Indian Oil & Gas. Epitome Global Services. Sector Coverage. April 2008

Transcription

1 Indian Oil & Gas Sector Coverage April 2008 Epitome Global Services Epitome Global Services Pvt. Ltd. India: 7th Floor, "A" Wing, Prism Towers, Mindspace, Goregaon (West), Mumbai Tel: Fax: Epitome Global Services, Inc. USA: Rockefeller Center,1230 Avenue of the Americas, 7th Floor, New York, NY Tel: , Fax:

2 Sector Coverage Indian Oil & Gas April 2008 Table of Contents 1. Executive Summary Introduction Historical Background Importance of Oil & Gas in the Economy India s Energy Position Industry Structure: Overview Regulatory / Government body structure Michel Porter Analysis Critical Success Factors Recent Trends & Budget Impact Investment opportunities and current status of the project Mergers & Acquisitions Conclusion Profile of Major Players...41 Sector Coverage 1

3 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 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 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 The growth continues in the new fiscal with export of petroleum products touching US$19.7 billion during April- December 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 per cent in FY2000 to 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 to 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 But refining margins can take a hit because of the capacity additions by the end of FY 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 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 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 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 FY According to oil marketing companies, under-recoveries are expected to be around Rs 180,000 crores in FY Government is issuing bonds to compensate downstream companies and has also asked upstream companies to share a part of underrecoveries 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 The total proven reserves of Natural Gas in India at the end of 2003 was 1055 billion cubic meters (bcm) in 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 and 100 per cent by Sector Coverage 3

5 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 (Mn Btu) Brazil China India Russia Japan United States Asia & Oceania World Total Oil, gas, hydroelectricity, nuclear power and coal are major constituents of conventionally used primary energy. Solar power and winds are two majorly used sources of non-conventional energy. The Indian oil and gas sector constitutes 46 per cent of total conventional primary energy consumption, which is lower Source: EIA than the world average of 62 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 growth for demand in India as a result of comparatively higher growth rate of consumption than the world average and continuously increasing share of oil and gas in primary energy consumption. The oil and gas sector gained importance on account of its multiple and widely used application as compared to other primary energy sources Oil accounts for approximately 31 per cent of India's total import bill and contributes over 20 per cent to the exchequer through customs and excise taxes. India's oil and gas sector has an insignificant share of less than 1 per cent in world's oil and gas production, approximately 0.5 per cent of proved reserve and round about 3 per cent in petro product consumption. Historically, the sector has 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 3. Historical Background The history of India's 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 India's 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 High's 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 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. United States Top World Oil Net Importers, 2006 (Million Barrels/ Day) Japan China Germany S. Korea France India Italy Spain Taiwan Source: EIA United States Japan China Germany S. Korea France Spain Taiwan Annualized Oil Import Growth, India Itly -1.12% -0.72% 0.27% -0.22% -1.54% 2.52% 1.71% 1.26% 4.16% 15.85% Source: EIA Sector Coverage 6

8 Strong growth in GDP resulted into rise in oil import India s crude oil import as a percentage of total import has increased from per cent in FY2000 to 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 to India's Total Import vs. Crude Import % GDP Growth & Oil Import 8% Rs. Billion % 25% % 4% India's Total Import Oil Import 20% % 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 Annualized Oil Production Growth, Brazil Russia India China USA Europe -1.39% -3.75% 1.73% 2.18% 5.81% 6.26% barrels per day in 2006 as compared to world production of million barrels per day. This demonstrates huge demand supply gap in energy strive nation. India s oil production has increased at annualized growth rate of 1.73 per cent during 2000 to 2006, which was lowest among BRIC countries but higher than USA and Europe. Japan 2.34% Source: EIA Sector Coverage 7

9 Oil consumption growing at a healthy pace Annualized oil consumption growth, Brazil 0.38% Russia India China USA Europe Japan 0.53% -1.05% 0.82% 1.75% 3.31% 7.19% India consumed about 3 per cent of total world oil and gas consumption. India consumed 2.56 million barrels of oil per day as compared to world consumption of million barrels per day in India s oil consumption has increased at annualized Source:EIA growth rate of 3.31 per cent which was higher than USA, Europe, Japan, and BRIC nations except China during 2000 to A major source of revenues to the Government Oil contributed per cent of total tax revenue to central and state exchequer through excise and custom duty in Oil contributed per cent of total excise and per cent of total custom duty in Excise and custom duty from oil has increased at a CAGR of per cent and per cent respectively during 2002 to 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 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 , the total energy consumption for India was 572 India Per Capita Electricity Consumption (KWH) 457 MTOE (Million tons oil equivalent) and the per capita consumption at 531 Kgoe (Kilograms oil equivalent) China South Korea Japan USA OECD World Avg With a target GDP growth rate of 7-8 per cent and an estimated elasticity of 0.80, energy requirement is expected to grow at per cent. This would mean a four-fold increased in India s energy requirement Source: IEA 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. India's composition of energy sources and usage World's Primary Energy Sources (%) India's Primary Energy Sources (%) Gas, 23 Hydro, 6 Oil, 36 Gas, 9 Oil, 37 Nuclear, 6 Hydro, 2 Nuclear, 2 Coal, 28 Coal, 51 Source: Planning Commission of India, 2006 Sector Coverage 9

11 Future Energy Requirements and Supply Options Estimated energy reserves Resources Unit Reserves Coal - Extractable Mtoe 13,489 Oil Mtoe 786 Gas - including coal bed methane Mtoe 1,866 Uranium - metal Tonnes 61,000 Thorium - metal Tonnes 225,000 Hydel MW 150,000 Given the present growth rate of 5 per cent in coal production, India s extractable reserves would be exhausted in 45 years, and hence there is a greater need to look at sustainable and cleaner fuels. Recent discoveries hold promise for India s gas reserves and coal bed methane. On the nuclear front, Source: Planning Commission of India, 2006 advanced technology needs to 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 requirements. Over the longer term, it is expected to gain strategic importance as a sustainable fuel that would help build self-reliance in energy sources. The table details the estimated energy reserves in the country. Different scenarios developed both on supply-side are detailed as follows: Energy efficiency in end-use: Efficient energy used in industry, lighting, home appliances etc. could possibly lower the energy needs by 142 MTOE in (7.5 per cent of total requirement) Increase of railway s share in freight: Presently, most of the freight traffic is carried by roads. If the share of railways in freight increases from the current 32 per cent to 50 per cent by , there would be an estimated energy saving of 34 MTOE in (1.8 per cent of total requirement) 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 (4.3 per cent of total requirement) Efficiencies in thermal power generation: Increase in thermal generation efficiency from present 31 per cent to per cent through use of super critical boiler technologies could lead to savings of 111 MTOE in (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 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 Water Reactor (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 with present market trend Energy Consumption Scenario Resources Utilization in Current Utilization (MTOE) (MTOE) Oil Natural Gas (including CBM) Coal Hydro Nuclear Solar 1200 <1 Wind 10 <1 Fuel wood Ethanol 10 <1 Bio diesel 20 <1 Source: Planning Commission of India, India vs. World energy consumption matrix 38 World Oil Natural Gas Coal Nuclear energy Hydro electricity India Source: India Hydrocarbon Vision 2025 India is the sixth largest energy consumer in the world and is one of the world s fastest growing energy consumers. The energy consumption matrix in India is dominated by coal, followed by oil and natural gas. While this pattern contrast with the World Energy Consumption Matrix, which is dominated by oil and gas, it is important to note Sector Coverage 11

13 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 Matrix 2005 India Energy Consumption Matrix 2025 Natural Gas, 54% Nuclear Energy, 1% Oil, 26% Natural Gas, 20% Nuclear Energy, 2% Oil, 8% Coal, 33% Hydel, 4% Coal, 51% Hydel, 1% Source: India Hydrocarbon Vision 2025 Oil Production & Demand (mn Metric Tonnes) Oil Production & Demand Production + Oil Equity Demand Source: India Hydrocarbon Vision 2025 India s demand for oil has consistently been far in excess of its domestic production. It meets 66 per cent of its demand for crude oil through imports from Middle East and the balance from other countries. The dependence on oil imports is expected to increase in the future. The Hydrocarbon Vision 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 2025 Projections. Sector Coverage 12

14 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 the refining capacity stood at 126 MMTPA, against the annual consumption of about MMTPA. In , 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 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 SKO/LDO Dealers LPG Dealers 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 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 It is expected to increase substantially to 20 per cent by 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 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 Natural Gas (MMSCMD) Supply Demand Sector Coverage 14

16 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 Sector Downstream Sector Oil & Gas Exploration Refining and Marketing Natural Gas Distribution ONGC, RIL, OIL IOC, HPCL, BPCL, ONGC, RIL, CPCL, BRPL, NRL, MRPL, Essar Oil GAIL, RIL, IGL 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 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 India's Oil Production and Consumption The Indian Oil & Gas sector is under the purview of the ('000 barrels/day) Consumption Net Imports Production Ministry of Petroleum and Natural Gas (MoPNG). The oil and gas industry has 2 subsectors: Oil and Gas Exploration and Production (E&P), Oil & Gas Refining and marketing of refined products (R&M). The annual turnover of the industry is over $65 bn. 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 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 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 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 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 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 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 Basin Category Nature No. of Basins Onland and Offshore Area (sq.km.) Basins Category I Proven production commercial Cambay, Assam Shelf, Bombay offshore, Krishna- Godavari, Cauvery, Assam-Arakan Fold Belt, Rajasthan Category II Identified prospectively Known accumulation Hydrocarbons, but no Commercial Production Kutch, Andaman-Nicobar,Mahanadi- NEC Category III Geologically prospective basin Himalayan Foreland, Ganga, Vindhyan, Saurashtra, Kerala- Konkan- Lakshadweep, Bengal Karewa, Spiti-Zansakar, Category IV Potentially prospective basins Satpura-South Rewa- Damodar, Narmada, Deccan Syneclise, Bhima- Kaladgi, Bastar, Chhatisgarh Subtotal Deep-waters Total Source: Directorate General of Hydrocarbons Petroleum Exploration & Production Activities, India India's 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 Major players Oil and gas exploration is also dominated by ONGC & Reliance Industries, which holds approximately per cent & 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, Sector Coverage 18

20 Licensed Domestic Production Area Licensed for Oil & Gas Exploration Licensee (as of March 31, 2007) (Sq. Km.) (%) ONGC Reliance Industries Ltd Oil India Ltd Cairn Energy India Ltd Hindustan Oil Exploration Company Ltd FOCUS ENI OAO GAZPROM Gujarat State Petroleum Corp. Ltd GGR Jubilant Oil & Gas Pvt. Ltd Canoro Resources Ltd TULLOW NIKO Hardy Exploration Production India Inc PONEI ESSAR GEOPETROL TOTAL Source: Directorate General of Hydrocarbons Petroleum Exploration & Production Activities, India ONGC has undertaken onshore exploratory activities in the Himalayan foothills, the North-Eastern States, Gujarat, Andhra Pradesh, Tamil Nadu and Rajasthan. Its onshore 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 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, 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, Sector Coverage 19

21 Leased Domestic Production Area Lessee Leased for Oil & Gas Exploration (as of March 31, 2007) (Sq. Km.) (%) ONGC OIL India Ltd CAIRN BG-RIL-ONGC GEOENPRO CANORO HOEC INTERLINK JTI NIKO SELAN HERAMEC HYDROCARBON RES. DEV.-PPCL OILEX Lessee Leased for Oil & Gas Exploration (as of March 31, 2007) (Sq. Km.) (%) GSPCL HARDY RIL Total Sector Coverage 20

22 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% 55% 63% 64% 65% 66% 66% 64% 67% 70% 50% 78% 74% 72% 72% 71% 70% 71% 35% 15% 37% 36% 35% 34% 34% 36% 33% % 10% 22% 26% 28% 28% 29% 30% 29% Onshore Gas Offshore Gas Onshore Oil Offshore Oil Natural Gas The natural gas in India is primarily produced by ONGC & OIL, with a market share of 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 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 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. Million Tonnes Oil & Gas Production Trends Billion Cubic Metres C rude Oil Natural Gas Source: MoP&NG Million Tonnes 800 Oil & Gas Reserves C rude Oil Natural Gas Source: MoP&NG Billion Cubic Metres Stagnating Production Oil & Gas production, in recent years, has been much higher than that in the early 1980s. In , 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 level, in 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 , 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 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 inplace 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 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 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 bcm (billion cubic metres) in At this production level, India's reserves are likely to last for around 33 years, that is, nearly double than the 17.5 years estimated for oil reserves 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 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 (%) Crude Oil Production (MMT) Natural Gas Production (BCM) % of Oil Produced by Private Players % of Gas Produced by Private Players Source: MoP&NG 25% 20% 15% 10% 5% 0% Since early 1990s, government turned its attention towards small and mediumsized 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

25 To continue with the privatization process, in Dec'98, 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 highrisk nature of deep-water blocks. Since then, there have been five more rounds of NELP till 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 Dec'07, 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 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

26 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 India s Installed Refining Capacity, Throughput and Capacity utilization (FY ) Parent Company IOC BPCL HPCL ONGC Company Refinery Location Year of Commission Capacity ('000 tonnes) Throughput ('000 tonnes) IOC Guwahati IOC Barauni IOC Koyali IOC Haldia IOC Mathura IOC Digboi IOC Panipat Capacity Utilization (%) CPCL Chennai CPCL Narimanam BRPL Bongaigaon IOC Total BPCL Mumbai KRL Kochi NRL Numaligarh BPCL Total HPCL Mumbai Visakh HPCL Total ONGC Tatipaka MRPL Mangalore ONGC Total Reliance RIL Jamnagar Reliance Total Essar EOL Vadinar Essar Total INDIA Total Sector Coverage 25

27 Oil Refining capacity Marketshare, 2007 Overall Capacity Utilization, 2007 ESSAR 16.8% BPCL 15% RELIANCE 111.0% IOC 40% HPCL 9% ONGC 129.3% ONGC 7% HPCL 129.2% Essar 7% RIL 22% BPCL IOC 99.0% 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 India's total refining capacity increased up to 40 per cent and 15 per Marketing Market share FY IOC, 40.6 Consumption of Petro Products, April-Feb,'08 FO/LSHS Naphtha 10% 10% Diesel 38% BPCL, 18.8 HPCL, 16.5 Private Parties, 18.4 LPG 9% Petrol 8% Others 14% Kerosene 7% Others (PSUs), 5.7 ATF 4% cent, respectively. ONGC and HPCL had highest capacity utilization over 129 per cent whereas IOC had lowest 93.8 per cent among PSUs during Among private players RIL had highest capacity utilization over 111 per cent and EOL had lowest 16.8 per cent during Marketing of refined products in India is done mainly by 3 PSUs IOC (combined with IBP - taken over by IOC in Feb'02), HPCL, BPCL and 2 private sector companies RIL and EOL. The government has also decontrolled the marketing sector from April 1, 2002, with pricing of products linked to import parity prices. While the APM for Liquefied Petroleum Gas (LPG), Kerosene (SKO), Motor Spirit (MS) and Diesel (HSD) have been dismantled, prices of LPG (domestic) and Kerosene (Public Distribution System) are partially subsidized. While the three PSUs Sector Coverage 26

28 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, The three major government-owned downstream oil companies have historically dominated domestic sales of automotive fuels. All Petro Products FO / LSHS Diesel (HSD) Net Export Growth of Petro Products, % 60.5% 78.0% 98.0% 209.6% Petroleum products have contributed to foreign exchange reserve through export. India has exported petroleum products worth Rs billion in 20.8% FY Net ATF export of petroleum 74.3% 30.2% products has grown Petrol (MS) 31.8% 3.2% CAGR (Qty) CAGR (Rs.) by 78.0 per cent and 32.6 per cent in terms of quantity and Indian rupees respectively during The highest and the lowest net export growth in terms of quantity and Indian rupees has been recorded by FO/LSHS (Furnace Oil / Low sulfur heavy stock) and Petrol (MS or Motor Spirit) respectively during FY The three PSUs control an extensive distribution network consisting of retail outlets, SKO and LPG dealerships and product pipelines. Earlier, the oil companies used to set up the crude oil/product pipeline network in India. However, to facilitate development of major product pipelines in future, the government created a new company, Petronet India Ltd (PIL). The refineries are expected to construct pipelines on their own. In recent past, oil companies have undertaken several measures to combat air pollution. Auto fuel quality has been improved to enable the automobile industry to comply with the prescribed emission norms. Sector Coverage 27