final report on oil and gas industry

7/28/2019 Final Report on OIL and Gas INDUSTRY

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OIL AND GAS

INDUSTRY

CONTENTS....._______________________________________________________

Sector Overview..................................................................................................................................................................................................................................................

Structure of this sector..................................................................................................................................................................................................................................................

Trends in the Indian Oil and Gas Sector..................................................................................................................................................................................................................................................

Past and Present Growth in the sector..................................................................................................................................................................................................................................................

Opportunities in the sector..................................................................................................................................................................................................................................................

Major Issues faced by the Oil and Gas sector in India..................................................................................................................................................................................................................................................

Conclusion..................................................................................................................................................................................................................................................

OIL AND GAS

INDUSTRY


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SectorOverview


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Countrys upstream policies such as the New Exploration Licensing Policy (NELP)are focused at increasing investments in domestic exploration and production (E&P)activities. Nine rounds of acreage awards have been completed in ten years in whichover 260 blocks were licensed out to companies. In the coming years, additionalrounds of awards are expected to be rolled out for investors to bid. Total foreign

direct investment is permitted without any necessity of NOC carry. The productionshare, cost recovery and work programme are biddable. The local NOCs ONGC,OIL, GAIL, IOC, BPCL and HPCL have actively participated, and so have theIndian private companies. They compete on equal footing with internationalinvestors. However, despite many promising discoveries in the NELP blocks, the

policy has had limited success in reducing the dependence on foreign imports. Thepolicies have also not been able to attract oil majors with experience and othertechnical expertise to invest in India. Experience of operating in deepwater and otherdifficult environments is critically required in India, if not the investments the

international companies can bring in.In the gas sector, the the government has continued to exercise its control on pricing.Administered Pricing Mechanism (APM) natural gas - produced from fields given toONGC and OIL on nomination basis was increased in May 2010 more than doubledin price in May 2010; from US$ 1.8 per MMBtu to $4.2 /MMBtu, although. Price forgas produced by companies investing through NELP is indexed to oil, and is in somecases marginally higher. The government has reaffirmed its intents to determine themarketing priorities for natural gas with a pricing formula stipulated by thegovernment.

In the downstream sector, the government has introduced certain reforms includingderegulation of petrol prices. However, with the marketing companies, under thecontrol of central Government, still set the prices at levels which are more reflectiveof the consumer concerns and not markets, the sector represents an extremely riskyenvironment to operate in for private fuel retailers which do not qualify for subsidydissuading them from using or expanding their retail portfolio.

The regulatory and legal landscape in the sector involves many agencies and minis-tries. A snapshot of the same is given below:


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Policy-making & Planning

Empowered group of ministers: Decision on industry issues that that have a strong impacton the countrys economy and investment climate

Planning Commission: Helps in formulated policies such as the Integrated Energy Policy

Ministry of Petroleum and Natural Gas: Policy making and planning, overseeing E&Pactivities in India, pricing of regulated petroleum products, regulation of services andrefining sector

Ministry of Finance: Formulating tax and fiscal regime

Regulatory Bodies

Director General of Hydrocarbons (DGH) under the Government of India is the upstreamregulator and is entrusted with monitoring compliance to Production Sharing Contracts(PSCs) and other E&P regulations

Petroleum & Natural Gas Regulatory Board (PNGRB) is mandated to regulate the refining,processing, storage, transportation, distribution, marketing and sale of petroleum, petroleumproducts and natural gas excluding production of crude oil and natural gas

Key Acts & Legislations

The Petroleum Act, 1934 sets out rules for the import, transport, and storage of petroleum

The Oilfields Act of 1948 has provisions for regulation of oilfield development

1976 Petroleum Rules has provisions for regulations governing pollution, safety and otheroperating standards

New Exploration and Licensing Policy (NELP): Allowed for competitive bidding byforeignoil & gas companies for exploration and production licenses without any bias towards the

public sector companies

Integrated Energy Policy (IEP) of 2006 outlines goals for dealing with the challenges faced


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Past and

PresentGrowth of

the sector

Key Developments and current state of the

Indian oil and gas sector:The oil and gas sector in India is a critical component of thecountrys economy, accounting for 15 per cent of thecountrys gross domestic product (GDP). Economic growth isdirectly linked with energy demand, and a conservativeestimate of 7 per cent growth is expected to double Indias percapita energy consumption from 560 kilograms of oilequivalent in FY10 to 1,124 kilograms of oil equivalent byFY32. As oil and gas is one of the main sources to meet therequired demand for energy in India, its demand is forecast torise further. In 2011, natural gas accounted for 10 per cent ofthe countrys total energy requirements, whereas estimatessuggest that this figure will reach 20 per cent by 2025, withoil and gas together accounting for approximately 45 per cent

of the total demand. Market reports estimate that this growthis expected to take the size of the Indian gas market to that ofthe gas market in Japan, the largest consumer of liquefiednatural gas (LNG) in Asia, by the end of 20156. As shown inFigure 1.1 and Figure 1.2, despite having significant reservesin India, the increase in demand is expected to be primarilymet through imports.


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To cope up with the high demand, the Indian government has adopted policies such as allowing 100per cent foreign direct investment (FDI) in many segments of the oil and gas sector such asrefineries, pipelines, petroleum products, natural gas and infrastructure related to the marketing of


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petroleum products. In 2011, the oil and gas sector experienced one of the biggest FDI deals in thecountry, with British Petroleum (BP) entering a US$ 7.2 billion deal with Reliance Industries for theexploration of offshore oil and gas. Subsequently, BP formed a joint venture with Reliance for themarketing of gas and took a 30 per cent stake in 23 oil and gas blocks.8 Owing to many large scaleinvestments, the oil and gas sector in India attracted FDI worth US$ 3,152 million over 200011.

Some other policy initiatives to promote investments included the New Exploration LicensingPolicy (NELP), to aid both public and private sector companies in bidding for exploration rights.Over 246 blocks were given out over eight bidding rounds through this initiative during the lastdecade alone, resulting in the discovery of 68 oil and gas fields. The NELP allows 100 per cent FDIin small to medium sized oil fields.However, the NELP may soon be replaced by the Open AcreageLicensing Policy (OALP), which invites bids all year round unlike NELP that invites bids yearly.

1.1Regulatory landscape and

competitive scenario:

The Indian oil and gas sector is highly regulatedand largely state controlled. Figure 2 shows keyregulatory authorities in India and the mainlegislations that govern the sector. Among otherinitiatives, the Petroleum and Natural GasRegulatory Board was formulated to ensure thesmooth supply of petroleum and petroleum

products throughout the country at regulatedprices. This body was also tasked with enablingpipeline development, and regulating the

midstream and downstream segments of the oiland gas sector.The oil and gas sector is dominated by PSUsand a few large private sector companies.Figure 3 highlights the credentials of leading

players in each segment (upstream, midstreamand downstream) of the oil and gas industry.In India, Oil and Natural Gas Corporation(ONGC) accounts for approximately 67 percent of the total oil and gas production, whereasthe Indian Oil Corporation (IOC) and its

subsidiary, the Chennai Petroleum CorporationLimited (CPCL), command the largest marketshare (approximately 48 per cent) in petroleum

products. The countrys refining segment isprimarily dominated by domestic players suchas Hindustan petroleum Corporation Limited(HPCL), Bharat Petroleum Corporation Limited


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1.2. Key developments for the Oil and Gas sector during the 11th

Five Year Plan:

In the 11th Five Year Plan, the government focus related to energy was threefold. First, its mainobjective was to attain energy security and mitigate the need for imports in the oil and gas sectorthrough sustainably scaling up exploration and production (E&P) activities, use of alternate fuelsand infrastructure development. Second, the government focused on tax and pricing reforms, with

plans to phase out subsidy on LPG and kerosene, and to align fuel prices with global trends. Third,the government tried to focus specifically on infrastructure development for the midstream oil andgas segment.

Further, the government undertook numerous measures such as setting up the Integrated EnergyPolicy, the Directorate General of Hydrocarbons, and the Petroleum and Natural Gas RegulatoryBoard to aid the rapid development of the sector. Further, the government focused on creating alevel playing environment in both the upstream and downstream segments by ensuring unhinderedaccess to common infrastructure at the regulated prices.

The government has taken into consideration the Kirit Parikh Committees recommendations, andmade numerous actionable reforms on the pricing of petroleum products. The recommendations arethe following:

Petrol prices should be hiked, while diesel prices should be adjusted to market rates insteadof being subsidised, as this will not affect consumers significantly, and can be borne bythem. These price hikes will reduce under recoveries to zero, as failing to hike fuel priceswill result in under recoveries of approximately Rs 2 trillion (US$ 37.6 billion).

The price hike process and distribution system needs to be more transparent, as there iscurrently a significant disparity in the per capita allocation of kerosene between states11Transparency especially in the distribution of LPG and kerosene can be attained through theUID smartcard scheme.

The implications of these measures would primary reduce the under recoveries in the oil andgas sector, thereby making the sector more profitable.

Acting on these recommendations, the government implemented numerous actionablereforms on the pricing of petroleum products.

Table 1 demonstrates the total expenditure outlay in the oil and gas sector during the 11th Five Year

Plan, and some indications on the revised projections that were made over the course of themidterm appraisal.


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1.3. Factors affecting the Indian Oil and Gas sector Some keyfactors affecting the Indian oil and gas industry are the following:

There was a notable increase in projected expenditure in the E&P segment, primarily due toincreased drilling costs and high production costs. The refineries segment is also expected toexperience an increase in its expenditure, due to an increase in infrastructure development cost for

pipelines.

Dominated by state controlled enterprises: The sector is primarily dominated by statecontrolled enterprises, with only a few foreign players. The primary reason for this could bethe countrys regulatory framework, where ventures involving foreign players take longer to

get the required approvals. Further, the participation of foreign players has been limitedduring the nine rounds of bidding for exploration rights through the NELP, while theparticipation of state owned players has been high.

Subsidies on Oil and Gas products: Eliminating subsidies on oil and gas products is provingto be a major challenge for the government, due to political pressure. These subsidies haveled to large scale under recoveries in the Indian oil and gas sector.

Environmental issues: Offshore mining of oil and gas and deep water exploration posessignificant threats to the environment in terms of potential threats of water contamination.Further particulate emissions of refineries and production plants could have an adverseimpact on the environment as well.

Requirement of advanced technology for upstream segment: The industry faces a shortage ofskilled labour for the mining of unconventional assets such as shale gas and Coal BedMethane (CBM), which offer a huge potential in terms of ensuring sustainability.

The Government has proactively aimed to curb some of these challenges including subsidies on oiland gas, and technology requirements in the upstream segments through actionable reforms such asthe Kirith Parikh Committees recommendations, and by encouraging a higher level of privatesector participation.


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The Oil & Gas sector in India is replete with opportunities across its value chain and sub sectors.Many of these opportunities stem from the mega trends discussed above. A brief overview of theseopportunities is presented below.

1. Opportunities for foreign investments and technology

partnerships in the upstream sector:

Securing supplies is expected to remain on top of Indias energy agenda for the foreseeable future.While a lot of exploration activity has taken place in the on-land and shallow basins of the country,it is believed by many that deepwater and ultra deepwater Oil & Gas resources hold a key tosubstantially increasing domestic production. However, Indian companies especially the PSUs havelimited technical and monetary bandwidth or experience to undertake exploration and developmentactivities in such areas. This creates a plethora of opportunities for strategic investors havingrelevant technical expertise and financial muscle such as BP to invest in the country through

partnerships with local public and private sector companies.

2. Opportunities for transactions and partnerships in assets

abroad:

The race for securing future energy supplies has led Chinese NOCs to aggressively scout for Oil &Gas assets abroad during the last few years. Many Indian companies have been aggressivelyscouting for opportunities to pick up equity oil abroad or pick up strategic stakes in unconventionalacreages in order to acquire technology/expertise for similar developments back home.

3. Opportunities in unconventional Oil & Gas (CBM, Shale Gas and

UCG):

CBM is a proven energy source as it contributes approximately 10% of total natural gasproduction in USA. Given the substantial coal resources in India, experts claim significantCBM potential in the country. The CBM policy devised by Government of India (GoI)

Opportunities in this sector


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The new and existing players view CGD as a combination of marketing and infrastructuredevelopment. While the activity of development of infrastructure for the CGD network is regulated,the activity of marketing is unregulated. Thus the bidders bid for lower tariffs to obtainauthorization.

Along with investors and project developers, CGD project development also offers opportunities fortechnology companies, project management consultants and other service and equipment providers.

Opportunities in the LNG sector:LNG has great market potential due to huge demandsupply gap (figure 1 below) which according to industry sources, is expected to widen infuture in absence of LNG.

The present gas demand supply scenario makes up for a good business case for up LNG terminals.The future too holds promising as the following chart below depicts the sector-wise natural gas

demand which is overall expected to grow by 12.7% as per industry sources.

Regulatory aspect: As of now, setting up an LNG terminal only requires notifying the governmentand there is no competitive bidding for setting up an LNG terminal.


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Refining Sector:India has its sights well set on becoming one of the major globalrefining hubs. In order to realize this aspiration, India will focus on expanding its

capabilities and position itself to become an increasingly important player in theinternational export markets for refined petroleum products. The country is expected to beone of the major investors in development of refinery infrastructure in the world during thenext couple of decades. The cumulative investment in refining infrastructure in the countryduring 2011-2035 as per projection by the IEA under the new policies scenario is expectedto be about US$ 140 billion.

Opportunities in tankage: Import of crude oilwill grow at a CAGR of 4.25% as per IEAprojections for the next 20 years. Average per barrel cost of crude imports has seen a CAGRrise of 6.42%.. Thus pushing a strong thrust on the infrastructure of storage tanks within thecountry.

Opportunities for pipeline transportations: Compared to advanced economies like USA,where more than 60% of petroleum product movements happen by pipeline, in India,currently, only 35% of product movement happen over pipelines. Cross-country pipelinenetworks, preferred as a cost-effective, energy-efficient, safe and environment friendly modefor transportation of crude oil and petroleum products, have been playing a vital role inmeeting Indias energy demand. They are now a key constituent of the countrysinfrastructure, transporting crude oil from import terminals as well as domestic sources to

inland refineries, and finished products from refineries to major consumption centres. If theindustry, regulator, Government and policy makers find suitable solution for regulatoryapprovals, right of way etc. India has a substantial head room for growth in both crude and

petroleum product pipelines.

Major Challenges

faced by the oil

and gas sector

The Oil & Gas sector in India has come along way since our independence. There hasbeen significant progress in every sub-sec-tor of the Oil & Gas industry. The sector isteeming with opportunities but at the sametime its dealing with some fundamentalissues which can hinder its progress andthwart the achievement of its growth

objective. While some of these issues arespecific to a sub-sector, other such asinfrastructure development are applicable tothe entire sector. Some of these majorissues have been discussed below:

1.Limited participation by foreign

companies in the Indian upstream sector -

Prospectivity or Policy:The nine rounds of NELPhave seen enthusi- astic participation by the state ownedcompanies, the participation by private playersespecially the foreign majors has been limited. Thesecompanies bring a lot of investment muscle required fordevelopment of capital intensive and high risk upstream

projects. More impor- tantly however, these companiesbring technological expertise and diverse projectexperience. Some sections of the industry attribute thelack of participation of these companies to the

prospectivity of the Indian basins. However the DGHis extremely confident about the prospectivity of Indianhydrocarbon basins and do not deem it as a roadblock.Other sections of the industry believe that inconsistencyand ambiguity in the policy and fiscal framework is oneof the major factors due to which foreign companieseither stay away or withdraw participation. Interference

in terms of a signed contractual terms is also counted asa factor that discourages foreign participation


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The oil and gas developed in India, and is poised to contribute a large share toIndias energy basket over the next 1520 years. A conservative estimate of 7per cent growth in the Indian economy is expected to approximately doubleIndias per capita energy consumptionover the next 20 years. Since energydemand and economic growth are almost interlinked, the Indian oil and gassector, which provides the country with a significant portion of its energyrequirements, has been identified as a key metric that will drive future GDPgrowth.

To cope up with the increasing demand, the government has allowed 100 percent FDI in the oil and gas sector, enabling some large partnerships such as theUS$ 7.2 billion deal between BP and Reliance Industries. In order to further aidthe development of the sector, the government introduces legislations such asthe NELP to enable companies to bid for exploration rights, and encourageprivate sector participation. The participation of the private sector is expectedto bring in monetary resources and technological capabilities, especially in thefield of deep sea exploration while simultaneously reducing the dominance ofPSUs in the countrys competitive landscape.

1. Upstream skills, technology and equipment shortage: Upstream talent shortage and


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ageing workforce is an issue being faced the global as well as Indian upstream industry. Theindustry is especially pressed with shortfall of labor with specialized skills such as reservoirengineering or with experience of developing unconventional gas assets. Also, while we arecounting the unconventional sources of energy such as Shale gas as major areas ofopportunities we must also not forget the associated challenges such as high water and landrequirements and also the limited availability drilling equipment. An enabling policy and

fiscal environment that makes investment in this area an attractive proposition even aftertaking into account the associated risk and challenges is required to take advantage of theopportunity associated with unconventional.

2. Enablers for acquisition of oil & gas assets abroad: Indian Oil & Gas companies, especiallythe public sector companies have been competing with aggressive Chinese counterparts andIOCs for acquisitions of assets abroad. However, in many cases these companies have tolose out to the competition due to the slow speed of clearances and decision making processin place for making large investment decisions.

3. Also, the Indian companies are sometimes also constrained by lack of opportunity trackingresources and networks that can spot opportunities early and pass on to the companies.

However, the Indian government has taken many diplomatic relationship building initiativeswith countries in regions such as Africa. More initiatives are required for strengthening thisnetwork so that Indian companies are not at a disadvantage to the international competition.

4. Ambiguity on policies relating to pricing and marketing of domestic gas as well as the gasend-user segment policies creating hurdles to gas market development:

5. Gas sector in India holds tremendous potential as detailed in the section on opportunities.However, its growth is constrained on account of ambiguity in investors mind about pricingand marketing policies of the Government with respect to the domestically produced gas. Toadd to the woes of investors the recent unexpected dip in domestic gas supplies has addednew dimension of ambiguity that of supply uncertainty. Growth in infrastructure has not

kept pace with demand-supply dynamics largely owing to the way the new regulatoryregime has unfolded over the years. LNG market development has also not realized its

potential largely owing to the governments policies around the two major anchor customersegments viz. power and fertiliser.

CONCLUSION

The oil and gas sector is fairly well developed in India, and is poised to contribute a large share toIndias energy basket over the next 1520 years. A conservative estimate of 7 per cent growth in theIndian economy is expected to approximately double Indias per capita energy consumption overthe next 20 years. Since energy demand and economic growth are almost interlinked, the Indian oiland gas sector, which provides the country with a significant portion of its energy requirements, has

been identified as a key metric that will drive future GDP growth.

To cope up with the increasing demand, the government has allowed 100 per cent FDI in the oil andgas sector, enabling some large partnerships such as the US$ 7.2 billion deal between BP andReliance Industries. In order to further aid the development of the sector, the government introduces

legislations such as the NELP to enable companies to bid for exploration rights, and encourageprivate sector participation. The participation of the private sector is expected to bring in monetaryresources and technological capabilities, especially in the field of deep sea exploration whilesimultaneously reducing the dominance of PSUs in the countrys competitive landscape.


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The burgeoning demand of hydrocarbons in India necessitates aggressive exploration of reserves.Licensing policies, however, coming in the way of hydrocarbon finds is not uncommon in theworld. Today, more and more companies are able to conduct their exploration and production inmore and more countries. As a result, companies are competing fiercely for the best acreage. Thereexists an open market for exploration rights, which is good news and bad for host countries. Thegood news is that they can drive a harder bargain with the oil companies over access to acreage. The

bad news is that, all things considered, too hard a bargain will drive the companies away, to othercountries. Each solution depends on each countrys individual circumstances. Geology, fiscalsystems, regulatory capability, politics; all enter into it. Practices proven best in some regimes maynot suffice in this realm.

India having recognized the need of much higher exploration investments must therefore enable thatthrough a scientifically designed regulatory regime. . Unlike in the industrialised world, this futureof Indian petroleum sector bodes well for best of the companies; they would like to lay finest of theinfrastructure. Lets hope they are waiting in the wings for competitive, safe and efficient businessenvironment to develop.

THANKYOU.

final report on oil and gas industry

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