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OIL AND GAS SECTOR

1) OVERVIEW

The economic growth of a country depends on the long-term availability of energy from the
sources that are affordable, accessible and environment friendly and also given the plans for rapid
economic growth, it is evident that the countrys requirements for energy and supporting infrastructure
would increase rapidly as well. For the GDP to grow at 9%, commercial energy supplies will have to
grow at a rate between 6.5 and 7% per year. Since Indias domestic energy supplies are limited,
dependence upon imports will increase. Import dependence in the case of petroleum has always been
high and is projected to be more than 80% in the Twelfth Plan In 2011, India was the fourth-largest
energy consumer in the world, with consumption of 559 million tonne oil equivalent (MTOE). The below
depicts the evolution of primary energy demand in India explicating the very fact that its not only
imperative to look out for exploring new reforms be it NELP in the sector but also to stick to the
sustainable motto in line with ever growing need of people :





A projection in the Twelfth Plan document of the Planning Commission indicates that total
domestic energy production of 669.6 million tons of oil equivalent (MTOE) will be reached by 2016-17
and 844 MTOE by 2021-22. This will meet around 71 per cent and 69 per cent of expected energy
consumption, with the balance to be met from imports, projected to be about 267.8 MTOE by 2016-17
and 375.6 MTOE by 2021-22 and 1464 by 2035.

Currently India is dependent on imported crude oil to the extent that recently the US Energy
Information Administration (EIA) has observed that India imported 184 MT of oil or about 84 % of
consumption. All stakeholders, therefore, continue to remain engaged in quest for energy. Hence If no
significant measures are implemented and urgently, India is expected to import between now and 2030
a cumulative amount of energy equivalent to 3.6 Trillion USD, more than twice the current Gross
Domestic Product as shown in figure one below:
42%
23%
8%
26%
1%
559 MTOE, 2010
Coal
Oil
Gas
Renewables
Nuclear
42%
26%
11%
18%
3%
1516 MTOE, 2035
Coal
Oil
Gas
Renewables
Nuclear
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Despite the increase in exploration and production activities in the country, its dependence on
imported oil is almost 82% of the total domestic demand. The domestic oil production has been almost
flat over the years due to limited prospects, delays in commissioning of projects and declining
production from existing maturing fields. As of 1 April 2011, the Ministry of Petroleum and Natural Gas
revealed that the total domestic oil reserve is 757 million metric tonnes (MMT). The crude oil production
will remain almost stagnant in the Twelfth Five Year Plan. In 2031-32, the consumption is expected to be
in the range of 350 to 486 MMT and the import dependency will be in the range of 90 to 93%.





In India, natural gas is a minor part of the overall energy mix, accounting for only 10% of the
total energy consumption in 2011. The natural gas consumption is poised to increase and will account
for 11% of the total energy consumed in India in 2035.Indias natural gas consumption is expected to be
in the range of 100-197 MMTOE in 2031-2032. Thus, imports will account for up to 49% of the total gas
consumed.




34 34 34 38 37
156
161
193
206
184
78%
79%
83%
82%
84%
74%
76%
78%
80%
82%
84%
86%
0
50
100
150
200
250
FY 08 FY 09 FY 10 Fy 11 FY 12
India's Oil Production and Consumption Pattern,
MT
Production
Consumption
Imports
31
39
51
46
40 41
51
62 61
53
26%
23%
18%
25%
33%
0%
5%
10%
15%
20%
25%
30%
35%
0
10
20
30
40
50
60
70
FY 08 FY 09 FY 10 Fy 11 FY 12
India's Naural Gas Production and Consumption
Pattern, in BCM
Production
Consumption
Imports
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Adding more is the fluctuating high oil and gas prices have prompted increased investments in
the exploration and production (E&P) sector posing new challenges for the sector in the form of
increased cost of operations due to high service costs, exposure to logistically difficult terrain and
shortage of technical manpower. Global refining scenario indicates very little to negligible addition in
capacities in major developed consuming markets like the USA and the European countries. Developing
countries like the Middle East, China and India are fast emerging as refining hubs. Needless to say that
capacity augmentation in these regions would also result into possible integration of both the refining
and petrochemicals business.

In the gas sector, the government has continued to exercise its control on pricing. Administered
Pricing Mechanism (APM) natural gas - produced from fields given to ONGC and OIL on nomination basis
was increased in May 2010 more than doubled in price in May 2010; from US$ 1.8 per MMBtu to $4.2
/MMBtu, although. Price for gas produced by companies investing through NELP is indexed to oil, and is
in some cases marginally higher. The government has reaffirmed its intents to determine the marketing
priorities for natural gas with a pricing formula stipulated by the government. The regulatory framework
in this sparking regard thus proves to be imperative and a look at the same below outlines the various
authorities involved:




1. Ministry of Petroleum and Gas(Pricing of
Petroleum products)
2. Planning Commission & Empowered group of
Ministers (Decisions on Industry issues)
3. Ministry of Finance (Tax formulation & Fiscal Reg.)

1. Directorate General of India (Upstream regulator,
Production sharing contracts)
2. Petroleum and natural Gas Regulatory Board
(Regulate refining, processing, sale & distribution)


1. Petroleum Act 1934, (Rules for Import, storage)
2. Oilfields Act ( Safety regulations)
3. NELP ( Allocation of oil blocks)



While India is not perceived as one of the most resource rich nations, it potentially
possesses considerable amounts of hydrocarbon reserves that are largely unexplored and untapped. The
15 basins out of a total 26 sedimentary basins in India have prognosticated hydrocarbon resources.
According to Oil and Gas Journal India have almost 5.5 billion barrels of reserves against consumption of
approximately 3 million barrels a year which clearly thrusts the need t expand the exploratory engines.
Therefore, the need for accelerated and concerted exploration efforts is of utmost importance and
should be given top priority by the Government

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2) NOTABLE TRENDS & KEY ISSUES
2.1 Notable Trends
a) Coal bed Methane
Government approved the CBM policy in 1997 to boost the development of clean and
renewable energy resources.
CBM policy was designed to be liberal and investor friendly; the first commercial production
of CBM was initiated in July 2007 at about 72,000 cubic meters per day.
CBM is an eco-friendly natural gas (methane), which is absorbed in coal and lignite seams.
b) Underground coal gasification (UCG)

The technology was first widely used in the US in the 1800s and in India (Kolkata and
Mumbai) in the early 1900s.
UCG is currently the only feasible technology available to harness energy from deep
unmineable coal seams economically in an eco-friendly manner.
Reduces capital outlay, operating costs and output gas expenses by 2550 per cent, vis--vis
surface gasification.
c) Gas hydrates and bio-fuels

The government initiated the National Gas Hydrate Programme (NGHP), a consortium of
national E&P companies and research institutions, to map gas hydrates for use as an
alternate source of energy.
Bio-fuels (bio-ethanol and bio-diesel) are alternate sources of energy from domestic
renewable resources; these have lower emissions compared to petroleum or diesel.
d) Shale Gas
According to the preliminary studies carried out by the US Energy Information Administration in
April, 2011 India has technically recoverable Shale gas resources of nearly 63 trillion cubic feet (tcf).
The draft shale gas licensing policy has been circulated to various industry members. The
government expects the licensing round to be conducted during the first half of the 12th plan. It is a
well known fact that Shale Gas has transformed the landscape of the energy industry in the United
States with the country becoming a net exporter of natural gas from a net importer of gas.
According to the EIA, shale gas production in the USA in 2010 reached 4.87 Tcf (23 percent of total
U.S. natural gas production), compared with 0.39 Tcf in 2000.
e) Substantial latent demand in natural gas sector:
Many of the end customers of the natural gas sector offer significant latent demand on account
of factors such as lack of infrastructure or last mile connectivity. The opportunities available thought
unlocking of this latent demand through infrastructure expansion are immense especially as gas is
cheaper than crude oil and other feedstock for many industry sectors.
Though these trends are definitely positive sign and prove to be future fuel for generations to
come, there are some key issues pertinent to oil and gas sector which are duly outlined:
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2.2 Key issues

2.2.1) Demand & Supply Side Challenges

1) Import Dependency
By 2031-32, Indias import dependency on fossil fuels is likely to be between 91 and 94% for oil,
between 40 and 50% for gas and between 40 and 50% for coal. Such high import dependency is likely to
strain Indias foreign exchange reserves and balance of payments position and will result in rupee
depreciation, fiscal deficits and inflation. To counter these challenges, the monetary policy may have to
raise interest rates, which will have a negative effect on growth, investments and job creation.

2) Lack of Exploration & Production
Almost 40-50% available oil is already explored. But the natural gas reserves in India have
remained largely unexplored7. Similarly, for coal, success of exploration efforts has been limited, with
activities starting only in 100 blocks out of 208 blocks. Below clearly depicts the impaired situation of the
sector as of today and that years to come

3) Technology dependent operations
As the era of easy oil is getting over, new finds will have to be made in areas that are
geographically difficult to reach. Our domestic oil and gas companies are challenged by capabilities in
deep-water technologies, etc. This will necessitate joint ventures and partnerships with global oil and
gas majors and service providers. Thus, our regulatory environment should be conducive enough to
attract investments from them.




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4) Geo Political Risks
The recent Libyan crisis and embargo on Iran has brought focus on the vulnerability of large
consumers like India (which imports more than half of its oil and gas from the Middle East) to
geopolitical tensions.

2.2.2) Policy Related Challenges

1) Pricing of domestically produced Natural Gas
The gas sector in India holds tremendous potential. However, its growth is constrained due to
pricing and marketing policies of the government with respect to gas produced domestically. Gas
produced by PSUs and RIL from the KG block is priced at 4.2 USD per million metric British thermal units
(mmbtu) whereas gas produced from some of the blocks has been allowed to be sold at slightly higher
rate. This has caused a sense of uncertainty in investors minds.

2) Pricing of Petroleum Products
The country has become extremely dependent on imported crude oil. One of the major
challenges in the oil and gas sector is a subsidy for sensitive petroleum products (kerosene, LPG and
diesel), which has led to large under recoveries and accounted for huge loss.

3) Lack of clear policy in E&P sector
The government has not been able to attract investors in the exploration and production (E&P)
sector due to uncertainties in areas of pricing and allocation of hydrocarbon resources, complexity in
granting of approvals and various clearances, interpretation of the terms of the production sharing
contracts (PSCs) and other framework agreements.

2.2.3) Operational Side Issues

1) Remaining operationally effective while maintaining margins within an environment of fluctuating
crude prices.
2) Leveraging sales and operations planning as an effective tool in strategic crude supply and refined
product forecasting.
3) Reinventing a more integrated strategic supply chain that can dramatically enhance cost savings (such
as in the extraction of previously economically stranded and remote oil reserves) in the supply base
and reduce risk.
4) Paying greater attention to HSE issues within broader operations concerns that are premised upon
sustainability.


2.2.4) General Issues

1) Limited participation by foreign companies in Indian Upstream sector
The nine rounds of NELP have seen enthusiastic participation by the state owned companies,
the participation by private players especially the foreign majors has been limited. These companies
bring a lot of investment muscle required for development of capital intensive and high risk upstream
projects. More importantly however, these companies bring technological expertise and diverse project
experience.


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2) Acquisition of Oil & gas abroad
Indian Oil & Gas companies, especially the public sector companies have been competing with
aggressive Chinese counterparts and IOCs for acquisitions of assets abroad. However, in many cases
these companies have to lose out to the competition due to the slow speed of clearances and decision
making process in place for making large investment decisions.

3) 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 pricing and marketing policies
of the Government with respect to the domestically produced gas. To add to the woes of investors the
recent unexpected dip in domestic gas supplies has added new dimension of ambiguity that of supply
uncertainty.


3) OPPORTUNITIES / KEY INITIATIVES
Currently, government-owned companies dominate Indias energy industry, although the
private sector is actively capturing market share and even investing in state-owned companies.
However, the policy and planning is largely controlled by the central government in Indias federal
political set up. The August 2006 report of the Expert Committee on the IEP analysed the resource
options for the countrys energy needs. According to the policy, the countrys hydrocarbon resources
will be grossly inadequate to meet its demand. The government has taken certain steps to build
infrastructure for energy security.

1) Asset acquisitions in oil and gas sector
To secure hydrocarbon resources for the country, the government has been encouraging
national oil companies (NOCs) to aggressively pursue equity stake in overseas oil and gas companies.
The ONGC Videsh Ltd (OVL) has invested 11 billion USD abroad. In addition, a number of other investors,
both public sector undertakings and private players, have also invested in 50 other projects in 19
countries. The combined production from these is 9.36 MTOE of oil and gas in 2010-11, and OVLs share
was 8.78 MTOE of oil and gas from its assets abroad in Sudan, Vietnam, Russia, Syria, Colombia and
Venezuela. The OVL oil equity so far accounts for only 9% of Indias current oil import requirements. If
these assets were to meet at least 10% of the requirements in 2031-32, the investments will have to be
increased six times.

2) New Exploration and Licensing Policy NELP
The New Exploration Licensing Policy (NELP) for exploration & production of oil & natural gas
(but excluding Coal Bed Methane), and the Coal Bed Methane (CBM) Policy were formulated by the
Government of India, with Directorate General of Hydrocarbons (DGH) as the nodal agency, during
1997-98 to provide a level playing field to both the Public and Private sector companies in exploration
and production (E&P) of hydrocarbons.

NELP Status

Under NELP, which became effective in February 1999, acreages are offered to the participating
companies through the process of open international competitive bidding. The terms & conditions of
this open and transparent policy rank among the most attractive in the world. The first round of offer of
blocks was launched in 1999 and most of the ninth round awards were concluded in 2012. The 10
th

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Round of NELP has been scheduled for this Month offering 46 Blocks. Under NELP, 360 exploration
blocks have been offered so far and 254 blocks have been awarded, as shown below. Presently 166
blocks are active and 88 have been relinquished. The following figure shows the number of blocks
offered, blocks for which bids received and the blocks awarded. Below depicts the same in an clear
manner





Since Cost recovery is at the root of the problems, the C Rangarajan committee in December
2012 has proposed that it be dispensed with it favor of sharing the overall revenues of the contractor. In
the proposed system the government will be able to capture economic rent in the form of royalty and
revenue share of hydrocarbons right from the onset of production.

3) Opportunities in CGD Sector
City Gas Distribution (CGD) has been one of the most talked about subsector in Oil & Gas sector
in India. The CGD sector offers opportunities for both incumbents and new companies to participate.
Owing to the capital intensive nature of the sector, PNGRB allowed various incentives such as exclusivity
and related item.

4) Opportunity in Tankage
Import of crude oil will grow at a CAGR of 4.25% as per IEA projections for the next 20 years.
Average per barrel cost of crude imports has seen a CAGR rise of 6.42%. Thus pushing a strong thrust on
the infrastructure of storage tanks within the country.
.
5) Pipeline Transportation
In order to curb the cost and 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 happens over pipelines. Cross country pipeline networks, preferred as a cost effective,
energy-efficient, safe and environment friendly mode for transportation of crude oil and petroleum
products, have been playing a vital role in meeting Indias energy demand. They are now a key
constituent of the countrys infrastructure, transporting crude oil from import terminals as well as
48
25
27
24
20
55
57
70
34
46
25
23 23
21
20
52
44
34
19
0
10
20
30
40
50
60
70
80
1 2 3 4 5 6 7 8 9 10 in
2014
Bocks Offered under NELP
Blocks Offered
Blocks Awarded
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domestic sources to inland refineries, and finished products from refineries to major consumption
centres.

6) Expediting and closely monitoring the creation of strategic petroleum reserve to cater to potential
supply disruptions. Based on recommendations of the Planning Commission in the IEP, the government
has set up the Indian Strategic Petroleum Reserves Ltd (ISPRL), under the Ministry of Petroleum and
Natural Gas. The ISPRL, a government company, is building three huge underground caverns that can
hold beneath the earth that can hold 14 days worth of oil.


4) CONCLUSION


Economic constraints are compelling India to reduce dependency on oil and gas imports
and develop capabilities in domestic hydrocarbon exploration and production. The oil and gas
sector in India has untapped potential, calling for more intense exploration activities. Hence,
there is a meritorious case for catalyzing actions leading to the development of domestic
hydrocarbon E&P industry. Given the need to boost development of domestic oil and gas
industry in an energy starved nation, the government needs to proactively encourage public-
private partnerships for developing the oil and gas industry. Indias dream of energy security
may turn into reality if the policies are aligned to meet the challenges the sector is facing.

The demand is here and in the next two and half decade, the consumption would be
three to four times. Unlike in the industrialized world, this future of Indian petroleum sector
bodes well for best of the companies; they would like to lay finest of the infrastructure. Lets
hope they are waiting in the wings for competitive, safe and efficient business environment to
develop.