Oil and Gas Sector

Topics Covered: 1. Profile of India’s Oil and Gas Sector 2. Upstream Sector 3. Midstream Sector 4. Downstream Sector

Overview of Indian Economy An emerging economy with cr. Rs. GDP and a growth rate of 7.4 per cent ( ) A rising economy led by industrial and service growth Overall growth in industrial output per cent Growth in the industrial sector in is 9.2 per cent. Expected increase in per cent The net foreign fund investment crossed the US$ 100 billion mark on November , since the liberalization policy was implemented in 1992

Rising Economy’s Energy Needs Oil accounts for 36 percent of the Primary Energy Mix in India Along with natural gas, accounts for 45 % of energy mix Consumption of gas grew by 6.8 percent in 2007

Profile of Oil and Gas Sector

Oil & Gas sector has a long history in India- Oil struck at Makum near Margherita in Assam in 1867 First commercial oil discovery in Digboi in 1889 Systematic E&P in 1899 after Assam Oil Company formed 1947 India’s domestic oil production just 250,000 tonnes per annum 1954 IPR - petroleum to be core sector 1955 – ONGC set up First Gas & Oil pool discovered in Jwalamukhi (Punjab) and Cambay. Oil India Limited (OIL) was set up

Discovery of giant Bombay High field in 1974 – Western offshore highest producer 1991 – Liberalized petroleum exploitation and exploration policy – 4th, 5th, 6th, 7th and 8th Rounds of exploration bidding 1999 New Exploration Licensing Policy (NELP) 2000 – NELP II 2002 – NELP III 2003 – NELP IV 2004 – NELP V 2006 – NELP VI 2007 – NELP VII

1)Fiscal stability provision in the PSC (Production Sharing Contract ). 2)No signature, discovery or production bonus. 3)No customs duty on imports. 4)No mandatory state participation. 5)No carried interest by National Oil Companies (NOC). 6)Freedom to the contractor for marketing of oil & gas in the domestic market. MAIN FEATURES OF NELP

Oil and Gas Companies in India Public Sector Undertakings (PSU's): 1)ONGC - Oil & Natural Gas Corp (exploration and production) 2)OIL - Oil India Limited (exploration & production) 3)IOC - Indian Oil Corporation (refining & marketing) 4)BPCL - Bharat Petroleum Corporation Ltd (refining and marketing) 5)HPCL - Hindustan Petroleum (refining & marketing) 6)GSPC - Gujarat State Petroleum Corp

Private Oil & Gas companies in India: 1)RIL - Reliance Industries Limited (Indian Oil & gas company) 2)ESSAR (Indian Oil & Gas company) 3)Cairns Energy India 4)BG energy 5)Niko (upstream exploration & production) 6)Chevron Oil Limited 7)Shell Oil 8)BP 9)Total (downstream exploration & production, chemicals)  An achievement that deserves mention here is that five of the Indian oil & gas companies are listed in Global Fortune 500.

Industry Bodies/Others: Downstream: Refining and Marketing Ministry of Petroleum and Natural Gas Upstream: Exploration and production Institutional Arrangement

ONGC Videsh Limited (Overseas E & P) Manglore Refineries and Petrochemicals (Refining) Oil India Limited Private E & P players: Cairn, RIL, Niko etc. ONGC Upstream: Exploration and production

Hindustan Petroleum (Refining and Marketing) Indian Oil (Refining and Marketing) Bharat Petroleum (Refining and Marketing) Gail gas Transport and Petrochemicals Reliance India Limited (Refining and Marketing) GGSR (Refining) Chennai Petro (Refining) IBP (Marketing) Downstream: Refining and Marketing Kochi Refinery (Refining) Bongaigaon Refineries (Refining) Numaligarh Refineries (Refining)

Oil Industry Safety Directorate Petro Fed Petroleum Conservation Research Association Center for high technology Petroleum Planning and Analysis cell Petroleum India International Engineers India Limited Industry Bodies/Others:

India – oil and Gas Reserves India has significant Oil and Gas Reserves:

Just over 60% of potential in oil sector has been explored so far

Annual crude oil production (Million Metric Tonnes) Total production of oil and oil equivalent gas (O+OEG) during the year is MMT Contribution from Pvt./JV small, medium and discovered fields during the year is 4.552MMT of oil which accounts for about 14% of the national oil production. Annual gas production (Billion Cubic Meters) Total production of oil and oil equivalent gas (O+OEG) during the year is MMT Contribution from Pvt./JV small, medium and discovered fields during the year is BCM of gas, which accounts for about 23% of the national gas production

Alternative fuels scenario Coal Bed Methane (CBM)  Methane trapped in coal seams. 26 blocks awarded in three rounds of bidding. Production potential of over 25 MMSCMD Underground Coal Gasification (UCG)  Huge potential in India to get natural gas through UCG. ONGC has signed agreement with Sckochinsky Institute of Mining, Russia to harness world class technology to tap this energy source

Gas Hydrates  National Gas Hydrate Program and Steering Committee in place  Agreement on Collaborative Research on drilling of experimental wells with USA, Canada and Japan  Road map for gas hydrates is in place Ethanol Blended Petrol  Marketing of petrol with up to 5% ethanol blending being undertaken. Percentage of ethanol in petrol is proposed to be increased to 10% in future Bio-Diesel  Government has already decided to introduce 5% blended bio-diesel

Key issues confronting the Oil and Gas sector  Absence of statutory framework in the upstream industry  Incidence of cross subsidy due to social obligations  Domestic reserves/production will not be sufficient  Cross-border gas pipelines facing uncertainty, but attracting interest  Inability to take international prices

Upstream Sector

The Indian oil & gas industry pegged at US 110 bn - which is about 15% of India’s gross domestic product Upstream – exploration and production activities-1.On land, Offshore & Deepwater E&P;2. Coal Bed Methane(CBM) and 3.a National Gas Hydrate(NGHP) During April-October 2010, crude oil production reached MMT, as compared to MMT in the corresponding period in 2009 During April-October 2010, the actual natural gas product PPAC ion was 31.0 BCM, as compared to 25.4 BCM in the corresponding period in 2009

Upstream companies: 1)Indian Oil Corporation 2)ONGC 3)Bharat Petroleum 4)Reliance Petroleum 5)Hindustan Petroleum 6)Essar Oil 7)Gas Authority of India  ONGC and Oil India dominate the upstream segment contributing 85% to India's total oil production. More than 60% gas production by ONGC

India’s Oil and Natural Gas Reserves Total Hydrocarbon Resource base – 32 billion tons Established Oil in place : 6,1 billion tons Established gas in place: 3,4 billion tons YET A SIGNIFICANT DEMAND SUPPLY GAP EXISITS India imports over 70 percent ( MMT) of its crude oil. Its oil import bill close to USD 90 billion in Foreign exchange of about $ 39 billion spent in towards the import of crude oil Oil price vulnerability may affect GDP growth

Energy reports project incremental demand of oil at about 38 million barrels per day (mbpd) in 2030 in world demand

Key efforts to meet demand-supply gap High crude prices-efforts focused on increasing domestic production through new E&P activities New Exploration Licensing Policy (NELP)- → Exploration activity, prior to NELP, dominated by public sector firms such as Oil and Natural Gas Corporation Ltd. (ONGC) and Oil India Ltd. (OIL) → NELP launched to encourage private companies to take up Oil and Gas exploration → New technologies such as Underground Coal Gasification (UCG), harnessing Coal Bed Methane and the exploration of Gas Hydrates taken up to enhance domestic production. → ONGC using Improved oil recovery to revive existing fields

In the eighth round of the New Exploration Licensing Policy (NELP-VIII), 1.62 sq km area will be covered comprising 70 blocks. Out of 70 blocks, 36 have been awarded under NELP- VIII, according to the Economic Survey NELP-IX) in New Delhi on October 15, NELP-IX round offers 34 exploration blocks comprising of 8 deepwater blocks, 7 shallow water blocks and 19 on land blocks

Pricing Mechanism in Indian Oil Industry Pricing of crude oil determined by averaging the respective prices of constituents India’s (special) mix oil basket Pricing of gas- Administered price mechanism

In Xth plan, under APM-gas from nominated ONGC & OIL fields priced uniformly at Rs.2,850/(SCM). uniformly for all customers except in North East, wherein the customers were charged a price of Rs.1700 per 1000 SCM With effect from , the gas pricing for APM gas was changed. all available APM gas would be supplied only to the power and fertilizer sector consumers All other consumers would be supplied natural gas at market related price subject to a ceiling of ex-Dahej RLN. Free market gas -JV/Private sector, re-gasified LNG etc.

Transition from APM to Market Determined Pricing Mechanism A Paradigm Shift

Administered Pricing Mechanism: Characteristics Fixed parameters Rare revisionsCost Plus Administered Pricing Mechanism Assured returns Supplier- Averaging effect Customer Linkages Averaging effect

The Fundamentals of Import Parity Pricing Import Parity Pricing for MS & HSD: Constituents Landed Cost Ocean LossWharfage

Foreign Direct Investment FDI up to 100 per cent under the automatic route is permitted in exploration activities of oil and natural gas fields, along with marketing, infrastructure investment The Vedanta-Cairn Deal Government is encouraging oil PSUs to aggressively pursue equity oil and gas opportunities overseas OVL has made an investment commitment of over US$ 5 Billion and has an oil and gas production of 6.6 MMTOE in the year OIL–IO Ccombine has an exploration block in Libya apart from being OVL partners. GAIL has interest in one Myanmar offshore block.

Regulation of Upstream - DGH Directorate General of Hydrocarbons-Holds delegated powers under under Oilfields(Regulation and Development) Act, 1948 and Petroleum and Natural Gas Rules, 1959 The delegation of statutory powers is to empower DGH so that it can effectively oversee the ever increasing E&P activities in India These include monitoring exploration and developmental activities, optimizing hydrocarbon recoveries, monitor Government revenue such as royalty and profit petroleum etc. Government has also amended Rule 19 of the P&NG Rules to enable the Government/DGH to get all data from licensees/lessees, free of cost S.K.Srivastava-current DGH

Major Thrust Areas for oil and gas in XI Plan Period → Increasing Domestic Oil and Gas Production → Increasing Production in ONGC’s Assets → Natural Gas Allocation and Pricing Other Important Activities → Asset/Activity based E&P management through multi- disciplinary teams → Boosting Energy Related R&D → A proposed National Energy Fund (NEF) for funding research and development activities

Midstream Sector

The midstream sector is primarily concerned with the transportation of oil and natural gas from the extraction site to the refineries. This sector is often included as an extension of either the upstream or downstream sector, depending on the source. The midstream sector is also responsible for treating raw materials in order to remove impurities such as water vapor or hydrogen sulfide. Removing impurities and compressing the fluids helps maximize the amount of oil and natural gas that can be transported, thus maximizing efficiency and profits for companies are an important aspect in this sector of the industry

Jobs involved in the midstream sector include chemical engineers, petroleum pump systems operators, business advisors, energy and gas managers and midstream consultants, who typically work with engineers to provide consulting to clients. Because the midstream sector is involved with transporting large quantities of oil and natural gas, it is imperative for companies to have a lot of awareness to help minimize pollutants that may result from miles and miles of pipeline Once the petroleum has been through the midstream sector and transported to the refineries, it must undergo one last transformation before it is ready to be sold on the market.

Growth rate in the Financial Year India's oil reserves meet 25% of the country's domestic oil demand. As of 2009, India's total proven oil reserves stood at 775 million metric tonnes while gas reserves stood at 1074 billion cubic metres.Oil and natural gas fields are located offshore at Mumbai High, Krishna Godavari Basin and the Cauvery Delta, and onshore mainly in the states of Assam, Gujarat and Rajasthan. India is the fourth largest consumer of oil in the world and imported $82.1 billion worth of oil in the first three quarters of 2010, which had an adverse effect on its current account deficit.

The petroleum industry in India mostly consists of public sector companies such as Oil and Natural Gas Corporation(ONGC), Hindustan Petroleum Corporation Limited(HPCL) and Indian Oil Corporation Limited (IOCL). There are some major private Indian companies in the oil sector such as Reliance Industries Limited(RIL) which operates the world's largest oil refining complex. The government is planning its first ever offer of shale gas exploration in According to Mr Murli Deora, Union Minister of Petroleum & Natural Gas "Shale gas (gas locked in sedimentary rocks) is an emerging area. It has become an important source of energy in a few countries who have been able to commercially exploit this resource."

Downstream Sector

The downstream sector of the oil and gas industry is responsible for logistics and distribution of finished products to the market. It involves overall management of the way the resources (extracted in the midstream activities) are moved to the areas where they are required The process completely depends upon the proper management and coordination of supply chain for increasing efficiency and profitability. The logistical support forms the backbone of the distribution and marketing process. It involves the integration of information, transportation, inventory, warehousing, material handling and packaging By efficiently management of the complete supply chain, companies are able to significantly reduce the time, delivering products faster. This down stream sector of the industry is responsible for a considerable portion of the oil industry's' profits every year

Other integral parts of downstream sector: Production By the end of the Eleventh Plan, the refinery capacity is expected to reach million metric tonnes per annum (MMTPA). As per Mr Jitin Prasada, Minister of State for Petroleum & Natural Gas, the refining capacity of the oil refineries in the country has undergone nearly a three-fold increase from 62 MMTPA in April, 1998 to 184 MMTPA in April, 2010.

According to the provisional data released by the Ministry of Petroleum & Natural Gas, dated November 26, 2010: During April-October 2010, crude oil production reached MMT, as compared to MMT in the corresponding period in 2009 During April-October 2010, MMT of crude oil was refined, as compared to MMT in April-October 2009 During April-October 2010, the actual natural gas production was 31.0 BCM, as compared to 25.4 BCM in the corresponding period in 2009

Consumption The consumption of petroleum products during were MMT (including sales through private imports) an increase of 3.60 per cent over sales of MMT during , according to the Ministry of Petroleum. According to estimates of the Petroleum Planning and Analysis Cell (PPAC), the consumption of fuels in the current financial year ( ) will be at million tonne (MT) up from MT in the last fiscal. The estimates show that diesel consumption in the current fiscal may see an increase of 8.8 per cent at MT compared with 56.3 MT in the last fiscal, while petrol sales were expected to go up by 12.8 per cent to MT from 12.8 MT.

India maintains price controls on four “sensitive” petroleum products – petrol, diesel, liquefied petroleum gas (LPG), and kerosene. As international crude prices began structural appreciation from 2004, OMCs began recording significant “under-recoveries” on the sale of sensitive petroleum products. Under-recoveries are a notional measure representing the difference between the trade- parity refinery-gate cost of refined product paid by OMCs and their managed sale price. In FY , OMCs under-recoveries amounted to over USD 25 billion.

The GoI has been forced to issue hundreds of billions of Indian rupees to OMCs to counteract mass under-recoveries since 2005 in order to maintain the solvency of these key companies. The fiscal impact of under-recoveries Two key objectives motivate the GoI’s policy in India’s downstream petroleum sector: a) ensuring India’s growing refined product demand is met at affordable prices over time b) establishing India as a major global refined product exporter.

Why examine pricing and refining investment in India’s downstream petroleum sector? 1.India as a globally significant oil consumer o In 2009, India was the world’s fourth largest consumer of crude oil and petroleum products o India is forecast to become the world’s third largest oil consumer by 2014 o growing significance of India as a crude consumer

2.The impact of oil-sector expenditures on budgetary stability o “under-recoveries” o In March 2009, ratings agency Standard & Poor’s threatened to downgrade India’s sovereign credit rating to “junk” status due to the ballooning of the Central Budget deficit o Petroleum product pricing 3.Investment in India’s downstream sector o Investment in India’s downstream sector will determine the ability of the domestic downstream industry o The nature of downstream investment in India over time will determine the success of the GoI’s ambitious policy to establish a world-competitive refined product export industry in India

Oil bonds Oil bond issuance has become the key fiscal tool for “solving” the petroleum pricing issue. The oil bonds issued by the GoI typically have maturities of ranging between 5-7 years The first oil bonds issued by the government will begin to reach maturity from 2010 Tradable bonds Non-tradable bonds Indian oil bonds have not been given Statutory Liquidity Ratio (SLR) status by the Reserve Bank of India (RBI).

Policy goals and regulatory environment of the downstream sector The government of India’s 11th Five-Year Plan (covering the years ) builds on the IEP of 2006 to outline the key policy goals for India’s refining and retail sector. These policy goals are fourfold: 1.Market-based pricing throughout the downstream value-chain. 2.Significantly enhanced refining capacity to: a)meet growing Indian demand, in order to allow economic growth and standard of living appreciation; b)establish India as a competitive liquid fuels exporter to take advantage of expanding fuels demand in East- and South-East Asia.

3.Ensuring Indian refineries are equipped to process cheap, sour and heavy crudes while still producing internationally- recognised clean-product grades. 4. Maintaining a streamlined, enabling sectoral regulatory framework that stimulates private-sector and joint-venture investment in order to meet goal (2) above

The Petroleum and Natural Gas Regulatory Board (PNGRB) was established in 2007 as the downstream sector regulator, tasked with regulating, refining, processing, storage, transportation, distribution, marketing and sales of petroleum products and natural gas. It does not, however, authorize refinery infrastructure construction, which is controlled by MPNG, and has no role in market pricing, or pricing policy. The key practical function of the Board relates to: a)its role as court of arbitration in disputes within the downstream sector b)its powers to release tenders for, and grant of authorisation to lay, build, operate and expand cities natural gas distribution networks.

PNGRB has powers to investigate and litigate against downstream operators PNGRB also monitors prices through the downstream value-chain The establishment of PNGRB is clearly a necessary step in the evolution and maturation of India’s downstream sector

Downstream business environment The key aspects of India’s business environment are examined below: (a)Foreign investment policy: o All private-sector refining projects have automatic foreign investment approval and may be 100% foreign-owned. o In the case of Public-Sector Undertakings, however, foreign equity has to be approved by India’s Foreign Investment Promotion Board (FIPB), and cannot exceed 49% of total ownership. o While India has considerably increased the access of foreign investors to India’s downstream sector through liberalization of foreign investments approval process, there remain significant “behind-the-border” barriers to investment.

(b)Tax policy: o India maintains a relatively cumbersome tax regime compared to similar economies o The standard corporate tax rate is high, at 42%, and the maximum personal tax rate is also high, at over 33%. o Capital gains on assets held for less than three years are taxed as income. Long-term gains are taxed at 20% (c) Legal environment: o India’s downstream legal framework is extremely complex, with a variety of often conflicting regulations still in place. o India’s court system in general is prone to lengthy delays, with most courts lumbered with numerous unsettled dispute cases. In ordinary cases, foreign downstream investors have to manoeuvre through a myriad of rules and certifications to obtain the estimated seventy separate approvals needed for setting up business in India o The establishment of the PNGRB, in particular, has added a degree of certainty and oversight to downstream business practice.

Case Study – Indian Oil

Indian state owned oil and gas company. India’s largest commercial enterprise, ranking 125th on the Fortune Global 500 list in The Indian Oil Group of Companies owns and operates 10 of India's 19 refineries with a combined refining capacity of 65.7 million metric tons per year. Indian Oil began operation in 1964 as Indian Oil Company Ltd. 18th largest petroleum company in the world and the number one petroleum trading company among the National Oil Companies in the Asia-Pacific region.

Out of all the commodities, petrol and oil products have a very drastic impact on the common man. If the price of these products goes up by even one rupee, the entire balance sheet of a household undergoes a change. The financial year was significant in more ways than one. During the year, the company celebrated its golden jubilee after completing 50 years of glorious service to the nation. Sharing this joy with our shareowners, the company had issued bonus shares in the ratio of 1:1 exuding optimism about the future potential. The year ended with the highest ever profit crossing the Rs. 10,000 crore barriers, recording a net profit of Rs. 10,221 crore. Company recorded the highest ever capital expenditure of Rs. 14,260 crore during the year.

GDP was million metric tones The major project at Panipat, the Naphtha Cracker, was commissioned as also the Hydrocracker at Haldia Refinery Sales turnover of Rs. 271,074 crore Gross turnover for (1 st Quarter-unaudited) was Rs.82, Gross Profit was Rs

 India has begun the development of a strategic crude oil reserve sized at 37.4 million barrels, enough for two weeks of consumption. Petroleum stocks have been transferred from the Indian Oil Corporation (Indian Oil) to the Oil Industry Development Board (OIDB).The OIDB then created the Indian Strategic Petroleum Reserves Ltd (ISPRL) to serve as the controlling government agency for the strategic reserve.

Sources 7dafeec a96/$FILE/Indian%20Oil%20and%20Gas%20Scenario.pdf 7dafeec a96/$FILE/Indian%20Oil%20and%20Gas%20Scenario.pdf Oil and gas_16May_09.pdf

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