Industry Institute Partnership Cell NMIMS, Mumbai

Oil and Gas

Sector study of Oil and Gas

Submitted by:
Mona Arora A005
Tarun Gahlot B018
Neha Nagpal
F037
Ramita Bindra HR011

Table of Contents

Table of Contents.......................................................................................................................2
1. Introduction....................................................................................................................3
2. Value Chain Oil and Gas Sector..................................................................................4
3. Petroleum Supply Chain in India...................................................................................5
4. Oil Pricing in India.........................................................................................................6
5. Competitive landscape...................................................................................................8
6. SWOT Analysis of Oil and Gas Sector........................................................................11
7. Investment in the sector................................................................................................11
8. Future Outlook.............................................................................................................12
9. Appendix A..................................................................................................................14

Introduction
The oil and gas sector is one of the six core industries in India. It is of strategic importance
and plays a pivotal role in influencing decisions across other important spheres of the
economy. In 199798, the New Exploration Licensing Policy (NELP) was envisioned to deal
with the ever-growing gap between demand and supply of gas in India. As per a recent report,
the oil and gas industry in India is anticipated to be worth US$ 139,814.7 million by 2015.
With Indias economic growth closely linked to energy demand, the need for oil and gas is
projected to grow further, rendering the sector a fertile ground for investment1.
The oil and gas sector in India is a critical component of the countrys economy, accounting
for 15 per cent of the countrys gross domestic product (GDP). Economic growth is directly
linked with energy demand, and a conservative estimate of 7 per cent growth is expected to
double Indias per capita energy consumption from 560 kilograms of oil equivalent in FY10
to 1,124 kilograms of oil equivalent by FY 2015-16. As oil and gas is one of the main sources
to meet the required demand for energy in India, its demand is forecast to rise further. Backed
by new oil fields, domestic oil output is anticipated to grow to 1 MBPD by FY16. With India
developing gas-fired power stations, consumption is up more than 160 per cent since 1995.
Gas consumption is likely to expand at a CAGR of 21 per cent during FY0817. Domestic
production accounts for more than three-quarters of the countrys total gas consumption.
India increasingly relies on imported LNG; the country was the fifth-largest LNG importer in
2013, accounting for 5.5 per cent of global imports. Indias LNG imports are forecasted to
increase at a CAGR of 33 per cent during 201217. State-owned ONGC dominates the
upstream segment (exploration and production), accounting for approximately 60 per cent of
the countrys total oil output (FY13). IOCL operates 11,214 km network of crude, gas and
product pipelines, with a capacity of 1.6 MBPD of oil and 10 million metric standard cubic
metres per day (MMSCMD) of gas.

Value Chain Oil and Gas Sector

The value chain analysis investigates the sequence of consecutive activities which are
required to bring a product or service from conception and procurement, through the different
phases of production and distribution, to the final customer. In line with our focus on social
value creation, we will consider the industry value chain for the petroleum sector. Its
principal stages are the development, production, processing, transportation and marketing of
hydrocarbon.

The value chain starts with the identification of suitable areas to conduct exploration for oil
and/or gas. After initial exploration, petroleum fields are appraised, developed and produced.
These activities are generally called Exploration and Production (E&P), or referred to as
upstream oil and gas.
Infrastructure such as transport (pipelines, access to roads, rail and ports etc.) and storage are
critical at various stages in the value chain, including the links between production and
processing facilities, and between processing and final customer. These parts of the value
chain are usually referred to as midstream. Oil refining and gas processing are required to
turn the extracted hydrocarbons into usable products. The processed products are then
distributed onwards to wholesale, retail or direct industrial clients. Refining and Marketing
(R&M) is also referred to as downstream oil.
Individual companies can cover one or more activities along the value chain, implying a
degree of vertical integration or can seek to expand within a given activity, implying
horizontal consolidation. On the country level, horizontal scale in the upstream is limited by
natural resource endowments, and further downstream by the size of the domestic market
and/or the ability to export goods and services. Vertical portfolio choices at the country level
can be made using regulatory and licensing tools, e.g. approval (or not) to build certain
processing facilities or infrastructure such as pipelines.
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Petroleum Supply Chain in India

Ministry of Petroleum & Natural Gas

Oil Pricing in India

In India, refinery sells its products to marketing company on the basis of Import Parity
Price/Trade Parity Price of the Products. In case of Motor Spirit (MS) & Hi-Speed Diesel
(HSD) it is the trade parity price where as for Supreme Kerosene Oil (SKO) & Liquefied
Petroleum Gas (LPG) it is import parity price. Import Parity Price means the price that the
actual importer would pay for the imported cost and Export Parity Price means price realised
by Exporter due to supply of the product to outside country. Trade parity price currently
means 80% of Import Parity Price and 20% of Export Parity Price.
Computation of Retail Selling Prices

Ex-storage point
price

NRF + S/S
Refinery to
depot

RPO Charges

State Specific
Cost

Excise Duties
and Specific
Duty

Retail Selling
Price

Dealer
Commission

Sales Tax / VAT

Delivery
Charges

Prior to 2002, pricing of transport and domestic fuels were administered under the
Administered Pricing Mechanism (APM). As a step towards free market pricing, the APM
was dismantled on April 1, 2002. Further, increasing oil deficit and the need for attracting
fresh investments necessitated the process of price deregulation. The key objectives of oil
sector deregulation are 1) increasing competition in the industry by allowing entry of more
players; 2) attracting private capital; and 3) removing constraints on economic pricing of
products and services to enable the industry to earn a reasonable return on investment.
Currently, industrial fuels such as Aviation Turbine Fuel (ATF), kerosene (SKO), Motor
Spirit (MS) and Diesel (HSD) remain un-administered; while prices of domestic LPG,
Kerosene (Public Distribution System) are administered.
Price Build-up of Petrol at Delhi2

Price Build-up of Diesel at Delhi3

Under-recovery
Under-recovery is the difference between the retail selling price and the import price. It refers
to the difference between the selling price of a petroleum product and the cost of the same
had it been imported and processed from the international market. Although it does not
indicate loss incurred in selling fuel, under-recovery indicates the perceived loss in revenue.
Due to the de-regulation of prices, there should ideally be no condition where there is under
recovery, as the price of fuel would increase if the international prices were to rise.

Price Risk Management

The importance of price risk management of crude oil cannot be overstated. The government
too has set up high-level committees to suggest steps for fulfilling the objectives of price
discovery and price risk management on commodity derivative exchanges. The role of
commodity futures in risk management consists of anticipating price movement and shaping
resource allocations, and these ends can be achieved through hedging.
Fuel Hedging is a contractual tool some large fuel consuming companies, such as airlines, use
to reduce their exposure to volatile and potentially rising fuel costs. A fuel hedge contract
allows a fuel-consuming company to establish a fixed or capped cost, via a commodity swap
or option. The companies enter into hedging contracts to mitigate their exposure to future fuel
prices that may be higher than current prices and/or to establish a known fuel cost for
budgeting purposes. If such a company buys a fuel swap and the price of fuel declines, the
company will effectively be forced to pay an above-market rate for fuel. If the company buys
a fuel call option and the price of fuel increases, the company will receive a return on the
option that offsets their actual cost of fuel. If the company buys a fuel call option, which
requires an upfront premium cost, much like insurance, and the price of fuel decreases, the
company will not receive a return on the option but they will benefit from buying fuel at the
then-lower cost.

Competitive Landscape
Upstream:
India has a largely state-controlled Oil and Gas sector. The main government upstream
vehicle is ONGC, which accounts for two-thirds of Indias crude oil and natural gas
production. It is diversifying into refining and oil distribution. Privately owned domestic
conglomerate Reliance Industries also participates in the Indian exploration and refining
segments, with BP set to be a key partner in domestic upstream activities.
Downstream:
The refining industry has come a long way since the Mumbai refinery of HPCL was set up
post independence. Over the years, the PSU refineries have gradually increased their
capacities at existing locations or constructed Greenfield refineries at new locations. Today
there are around 20 refineries in the country with an existing refining capacity of about 178
mn tonnes per annum (mtpa). Moreover, even large expansions are being planned by Essar
and PSUs like IOL, BPCL and HPCL. The major expansion plans include the Vadinar
refinery of Essar, the IOC refinery at Paradeep and the planned refineries at Bina in Madhya
Pradesh by BPCL and Bhatinda in Punjab by HPCL-Mittal Energy. PSUs such as IOC,
BPCL and HPCL are involved in marketing of refined oil. Decontrolling of the marketing
sector from April 1, 2002 facilitated the entry of new private sector players such as Essar Oil,
RIL and Royal Dutch Shell Plc. Public Sector Oil Marketing Companies like IOC, BPCL,
and HPCL are also engaged in marketing of subsidized LPG in the country under the Public
Distribution System (PDS).
Key private players in the Indian Oil and Gas Industry 4

Key public players in the Indian Oil and Gas Industry5

India - Domestic
Retail Outlets
Share6

India - Domestic
Retail Sales Volume5

1.90%
8.70%

3.50%

8.40%

IOCL
IOCL

BPCL
45.60%
17.60%

23.70%

HPCL
Reliance

BPCL
48.40%

HPCL
Essar

Others

Reliance
19.70%

22.50%

ONGC

Reliance Industries

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SWOT Analysis of Oil and Gas Sector

Strengths
Weakness
India is the worlds fifth biggest
The oil and gas sector is dominated
energy consumer and continues to
by
state-controlled
enterprises,
grow rapidly
although the government has taken
steps to deregulate the industry and
Major natural gas discoveries by a
encourage foreign participation
number of domestic companies hold
significant medium to long-term
Increase in crude oil prices
potential.
Inadequate and slowly developing
Demand for petroleum products
infrastructure
High exploration portfolio
Environmental issues
Opportunities
Threats
LNG imports are still set to grow
Increased
competition
within
rapidly over the long term as
government and private players
domestic consumption expands
Continuing government interference
India has freed gasoline and diesel
Changes in national energy policies
retail price controls
High recovery rates from existing
projects

Investment in the sector

To cater to the increasing demand, the Government of India has adopted several policies;
including allowing 100 per cent foreign direct investment (FDI) in many segments of the
sector, such as natural gas, petroleum products, and refineries, among others. The
governments participation has made the oil and gas sector in the country a better target of
investment. Today, it attracts both domestic and foreign investment, as attested by the
presence of Reliance Industries Ltd (RIL) and Cairn India. According to data released by the
Department of Industrial Policy and Promotion (DIPP), the petroleum and natural gas sector
attracted foreign direct investment (FDI) worth US$ 6,519.53 million between April 2000
and January 20156.

FDI upto 100% is permitted under automatic route in exploration activities of oil and
natural gas fields, infrastructure related to the marketing of petroleum products and
natural gas, marketing of natural gas and petroleum products, petroleum product
pipelines, natural gas/pipelines, LNG re-gasification, market study and formulation and
petroleum refining in the private sector.
FDI in the above activity is subject to the existing policy and regulatory framework in the
oil marketing sector and the policy of the government on private participation in
exploration of oil and the discovered fields of national oil companies.
FDI upto 49% is permitted under automatic route in petroleum refining by Public Sector
Undertakings (PSUs), without any disinvestment or dilution of domestic equity in the
existing PSUs.

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Future Outlook

Despite surging global oil prices, the global demand for liquid fuels & other petroleum is
expected to increase from 85.0 mn barrels per day in 2006 to 106.6 mn barrels per day in
2030. Non-OECD Asian countries, mainly China & India, are expected to witness
significant increase in the demand for oil & gas. The demand for petroleum products in India
is estimated to grow at an annual rate of around 6% to reach the level of 370 Mtoe per
annum in 2025 owing to high GDP growth rate, rapidly growing vehicle population and
better road infrastructure7.
On exploration & development front, given the recent exploration & development efforts
under way in India like the commencement of production from RILs KG Basin fields, the
scheduled commencement of Cairn Indias production and the potential development of the
discoveries announced by GSPC & ONGC, crude oil production is likely to increase by over
30% in the next five years. On the other hand, natural gas production is expected to more
than double from the current level of about 90 MSCMPD by 2012. Moreover, the
considerable activity in the exploration & production sector is expected to attract more
foreign players. Nonetheless, the global economic slowdown and the consequent cut-back in
capital expenditures by some oil exploration companies might have some dampening impact
on the exploration & production activities.
Given that tremendous opportunity for investment exists in refining & marketing segments
in the coming years, private sector companies including the foreign companies are likely to
set up their projects in these segments. Further, the closure of small refineries in North
America and Europe due to high compliance costs along with difficulties in obtaining
permits for Greenfield refineries in these regions due to environmental concerns is expected
to result into large capacity additions in emerging countries like India. While the total
investment in refining is estimated at around US$ 60 bn by 2025, the investment in
marketing infrastructure during the same period is estimated to be around US$ 32.0 bn.
Tax as well as other fiscal incentives (such as providing SEZ status) provided by the
government to new refineries are also expected to have a positive impact on the Indian
refining industry. However, the muted export demand due to global economic slowdown
will continue to affect the refining sector in the current fiscal.
Further, the development of RILs KG Basin and other fields that are expected to supply the
requisite volumes of gas for gas transmission and city gas distribution activities will help in
accelerating growth of gas transmission & distribution activities in India. The fuel retailing
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business is also likely to witness some improvement in growth on the back of lower global
crude oil prices.
The consumption of crude oil is expected to rise at a higher pace in the years to come. In
contrast, the supply of crude oil might lag behind that of demand, leading to a widening
demand-supply gap in the medium term. This, in turn, would increase Indias dependence on
imported crude oil.
With a substantial increase in domestic exploration & drilling activities, the demand for
drilling services has exceeded its supply. The shortage of drilling rigs has adversely affected
the exploration & drilling activities of domestic oil companies as they are finding it difficult
to complete their minimum work programme in their respective blocks allotted under NELP
rounds. The shortage of drilling rigs coupled with volatility in global crude oil prices have
also resulted into high raw material costs and service costs for Indian upstream companies.
Furthermore, some uncertainty on freedom to market oil & gas and the applicability of tax
concessions for the production of natural gas are expected to be key concerns for exploration
& production companies
Besides, there exist few more concerns which need to be addressed by the oil & gas industry
in order to grow at the strong pace. The issue/challenges for the Indian oil & gas industry
are:

Ensuring sustained oil and gas supplies amidst volatile international prices.
Demand management of petroleum products and gas.
To sustain as a net exporter of petroleum products
Rational pricing in view of uncontrollable global prices.
Creation of market competition in distribution and retail business.
Improving the administration of subsidies in kerosene, LPG, petrol & diesel.
Improvement in energy efficiency and conservation and environmental management.
Absence of statutory framework in the upstream industry
Transnational gas pipelines facing uncertainty

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Appendix A
References:
1. http://www.ibef.org/industry/oil-gas-india.aspx
2. http://www.bharatpetroleum.co.in/Admin/RetailBuidUpPrice/Price/Petrol_MS%201
6th%20July%202015.pdf
3. http://www.bharatpetroleum.co.in/Admin/RetailBuidUpPrice/Price/Diesel_HSD%20
16th%20July%202015.pdf
4. http://www.ibef.org/industry/oil-gas-india/showcase
5. http://www.ibef.org/industry/oil-gas-india/showcase
6. http://makeinindia.com/sector/oidl-and-gas/
7. https://www.dnb.co.in/IndiasEnergySector/outlook.asp

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