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IndiaEnergy reportJuly 2011

CarHPCL_OGFJ_1107 1 6/17/11 5:20 PM

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IndiaPt.1

I ndia’s economic growth is widely praised, and with a GDP of

$4.046 trillion USD in 2010 and a GDP growth rate of 8.3%

last year, it is clear why the country is making the headlines in

the most positive of lights. In his latest visit to India, U.S. President

Barack Obama stated that "India is not simply emerging: India has

already emerged." However, before it can complete its transfor-

mation into one of the world’s superpowers, India must address

two big issues that are hampering its development. These are its

infrastructure and energy challenges.

The Silent Revolution

Project Directors: Karim Meggaro & Henrique Bezerra Project Coordina-tor: Federica Torgneur Project As-sistant: Andrey Muntyan Prepared

in collaboration with Petrofed

www.ogfj.com • Oil & Gas Financial Journal July 2011 www.focusreports.net 55

Refinery at night, courtesy of BPCL

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RPN Singh, Minister of State of Petroleum & Natural Gas

Sunil Kumar Srivastava, directorgeneral, DGH

AK Arora, secretary general, Petrofed

56 www.focusreports.net July 2011 Oil & Gas Financial Journal • www.ogfj.com

Despite the fact that stories of India’s booming economy and

emergence on the world stage shout from newsstands across the

world on a daily basis, very little time is dedicated to discussing

the industry that is needed to fuel this growth. However, India has

taken important steps to address its energy imbalance. Indeed, it

has been remarked that the transformation that has taken place in

the Indian oil and gas industry over the last two

decades has been a silent revolution, and today

India stands as one of the most influential and

important oil and gas markets in the world – and

more importantly, it has reached this position with-

out the rest of the world noticing. Focus Reports

has spent some time on the Indian subcontinent in

order to uncover the factors that have caused this

revolution, and discover where the Indian oil and

gas industry is now headed.

“The transformations in the Indian oil and gas

industry represent a silent revolution,” says S

Sundareshan, outgoing secretary of the ministry

of petroleum & natural gas, “because, besides

allowing India to grow and improve the lives of

hundreds of millions, it goes largely unnoticed. For

instance, India’s refining capacity jumped from 68

million tons to 185 million tons in only ten years.

It is likely to increase to 240 million tons before

2012.” Today, India has excess refining capacity,

and as a result the country currently exports about

40 million tons per annum. When capacity is fur-

ther bolstered, India will be in a position to export

more than 80 million tons per annum.

However, India is the world’s fourth largest

oil consumer after the United States, China, and

Japan, consuming around 3 million bbl/d in 2010

while producing only about 900 thousand bbl/d,

making energy security one of India’s major bottle-

necks for its future growth.

As a response to this, Indian policymakers have

gradually liberalized India’s oil and gas industry

over the last 15 years in an effort to boost the

country’s 5.6 billion barrels of proven oil reserves

(as of January 2011), the second-largest reserves

in the Asia-Pacific region after China. Its main

policy tool has been the New Exploration licens-

ing Policy (NELP), which aims to provide a level

playing field for all players active in E&P. Under

the NELP regime, organized in rounds and starting

with NELP I in 1999, 87 oil and gas discoveries

have already been made in 26 exploration blocks,

not counting this year’s bidding round.

The latest NELP round, NELP IX, closed in

March 2011, and offered 34 exploration blocks in

10 sedimentary basins covering an area of 88,807km2. The blocks

comprised 19 onshore blocks, 8 deep-water blocks and 7 shallow

water blocks. 19 of these blocks were being offered for the first

time to interested parties. At the close of the bidding cycle, 33

of these blocks had bids placed on them, with 10 new companies

entering the Indian E&P sector for the first time, 2 foreign and 8

Indian.

Sunil K Srivastava, the director general of Directorate General

of Hydrocarbons (DGH), India’s upstream regulatory authority,

believes the country’s sound governance and stable rules have

been the main ingredients in its efforts to attract more private

investment to its oil and gas industry: “Reliance Industries’ KG-D6

discovery took only six years to go from discovery

to production; its success was not only a product

of the competence of the operators but also the

government’s fast-tracked decisions, approvals,

governance and policies. Thanks to India’s sound

policies, investors both domestic and interna-

tional have increased their stakes in India’s E&P

industry.”

As a result, since April 2009 India has added

2.1 billion cubic feet of natural gas production per

day to its existing 2.65 billion with the start of pro-

duction on the Krishna Godavari (KG) basin and

specifically the KG-D6 block, the biggest natural

gas discovery in the world for the year 2002.

Even so, India is aware that it is far from

achieving self-sufficiency in the oil and gas sector.

As a result, it has applied pragmatic policies to

boost national production and import capacity;

internationalize its companies and secure assets

and markets overseas; and become a prominent

international refining hub by importing crude oil

from its Middle-Eastern neighbors and exporting

refined products to new markets.

The silent raise their voicesOn reflection, what many may regard as a fairly

quiet player on the oil and gas map seems to have

an awful lot to shout about. Admittedly, the vast

nature of the market, the history of state influ-

ence in India, and the need for subsidies in order

to make fuel affordable to India’s rural poor make

the downstream a fairly unattractive option for pri-

vate companies as it stands at the moment. But as

BP has shown recently, there are attractive options

in the country for multinationals willing to take

a bet on India’s untapped reserves, and less of a

bet on the country’s massive refining capacity. On

top of this, the private sector players have gone

through a period of change and emerged on the

other side as profitable, energized and creative

businesses, diversifying and evolving to overcome

new challenges and build themselves a market for

the future. The private sector cannot be forgotten

in this equation. Having established a formidable

presence in their home market, companies across

the value chain are now looking abroad to find the next frontier.

As India’s pioneering spirit develops and matures, the world will

see a tiger awake – one that can beat competitors on price, and

still bring an excellent level of quality to bear. Traveling to India, it

is hard to describe the country as silent, but now it is time for the

country to roar.

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India, in need of a little NELP For a long time the Indian oil and gas industry was dominated by

its top state-owned players: the so-called ‘public sector undertak-

ings’ or PSUs. Once funded by the government, these companies

are now self-sufficient, although due to fuel subsidies imposed by

the government, they rely on regular compensation in order to

keep themselves profitable. As a result, many of these companies,

headed by new management, are now looking to diversify their

businesses and make them independently sustainable, whilst con-

tinuing to play the role for which they were established; ensuring

that India has access to the energy it needs.

Outside India, these companies are not particularly well known,

but on the subcontinent, these companies are the public face

of India’s fight for energy security. From ONGC, the major E&P

player in India and the country’s most profitable company, to

GAIL, involved across the entire natural gas value chain including

pipeline infrastructure and LNG terminals; OIL, mostly onshore oil

E&P in the north west of the country but increasingly growing in

other regions, both onshore and offshore; IOCL, focused mostly

in the downstream sector owning around half of India’s refiner-

ies; and HPCL and BPCL, two companies traditionally focused in

downstream and marketing activities, bringing finished products

to consumers; and finally EIL, the engineering consultancy created

specifically to solve the challenges that would be faced by India’s

fledgling oil and gas industry.

In the 1990s, the liberalization of the industry and the introduc-

tion of the NELP started to change this state-dominated envi-

ronment. Companies such as Cairn and Reliance Industries have

become prominent private players in the upstream and down-

stream sectors – Reliance Industries recently completed the world’s

largest refinery complex at Jamnagar, with a combined production

capacity of more than 1,200,000 bpd. The development of private

players, together with the fast modernization and development of

India’s state-owned companies, has contributed significantly to the

creation of a complex and mighty service and equipment industry

that is now crossing India’s borders and conquering international

markets.

However, this excitement about the potential of India does not

Changing faces, evolving undertakings

In recent months, India has not only changed the top three

figures at the ministry of petroleum and natural gas (min-

ister, minister of state and secretary), but also, due to the

stipulation that the chairmen and managing directors (CMDs)

of state-owned companies must retire at sixty, the heads of

ONGC, IOCL, HPCL and BPCL have all been replaced. ONGC

still does not have a permanent CMD due to the complex

process by which these leaders must be nominated, approved,

checked and then appointed. Whether this situation will affect

the industry in the months and years to come will remain to

be seen; it has the potential to either set the country back by

removing those with the most influence and experience in the

industry, or bring bright new figures to these positions with the

ideas and creativity to help the industry realise its full potential.

We asked the new chairmen of several of India’s PSUs what

it is that makes their company unique, given the shifting and

diversification of the state-controlled industry. This is how they

replied…

AK Hazarika, ONGCONGC has an important role to play in India’s energy develop-

ment. Today, ONGC contributes about 70% of domestic oil

production for of the country. In gas, Reliance Industries has

taken a large share of the market after the commencement of

production from KG-D6, but still ONGC and ONGC’s share of

its joint ventures accounts for almost 50% of India’s domestic

gas production. OVL is also contributing around 20% of India’s

total oil production. In India’s oil and gas industry, ONGC’s role

will always remain important.

AK Purwaha, Engineers India Ltd.Engineers India is unique in its partnering relationship with all

of its esteemed clients, whether public or private sector. This

has developed well since the company began. Initially, the

company’s only interactions were with the Indian public sector,

as these were the only companies involved in the oil and gas

industry in the country. Today, we have seen that the market

has been liberalized and the world has entered India, and EIL

has learnt to deal with its new clients just as well as it did with

its old ones, who are still very valued clients. Our recall value

and return business rate are proof that we have managed these

relationships very well, even in this brand new industrial and

economic environment that we are facing today. As the years

progress, we hope that the confidence our clients have in us will

continue to be our greatest strength.

RK Singh, Bharat PetroleumThe question of whether BPCL continues to remain down-

stream or diversifies and looks at other opportunities has

been debated at length. Any company, whether it is a PSU or

a private sector business, wants to grow and have access to

more opportunities. BPCL also wants to grow and diversify its

business activities, but not at the cost of the core activities.

Therefore we have created strategic business units, so that each

remains focused on their core activities.

S Roy Choudhury, Hindustan PetroleumHindustan Petroleum is the amalgamation of Esso and Caltex.

As a result, we have a very rich cultural blend of Esso and

Caltex mixed with our experience in the public sector. Putting

all this together, I think HPCL got a very clear defined strategy

to service the people of the country at the same time maintain

its growth. Whatever we do, we should always remember that

we are a commercial organisation. We must generate profit in

order to grow, and we will ensure that we achieve this growth

hand in hand with India.

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yet seem

to have

spread to

the world’s

major oil

and gas

players.

The fact

that only

BP out of

the global

top ten is

currently

invest-

ing in India’s upstream says a lot about

the attractiveness of the Indian market for

many large foreign companies.

Vikram Singh Mehta, chairman of Shell

India, explains this lack of investment from

the international majors: “If Shell takes the

decision not to invest in Indian explora-

tion, it is not a reflection of a purposeful

strategic decision not to invest in India—it

is simply a decision based on the relative

geological attractiveness of the various

opportunities that are available to Shell,

at any particular point in time, throughout

the world.” Though this seems clear, Shell’s

decision years ago to sell its Northern

Rajasthan assets to Cairn was later regret-

ted when the massive Mangala oil field of 1

billion barrels of recoverable oil was found.

Indeed, as Rahul Dhir, managing direc-

tor and chief executive office of Cairn

India points out, “based on our success,

it becomes hard for us to imagine the

reasons why the world’s majors have not

invested in India.” He believe that “ people

still don’t understand India’s full poten-

tial; about 80% of our sedimentary basins

are not as well explored as elsewhere, so

people have been very cautious about

coming in. But on the upper side, the fiscal

terms are very well understood; the licensing regime

is very transparent; India has one of the fastest grow-

ing markets in the world; there is a very comprehensive

downstream infrastructure with India being a net exporter

of refined products; so there is no shortage of access to

oil and gas, with the demand for gas being constrained

only by supply bottlenecks. The government is very keen

on overcoming these challenges by, for instance, giving

open access to the pipelines. Therefore, it is a bit of a

mystery to us to understand why

some majors are not investing heavily

S. Roy Choudhury, chairman and managing director, HPCL

AK Hazarika, chairman and managing director, ONGC

RK Singh, chairman and managing director, BPCL

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in India’s upstream sector.”

It seems, though, that the situation might be starting to change.

Late February 2011 saw the largest foreign investment in India’s

energy sector to date, when BP

announced that it would buy a

30% stake in Reliance Industries’

assets, and form a strategic

partnership together which would

see a 50:50 joint venture created

between the two for sourcing and

marketing energy in India. Addi-

tionally, BP will take a 30% stake

in Reliance’s 23 oil and gas blocks,

for which the company paid $7.2

billion USD plus a further $1.8

billion USD in the future through

performance related payments.

Deals like this will perhaps lead

the way for greater involvement from the world’s biggest oil and

gas players.

As PMS Prasad, executive director of Reliance Industries (RIL)

points out: “This deal marks a

significant milestone in India’s

E&P history as it ushers in the

participation of a global oil and

gas major for the first time ever

with a material stake in Indian oil

and gas blocks. There are signifi-

cant synergies between both the

partners given BP’s deepwater

capabilities worldwide and RIL’s

demonstrated project execution

capabilities. We believe it is a

potent combination to find more

the hydrocarbons to meet India’s

energy needs.”

Interview with Jubilant EnergyFor the full interview, log onto energy.focusreports.net

Why did the Jubilant Group choose to invest in a sector that is so technologically and capitally intensive, when it had so many other choices?

There is a silent revolution going on in the E&P industry in India.

E&P markets opened up in India only in the 1990s, first through

the pre-NELP programs, and then through the NELP. Even

today, there is significant unexploited potential in this country.

There are areas where we have not even done basic exploration

activities. So, considering these facts, the group feels that there

is great opportunity in this market. We know that the sector

requires high technology, and considerable investment, but the

group is prepared for that.

In many aspects, the E&P industry strongly resembles the

pharmaceutical industry. In pharma, you have a very long pro-

cess of drug discovery, which is akin to the exploration phase in

oil and gas. Then, you have a process of drug testing—similar

to the appraisal phase in O&G. Then, in both industries, you go

into the production stage. In E&P, we work on 7 to 10 different

exploration prospects/blocks and the success rate of 30-40%

are likely to provide very good returns to shareholders. Both of

these businesses require a lot of industrial expertise, a wealth of

research, and a technologically focused mind frame.

The recent listing of Jubilant Energy on the AIM, raising $85 million USD, was the third largest IPO of the year on the AIM. What was your strategy to attract such high interest from the international investor community?

There were several reasons behind investor interest in our IPO.

The first was the profile of India as a country, and the opportu-

nities a company like ours has here. There are very few nations

in the world, especially from an E&P perspective, that have

sufficient in-house demand for everything you explore and pro-

duce in the country. That was a very strong selling point.

The second selling point was the significant under-exploita-

tion of the Indian sedimentary basins. If you speak to the DGH,

they will tell you that 70-75% of the Indian sedimentary basins

are underexploited.

Another very strong theme that investors were interested

in was that India is just emerging as an international E&P pres-

ence.

Jubilant is one of the very few E&P plays in the private sec-

tor in India. Yes, you have many government companies that

are involved in E&P, but if you look into the private sector, you

have Reliance and Cairn at the top, and then there is a huge

vacuum of pure, independent E&P plays. Our objective was to

show Jubilant, on the London market, as a model of such plays

in India. A final aspect was Jubilant’s reputation in India’s capital

market. Jubilant Group has always created significant share-

holder value in this market. Our objective was to replicate the

same model in the London market.

Ajay Khandelwal, CEO, Jubilant Energy

PMS Prasad, executive director, Reli-ance Industries

Vikram Singh Mehta, chairman, Shell India

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It is not just the majors that are

looking at India with hesitation;

India is also struggling to attract

junior players to its NELP blocks,

both domestic and international.

Ajay Khandelwal, CEO of Jubilant

Energy, a prominent junior player

who has actively acquired assets

in the NELP rounds seems opti-

mistic, but asks for improvements.

“With any market that undergoes

a regulatory transformation, it

takes time for everything to fall

into its intended place. It cannot

occur overnight… The whole idea and conception of the highly

transparent mechanism of NELP is great, and very successful, but

there are always limitations to any such mechanism. India has gone

through multiple rounds of regulatory framework, and there has

to be a transition where the market becomes even more investor-

friendly, such as if the Open Acreage Licensing Policy (OALP) gets

enacted. So, better times to come.”

AK Arora, director general of PetroFed, India’s main oil and

gas association, agrees, “What would further boost new explora-

tion intensity would be the implementation of the OALP, which

requires the creation of a data repository now on its way. With the

announcement of NELP IX the honorable minister of petroleum

Rahul Dhir, managing director and chief executive officer, Cairn India

India Sedimentary basins, courtesy of DGH

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and natural gas gave a clear

indication that the OALP would

follow soon. It will probably be

announced around 2012.”

In the same way Ashu Sagar,

secretary general of the Asso-

ciation of Oil & Gas Opera-

tors (AOGO), sees the need to

increase the number of players,

especially juniors in the Indian

market, “India must have many

more small E&P companies; the

current number is not enough. It

should be easy to get in; it should

be easy to get out. There should be a completely open market

where the increased number of players improves the quality of

service and bring competitive prices. This is not a demand. It is a

paradigm for a healthy industry.”

One of the major hurdles standing in the way of the planned

move to an open acreage policy is the lack of seismic survey work

done in the country to date; without this data, it is hard for compa-

nies to assess attractive prospects for investment. Prem Vasistha,

vice president of PGS India, explains the perspective from one of

the world’s largest seismic companies: “for some time, PGS has

been working in India, thinking and discussing with the people

that have been involved in policy regarding this transition. Until

the government comes up with a policy where they put everything

together to make speculative survey a viable option for the major

seismic companies, OALP is not a feasible option.”

Vasistha believes that in order to incentivize speculative survey

in India, the government must work with the seismic companies

and become stakeholders in the data that is needed in order to

move exploration of the country forward. “Even a small concession

of a financial contribution from the government will make a huge

difference. I believe that the government should consider funding

25% to 30% up front for this work, so that good service companies

would be encouraged to do the survey and recover the remaining

cost from sales. This would have some very positive consequences.

It would help the government with faster acquisition of data,

encourage more mutual trust between seismic companies and the

DGH, and also make the government, through the DGH, a joint

partner in eventual data sales.”

The government recognizes the need to consider new options,

but is rightly proud of the success of the initial liberalization of the

market through the NELP, as minister of state for petroleum & nat-

ural gas RPN Singh explains; “We will look at options of what we

can do to address acreages, because we need to make this policy

move at a much faster rate. Without doubt we can say that NELP

has been a very successful initiative of the government, and to

further kick-start exploration and production we will look at other

proposals.” He also addresses the need to collate the data on

which an open acreage policy must be based: “We are working on

Prem Vasistha, vice president - India, PGS

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•a National Data Repository to be set up. As soon as that is ready,

we will evaluate moving to an Open Acreage Licensing Policy.”

An industry refinedRefining in India has come a long way since the country’s first

refinery, Digboi, opened in 1901. Technological leaps and aspira-

tions towards global competitiveness mean that today, India is

home to the world’s largest refinery at Jamnagar on the country’s

west coast, operated by Reliance Industries and accounting for an

incredible 2% of the world’s refining capacity.

Quality has never been an issue for India’s refineries. AK Arora

of PetroFed points to the fact that it is not just the private sector

players that have changed the industry; from as far back as the

1980s, India’s state-owned refining companies were benchmarking

themselves against global standards of refining. This is what has

led India’s refining quality to be so high today. “This benchmark

exercise was a special challenge because it was done in a period

when India was absolutely destitute of hard currency. Yet the PSUs

spent valued resources on this, modernizing major refineries as

well as those smaller and remote. We set our targets high – true,

excellence is not always achievable, but you always have to aim in

that direction.” He concludes; “Indian refineries kept on improving

quality and capacity at the lowest cost for decades. Now it is only

natural that we are winning in international markets.”

This drive by the PSUs to strive for international refining quality

resonates with India’s desire to increase self-sufficiency and take

advantage of the relatively low cost of refinery building and opera-

tion in India, and today the government is pushing for an increase

of annual refining capacity in the country to 240 million tons by

2012, both for the home and domestic markets.

Bharat Petroleum Corporation Ltd. (BPCL) is one such company

paving the way to India’s increased refining capacity. Today, the

company’s capacity stands at 30 million tons per annum, but in

order to grow this capacity at the same rate as India’s GDP, the

company has initiated a plan involving brownfield expansions at

its refinery in Kochi, and has recently begun crude processing new

greenfield refinery at Bina, with a current capacity of 120,000 bar-

rels per day, expandable to 240,000 barrels in the future.

Hindustan Petroleum Corporation Ltd. (HPCL) accounts for 10%

of India’s refining capacity, but with a petroleum product market

share in the country of 20% and responsible for selling 40% of the

nation’s lube oil, the company is fighting a constant battle to refine

enough crude to supply its customers. For this reason, a new refin-

ery has been commissioned in Bathinda in partnership with Indian

industrial giant Mittal.

S Roy Choudhury became chairman and managing director of

HPCL in August 2010, after 20 years with the company across the

business, from marketing to sales, refinery, pipelines, operations

and distribution. Today, Choudhury also serves HPCL as director

of marketing. In his interview with Focus Reports, he explains the

need to expand the company’s refining capacity on a continuous

basis: “even after you take into consideration this new refinery,

HPCL will only be able to meet 56-57% of its requirement, because

of the company’s growth rate.” Projecting sales figures of 40

million tons by 2015-16, the company has resolved to expand its

refining operations in both Mumbai and Visakhapatnam. However,

budget constraints mean that these upgrades in capacity have

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to happen gradually: “We are not going for the

full capacity straight away because of the costs

involved. Today we are walking on a tightrope

economy, especially the public sectors. We have a

lot of borrowings, and already HPCL’s debt equity

ratio is very tight. We concluded it would be bet-

ter to start at 9 million tonnes, start to bring in

revenue, and then go for another 9 million tons.”

One of the companies that supported the

most the development of the Indian downstream

sector has been Engineers India (EIL). Accord-

ing to AK Purwaha, its chairman and managing

director, “today, to EIL’s credit, there are 20 of 24

refineries in country 9 of which were grassroots

refineries built by us and another grass root refinery at Bathinda is

close to completion. In this sense, Engineers India is unique, being

probably the only company in the design engineering and project

management consultancy segment who have more than 50 large

refinery projects to its name.”

Other PSUs, not traditionally involved in the refining sector,

have seen the opportunities available in the sector for growth.

Applying its expertise in the fertilizer sector to the refining indus-

try, Projects & Development India’s (PDIL) main growth driver

today is project management for various refining units, working

both in India and abroad.

There are not just opportunities for public sector players to take

advantage of the silent revolution happening in the Indian refining

sector. Engineering consultancies such as Enereff Engineers were

quick to take advantage of the newly liberalized market, but of

course had to overcome the traditional boundaries facing any new

service provider in the oil and gas industry; build-

ing up a track record and gaining the confidence

of clients, in this case, the PSUs who already had

existing facilities in the country. Enereff’s manag-

ing director, Lalit Shingal, explains that “once one

of the refineries of IOCL had accepted us, there

was less resistance with the second unit of the

same company: acceptance was a little smoother,

faster, better, as they had seen our work.”

Shingal has noticed some major changes in the

refining industry since he began his company at

the time the liberalization of the sector was begin-

ning to occur. As well as noting that today, Indian

refineries are processing more heavy and sulphu-

rous crude than ever before, he believes that the largest change

has been in the scale of refineries being built and upgraded:

“Today we talk of processing over 9 million tons per annum of

crude in a single refinery. This has enabled refiners to install a lot

of equipment that would otherwise have been non-viable eco-

nomically.” The complexity of equipment needed in such refineries

provides plenty of opportunities for niche engineering consultan-

cies such as Enereff, and today the company’s main focus is work-

ing with Indian Oil at their new refinery at Paradip, providing heat

exchangers in order to maximize the plant’s efficiency.

Increasingly however, the PSUs that have been responsible

for building up India’s strength as a refiner are today looking to

diversify their activities in order to continue their path to sustain-

able growth. RK Singh, newly appointed chairman and managing

director of BPCL after a long period as director (refineries), spoke

in detail to Focus Reports about his company’s foray s into the

Uhde - a global first

Uhde, part of the ThyssenKrupp group, has been in

India for over four decades, and the Indian subsid-

iary has worked on over 500 global contracts since

that time. Dr. Benno Lueke, managing director of Uhde India,

explains how the Indian subsidiary was responsible for taking

Uhde’s first steps into the oil and gas industry on a global level,

at the time that the sector was just starting to liberalize in India:

“after the refinery sector opened up, Uhde India was employed

to provide engineering services to India’s first public sector

refinery at Mangalore. Previously in India, this work had only

been given to Engineers India, as all of India’s refineries were

owned and operated by the public sector. The moment the

refining sector opened up to the private sector Uhde India got

involved. We started with the Mangalore refinery, and since that

project we have worked on almost all the refineries in India. This

is a competency that Uhde India developed on its own, and it

has been instrumental in driving the business here.”

It is the fact that Uhde India developed capabilities in the

refining sector separate from the main Uhde group that makes

it such a unique story. Today, the Indian subsidiary accounts for

20% of Uhde’s global workforce, and following Uhde India’s

successes in the oil and gas

sector, a new global business

unit comprising the best of

Uhde’s oil and gas talent is

being developed in order to

take on projects around the

world. “Combining forces,”

says Lueke, “we hope that

we will be qualified for more

projects in India, which will

enhance our oil and gas busi-

ness significantly.” As well

as offering EPCM and PMC

services for various refining

units, along with Uhde’s refining technologies division, the com-

pany can also offer hydrogen plants, sulphur recovery units and

aromatics extraction processes. It seems that for Uhde, India

has been the first step along a long and fruitful journey into the

hydrocarbon sector, and will play a continuing role in the years

to come.

Benno Lueke, managing director, Uhde India

Lalit Shingal, managing director, Enereff Engineers

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E&P sphere, as well as its plans to move into gas marketing, city

gas distribution, petrochemicals and power generation. He also

summed up the need to diversify and remain profitable by saying

“India is short of crude: we currently import 80% of our crude

oil, and accordingly the government has placed a lot of empha-

sis on increasing crude production. That is how the NELP policy

came into being. When India has such a demand for crude, it

makes sense for companies like BPCL to enter

the upstream sector. We took a risk, but we

succeeded. As an organization, we have dreamt

to grow and make more profit and diversify our

portfolio and activities, and I am sure that BPCL

now has a good future ahead.”

Go forth and multiplyAnother pillar of India’s strategy to guarantee

the supply of its fast-growing demand has been

the acquisition of assets oversees. According to

government figures, Indian oil and gas companies

are already present in more than 21 countries and

produce more than 8 million tons of oil and gas

per annum outside of the country. Unquestionably,

the company leading this charge to international markets for India

is ONGC, who as a PSU is charged with the task of guarantee-

ing India’s energy security for the years to come. Current chair-

man & managing director of ONGC AK Hazarika, also director

(onshore), and charged with the task of leading the company while

a permanent chairman is selected, explains the company’s strategy

in international markets: “Our focus is also on sourcing equity oil

from outside India to meet the country’s rising energy demands.

That is why we created our subsidiary company, ONGC Videsh Ltd

(OVL), whose sole purpose is to look for oil internationally. In this

regard, another strategy, set by the company in 2002 is to source

20 million tons of oil equivalent per year into the

country by 2020, through OVL.

“Today, OVL is a good growth vehicle for

the company, and now has 34 properties in 15

countries. OVL has 9 producing assets where it

has equity oil, and year on year the company is

producing an increasing amount of equity oil. This

year it has reached 9.4 million tons of oil equiva-

lent, whereas last year, in 2009, it was 8.87 million

tons.” Through its flagship projects in Sudan,

Venezuela, Brazil and Russia, ONGC hopes to

secure energy for India, and also bring the Indian

flag to large international projects, and promote

the strengths of the Indian oil and gas industry

abroad.

Oil India Ltd. (OIL) is another PSU now looking to international-

ize its exploration and production activities. Chairman and manag-

ing director NM Borah had some interesting comments to make

about the challenge of taking those first steps abroad: “one must

be cautious and strategic when internationalizing. Three years

back OIL had opportunities coming from everywhere, from Latin

America to Africa. But we didn’t have a structured way of think-

ing questions such as ‘given the choice, what part of the world

would OIL like to go and why? Is it onshore or offshore? Gas, oil

or both? If it’s oil, what size?’ The company didn’t have good

answers for these questions, so we realized that this was some-

thing we needed to figure out before further expanding abroad.

This brainstorming might take some time, but it will put OIL on a

better position to capitalize on good international opportunities

that come along the way.”

However, the acquisition of overseas oil and gas assets by

Indian companies, though in fast expansion, is still shy when

compared to its Chinese and Western counterparts. Outgoing

secretary Sundareshan explains that “the Indian model of inter-

nationalization has been very different from others. If you look at

Western countries, private companies carry all their investments.

If you look at other players such as China, all their investments

come from governmental funds, with the state’s backing. In India,

our state-owned companies have been internationalizing on their

own, using self-generated resources. There is no national govern-

ment contribution to this. But even without our explicit guidance,

they have done a very good job guaranteeing India’s future energy

security. We hope that the private sector will add increasingly to

this process, and help India’s fast-growing economy to secure the

future energy need.”

The successful internationalization of Indian state-owned

companies has followed the liberalization and modernization of

the sector. But one issue still remains in the domestic market, and

is arguably the main reason private companies are barely present

in India’s downstream sector: price controls for final consumers.

K. Venkataramanan, president (opera-tions), Larsen & Toubro

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The lack of profitability directly affects the international competi-

tiveness of India’s downstream companies and their capacity to

acquire assets abroad and raise capital in financial markets.

Despite the challenges faced by oil and gas companies in the

Indian market, one sector that has seen much growth and success

over the years has been the service industry, and today, after many

triumphs in the home market, these companies are now ready to

expand internationally. “Once people see our credentials,” says K

Venkataramanan, president of operations at Larsen & Toubro, “the

first question they ask is why are we not already present interna-

tionally? We tell them that we have been building our track record

in India and now we believe that we have a sufficient number

of references to internationalize. We have achieved that critical

mass.” This is something of an understatement from Larsen & Tou-

bro, India’s largest engineering and construction company, which

on its 70th anniversary was hailed by India’s political and industrial

elite as ‘the company that built India’. Now, after conquering many

diverse Indian sectors, from oil and gas to defense, the company

is looking beyond its borders. As Venkataramanan says, “we have

reached the point now where we would definitely like to become

an international player, initially in the Gulf area, parts of Africa and

South East Asian markets.”

Currently, international projects account for 10% of Larsen &

Toubro’s business, but over the next five years, Venkataramanan

hopes to increase this to at least 30%. With this in mind, the com-

pany is restructuring its international affiliates. In the Gulf, Larsen

& Toubro has split its business into two clusters, one to service

Oman and Qatar, and the other to cover Saudi Arabia, Bahrain

and Kuwait. By recruiting local managers to lead the businesses,

Venkataramanan hopes that their experience will help to drive

the businesses. As well as this, the company has invested in a

manufacturing complex at Sohar, Oman, where recently the largest

structures ever made in the Gulf were completed and delivered:

two 15,000 ton jackets for ONGC’s Bombay High field. Addition-

ally, the company has representatives in London, Houston, Singa-

pore, Kuala Lumpur and Perth in order to drive more international

business. Venkataramanan is optimistic about Larsen & Toubro’s

future in new countries, but is well aware of the challenges that lay

ahead. “Larsen & Toubro is well regarded in the equipment space

because that is where we are best known around the world. As a

fully integrated EPC player, we are enlarging our circle of recogni-

tion. Companies might consider us for a $1 billion USD project,

but we need to get into the consideration set right up to $2.5 bil-

lion USD, and for a wider range of services.”

India’s greatest natural resourceAfter Reliance’s discovery in the KG basin back in 2002 and Cairn’s

discovery onshore in Rajasthan, two discoveries that have changed

the shape of the upstream oil and gas industry in India, it might be

tempting to believe that India could yet become one of the world’s

most important oil and gas investment destinations. However,

there is one aspect in which India is already a world leader, and

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this is in the impressive

human resource base

on which the country is

capitalizing. There are

very few countries in the

world where it would

have been easy for Fer-

nas to build a workforce

of 1600 employees from

scratch in two years; it

now has plans to grow to

a 5000-strong company

by the end of 2011. The

human resources are

readily available in a

country with a popula-

tion of 1.2 billion; the biggest challenge is to make sure this rapid

growth is completed sustainably.

Despite the successes of Indian education institutions in creat-

ing generations of engineers and

scientists, there were some in

the industry who believed that a

dedicated institution for oil and

gas-based studies was needed

in India. Sanjay Kaul, the founder

and president of the University

of Petroleum & Energy Stud-

ies (UPES) explains his desire to

found such an institution: “when

I was in the oil and gas industry

working for an oil company, I

could walk into any hotel on any

highway and find a hotel man-

agement graduate, whereas an

industry that contributed almost

16-17% of India’s GDP did not even have a university.” He goes

on to explain the short-term insights that contributed to his vision

for an institution like UPES: “IT just boomed, and suddenly there

were no software engineers, there were no hardware engineers.

Innovation could only come from overseas. I thought to myself

that if the same reforms come to

the power sector and oil and gas

sector, would this also happen?

That you have got the reforms

done, investment is pouring in,

you have got a multiplier effect

fuelled by the 9-10% growth rate,

but no talent to fuel it.”

Having had the initial idea

for UPES in 1995, it was only in

2001 that Kaul felt the time was

right to put his ideas into action.

He believed that the only hurdle

in the way of sectoral education

was that there was no precedent.

After successfully generating

interest for the idea in the indus-

try through round table events and forums, Kaul’s dream became a

reality, and the university became the first public private partner-

ship (PPP) to be recognized by the University Grants Commission,

an Indian statutory and regulatory body governing university

education in the country.

SJ Chopra, the chancellor of UPES, explains his perception of

the mission of the university today. “Our aim with UPES was to

address the knowledge and skill gaps covering the entire gamut

of the oil and gas industry: upstream, downstream and midstream

components. Further, also for the management programs, our

emphasis has been very specific to domains. This thinking is

reflected in all our academic programs. Over the years we have

made efforts to remain true to our stated vision of providing

quality education and also engage effectively in training, research

and consultancy in the core areas of energy, power and infrastruc-

ture. Our aim is to now address the growing needs of the entire

spectrum of the energy sector with the idea of developing human

talent that is tailor-made for the oil and gas industry.”

The Indian AdvantageMany local service and manufacturing companies have made

extremely good business out of the oil and gas sector despite

international competition caused by liberalization and a transpar-

ent tendering process, because their home market allows them to

focus on quality while keeping prices low. However, this advan-

tage initially acts as a double-edged sword for companies, as the

international reputation for products in a market like India are that

quality suffers in order to keep costs low. However, as the cases

below show, it is not only possible to keep high manufacturing

standards in India, but also to overcome this issue of reputation

and perception by international companies and clients.

One company that has capitalized on its Indian advantage is

Jindal SAW, India’s first and largest manufacturer of submerged

arc welded (SAW) pipelines, with revenues of around $1.5 billion

USD in 2010. According to Jindal SAW’s managing director Sminu

Jindal, “international markets already represent around 50% of

Jindal SAW’s revenues and we intend to continue expanding in

fast-growing markets, especially through greenfield investments,

and of course if any good acquisition opportunity comes along

anywhere else we will take advantage of it.”

Sanjay Kaul, president and founder, UPES

Sminu Jindal, managing director, Jindal Saw

UPES campus, Dehradun, courtesy of UPES

CarUPES_OGFJ_1107 1 6/20/11 1:47 PM

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For Jindal, the initial challenges related to the general percep-

tion that Indian products lack of quality were quickly overcome

with high investments in quality and HSE standards. “This is a

perception that we had to fight initially but eventually our products

spoke for themselves. Jindal SAW’s experience in the USA speaks

volumes about how we managed to gain the confidence of our

international customers. Our products faired exceptionally well and

were in fact much above their prequalification criteria after which

we didn’t have to fight for recognition. Jindal SAW was the first of

its kind to go not only for ISO 9000, but also 18000 and 14000.”

Jindal SAW gained special recognition for its participation in

Cairn Energy’s Barmer Salaya pipe

line (BSPL) project. The project

involved the supply of longitudi-

nal submerged arc welded (LSAW)

line pipes for worlds' longest

underground pre-insulated heat

traced pipeline to transport waxy

and heavy crude which otherwise

solidifies at ambient temperature.

“By undertaking this challenge

and successfully completing the

task,” says Jindal, “Jindal SAW

Ltd. proved its technical compe-

tence and execution capabilities

to take on technologically chal-

lenging projects and accomplish

their execution to meet the

project’s requirement. We were

running on full capacity and to ful-

fill the requirement we had to set

up new thermal insulation coating

facility, new liquid epoxy coating

facility, new hydrotesting facility

for seamless tubes and sect tube

welding facility involving com-

plicated welding process – all

from scratch. We did this and

we also manufactured and sup-

plied 590km of thermal insulated

coated pipes all within 11 months – a record no one in the world

had accomplished before.”

Uma Shanker, chairman and managing director of Advance

Valves, recalls the challenges faced by Indian manufacturing com-

panies. In a concerted attempt to change the standard industry

template, Advance Valves opted for an extremely transparent way

of doing business that helped them win contracts with non-Indian

companies. “We were encouraged knowing that you could be suc-

cessful while disclosing the details of your technology—even as an

Indian company. Sometime in the 1990s, the West started listening

to Indian engineers. There was some resistance, but gradually they

began to accept our capability.”

Shanker believes that because of the high levels of quality

permeating the local market today, there is now no distinction

between international quality levels and Indian ones. “Indian buy-

ers are as technologically demanding as global customers. The

differences are vanishing more and more. Particularly with the

global market—the supplier base, and the vendor base, and the

engineering consulting base, are becoming more and more global;

and the scale of operation in India is ever growing.”

The fact that prominent Indian companies have been so

conscious about the quality of their products and services and

the safety of the environment and their employees has helped

to break paradigms in international markets about how Indian

companies are climbing the international value-added ladder while

maintaining their cost-competitiveness.

Jindal Drilling, part of the D.P. Jindal Group, is another example

of how Indian expertise has achieved international levels of quality.

Raghav Jindal, managing director, Jindal Drilling & Industries

Uma Shanker, chairman and manag-ing Director, Advance Valves

Manufacturing plant, Courtesy of Advance Valves

CarIGL_OGFJ_1107 1 6/17/11 5:22 PM

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The company was incorporated in 1983 with a focus on providing

quality offshore drilling and correlated services and today operates

five jackup rigs and provides a wide spectrum of services such as

offshore drilling, directional and horizontal drilling, mud logging,

and manufacturing of seamless pipes.

Having built its business through working almost exclusively

with ONGC in the Indian market, the company is now planning to

spread its tentacles throughout the Indian market and beyond, as

Raghav Jindal, newly appointed managing director of Jindal Drill-

ing explains. “With the broadening of the Indian market, we will

be looking at partnering with various new entrants. Jindal Drilling

is bidding for tenders with some of the other already established

companies in the market such as British Gas, Cairn and Reliance

Industries and we recently did a drilling project for Cairn. Last but

not least, Jindal Drilling will also target the international market

and look into acquisitions abroad while participating in quality

partnerships.”

As part of its growing international recognition, Jindal Drilling

recently received an award from Forbes Asia, rating the company

as one of the top 200 companies on the continent that are under a

billion in market capitalization. “That was a great achievement for

the company. The ratings criteria are not specifically provided, but

some of the noted areas are growth opportunities in the future,

services, profit margins and turnover. There were only 37 compa-

nies selected from India, and just two or three from the oil & gas

sector,” says Jindal.

Gas is always greenerThe 2002 discovery of KG-D6

natural gas reserves by Reli-

ance has awakened India to the

potential of natural gas in recent

years. Today India is finally invest-

ing heavily in LNG terminals, gas

pipelines, city gas distribution

(CGD), compressed natural gas

(CNG) and liquified petroleum

gas (LPG), and many established

Indian players are using such

plays as a way to diversify their

domestic business in the face of

government subsidies on petro-

leum products.

The state-owned gas and

infrastructure giant GAIL is

involved in most of India’s major

infrastructure projects to increase

its gas import capacity. According

to GAIL’s chairman and manag-

ing director BC Tripathi, the main

“benefit GAIL has provided to

India is in the development of its

gas industry. When GAIL’s first

project started in 1984, India

didn’t have the necessary technol-

ogy, consultants, or materials

providers (such as pipes, compressors, and valves). Today India is

one of the largest exporters of pipes in the world, having almost

25% share of the world pipes industry. The same happened in the

construction industry: India had no contractors in 1984. When you

look at the various equipment suppliers (such as gas turbines, com-

pressors, wags), any item required in the industry is now produced

in India and exported elsewhere”. As a result, the “contribution

that GAIL has provided to India over the last 25 years, apart from

building the backbone infrastructure to the industry and support-

ing the energy supply, is the development of the Indian oil and gas

value chain.” The growth in GAIL’s turnover has impacted directly

on its investments, “In the last 25 years GAIL had an accumulated

turnover of $5.5 billion USD, but we are going to achieve more

than that in the next four years. The company currently has almost

4970 miles of pipelines and we are going to have 9320 miles by

2014/2015, almost doubling the available infrastructure.”

Petronet LNG is an example of the emphasis placed by the gov-

ernment of India on increasing the country’s energy supply through

gas. The company constitutes an effort to bring together four

major public sector undertakings (PSUs) to start a new business in

LNG, a field where India had no real experience, technology, or

expertise. “This was in 1998. The four companies – ONGC, IOCL,

BPCL, and GAIL – came together, and to have access to the neces-

sary technology, GDF SUEZ was taken as a strategic partner. The

Asian Development Bank also provided international support. In

this period Petronet LNG has done pretty well. The company has

the biggest re-gasification plant in the world and we have been

awarded the largest LNG sourcing contract,” explains AK Balyan,

BC Tripathi, chairman and managing director, GAIL

BC Tripathi, chairman and managing director of GAIL

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CEO of Petronet.

Petronet set up India’s first LNG receiving and

regasification terminal at Dahej, Gujarat, and is in

the process of building another terminal at Kochi,

Kerala, both on India’s west coast. While the Dahej

terminal has a nominal capacity of 10 million tons

per annum (MTPA) the Kochi terminal will have a

capacity of 2.5 MTPA.

However, there are challenges to delivering the

gas India so desperately needs. Balyan explains

why. “Petronet LNG needs to have reasonably

priced and affordable gas to make it available to

a billion people and that is a challenge. The world

gas scenario is very volatile and filled with uncer-

tainties. So one thing we are working on is to have

sustainable, long-term contracts at reasonable

price levels, to be able to import and bridge the

gap between demand and supply.”

Vikram Singh Mehta from Shell complements

Balyan’s comments; “You cannot produce gas

without infrastructure in place to support the

market. That means power plants must be con-

structed, fertilizer plants must be constructed,

and more. Demand is potentially huge, but you

have to facilitate the demand.” Even so, Shell and

its partner Total have built the $700 million USD

Hazira Terminal, which includes an LNG storage

and regasification terminal with a fully functioning

port. The industry hopes that current investments

in infrastructure will facilitate the access of oil and natural gas to a

largely unattended industry and population; LNG’s current prices

will help make it more competitive in a coal abundant, though

extremely polluted, country.

If finding major buyers looks challenging, try delivering fuel

directly to more than a billion people who are urbanizing at record

speed, with a 300 million-strong middle class growing in size and

purchasing power. This is what companies such as Indraprastha Gas

Limited (IGL) are doing. Their main achievement, as its managing

director Rajesh Vedvyas highlights, “has been to expand IGL’s infra-

structure so as to meet the ever growing demand. When I entered

the scene there were long queues at Delhi’s compressed natural gas

(CNG) stations, so I took as my first task the expansion of the infra-

structure at a rather fast pace to allow consumers to conveniently

refill their vehicles. In a matter of two years IGL

has built about 80 CNG stations from an initial

base of 160, and another 40 are under construc-

tion. There is a huge jump in the infrastructure

so as to make CNG refueling a pleasant experi-

ence for our consumers.”

Thanks to the enforcement of incentive laws

and the obligation for all public transport to

run on CNG, the pollution levels in Delhi have

diminished considerably, though there is still

a long way to go. Vedvyas expects that in five

years IGL will be at least four times bigger than

today in terms of turnover. “Last year IGL had

revenues of around $300 million USD, but our

target for 2015 is to become a $1 billion USD

company.”

IGL is also growing quickly in PNG city gas

distribution (CGD), though Delhi’s wide accep-

tance of this clean alternative has not been a norm

in India. “At the moment we have 40 Indian cities

where CGD has been rolled out in the last five

years, but in most of these cities, CGD business

has not taken off in real terms. There are issues

that need to be addressed before the PNGRB

tries to implement CGD in 200 plus cities they are

planning to. Even cities like Delhi and Mumbai

still have unresolved issues. The PNGRB needs

to act as a facilitator to resolve these problems

first before expanding the CGD business on such

a large scale. Unless they do that, it is doubtful

that CGD business can be successfully launched

in other cities.” Again, the problem is not lack of

demand, but how much large and small consumers

are willing to pay and how much the government

is willing to subsidize or enforce the use of cleaner

fuels.

Fernas, a Turkish construction company,

entered the Indian market explosively 2 years ago

through the medium of oil and gas, winning pipe-

line contracts with GAIL, IOCL, and ONGC’s Petro

Additions Ltd. It is already looking to diversify its

portfolio in India, firstly through power and road

projects, but also through city gas distribution, an

area where the company has experience as the owner and operator

of city gas distribution in the Turkish city of Diyarbaker, where it

supplies gas to more than 100,000 consumers.

As CEO of Fernas India Rohit Singhal explains, this would mark

a shift in the strategy of Fernas in India so far: “City gas distribution

is going to be another area where we may compete as an opera-

tor, rather than just as a constructor. The company outside India,

especially in Turkey, has moved away from construction to asset

ownership. We want to follow a similar strategy in India.” It seems

that despite the challenges of bringing gas to such an enormous

market, including the logistical challenges of bringing gas to new

cities and the legislative challenges still being faced regarding

distribution rights for new cities, there are companies in India today

willing to brave the challenges and seize the opportunities.

Rohit Singhal, chief executive officer (India), Fernas Construction Company

Rajesh Vedvyas, managing director, IGL

Pipelines in Rajasthan, Courtesy of Cairn India

email: [email protected]

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