsistently been far in 350excess of its domestic (mn Metric Production + Oil EquityDemand Tonnes) 300production. It meets 66 per cent of its demand for250 crude oil through imports 200 from Middle East and the 150 balancefromother 100 countries.The 50dependence on oil imports 0is expected to increase in 1999-00 2001-02 2006-07 2011-12 2024-25thefuture.The Source: India Hydrocarbon Vision 2025 HydrocarbonVision provides a scenario for the future of oil demand and supply. The following diagram shows demand and supply (comprising domestic production and overseas oil equity that Indian companies will own) based on Hydrocarbon Vision 2025Sector Coverage Projections. 12
    • Indian Sector Report - April 2008 Liquid pipeline infrastructure India has one of the largest refining capacities in the world. The country has attained self-sufficiency in refining crude oil. In 2003-04 the refining capacity stood at 126 MMTPA, against the annual consumption of about 107.7 MMTPA. In 2003-04, the length of the crude pipelines was 5918 kms and that of the product pipelines were 7033 kms. Petrol Retails With the APM dismantled, the Govt. of India is encouraging healthy competition in the petroleum retailing sector. Its directed aim is to improve competitiveness and quality of service to the customer. Private sector participation in the retail market is being particularly promoted. Petrol retail companies today offer a slew of customer friendly initiatives such as online support to customers, strengthen market share through advertising and product differentiation, premium products and customers loyalty programs. These initiatives have contributed to a progressively changing petrol retail market in India, translating into quality service for the consumer. The Government of India has granted licenses to many companies. A table is given below regarding some of the companies to whom licenses have been granted. However, government control over the retail price has made petroleum retail unprofitable for the private sector companies. Recently Reliance has announced to shut down its entire operational retail outlet after which its market share fell to near 0 per cent from 14 per cent in mid 2007. Company No. of Retail Licenses ONGC, MRPL 1100 Shell 2000 Reliance 5849 Essar 1700 Numaligarh Refinery 510 IOCL, BPCL, HPCL 2900 Source: Epitome Research * IOCL Retail Outlets include IBP Retail outlets Ethanol blended fuel Type of Outlets IOCL* HPCL BPCL Retail fuel pumps 9930 4944 4926 SKO/LDO Dealers 3867 1658 985 LPG Dealers 4232 1922 1928 The National program for 5 per cent blending of ethanol with petrol was launched on January 1, 2003 in the sugarcane producing states in the phase 1. Majority of the other states are planned to be covered in phase 2.Sector Coverage 13
    • Indian Sector Report - April 2008 Demand- Supply scenario Natural Gas: The share of natural gas in India’s energy mix has increased from 2.5 per cent in the early 1980s to around 8 per cent in 2003. It is expected to increase substantially to 20 per cent by 2025. The gas supply would be met through domestic production, LNG imports from LNG terminals at Dahej, Hazira, future projects and monetization of Krishna Godavari basin (KG basin) gas found in 2005-06 as well as through any future findings. The natural gas demand-supply projections by Government of India based on the ‘Hydrocarbon Vision 2025 ’is given below in the diagram. 450 Natural Gas (MMSCMD) 391 400 350 313 300 231 250 200 170 151 158 150 95 81 100 50 2001-02 2006-07 2011-12 2024-25 Supply DemandSector Coverage 14
    • Indian Sector Report - April 2008 6. Industry Structure: Overview Oil & gas industry in India is mainly dominated by the public sector companies. Indian oil companies are broadly classified into upstream and downstream segments. Major players in the upstream sector are Oil and Natural Gas Corporation (ONGC), Oil India limited (OIL), Reliance Industries and Cairn Energy, who explores crude oil & gas and produce it, for supply to downstream oil companies in the country. Oil refineries get allocation of imported and domestic crude oil at a pooled price fixed by the Oil Co-ordination Committee (OCC). The downstream sector players are primarily involved in refining crude oil (both domestically produced and imported); and marketing of petroleum products. The sector in dominated by the 3 public sector undertakings Indian Oil Corporation (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL). There are few other standalone refineries namely Chennai Petroleum, Kochi Refineries, Bongaigon Refinery, Mangalore Refineries, Numaligarh Refinery etc, which accounted for the rest of the production. However, these standalone refineries are now taken over by the major PSUs. The Indian Petroleum Sector Upstream Downstream Sector Sector Oil & Gas Refining and Natural Gas Exploration Marketing Distribution ONGC, RIL, IOC, HPCL, BPCL, ONGC, GAIL, RIL, OIL RIL, CPCL, BRPL, NRL, MRPL, IGL Essar Oil The latest entrant into the market is Reliance Petroleum with its 27 million tonnes of refining capacity per annum plant in Jamnagar, Gujarat. However, this new refinery will primarily focus on importing high sulfur crude oil and exporting higher standard refined products. Oil marketing segment in India is primarily dominated by the public sector undertakings.Sector Coverage 15
    • Indian Sector Report - April 2008 There were few entrants after government allowed private sector to join the marketing bandwagon, which includes Reliance Industries, Essar Oil. However, these players are now shutting down there retail outlet because they were not able to match the fuel price offered by state-run retailers, who get compensated by the Government for selling fuel below the cost. Reliance Industries, which runs approximately 1400 retail outlets has announced to shut down these outlets by the end of April 2008. Indias Oil Production and The Indian Oil & Gas sector is 3000 Consumption under the purview of the C onsumption Ministry of Petroleum and 2500 (000 barrels/ Natural Gas (MoPNG). The oil day) and gas industry has 2 sub- 2000 sectors:OilandGas Net Imports 1500 ExplorationandProduction (E&P), Oil & Gas Refining and 1000 Production marketing of refined products (R&M). The annual turnover of 500 the industry is over $65 bn. 1997 1998 1999 20002001 2002 20032004 2005 2006 2007 6.1 Upstream Sector: Exploration & Production Introduction To meet the growing oil demand, India has invested in various explorations and production (E&P) projects over the last few years in order to boost domestic oil production. The primary mechanism through which the Indian government has promoted new E&P projects is based on the NELP framework. Between 1999 and 2006, the government awarded 168 oil and natural gas concessions in six separate licensing rounds. The seventh bidding round (known as NELP-VII) recently announced, with 57 exploration blocks offered. As in previous rounds, ONGC and other Indian national oil companies (NOCs) fared very well. ONGC secured a total of 104 exploration blocks, often in consortium with other Indian NOCs. Reliance Industries secured seven deepwater blocks in the Krishna-Godavari and Mahanadi basins, which are considered to be some of India’s most promising offshore hydrocarbon basins. Notably, absent on the list of bidders for the NELP-VI are international oil majors. The Indian government was keen to attract oil majors to utilize their vast deepwater experience and other technical expertise. Some industry publications suggest that the Indian government will now move to an open acreage system, in which domestic and international oil companies can apply for available E&P projects at any time, rather than licensing rounds.Sector Coverage 16
    • Indian Sector Report - April 2008 6.1.1 Overseas E&P In recent years Indian NOCs are looked to acquire more and more equity stakes in E&P projects overseas. The most active company is ONGC Videsh Ltd., the overseas investment arm of ONGC. As of September 2007, ONGC Videsh holds interests in 26 oil and natural gas projects in 15 countries, spanning Russia, Sudan, Vietnam, Africa, Asia, Latin America, and the Middle East. One of ONGC Videsh’s most high profile investments is its share in the Greater Nile Petroleum Operating Company (GNPOC), which has engaged in E&P work in Sudan since 1997. OVL is seeking a 30 per cent stake from Petronas of Malaysia in Block 8 in Blue Nile Basin, northeast of prolific Melut Basin. Petronas Carigali Overseas has a 77 per cent interest in the block. The remaining equity is with Sudan’s national oil company Sudapet (15 per cent) and High Tech Group (8 per cent). Petronas has undertaken some seismic surveys in the block, and drilling is yet to begin. OVL has also shown interest in taking the unallocated 32.5 per cent stake in Block B where French major Total is the operator. Total has 31-32 per cent stake in the block. The block also has White Nile as a partner. OVL already has three blocks in Sudan — 5A, 5B, and 1, 2, & 4. Petronas had waived off its pre-emption rights to allow OVL to buy Austrian firm OMV’s stake in Block 5A and 5B.OVL acquired OMV’s 26.125 per cent stake in exploration block 5A and 24.5 per cent stake in Block 5B for $115 million. ONGC Videsh also holds a 20 per cent stake in the ExxonMobil-led consortium that operates the Sakhalin-I project in Russia. According to company estimates, the oil fields associated with Sakhalin-I hold recoverable crude oil reserves of 2.3 billion barrels. Production at Sakhalin-I started in October 2005, and is expected to reach 250,000 bbl/d in early 2007. Oil from the Sakhalin-I project will be piped westward to the DeKastri terminal on the Russian mainland export, while some crude oil will also be pumped into Russia’s domestic pipeline system for local consumption. 6.1.2 Current Scenario There are 26 sedimentary basins in India, covering a total area of approximately 3.14 million sq. km. The sedimentary basins in India have been classified into four categories, based on: the geological knowledge of the basin; presence and/or indication of hydrocarbons; and the current status of exploration.Sector Coverage 17
    • Indian Sector Report - April 2008 Onland and Basin No. of Nature Offshore Basins Category Basins Area (sq.km.) Cambay, Assam Shelf, Bombay Provencommercial offshore, Krishna- Category I 7 518500 production Godavari, Cauvery, Assam-Arakan Fold Belt, Rajasthan Identified prospectively Knownaccumulation Kutch, Andaman-Nicobar,Mahanadi- Category II 3 164000 Hydrocarbons, but no NEC Commercial Production Himalayan Foreland, Geologically Ganga, Vindhyan, Category III prospective 6 641000 Saurashtra, Kerala- basin Konkan- Lakshadweep, Bengal Karewa, Spiti-Zansakar, Satpura-South Rewa- Potentially prospective Category IV 10 461200 Damodar, Narmada, basins Deccan Syneclise, Bhima- Kaladgi, Bastar, Chhatisgarh Subtotal 26 1784700 Deep-waters 1350000 Total 3134700 Source: Directorate General of Hydrocarbons – Petroleum Exploration & Production Activities, India 2006-07 Indias prognosticated hydrocarbon resource base, according to the Ministry of Petroleum & Natural Gas, is 29 billion metric tonnes. So far, oil has been commercially produced in only 7 of the 26 sedimentary basins, while the oil reserve established through exploration is only 6.8 billion metric tonnes, which approximately translates to 23 per cent of the total oil and oil equivalent suspected to exist. Exploratory drilling, so far, has been confined mainly to onland areas and up to water depths of 200 metres. Exploratory drilling has recently been initiated in some segments of the deep-water areas, which have an estimated basin area of 1.35 million sq. km and are believed to hold a significant resource base. Of the total sedimentary basin area of 3.14 million sq. km (including deep waters), only 16 per cent falls under the moderate to well explored category. Of the balance, while exploratory activity has been initiated in approximately 27 per cent of the area, over 57 per cent of the area continues to fall under unexplored (41 per cent) or poorly explored (16 per cent) category. 6.1.3 Major players Oil and gas exploration is also dominated by ONGC & Reliance Industries, which holds approximately 48.81 per cent & 34.73 per cent of the total area licensed by the Indian government for hydrocarbon exploration. The following table below sets forth acreage licenses to oil companies under PELs as of March 31, 2007.Sector Coverage 18
    • Indian Sector Report - April 2008 Licensed Domestic Production Area Licensed for Oil & Gas Exploration Licensee (as of March 31, 2007) (Sq. Km.) (%) ONGC 439442.09 48.81 Reliance Industries Ltd. 312706.00 34.73 Oil India Ltd. 38091.55 4.23 Cairn Energy India Ltd. 28921.50 3.21 Hindustan Oil Exploration Company Ltd. 25124.00 2.79 FOCUS 18383.59 2.04 ENI 14445.00 1.60 OAO GAZPROM 7779.00 0.86 Gujarat State Petroleum Corp. Ltd. 3784.17 0.42 GGR 3155.00 0.35 Jubilant Oil & Gas Pvt. Ltd 2566.00 0.29 Canoro Resources Ltd. 1444.70 0.16 TULLOW 1277.00 0.14 NIKO 957.00 0.11 Hardy Exploration Production India Inc 859.00 0.10 PONEI 635.38 0.07 ESSAR 430.50 0.05 GEOPETROL 295.00 0.03 TOTAL 900296.48 100 Source: Directorate General of Hydrocarbons – Petroleum Exploration & Production Activities, India 2007-08 ONGC has undertaken onshore exploratory activities in the Himalayan foothills, the North-Eastern States, Gujarat, Andhra Pradesh, Tamil Nadu and Rajasthan. Its on- shore oilfields are located at Cambay and Ankaleshwar (both in Gujarat) and at Rudrasagar and Galeki (both located in Assam). ONGC has undertaken offshore exploratory activities in both the Eastern and the Western coasts. Its offshore field is located on the Western Coast at Bombay High. OIL has been carrying out exploration in the sedimentary basins of Assam, Arunachal Pradesh, Rajasthan, Orissa (onshore and offshore), the Andamans (offshore), Saurashtra (offshore) and the Ganga Valley (Uttar Pradesh). Its production is confined to the oilfields of Assam and Arunachal Pradesh and the Tanot gasfield in Rajasthan. ONGC and OIL also hold the largest portion of leased acreage for oil and natural gas production, accounting collectively for approximately 80.73 per cent of the total territory licensed by the Government of India for commercial production of crude oil and natural gas as of March 31, 2007. The following table sets forth the amount of domestic production area granted to lessees under petroleum mining leases, or MLs, in effect as of March 31, 2007.Sector Coverage 19
    • Indian Sector Report - April 2008 Leased Domestic Production Area Leased for Oil & Gas Exploration Lessee (as of March 31, 2007) (Sq. Km.) (%) ONGC 23637.18 67.08 OIL India Ltd. 4811.01 13.65 CAIRN 2934.96 8.33 BG-RIL-ONGC 2678.00 7.60 GEOENPRO 11.00 0.03 CANORO 52.75 0.15 HOEC 120.84 0.34 INTERLINK 16.70 0.05 JTI 57.00 0.16 NIKO 74.25 0.21 SELAN 189.65 0.54 HERAMEC 34.15 0.10 HYDROCARBON RES. DEV.-PPCL 4.40 0.01 OILEX 172.80 0.49 Leased for Oil & Gas Exploration Lessee (as of March 31, 2007) (Sq. Km.) (%) GSPCL 19.75 0.06 HARDY 81.00 0.23 RIL 339.70 0.96 Total 35235.14 100Sector Coverage 20
    • Indian Sector Report - April 2008 6.1.4 The Crude Oil and Natural Gas fields Crude oil and natural gas are currently produced from both onshore and offshore fields. The major onshore fields are located in Gujarat, Assam, Nagaland, Tamil Nadu, Andhra Pradesh and Arunachal Pradesh. In addition to production from the regions mentioned, natural gas is produced in Tripura. The major offshore fields are Cauvery Offshore, KG Offshore (Shallow and Deep), Mahanadi, Andaman, Cambay, Mumbai Offshore and Kutch. Oil Production Trend Gas Production Trend 95% 90% 75% 70% 71% 70% 71% 63% 64% 65% 66% 66% 64% 67% 78% 74% 72% 72% 55% 50% 35% 30% 37% 36% 35% 34% 34% 36% 33% 22% 26% 28% 28% 29% 30% 29% 15% 10% 19 20 202020 20 20 1990- 2000- 2002- 2003- 2004- 2005- 2006- 90- 00- 02-03-04- 05- 06- 91010304050607 91 01 030405 06 07 Onshore Gas Offshore Gas Onshore Oil Offshore Oil 6.1.5 Natural Gas The natural gas in India is primarily produced by ONGC & OIL, with a market share of 70.69 per cent and 7.13 per cent respectively in FY2007. The balance is undertaken by private/joint sector in the eastern & western offshore regions. Reliance has recently reported discovery of significant gas reserves at Krishna- Godavari and Mahanadi basins (more than 10 trillion cubic feet). The Indian natural gas industry started off in the 1960s with production from the finds in Gujarat and Assam. However, it picked up momentum only in the 1970s with the discovery of associated gas at Bombay High. Subsequently, in the 1980s, production of free gas started from the South Bassien fields with the Gas Authority of India Limited (GAIL) constructing India’s only onshore cross-country Hazira- Bijaipur- Jagdishpur (HBJ) pipeline in 1987. A large proportion of the gas produced at Bombay Offshore is now transmitted through the HBJ pipeline. In the 1990s, other fields at Tapti, Panna-Mukta and Ravva have been explored by the private sector in JVs with ONGC and OIL. The transport, distribution and sale of natural gas in India fall almost exclusively under the purview of GAIL (having more than 85 per cent of the market share). Most of the transmission infrastructure is installed in the northwest of India, for transportation of gas from the Bombay High fields, onto shore, and then to end users. The HBJ line is by far the most significant of these pipelines. In addition to the HBJ pipeline, GAIL also owns and operates regional gas grids of varying sizes in the states of Gujarat, Andhra Pradesh, Assam, Maharashtra, Rajasthan, Tamil Nadu, and Tripura. These small regional pipelines add up to about 1600 kilometers in total length.Sector Coverage 21
    • Indian Sector Report - April 2008 6.1.6 Key Issues High Risk Associated with Upstream Sector The Exploration & Production (E&P) exercise is characterized by a high degree of uncertainty and, hence, a substantial amount of risk. At every stage of the E&P exercise, there is a very high degree of likelihood that the E&P efforts may have to be abandoned. 800 Oil & Ga s Re s e rv e s 35 Oil & Gas Production Trends 35 1050 Billion Cubic Million Tonnes 780 Million Metres 30 Billion Cubic 34 Tonnes 950 Metres 760 25 850 33 740 20 720 750 32 15 1990- 2000- 2002- 2003- 2004- 2005- 2006- 700 650 91010304050607 90 00 02 03 04 05 06 07 C rude Oil Natural Gas Source: MoP&NG 19 20 20 20 20 20 20 20 C rude O il Na tura l G as S o urce : Mo P &NG Stagnating Production Oil & Gas production, in recent years, has been much higher than that in the early 1980s. In 1980-81, the total crude oil and natural gas produced were 10.5 million metric tonnes (mmt) and 2.4 billion cubic metres, respectively. The discovery of the offshore Bombay High oilfields by ONGC in the mid-1970s and the subsequent development in the mid-1980s resulted in the total oil & gas production rising by around three times over the 1980-81 level, in 1985-96. However, in the absence of any new discovery, oil production has stagnated at the mid-1980s levels. Gas production, on the other hand, showed a spectacular growth of 10 times during 1981-96, mainly because of the development of the South Basin fields and reduction in flaring in the Bombay offshore region. Further, the gas transportation infrastructure has improved significantly with the laying of the Hazira-Bijaipur- Jagdishpur (HBJ) natural gas pipeline by the Gas Authority of Indian Limited (GAIL) in 1987. However, beyond 1996, the growth rate in gas production has also been lower. Pressure on Reserves The total resource base of oil and gas is the entire volume formed and trapped in- place within the Earth before any production. The largest portion of this base is non-recoverable by current or foreseeable technology. This inability is either because of unfavorable economics or intractable physical forces, or a combination of both. At the next level, the recoverable resources are divided into discovered and undiscovered segments. Although the crude oil reserves in India have grown by over six times during the past three decades, the past few years have seen a significant depletion because of the absence of any new findings.Sector Coverage 22
    • Indian Sector Report - April 2008 The life of oil reserves (as measured by the Reserve to Production or the R/P ratio) has also declined to 17.5 years in 2007 from a high of 45 years in 1980-81. The total proven reserves of natural gas in India as at the end of 2003 was 1055 billion cubic metres (bcm). The gas production in India is currently around 31.75 bcm (billion cubic metres) in 2007. At this production level, Indias reserves are likely to last for around 33 years, that is, nearly double than the 17.5 years estimated for oil reserves. 6.1.7 Role of Private Sector So far, the private sector has played a minor role in the upstream sector. Following the second oil price shock and the realization of rising oil imports, the Government of India opened the E&P to private sector in 1979. Since 1991, though there have been six rounds of exploration licensing (excluding NELP), limited success has been achieved in the award of the blocks. The primary reasons being: ■ The exploration activities have been initiated only in few (15 per cent) potential oil-bearing areas ■ There has been a delay on the part of the government to award contracts for oil exploration. ■ In the absence of any major oil discovery for the past 15 years, the confidence of the oil majors has gone down. Private Players Share in Oil & Gas Production (%) 25% 35 20% 30 15% 25 10% 20 5% 15 0% 1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 Crude Oil Production (MMT) Natural Gas Production (BCM) % of Oil Produced by Private Players % of Gas Produced by Private Players Source: MoP&NG Since early 1990s, government turned its attention towards small and medium- sized oil fields. Under this, two kinds of contracts were offered to the private sector - one, for small-sized fields, involved a production-sharing contract (PSC) with the government, second, for medium-sized fields which involved an equity participation of up to 40 per cent by ONGC/OIL. This privatization program has been highly successful as these carried little risks. The development of these fields led to increase in production and the share of private sector in the total oil and gas production.Sector Coverage 23
    • Indian Sector Report - April 2008 To continue with the privatization process, in Dec98, the government introduced the New Exploration Licensing Policy (NELP). Under NELP, the government offered fiscal incentives like: level playing field for National oil companies (NOCs), international oil price to contractors, zero cess liability and 50 per cent rebate on royalty payments for seven years for deep offshore areas. Oil E&P has been given "infrastructure" status, which provides a seven-year tax holiday. NELP I failed to obtain a good response mainly due to low oil prices at the time of launch and high- risk nature of deep-water blocks. Since then, there have been five more rounds of NELP till 2006. And in all these the award process happened in a very short span of time. So far, the government has signed PSCs for 165 blocks awarded in the first six rounds of NELP. At present more than 84 per cent of the area under E&P belongs to the NELP Blocks. Recently, in Dec07, NELP-VII was announced with 57 blocks on offer which going to be awarded shortly. Due to attractive fiscal terms, transparent approach in bidding process, lesser time in awarding contracts and high success rate of oil strikes recently India has been able to attract international oil majors recently. 6.2 Downstream Sector: Refining & Marketing Major Players and Structure As of April 1, 2007, the Indian oil-refining sector had 11 companies (6 parent companies and 5 subsidiaries) with 19 refineries and a combined annual installed capacity of 148.968 mmt. Public sector Undertakings (PSUs): ■ Indian Oil Corporation Limited (IOC) and its two subsidiaries, Chennai Petroleum Corporation Limited (CPCL) and Bongaigaon Refinery and Petrochemicals Limited (BRPL); ■ Bharat Petroleum Corporation Limited (BPCL) and its two subsidiaries, Kochi Refineries Limited (KRL) and Numaligarh Refineries Limited (NRL); ■ Hindustan Petroleum Corporation Limited (HPCL); ■ Oil and Natural Gas Corporation Ltd. (ONGC) and its subsidiary Mangalore Refinery and Petrochemicals Limited (MRPL) Private sector Undertakings Reliance Industries Limited (RIL) Essar Oil Limited (EOL) ONGC and EOL are recent entrants in the refining business. ONGC has taken over MRPL in March, 2003 before that MRPL was a joint sector entity. The entry of ONGC into the refining segment appears to be its strategy in the direction of becoming integrated company along the oil & gas value chain.Sector Coverage 24
    • Indian Sector Report - April 2008 RIL has the largest single location refinery in India with capacity of 33 mmt and planning to become world’s largest single location refinery by adding capacity of 29 mmt which is going to be completed by end of 2008. India’s Installed Refining Capacity, Throughput and Capacity utilization (FY 2006-07) Capacity ParentRefineryYearofThroughputCapacity Company(000 CompanyLocationCommission(000 tonnes)Utilization (%) tonnes) IOCGuwahati1962100083983.90 IOCBarauni19646000546991.15 IOCKoyali1965137001295394.55 IOCHaldia19746000583697.27 IOCMathura198280008883111.04 IOC IOCDigboi190165058690.15 IOCPanipat199812000943578.63 CPCLChennai196995009784102.99 CPCLNarimanam1993100061861.80 BRPLBongaigaon19792350206787.96 IOC Total602005647093.80 BPCLMumbai19551200012030100.25 BPCLKRLKochi196675007742103.23 NRLNumaligarh19993000250483.47 BPCL Total225002227699.00 HPCLMumbai195455007419134.89 HPCL Visakh195775009377125.03 HPCL Total1300016796129.20 ONGCTatipaka20017894120.51 ONGC INDIA Total 148968 146551 98.38 MRPLMangalore1996969012536129.37 ONGC Total976812630129.30 RelianceRILJamnagar19993300036616110.96 Reliance Total3300036616110.96 EssarEOLVadinar200610500176316.79 Essar Total10500176316.79Sector Coverage 25
    • Indian Sector Report - April 2008 Oil Refining capacity Marketshare, 2007 Overall Capacity Utilization, 2007 ESSAR 16.8% BPCL 15% RELIANCE 111.0% IOC HPCL ONGC 129.3% 40% 9% ONGC HPCL 129.2% 7% BPCL 99.0% Essar RIL 7% 22% IOC 93.8% The Indian petroleum sector has been under the government control. Keeping the consumers and producers’ interest, the government decided to decontrol the sector in a phased manner. To maintain viability of public sector refineries in the decontrolled regime, the government, in September, 2000, decided to integrate the pure refining companies with the integrated majors. Post-restructuring, the shares of IOC (Indian Oil Corporation) and BPCL (Bharat Petroleum Corporation Limited) in Indias total refining capacity increased up to 40 per cent and 15 per cent, respectively. ONGC and HPCL had highest capacityMarketing Market share FY 2006-2007utilization over 129 per cent whereas IOC had lowest 93.8 per cent among BPCL, 18.8PSUs during 2007. Among private players RIL had highest capacity HPCL, 16.5 utilization over 111 per cent and EOL 5.7 IOC, 40.6 had lowest 16.8 per cent duringOthers Private (PSUs),2007. Marketing of refined products in India Parties, is done mainly by 3 PSUs – IOC 18.4 (combined with IBP - taken over by IOC in Feb02), HPCL, BPCL and 2 private sector companies – RIL and Consumption of Petro Products, EOL. The government has also April-Feb,08 FO/LSHS decontrolled the marketing sector Naphtha 10% LPG from April 1, 2002, with pricing of 10% 9% products linked to import parity Petrol prices. While the APM for Liquefied 8% Petroleum Gas (LPG), Kerosene Kerosene 7% (SKO), Motor Spirit (MS) and Diesel Diesel (HSD) have been dismantled, prices ATF 38% Others 4% of LPG (domestic) and Kerosene 14% (Public Distribution System) are partially subsidized. While the three PSUsSector Coverage 26
    • Indian Sector Report - April 2008 account for 76 per cent of total sale of petroleum products in India, the balance sale of 24 per cent is accounted for by imports and also by sales by private parties. Amongst the PSUs, IOC is the market leader with over 40 per cent market share, followed by BPCL and HPCL having 19 per cent & 17 per cent respectively. The pie-chart shows domestic consumption data for the major categories of refined petroleum products, as a percentage of total domestic consumption of refined petroleum products. Automotive fuels such as diesel (in particular high-speed diesel, or HSD) and motor spirit, or MS (also referred to as gasoline or petrol), account for a significant portion of refined petroleum products sold domestically, making up approximately 45.1 per cent of total sales of refined petroleum in India for the period April- February, 2008. The three major government-owned downstream oil companies have historically dominated domestic sales of automotive fuels. Petroleum products Net Export Growth of Petro Products,have contributed to 2004-07foreignexchange All Petroreservethrough78.0% 32.6%Products export. India has exported petroleum 209.6% FO / LSHS 98.0%productsworth Rs.39.78 billion in 60.5% Diesel ( HSD ) FY 2006-07. Net20.8% export of petroleum 74.3% ATFproducts has grown30.2% by 78.0 per cent 31.8% The three PSUs control an extensive distribution network consisting of retail CAGR (Qty)CAGR (Rs.)Petrol (MS)and 32.6 per cent in outlets, SKO and LPG dealerships and product pipelines. Earlier, the oil companies 3.2% used to set up the crude oil/product pipeline network in India. However, to terms of quantity facilitate development of major product pipelines in future, the government and Indian rupees respectively during 2004-07. The highest and the lowest net created a new company, Petronet India Ltd (PIL). The refineries are expected to export growth in terms of quantity and Indian rupees has been recorded by construct pipelines on their own. In recent past, oil companies have undertaken FO/LSHS (Furnace Oil / Low sulfur heavy stock) and Petrol (MS or Motor Spirit) several measures to combat air pollution. Auto fuel quality has been improved to respectively during FY 2004-07. enable the automobile industry to comply with the prescribed emission norms.Sector Coverage 27
    • Indian Sector Report - April 2008 7. Regulatory / Government body structure The Ministry of Petroleum & Natural Gas is situated in Shastri Bhawan, New Delhi and is entrusted with the responsibility of exploration and production of oil and natural gas, their refining, distribution and marketing, import, export, and conservation of petroleum products and Liquefied Natural Gas. The Ministry of Petroleum & Natural Gas gets its authority under item no. 53, list 1, Seventh Schedule, Article 246 of the Constitution of India. The item reads "Regulation and development of oil fields and mineral oil resources, Petroleum and Petroleum products, other liquid and substances declared by Parliament by law to be dangerously inflammable”. Cabinet Minister Ministry of State Secretary Additional Secretary Additional Secretary (IC) JS & FA JS (Ref) JS (Exp) JS (Exp) JS (Exp) Joint Dir Dir Dir Joint Dir Advisor (A&R) (Exp 1) (NG) Advisor (IC I) Dy. Sec. Dir Dir Dir Joint Dir (Distt) (Supp) (Exp II) (Mkt) Director (IC II) Dir Dir Dy. Sec. (Vig) (Exp III) (Cons) Dy. Sec. Dy. Sec. Dy. Sec. (Coord) (Mkt) (Distt)Sector Coverage 28
    • Indian Sector Report - April 2008 8. Michel Porter Analysis Entry Barriers Large investments required with long gestation period Entry restricted into auto fuel marketing Technology intensive upstream sector Distribution & logistics intensive downstream sector Bargaining Power of Bargaining power customers Inter-Firm Rivalry of suppliers High with bulk / Keen in deregulated products, High because of corporate customers, e.g. lubricants few participants. who can purchase With full deregulation, Marked by products from competition to hot up in all presence of cartels. competitors Otherwise Limited products bargaining power Threat of Substitutes Largely substitution from inter-petro products Limited substitution with other forms of primary energy productsSector Coverage 29
    • Indian Sector Report - April 2008 9. Critical Success Factors Reserve replacement ratio Reserve replacement ratio indicates the extent to which a company replenishes its reserve base as it is depleted by production. If a company replaces more than 100 per cent of its production volume during a given year, its reserves will be larger at the end of the year than at the beginning. Increases in the reserve replacement ratio generally come from acquisitions or new discoveries. As oil and gas are non- replenishable resources, continuous additions to reserve base are necessary to sustain earnings growth. In the last decade, change in reserves position besides being positive except for 1997, has always been more than the change in production levels. For instance, reserve replacement ratio of BP was 179 percent in 2007, compared to 127 percent of Shell’s. The reserve replacement ratio of BP has exceeded 100 per cent for the past 15 years. Geological knowledge and experience The skill set to analyze subsurface geology is critical in reducing the lead time in developing or abandoning a prospective reserve area. This again has an implication on the cost front. This factor also determines the areas where a company should bid. Cost competitiveness As the oil prices are not in the control of oil companies, it is important to focus on lowering the finding, development and lifting costs on an ongoing basis so as to be in a position to survive in phases of low prices. Gas supply source The ability to lock in to alternate gas supply sources (either through an existing gas producer / supplier or by venturing on its own into E&P activities) would be crucial for streamlining the supply chain and minimizing disruption. Gas Pricing Price of gas supplied should be competitive vis-à-vis alternate fuel such as Naphtha and Fuel Oil so that it remains a commercially preferred fuel. Financial strength As the exploration and production require large amount of financial resources, it is important for the players to raise the necessary capital at low costs. Risk taking ability The upstream business is characterized with high risk and high return. Hence, the ability to take risks and absorb losses becomes extremely important. Companies increasingly form a consortium for bidding purposes so as to minimize risk. Ability to win contracts Normally, blocks are assigned based on competitive bidding. Hence, the ability to win contracts by competing with other major players becomes a key success factor.Sector Coverage 30
    • Indian Sector Report - April 2008 Technological advancement The upstream segment is a technology intensive segment. The undiscovered reserves are likely to be located in a more difficult environment and hence, technological advancements may be crucial to tap these undiscovered reserves. Competitiveness of Indian refineries In a deregulated scenario the competitiveness of Indian refineries influences margin expansion. The constituent of net cash margins, which is a measure of competitiveness, includes the complexity level, operating costs and location of refinery. Thus Indian refineries have to perform so as to meet these success parameters and ultimately become more profitable. Important Tariff Protection This is the single most important factor in protecting the local refinery margins. Products sold in the local market enjoy an import parity price which includes landed cost plus import duty. Previously the import duty on the petroleum products were less then the duty on the crude oil which use to create an anomaly now this has been corrected and duty structure on import duty has been rationalized. Product portfolio The light distillate such as MS, ATF, Naphtha and LPG are considered to be high value products, whereas heavy distillates are considered to be low value products. The margins in the deregulated scenario will be higher on the high value products and moreover demand growth rate for the high value products is higher than low value products. Presently BPCL markets highest percentage high value products in its sales volume. In absolute terms IOCL has the highest sales volume of high value products. Location of Retail outlets This becomes important in a decontrolled regime. Retail outlets located in high traffic industrial corridors, prime metropolitan areas and the deficit regions (primarily Northern) of the country, are likely to see a higher throughput and asset utilization and hence higher profitability. Setting up retail outlets Ownership of marketing assets and bringing more retail outlets under ownership for mitigating poaching risk assumes paramount importance in deregulated market. Upgrading retail stations Upgradation of retail outlets and adoption of promotional schemes for increasing volume off take and building customer loyalty, would play a very critical role in the future market.Sector Coverage 31
    • Indian Sector Report - April 2008 Investment in strengthening retail infrastructure NOCs should invest more in strengthening the retail network inorganically by acquiring other player in pure marketing business only. For e. g. IOC acquiring IBP, having over 1500 retail outlets, and thus adding more muscle to its retail business. Gas Distribution Infrastructure Well laid out pipeline network so as to optimally reach out to the customers. Further expanding the existing customer base and meeting the enhanced demand of the existing customers would be key to earnings growth. Fully Integrated Player There are very few big oil companies worldwide that are only into E&P. Giants such as Royal Dutch/Shell, ExxonMobil, ChevronTexaco and BP Amoco are all present across the value chain from oil production to downstream products and even into power generation. With the opening of the sector, this is the way to go in India as well. At present there is no fully integrated player in India. Reliance and ONGC, along with Indian Oil, stand the best chance of emerging as truly integrated global oil players from the country in the long run.Sector Coverage 32
    • Indian Sector Report - April 2008 10. Recent Trends & Budget Impact 10.1 Union Budget 2008-09 ■ Average crude oil (Dated Brent) prices moved up by over 11 per cent in 2007 over the previous year to average US$72.7 per barrel as compared with US$65.3 per barrel in 2006. This rise in prices over the last year is mainly reflective of the continuing weakness experienced by the US dollar against other world currencies, primarily the euro coupled with demand -supply mismatch. ■ Tighter global product markets are expected to improve average GRMs (Gross Refining Margin) for Indian refining entities in 2007-08 to US$6.5 - US$7.0 per barrel when compared with the previous year of US$4.7 per barrel, as their entire production, except auto (petrol and diesel) and cooking fuels [liquefied petroleum gas (LPG) and kerosene], is priced on import parity basis. Auto and cooking fuels are priced on trade parity basis (import parity and export parity in the ratio of 80:20) and export parity basis, respectively. ■ Although the appreciating rupee vis-à-vis the US dollar has lowered the impact of the rising international auto and cooking fuel prices on the retail sale of these products in domestic markets by oil marketing companies (OMCs), they continue to slide deeper into the red on this front in 2007-08. In 2007-08, blended auto fuel margins are expected to be in the negative Rs 3.5-4.0 per litre as compared with a negative of Rs 1.97 per litre of 2006-07. Similarly, the total under-recovery on LPG and kerosene is expected to be Rs 159-161 per cylinder and Rs 13-14 per litre, respectively, in 2007-08 as against Rs 136.34 per cylinder and Rs 15.29 per litre, respectively, in 2006-07. Thus, the total under recovery on the retail sale of these fuels is expected to worsen in 2007-08 to Rs 490-500 billion as compared with Rs 341 billion in 2006-07. ■ However, this will be offset by the loss-sharing mechanism followed by the government in the current year (2007- 08) as in the previous year (2006-07). This is in the form of upstream assistance given by companies, such as Oil and ■ Natural Gas Corp (ONGC), GAIL (India) Ltd and Oil India Ltd (OIL), and oil bonds issued by the government in lieu of the losses suffered by OMCs on retail sales of auto and cooking fuels. This, coupled with higher refining profits, has improved operating profits of the refining and marketing industry for the 9 months ended of 2007-08 to around Rs 166 billion as compared with the corresponding period of the previous year when it was around Rs 103 billion. ■ Domestic consumption of petroleum products continued to grow at a healthy rate of 5.5 per cent during April- December 2007 as compared with the previous year, backed by higher growth in petrol, LPG and diesel. ■ Differential pricing is followed for pricing domestic natural gas in the country, wherein a large proportion of the gas is allocated to sectors, such as power, fertilizers, transportation, and consumers, consuming less than 0.05 mmscmd of gas on a controlled preferential basis.Sector Coverage 33
    • Indian Sector Report - April 2008 ■ However, unlike retail auto and cooking fuels, the government seems to be moving towards a market-determined pricing mechanism for natural gas, as it has recently approved a market-evolved price for the gas from Reliance Industries Ltds (RIL) Krishna-Godavari (KG) Dhirubhai (D) – 6 blocks. ■ As against this, the price of imported natural gas, liquefied natural gas (LNG) averaged US$11 - US$12/mmbtu (cif) between April 2007 and January 2008. ■ We believe that the exchange rate will remain a critical element in determining the average crude oil price in 2008 in dollar term. Assuming no further depreciation in the dollar-euro exchange rates from the levels of US$1.46 per euro and an easing market for crude, its price is forecast to be US$74 – US$76 per barrel in 2008 as compared with US$72.7 per barrel in 2007. We also expect GRMs to decline from its 2007-08 levels to average US$5.0 –US$5.5 per barrel in 2008-09 on the back of easing product markets. With the government still actively involved in the pricing of retail auto and cooking fuels, the marketing business of OMCs is expected to remain strained even in 2008-09. However, since the government is also likely to continue with its financial assistance scheme, the overall profitability of the sector may not suffer. 10.2 Impact factors ■ The withdrawal of customs duty exemption on naphtha for the manufacture of polymers and subjecting it to its normal rate of 5 per cent is expected to marginally improve refining profits by Rs 7 – Rs 8 billion. ■ Reduction of 2.5 per cent in customs duty on project imports is likely to reduce capital costs of players in the oil and gas industry. ■ The replacement of ad-valorem portion of the excise duty (6.2 per cent) on unbranded petrol and diesel by an equivalent specific duty of Rs 1.35 per litre would be revenue neutral. ■ However, this is expected to act as a cushion against the cascading effect of any future change in international prices on domestic prices for consumers. ■ Reduction in peak excise duty (by 2 per cent) and CST (by 1 per cent) is expected to be revenue neutral for the sector, as they are likely to be passed on to the final consumer.Sector Coverage 34
    • Indian Sector Report - April 2008 10.3 Policy Initiatives Overview India offers favorable investment climate across all the sub-segments of oil & gas. The regulatory regime of India permits Foreign Direct Investment (FDI) into petroleum sector without any constraints. Upstream sector investments are facilitated by licensing policy (NELP) which provides a conducive regulatory framework. A Downstream Petroleum and Gas Regulatory Bill awaiting enactment will set up a regulator to regulate downstream activities. Key Features of Policy Initiatives Upstream New Exploration Licensing Policy (NELP) ■ Seventh round was launched on 13 December offering 57 blocks to national and international ■ players with revenue expectation of US$3.5 – US$4 billion. ■ Fiscal stability provision ■ Finalization of contract on the basis of Model Production Sharing Contract (MPSC) provided at the bidding stage ■ Petroleum tax guide provided with bidding documents ■ Possibility of seismic option in the first phase of the exploration period ■ NOCs also compete on the same terms. ■ No mandatory state participation/carried interest by NOCs ■ No payment of signature, discovery or production bonu ■ No Customs duty on imports required for petroleum operations ■ Freedom to sell crude oil and natural gas in domestic market at market determined prices ■ Biddable cost recovery up to 100 per cent ■ Sharing of profit petroleum based on pre-tax investment multiple achieved and is biddable ■ No cess on crude oil production. Royalty payment for crude oil and natural gas on ad-valorem basis. Corporate Tax Deduction and allowances available to companies prospecting for oil and gas and they have a 7 year income tax holiday.Sector Coverage 35
    • Indian Sector Report - April 2008 Draft Downstream Petroleum and Natural Gas Regulatory Board Bill ■ Proposed Regulator to oversee all downstream activities in India which include refining, processing, storage, transportation, gas transmission and distribution. ■ Any company that wants to enter into the retail segment should have invested US$444 million in any of the other segments of oil and gas. ■ Pipelines originating from refineries and ports will need to be built on a common carrier principle. The company laying down the pipeline would have to share 25 per cent of the carrying capacity with other companies. Draft Gas Pipeline Policy that has merged with this bill, proposed to set up a gas regulator which would authorize laying down the pipelines for any entity desirous to transport gas along with preparing long term gas pipeline network and laying down cap for negotiable tariffs. Guidelines for laying petroleum product pipeline In a major decision towards deregulation of oil sector and to attract investment in the petroleum product pipelines, in November, 2002, Government had laid down a new Petroleum Product Pipeline Policy for laying pipelines in the country on common carrier principle. Guidelines for laying petroleum product pipelines were notified on 20th November, 2002. Supplementary guidelines in this regard have also been notified on 26 th October, 2004. Auto Fuel Policy Schedule for introducing improved quality fuels as per Auto Fuel Policy ■ Euro-III Petrol & Diesel has been introduced from 1-4-2005 in all 11 identified cities (Delhi/National Capital Region, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad, Ahmedabad, Pune, Surat, Kanpur & Agra) in line with Auto Fuel Policy ■ BS-II Petrol throughout the country has been introduced w.e.f. 1-4-2005 in line with Auto Fuel Policy BS-II Diesel in all states except Rajasthan, West U.P, Uttaranchal, M.P, Punjab H.P and Jammu & Kashmir has been introduced from 1-4-2005 as per Auto Fuel Policy ■ As per the revised program BS-II diesel has been introduced in Rajasthan from 1-6-2005 and in West U.P and Uttaranchal from 1-7-2005 Introduction of BSII Diesel is proposed in a phased manner as per the revised program as under: ■ M.P from 1-9-2005 ■ Punjab, H.P and J&K from 1-10-2005Sector Coverage 36
    • Indian Sector Report - April 2008 National Auto Fuel Policy Comprehensive Policy on auto fuels, their availability and security of supplies, vehicle technology, and emission reduction in a cost effective manner. 10.4 FDI Limits ■ Exploration & Production – 100 per cent (automatic – no approvals required). ■ Petroleum Product Pipeline & Marketing - 100 per cent (automatic). ■ Natural Gas / LNG Pipeline - 100 per cent (non automatic – Approvals required from the Foreign Investment Promotion Board, GoI) ■ Refining – In case of state owned companies, FDI is limited to 26 per cent (26 per cent held by NOCs and balance by public). In case of private Indian companies, FDI upto 100 per cent permitted under the automatic routeSector Coverage 37
    • Indian Sector Report - April 2008 11. Investment opportunities and current status of the project Discoveries by Reliance Industries ■ RIL has made 3 discoveries in KG Basin, two in Krishna Basin Deep Waters, one in shallow waters of Krishna Basin ■ Eight discoveries in Mahanadi Basin establishes the hydrocarbon potential towards the deeper part of NEC-Mahanadi Basin and opens up more acreage for further hydrocarbon exploration efforts. ONGC-28 Discoveries in 2007-08 ■ Company has succeeded in 28 exploration discoveries ■ in Oil Sector ■ 17 in Gas Sector Reliance Petroleum Ltd – Refinery ahead of schedule ■ Company has marched rapidly and achieved 90 per cent progress at Jamnagar Refinery ■ It is well positioned to reap benefits of its large scale, higher complexity, lower capital costs and faster schedule to generate significant value in the refining sector NELP VII -Opportunities in E&P Sector ■ 57 Blocks has been offered for bidding ■ Expected revenue generation is $3.5-4 billion BPCL-10300cr Bina Refinery ■ BPCL is major stakeholder ■ EURO IV compliant petrol & diesel will be produced ■ 46 per cent of the output will be diesel Unclear stand of the Government Regarding Tax Holiday to E&P ■ Uncertainty exists in E&P sector regarding 7 year Tax Holiday ■ Income Tax Holiday has been Extended to 3 PSU refineries ■ BPCL’s Bina Refinery ■ IOC’s Paradeep Refinery ■ HPCL’s-MITTAL Bhatinda RefinerySector Coverage 38
    • Indian Sector Report - April 2008 12. Mergers & Acquisitions Total 14 deals have taken place since August 2007 in Oil & Gas industry amounting to US$1679.2mn (disclosed amount of 9 deals). Biggest deal was a private placement deal, in which Cairn India Ltd raised finance from Petronas of Malaysia, Orient Global Tamarind Fund of Singapore, amounting to US$627.5mn. BPCL’s acquisition of 10 per cent stake in M’boundi oil field will mark its entry into oil and gas rich Africa. The net proceeds will be used to fund capital expenditure and for general corporate purposes. The following Table shows deals that took place in Oil & Gas industry Acquirer name Nationality Target Name Nationality % sought Deal Value US$mn Petronas, Orient Global Malaysia, Cairn India India 6 627.5 Singapore Ltd. Investor Group India EnCanBrasil Brazil 425 Limitada BPCL India Undisclosed Rep Of 10 350 MboundiOil Congo Field BOC Group PLC UK BOC India Ltd India 42.4 152 Tata Sons Ltd India Nagarjuna Oil India 26 86.1 Co. Ltd Investor Group India Shiv-Vani Oil & India 7.8 24.5 Gas ‘Exploration Samara Capital India India 21.4 7.2 Asian Oilfield Partners Fund Services Ltd. Citigroup Venture United States Shiv-Vani Oil & India 7 2.5 Cap. Equity Partner Gas ‘ Exploration Global Infrastructure United States EastIndia India Partners Petroleum Ltd Mission Agro Energy Ltd. Mauritius Mission India Biofuels India Pvt Ltd IVRCLInfrastructure & India AlkorPetroo India projects Ltd. Ltd Mission Agro Energy Ltd. Mauritius Mission India Biofuels India Pvt Ltd ONGC Videsh Ltd. India San Venezuela CristobalOil- fieldSector Coverage 39
    • Indian Sector Report - April 2008 13. Conclusion The Indian oil and gas sector comprises 46 per cent of total conventional primary energy consumption as compared to the world average of 62 per cent. The sector is witnessing a huge demand and supply mismatch as consumption is far more than domestic production. This gap is expected to increase further as growth in demand is expected to be more then new capacity addition. International Energy Association estimates that India and China will contribute approximately 42 per cent of incremental oil demand by 2030. Going forward, this indicates huge surge in investment and production activities in the Indian Oil & Gas Sector. ONGC made 28 exploration discoveries in 2007-08. It has achieved an aggregate production of oil and oil equivalent of gas of 61.82 million metric tonne (1.8 per cent higher than FY07). This includes ONGC’s share of production in joint ventures as well as ONGC Videsh Ltd’s (OVL) share of production from overseas assets. Reliance has also made three discoveries in KG basin. In order to counter the effect of increasing crude prices, companies are exploring alternative sources like Coal Bed Methane (CBM), bio-fuel, ethanol blended petrol, etc. The government is also encouraging exploration of CBM by conducting bidding process to award blocks. Till now 23 blocks has been awarded to Indian and foreign company. India is the 4th largest coal producer in the world, so it holds significant advantage in this area. Because of the Government regulations in deciding the final price, downstream companies are incurring heavy losses every day on all the petroleum products. To save their bottom line these companies have decided to limit their supply of products by not providing new gas connections. To attract foreign funds in oil and gas industry Government has allowed 100 per cent FDI in E&P sector and in refining sector 100 per cent FDI is allowed in case of private companies and in case of state owned companies FDI limit is 26 per cent. Indian companies are entering in joint ventures with foreign firms to tap new markets. BPCL’s acquisition of 10 per cent stake in M’boundi oil field will mark its entry into oil and gas- rich Africa. As an initiative to attract investment in this sector Government has launched NELP VII offering 57 blocks. The offered blocks include 19 deep water blocks, 9 shallow water blocks and 29 onland blocks. NELP is expected to attract investment of around US$3.5 billion. Apart from Reliance many more private firms have also shown interest this time. Many discoveries have already been made by big companies like ONGC and Reliance in KG Basin & Mahanadi Basin in the blocks offered in previous rounds. India is emerging as a global refining hub attracting a lot of investment. Many big public sector companies are establishing refineries in joint venture with foreign firms to capitalize this opportunity. RPL’s Jamnagar refinery is the largest grassroots refinery in the world. Its remarkable ability to refine almost any kind of crude because of its unique configuration and high complexity, places it in decisively competitive position. Its access to fully integrated logistics and product handling allows it to move its products abroad in cost effective and timely manner.Sector Coverage 40
    • Indian Sector Report - April 2008 14. Profile of Major Players 11.1 Aban Offshore Ltd.Key Data Company Profile Aban Offshore, formerly Aban Loyd Chiles Offshore, provides oil field services forBSE Code: 523204 offshore exploration and production of hydrocarbons to the oil industry in IndiaNSE Code: ABAN and abroad. An Indo-US joint venture, the company was incorporated on Sep. 25,Bloomberg ABANPP@IN 1986. It is India’s largest offshore drilling entity in the private sector where itsCode: American partner provides technical know-how. The company together with itsReuters: ABAN.BO subsidiaries has 20 offshore assets including 15 jack-up offshore drilling rigs, 2CMP 3550.40 drill ships, 1 floating production platform and a jack-up rig and drill ship each on(10/4/2008) bareboat charter.Market Cap(Mn) 133.96 Aban Singapore was acquired to offer drilling services to large global oil and gas52 Week H/L 5555.00/2225.00 operators. The company has obtained ISO 9001:2000 for its drilling operations.Price to Equity -438.02 Business SegmentsPrice to Book 24.67 The Company is in the business of providing and operating ships, vessels, rigs, structures, equipment and personnel required for on-shore and off-shore drilling and oil field services. Clients include Oil and Natural Gas Corporation, Hardy Exploration and Production (India), Oriental Oil Company (Dubai), Hindustan Oil Corporation Company, Shell Brunei, Shell Malaysia etc. Future plans By 2009-10, all the new rigs under construction are anticipated to enjoy medium- term contracts at attractive rates. In view of this, it is expected to report a significant increase in income over the three years from 2007-08. Key Financials (INR Million) 2005 20062007 Sales 2895.41 4901.637175.48 EBITDA 1557.34 2904.314030.96 EBIT 1005.21 1890.282765.40 Net Income (Losses) 516.55 822.62 -140.01 Cash From Operations 965.94 2137.30 2032.57 Total Assets 10604.86 17163.14 121520.10 Total Debt 7179.05 11098.07 108525.20 Capital Expenditures -5656.82 -8405.20 -35744.91 Key Ratios (%) Operating Margin 34.72 38.56 38.54 ROCE 25.99 25.28 -6.22 Return on Assets 6.63 5.93 -0.43 Debt /Equity Ratio 325.90 257.84 2044.47 Cash Flow per Share 26.21 58.03 55.14 Diluted EPS 14.02 19.39 -8.11 Dividends per Share 2.00 2.60 3.00 Source: Bloomberg Sector Coverage 41
    • Indian Sector Report - April 2008 11.2 Bharat Petroleum Corporation Limited Company ProfileKey Data Bharat Petroleum Corporation Limited (BPCL) is one of Indias largest PSUBSE Code: 500547 companies. BPCL is engaged in the business of refining, storing, marketing andNSE Code: BPCL distributing petroleum products The Company has refineries at Mumbai and KochiBloomberg BPCL@IN with a capacity of 12 million metric tons (MMT) and 7.5 MMT per annum,Code: respectively for refining crude oil. Bharat Petroleum is considered to be a pioneerReuters: BPCL.BO in Indian Petroleum Industry with various path-breaking initiatives such as PureCMP 401.90 for Sure campaign, Petro card, Fleet card etc. Due to its impressive performance in(10/4/2008) 145.30 2006-2007, BPC has moved up in the Fortune Global 500 list with a ranking ofMarket 325 and currently.Cap (Mn)52 Week H/L 560.00/295.00 Business SegmentsPrice to Equity 6.77 Bharat Petroleum produces a diverse range of products, from petrochemicals andPrice to Book 1.28 solvents to aircraft fuel and specialty lubricants and markets them through its wide network of Petrol Stations, Kerosene Dealers, LPG Distributors, Lube Shoppes, besides supplying fuel directly to hundreds of industries, and several international and domestic airlines. Future Plan The implementation of the project for setting up of a 6 MMTPA refinery at Bina in Madhya Pradesh is progressing smoothly. Bharat Oman Refineries Limited, the joint venture vehicle implementing the project, has assumed a challenging target of December 2009 for mechanical completion of the refinery. BPCL has moved forward in its quest to have a significant presence in the upstream exploration and production sector. The efforts put in over the last couple of years have resulted in BPC having a participating interest in 14 blocks; 9 blocks are situated within India and the others are located in the North Sea, in the United Kingdom, Oman, Australia and Timor. Key Financials (INR Million) 2005 2006 2007 Sales644248.40 775160.80 984192.30 EBITDA40009.21 17326.43 50555.20 EBIT31199.50 7868.51 39534.43 Net Income (Losses)15419.62 5372.97 21451.95 Cash From Operations11364.19 16750.72 55257.67 Total Assets264814.60 315252.20 374889.40 Total Debt55452.20 92625.88 113666.20 Capital Expenditures-19208.99 -22266.01 -20478.89 Key Ratios (%) 1.02 4.02 Operating Margin4.84 6.11 20.15 ROCE21.70 1.85 6.22 Return on Assets6.20 93.38 99.96 Debt /Equity Ratio72.43 46.33 152.84 Cash Flow per Share37.88 14.86 59.33 Diluted EPS51.40 2.50 16.00 Dividends per Share12.50 Source: Bloomberg Sector Coverage 42
    • Indian Sector Report - April 2008 11.3 Cairn India LimitedKey Data Company ProfileBSE Code: 532792 Cairn Energy PLC is an independent, public oil and gas exploration and productionNSE Code: CAIRN company based in Edinburgh, Scotland and quoted on the London Stock Exchange.Bloomberg CAIR@IN Cairn successfully concluded the flotation of its Indian business in 2007. CairnCode: Energy PLC currently holds a 69.5 per cent interest in Cairn India Limited. The CAIL.BO Company operates two processing plants, 11 offshore platforms and 200 kilometerReuters: 258.00 of sub-sea pipelines.CMP(10/4/2008) Business Segments 459.03Market The Company operates the largest producing oil field in the Indian private sectorCap(Mn) 268.90/125.00 and has pioneered the use of cutting-edge technology to extend production life.52 Week H/L Today, they have an interest in 14 blocks in India. It is engaged into exploration, development of gas fields, and gas sales contract with public and private buyers and oil sales to four major refineries across India. Future plans India’s rapid economic growth has led to significant demand for crude oil and natural gas and it is expected that by 2010 Cairn India would be responsible for 20 per cent of the country’s domestic crude production. With a planned five-fold increase in production by 2010, Cairn India is working to reduce the country’s dependence on imported hydrocarbons. This increase is underpinned by the sustained production from existing assets, with a continued drilling program in Ravva and important new developments planned in Block CB/OS-2 in the Cambay Basin. The step-change in production occurs in 2009, when the Mangala field is planned to come on-stream in Rajasthan. Production from Bhagyam and Aishwariya is expected to follow. These fields have a targeted gross production of 150,000 barrels of oil per day (bopd). Sector Coverage 43
    • Indian Sector Report - April 2008 11.4 Essar Oil LimitedKey Data Company ProfileBSE Code: 500134 Essar Oil Limited (EOL) is an India-based company that is engaged in theNSE Code: ESSAROIL exploration & production, refining and marketing of oil and gas. The E&P divisionBloomberg ESOIL@IN operates nine onshore and three offshore blocks for oil, gas and coal bed methaneCode: (CBM) in India, Myanmar, Madagascar and Nigeria with total acreage of about ESRO.BOReuters: 46,000 sq. Km. in onshore and 4,600 sq. Km. in offshore. The company has 262.65CMP production and development blocks in Ratnagiri (Maharashtra) and Mehsana(10/4/2008) (Gujarat) and exploration blocks in India, Myanmar and Africa. The Company is 299.31Market implementing a 10.5-million metric-ton-per-annum oil refinery at Vadinar,Cap(Mn) Gujarat. EOL had a retail network of 1178 as at March 31, 2007. 360.00/47.4052 Week H/L -429.10 Business SegmentsPrice to Equity 9.99 The Company’s principal activities range from oil exploration to the downstreamPrice to Book sectors of marketing oil products and petrochemicals. It is organized into three divisions: exploration and production, refinery and marketing. With a firm foothold in India, Essar Global has been focusing on global expansion with projects/investments in Canada, USA, Africa, the Middle East, the Caribbean and South East Asia. Its Acquire Ontario (Canada) based Algoma Steel and US-based companies, Minnesota Future plans Essar Oil has acquired 50 per cent in 4 mt Kenyan refineries from Shell, Chevron and BP, and the acquisition will be completed by early 2008. It also plans to develop the Ratna and R-series fields, with in-place reserves of 500 million barrels of oil and recoverable reserves of 145 million barrels of oil. The management said they are going to put in USD 6 billion more to triple the capacity all the way from 10.5 million tonnes p.a. to about 34 million tonnes p.a. by 2010. Key Financials (INR Million) 2005 2006 2007 Sales 10451.20 6366.30 4739.80 EBITDA -627.90 -1288.40 -497.80 EBIT -690.10 -1335.00 -542.90 Net Income (Losses) 98.60 -936.80 -674.90 Cash From Operations 328.60 -1102.20 -945.50 Total Assets 91042.40 98421.10 158824.70 Total Debt 51147.10 65068.90 88947.70 Capital Expenditures -36964.70 -19760.40 -330.80 Key Ratios (%) Operating Margin -6.60 -20.97 -11.45 ROCE N/A -3.80 -2.45 Return on Assets 0.11 -0.99 -0.52 Debt /Equity Ratio 212.69 258.14 296.97 Cash Flow per Share 0.92 -1.05 -0.86 Diluted EPS 0.23 -0.89 -0.61 Dividends per Share 0.00 0.00 0.00 Source: Bloomberg Sector Coverage 44
    • Indian Sector Report - April 2008 11.5 GAIL (India) Limited Company ProfileKey Data The company was founded in 1984 under the name Gas Authority of India LimitedBSE Code: 532155 and changed its name to GAIL (India) Limited in 2002. GAIL is based in New Delhi,NSE Code: GAIL India.Bloomberg Code: GAIL@IN GAIL.BO The company has expanded into gas processing, petrochemicals, liquefiedReuters: 445.85 petroleum gas transmission and telecommunications. It has also extended itsCMP (10/4/2008) 377.03 presence in power, liquefied natural gas re-gasification, city gas distribution andMarket Cap(Mn) 555.50/271.0 exploration and production through equity and joint ventures participation. GAIL52 Week H/L 5 possesses 27 oil and gas Exploration blocks and 3 Coal Bed Methane Blocks. It isPrice to Equity 14.81 establishing its presence in the CNG and City Gas sectors in Egypt through equityPrice to Book 3.19 participation in three Egyptian companies: Fayum Gas Company SAE, Shell CNG SAE and National Gas Company SAE. It also has stake in China Gas Holding to explore opportunities in the CNG sector in mainland China. GAIL has a wholly- owned subsidiary company GAIL Global (Singapore) Pte Ltd in Singapore. Business Segments GAIL (India) Limited, is integrating all aspects of the Natural Gas value chain (including Exploration & Production, Processing, Transmission, Distribution and Marketing) and its related services. Future plans GAIL’s strategy is to integrate vertically in E&P sector (upstream) and in retail gas & petrochemicals (downstream). It is planning to construct new infrastructure 136 MMSCMD in next five years aimed at tapping new sources of domestic gas & LNG and to reach new markets. The company will participate in overseas E&P bidding round and farm in opportunities in Asia Pacific, Middle East, CIS and Africa. It plans to establish petrochemical business in Iran, Saudi Arab, Egypt and Uzbekistan and have city gas ventures in Libya, Uzbekistan, Indonesia, and Syria. The company is planning to invest another Rs 180 million in augmentation and creation of new infrastructure. Sector Coverage 45
    • Indian Sector Report - April 2008 11.6 Hindustan Petroleum Corporation Limited Company ProfileKey Data 500104 Hindustan Petroleum, with about 16 per cent market share, is one of the majorBSE Code: HINDPETRO players in Indian downstream oil sector. The Company is ranked 336 in theNSE Code: HPCL@IN Fortune 500 of 2007. The Corporation operates 2 major refineries producing aBloomberg wide variety of petroleum fuels & specialties, one in Mumbai (West Coast) of 5.5Code: HPCL.BO MMTPA capacities and the other in Vishakapatnam, (East Coast) with a capacity ofReuters: 251.35 7.5 MMTPA. HPCL holds an equity stake of 16.95 per cent in Mangalore Refinery &CMP Petrochemicals Limited. HPCL also owns and operates the largest Lube Refinery in(10/4/2008) 85.11 the country producing Lube Base Oils of international standards. This LubeMarket Refinery accounts for over 40 per cent of the Indias total Lube Base OilCap(Mn) 405.90/205.0 production.52 Week H/L 5.09 Business SegmentsPrice to Equity 0.89Price to Book The vast marketing network of the Corporation consists of Zonal offices in the 4 metro cities and over 85 Regional offices facilitated by a Supply & Distribution infrastructure comprising Terminals, Aviation Service Stations, LPG Bottling Plants, and Inland Relay Depots & Retail Outlets. The main products of the company include petrol, high speed diesel, superior kerosene oil, liquefied petroleum gas, aviation turbine fuel, naphtha, furnace oil, bitumen, low sulphur heavy stock, solvents, propylene and over 300 grades of lubes. Future plans HPCL plans to expand its capabilities in both refining as well as marketing segments. The marketing division is implementing two major product pipeline projects connecting Mundra with Delhi and Loni with Solapur at an estimated cost of Rs 19.6 billion in order to meet the demand in the northern sector. HPCL has drawn plans to set up a new US$3 billion refinery in India instead of expanding the plant’s capacity. Key Financials (INR Million) 2005 2006 2007 Sales624392.40 724388.00 884994.20 EBITDA24122.10 10167.50 28123.00 EBIT16876.20 2559.40 20343.10 Net Income (Losses)14156.40 4520.70 16740.20 Cash From Operations15538.50 6930.20 37576.30 Total Assets200608.90 258466.40 327836.40 Total Debt29209.60 73345.50 110317.40 Capital Expenditures-13029.50 -26263.10 -39866.70 Key Ratios (%) 0.35 2.30 Operating Margin2.70 5.30 18.34 ROCE17.78 1.97 5.71 Return on Assets7.15 84.45 115.30 Debt /Equity Ratio34.89 20.45 110.86 Cash Flow per Share45.85 13.34 49.39 Diluted EPS41.77 3.00 18.00 Source: Bloomberg Dividends per Share15.00Sector Coverage 46
    • Indian Sector Report - April 2008 11.7 Indian Oil Corporation Limited Company ProfileKey Data Indian Oil Corporation Limited (IOC) is Indias largest down stream Oil Company.BSE Code: 530965 The Indian Oil Group of companies owns and operates 10 of Indias 19 refineriesNSE Code: IOC with a combined refining capacity of 60.2 million tonnes per annum (1.2 millionBloomberg Code: IOCL@IN barrels per day). These include two refineries of subsidiary Chennai PetroleumReuters: IOC.BO Corporation Ltd. (CPCL) and one of Bongaigaon Refinery and PetrochemicalsCMP (10/4/2008) 452.85 Limited (BRPL). The company primarily operates in India with a presence in someMarket Cap(Mn) 539.97 Asian and African countries. IOC is currently Indias largest company by sales with52 Week H/L 810.00/349.00 a turnover of Rs. 220,779 crore (US$51 billion), the highest-ever for an IndianPrice to Equity 6.86 company, and profits of Rs. 7499 crore (US$1.73 billion) for fiscal 2006. Indian OilPrice to Book 1.45 is also the highest ranked Indian company in the prestigious Fortune Global 500 listing, having moved up 18 places to the 135th position this year based on fiscal 2006 performance. It is also the 20th largest petroleum company in the world. Business Segments Indian Oil Corporation Limited is engaged in petroleum refining, pipelines-crude oil and petroleum products, petroleum products marketing, and research and development. The Companys products include Indane LPG, SERVO Lubricants, Autogas LPG, XtraPremium Branded Petrol, XtraMile Branded Diesel, XtraPower Fleet Card, Indian Oil Aviation and XtraRewards cash customer loyalty programme. During the fiscal year ended March 31, 2007, the Company had 16,607 petrol/diesel stations (retail outlets), including 1,422 Kisan Seva Kendra outlets for rural customers, 6,973 bulk consumer outlets and 3,955 kerosene dealers. Key Financials (INR Million) 2005 2006 2007 Sales1316440.00 1524253.00 1844607.00 EBITDA84526.40 97836.90 127626.80 EBIT58744.50 72529.60 97517.40 Net Income (Losses)54692.30 51159.00 78674.50 Cash From Operations48969.70 -16887.50 -25055.30 Total Assets781779.80 942687.50 1041519.00 Total Debt203295.90 300630.10 294786.00 Capital Expenditures-75606.40 -6614.90 -51072.40 Key Ratios (%) 4.76 5.29 Operating Margin4.46 17.61 23.42 ROCE21.28 5.93 7.93 Return on Assets7.62 98.11 80.67 Debt /Equity Ratio74.06 -14.46 -21.01 Cash Flow per Share41.93 43.80 65.98 Diluted EPS46.83 12.50 19.00 Dividends per Share14.50 Source: Bloomberg Sector Coverage 47
    • Indian Sector Report - April 2008 Future plans It plans a capacity addition of (+) 3.0 MMTPA (from 12 to 15 MMTPA) in Panipat and 1 5 MMTPA (from 6.0 to 7.5) in Haldia. It also plans to set up a 15 MMTPA grassroot refinery with petrochemicals complex in Paradip. In its retailing segment it plans to explore new markets, including penetrating the largely untapped rural markets through Kisan Seva Kendras and introducing branded fuels and other branded products to maintain its position as a market leader. It also plans forward Integration into Petrochemicals by setting up Naphtha Cracker and downstream Polymer complex at Panipat which is expectedSector Coverage 48
    • Indian Sector Report - April 2008 11.8 Oil &Natural Gas Limited (ONGC) Company ProfileKey Data 500312 Oil and Natural Gas Corporation Limited (ONGC) is a public sector unit and one ofBSE Code: ONGC the biggest Indian Multinational Corporations. It has 26 projects in 15 countries.NSE Code: ONGC@IN ONGC owns and operates more than 11000 kilometers of pipelines in India. It hasBloomberg established 6.42 billion tonnes of In-place hydrocarbon reserves with more thanCode: ONGC.BO 300 discoveries of oil and gas; 6 out of the 7 producing basins have beenReuters: 1017.30 discovered by ONGC. It has also ventured into coal bed methane (CBM) andCMP underground coal gasification (UCG); UCG in 2008-2009. It is also looking at gas(10/4/2008) 2175.88 hydrates as it is one possible source that could make India self sufficient inMarket Cap(Mn) 1386.90/768.00 energy.52 Week H/L 12.24Price to Equity The oil major picked up 71.6 per cent equity in the Mangalore Refinery & 3.26Price to Book Petrochemicals (MRPL) and also took up a 23 per cent stake in the 364 km long Mangalore-Hasan-Bangalore product pipeline connecting the refinery to the Karnataka hinterland. ONGC has also entered the global field through its subsidiary, ONGC Videsh. ONGC has made major investments in Vietnam, Sakhalin and Sudan. It has acquired 25 per cent equity in the Greater Nile oil project in Sudan, the first producing oil property. ONGC Nile Ganga BV, a wholly- owned subsidiary, has been set up in the Netherlands to manage this property. Business Segments ONGC is engaged in the exploration, production, refining, transporting and marketing of crude oil, natural gas, liquefied petroleum gas, natural gas liquid, ethane, propane and other products. Key Financials (INR Million) 2005 2006 2007 Sales597464.30 706807.60 822615.50 EBITDAN/A 300297.80 333821.30 EBIT215134.10 232540.70 255178.40 Net Income (Losses)143390.00 153976.20 177696.00 Cash From Operations190320.00 226003.10 292161.30 Total Assets789989.30 929838.70 1107393.00 Total Debt40602.94 22341.49 16005.27 Capital Expenditures -54624.25 -57589.66 -111677.30 Key Ratios (%) Operating Margin 36.01 32.90 31.02 ROCE 31.88 29.22 28.78 Return on Assets 19.31 17.91 17.44 Debt /Equity Ratio 8.35 3.94 2.40 Cash Flow per Share 88.98 105.66 136.60 Diluted EPS 67.04 71.99 83.08 Dividends per Share 26.67 30.00 31.00 Source: Bloomberg Sector Coverage 49
    • Indian Sector Report - April 2008 Future plans The company has outlined its strategic vision for 2001-2020. The company is focusing on doubling reserves (i.e. accreting 6 billion tons of O+OEG) by 2020. Out of this, 4 billion tons are targeted from deep waters. It also plans to improve average recovery from 28 per cent to 40 per cent. It has plans to tie up 20 MMTPA of equity hydrocarbon from abroad. It is planning to erect a new mini refinery unit at Tatipaka in the Krishna-Godavari basin. The oil major also intends to expand its presence in the power sector by adding about 2,700 MW of gas-based generation capacity, for both captive and commercial use, through three plants.Sector Coverage 50
    • Indian Sector Report - April 2008 11.9 Reliance Natural Resources LimitedKey Data Company ProfileBSE Code: 532709 The company was incorporated in 2000. It was formerly known as RelianceNSE Code: RNRL Platforms Communications.Com Public Limited and changed its name to RelianceBloomberg Code: RNR@IN Natural Resources Limited in 2006. The company is vested with the gas-basedReuters: RENR.BO energy undertaking of Reliance Industries. It has been awarded four blocks, overCMP (10/4/2008) 109.10 acreage of 3,251 square kilometers, for the exploration and production of coal bedMarket Cap(Mn) 178.17 methane. It has also been awarded a block in the state of Mizoram under the New52 Week H/L 249.70/23.35 Exploration Licensing Policy for the exploration and production of oil and gas. It isPrice to Equity 479.82 actively involved in the development of coal blocks and the supply of coal to powerPrice to Book 12.44 plants. It is also pursuing business opportunities in the field of city gas distribution, laying of natural gas pipeline and sourcing of coal from multiple locations. Business Segments Reliance Natural Resources Limited engages in sourcing, supplying, and transporting gas, coal, and liquid fuels in India. It also involves in the exploration, production, and distribution of gas; and the mining of coal. Key Financials (INR Million) 2007 Sales 1506.81 EBITDA 124.81 EBIT -12.55 Net Income (Losses) 298.58 Cash From Operations 2272.02 Total Assets 26722.42 Total Debt 13041.00 Capital Expenditures 0.00 Key Ratios (%) Operating Margin -0.83 Return on Assets 1.12 Debt /Equity Ratio 100.91 Cash Flow per Share 1.73 Diluted EPS 0.20 Dividends per Share 0.00 Source: Bloomberg * Since the company has just been incorporated, the data is not available Future plans Reliance Natural Resources planned in 2007 to invest Rs 160 billion in the gas business. It is planning to acquire stake in coal mines abroad and enter into contracts for importing fuel for Anil Dhirubhai Ambani Group’s thermal power plants. Sector Coverage 51
    • Indian Sector Report - April 2008 11.10 Reliance Petroleum Limited Key Data Company Profile BSE Code: 532743 Reliance Petroleum Limited (RPL) is an India-based company. The Company has NSE Code: RPL been formed to set up a greenfield petroleum refinery and polypropylene plant to Bloomberg RPET@IN be located in a special economic zone (SEZ) in Jamnagar, Gujarat, and Western Code: India. RPL has the world’s largest grass root refinery (27mtpa) at Jamnagar - RPET.BO Reuters: Gujarat, accounting for 25 per cent of Indias refining capacity. RPL also has 187.15 CMP Indias largest marine oil terminal at its captive port facility at Jamnagar, which (10/4/2008) has the capacity to handle 50mn ton of products every year. 842.18 Market Business Segments Cap(Mn) 295.00/74.20 RIL’s business operations comprise of two business segments: refining and 52 Week H/L N/A marketing and petrochemicals. Price to Equity 6.26 Price to Book Future plansKey Financials (INR Million) With an annual crude processing capacity of 580,000 barrels per stream day 2007 (BPSD), RPL will be the sixth largest refinery in the world. It will have a complexityCash From of 14.0, using the Nelson Complexity Index, ranking it amongst the highest in theOperations648.42 sector. The polypropylene plant will have a capacity to produce 0.9 million metricTotal Assets195679.10 tonnes per annum. RPL has successfully completed the second year ofTotal Debt54670.00 implementation of its complex refinery, coming up in a Special Economic Zone atCapital Jamnagar. RPL has achieved 82 per cent overall progress in just 24 months since -164733.40Expenditures commencement of the Project. Based on the progress so far, RPL is on course toKey Ratios (%) complete the project ahead of its initial schedule of December 2008. It is alsoDebt/Equity Ratio40.65 Source: Bloomberg planning to strengthen its exploration activities in the next three to four years. * Since the company was listed in May 2006 and yet not started its operations, data is Sector Coverage 52
    • Indian Sector Report - April 2008 11.11 Reliance Industries LimitedKey Data Company ProfileBSE Code: 500325 Reliance Industries Limited (RIL) is a Fortune Global 500 company and is theNSE Code: RELIANCE largest private sector company in India. The Reliance group exports products in RIL@INBloomberg Code: excess of US$15 billion to more than 100 countries in the world. Some of RIL’sReuters: RELI.BO group companies include Indian Petrochemicals Corporation (IPCL), Reliance 2640.05CMP (10/4/2008) Petroleum (RPL), Reliance Retail, and Reliance Industrial Infrastructure. 3837.71Market Cap (Mn) Business Segments52 Week H/L 3298.00/ The Company is organized into five business segments; exploration and production 1452.35 of oil and gas, petroleum refining and marketing, petrochemicals, textile andPrice toBusiness Segments 31.78Equity retail. The petrochemicals segment includes production and marketing operationsPrice to Book5.39 of various polymers, polyesters, polyester intermediaries and other petrochemical Refini products. Its refining segment includes production and marketing operations of the ng 62% petroleum refinery. Its textile segment produces about 25 million meters of fabric Other s both for domestic and international markets. Its retail endeavor is aggressively Petro 2% working on introducing a pan-India network of retail outlets in multiple formats chemi like Hypermarkets, Supermarkets, Convenience Stores, Specialty stores and Rural cals Business Hubs. 36% Key Financials (INR Million) 2005 2006 2007 Sales 29304.90 34433.42 40763.22 EBITDA 1881.69 2210.17 2820.37 EBIT 1307.69 1638.47 2154.99 Net Income (Losses) 1217.49 1155.70 1738.60 Cash From Operations 1090.10 (381.49) (553.68) Total Assets 17871.29 21125.83 23958.12 Total Debt 4647.29 6737.187 6780.97 Capital Expenditures 1683.05 149.43 1128.62 Key Ratios (%) Operating Margin 4.46 4.76 5.29 ROCE 21.28 17.61 23.42 Return on Assets 7.62 5.93 7.93 Debt /Equity Ratio 74.06 98.11 80.67 Cash Flow per Share 0.93 0.00 -0.46 Diluted EPS 1.04 0.00 1.46 Dividends per Share 0.32 0.28 0.42 Source: Bloomberg Future plans With India projected to grow at 8-9 per cent, it would continue to expand its E&P business and plans to spend US$5.2 billion on the development of KG-D6. It has also announced the setting up of a global sized, integrated cracker and petrochemical complex with a capacity of 2 MMTPA in the Special Economic Zone at Jamnagar. The project is expected to go on stream by FY 2010-11.Sector Coverage 53
    • Indian Sector Report - April 2008 About Epitome Global Services Based in New York, with a strategic delivery centre in Mumbai, India, Epitome offers a wide range of services to asset managers including hedge funds. Epitome’s client offerings include bespoke research and analytics services, middle and back office support including risk management solutions, independent price verification and over the counter (OTC) derivatives valuation, fund services and advisory services. The company was founded in late 2005 by Raju Panjwani, a former managing director at Morgan Stanley. U.S.A.: Rockefeller Center, 1230 Avenue of the Americas, 7th Floor, New York, NY 10020 Tel: +1 212 618 6365 Fax: +1 212 618 6309 India: 7th Floor, "A" Wing, Prism Towers, Mindspace, Goregaon (West), Mumbai 400 062 Tel: +91 22 4001 6600 Fax: +91 22 4001 6666 Contact Details Annie George Sales annie.george@epitomeglobalservices.com +646 70603 425 Asutosh K Mishra Research asutosh.mihsra@epitomeglobalservices.com +91 22 4001 6702 Disclaimer This report is not for public distribution and has been furnished solely for information for the exclusive use of the addressee(s). If you are not the intended recipient, you are hereby notified that any dissemination, distribution or copying of this report is strictly prohibited. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security/commodities. We have reviewed the report, and believe it to be reliable though its accuracy or completeness cannot be guaranteed. Neither Epitome Global Services, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. ©Epitome Global Services Ltd. All Rights Reserved.Sector Coverage 54