indian oil thing2

1. Indian Oil & Gas
April
Sector Coverage 2008
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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 .............................................................................41
Sector Coverage 1

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. 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.
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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 India'sas 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
India's 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
world's 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. Indian Sector Report - April 2008
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. 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: EIA
Sector Coverage 6

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%
India's 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
India's 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. 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. 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.
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
Nuclear, 6 Hydro, 2
Nuclear, 2
Oil, 37
Coal, 28
Coal, 51
Source: Planning Commission of India, 2006
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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. 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 note
Sector Coverage 11

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 2025
Sector Coverage Projections. 12

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. 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 Demand
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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. 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.
India's 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.
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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. 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
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.
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. 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. 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 35235.14 100
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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.
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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.
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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, India's 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.
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25. Indian Sector Report - April 2008
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 high-
risk nature of deep-water blocks. Since then, there have been five more rounds of
NELP till 2006. And in all these the award process happened in a very short span
of time. So far, the government has signed PSCs for 165 blocks awarded in the
first six rounds of NELP. At present more than 84 per cent of the area under E&P
belongs to the NELP Blocks. Recently, in 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 148.968 mmt.
Public sector Undertakings (PSUs):
■ Indian Oil Corporation Limited (IOC) and its two subsidiaries, Chennai
Petroleum Corporation Limited (CPCL) and Bongaigaon Refinery and
Petrochemicals Limited (BRPL);
■ Bharat Petroleum Corporation Limited (BPCL) and its two subsidiaries, Kochi
Refineries Limited (KRL) and Numaligarh Refineries Limited (NRL);
■ Hindustan Petroleum Corporation Limited (HPCL);
■ Oil and Natural Gas Corporation Ltd. (ONGC) and its subsidiary Mangalore
Refinery and Petrochemicals Limited (MRPL)
Private sector Undertakings
Reliance Industries Limited (RIL)
Essar Oil Limited (EOL)
ONGC and EOL are recent entrants in the refining business. ONGC has taken over
MRPL in March, 2003 before that MRPL was a joint sector entity. The entry of
ONGC into the refining segment appears to be its strategy in the direction of
becoming integrated company along the oil & gas value chain.
Sector Coverage 24