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  1. 1. 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
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. 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
  23. 23. 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
  24. 24. 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

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