22 November 2013

Voyagecapital@iimidr.ac.in
Voyage Capital Team
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Oil and Gas Industry in India- An Overview

Kunal Shah

As of 2013, India is the fourth largest energy consumer in the world after the United States, China, and Russia. India's economy has grown at an annual rate of approximately 7 percent since 2000 and its demand for energy has proved to be relatively resilient to the 2008 global financial crisis. India was the 10th largest economy in the world in 2011, as measured by nominal gross domestic product (GDP). Energy Information Agency (EIA) projects India and China to account for the biggest share of Asian energy demand growth through 2035. A huge chunk of this demand requirement is expected to be fulfilled by oil and natural gas, which makes the oil and gas sector of paramount national importance. Figure 1 and Fig. 2 highlight Indias dependence on oil and natural gas and gives an idea of growth in the sector in the coming years.

Fig 1: Energy Mix of the Indian Economy (Source: US EIA, International energy statistics)

Fig 2: Indias crude oil consumption (Source: US EIA, International energy statistics)

The years since independence have seen the rapid growth of the upstream and downstream oil sectors. Yet, India remains one of the least-explored countries in the world, with an oil well density among the lowest in the world. Also, in the recent decades, the sector has been characterized by rising consumption of oil products, declining crude production and low reserve accretion. However, the increasing consumption of hydrocarbons in the coming decades, liberalization, deregulation and reforms in the petroleum sector entail a healthy overall growth of the industry.

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Industry Profile
The hydrocarbon value chain can be divided into three distinct sub categories: upstream, midstream and downstream. Figure 3 highlights this in greater effect.

Fig 3 Hydrocarbon Value Chain (Source: www. Petrostrategies.org)

Upstream Sector The Upstream sector includes activities related to exploration and production (E&P) of oil and natural gas in the sedimentary basins of the country. While the Upstream sector was historically dominated by National Oil Companies (NOC) like ONGC, Oil India the last few decades have seen the emergence of private players like Reliance Industries Ltd., Cairn India Ltd. etc. India presents an attractive opportunity in the E&P sector on account of its growing consumption market, and largely unexplored sedimentary basins. Fig 4 highlights the scope of growth in the sector.

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Fig 4 Indias yet to find potential Among the top 15 countries globally (Source: Boston consulting group, 2012)

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22 November 2013 The growth of the upstream sector in the country has been a mixed bag. While recoverable oil reserves have grown from 739 Million tonnes in 2004-05 to 760 Mn. tonne in 2011-12, natural gas reserves have ballooned from 923 Billion cubic meters (BCM) to 1330 BCM in the same period. Oil production has increased from 33.98 Mn tonne to 38.09 Mn tonne between 2004 and 2012 and gas production increased from 31.76 BCM to 47.56 BCM after hitting an all time high of 51.2 BCM in 2010. The major drivers of growth in the last decade have been the flurry of natural gas discoveries in the Krishna Godavari Basin and commencement of production by Reliance Industries Limited from the KG-D6 block. Oil production has been supported by commissioning of Mangala and Bhagyam oil fields in the Rajasthan asset of Cairn India. Midstream Sector The midstream sector includes activities related to transportation of oil and natural gas and processing of the same. India has a network of 19,103 km of crude and product pipelines with a capacity of around 163 million tons per annum (MMTPA). Indian Oil Corporation (IOCL) holds the majority share of the transport pipelines and the rest is held by other government-owned petroleum companies such as OIL India, ONGC, BPCL and HPCL. India, currently, has a network of about 13,000 km of natural gas transmission pipelines with a design capacity of around 337 mmscmd. GAIL accounts for nearly 8,000 km of this network. The remaining network belongs to Reliance Gas Transportation Infrastructure Limited (RGTIL), Gujarat State Petronet Limited (GSPL), Assam Gas Company and OIL India. While Indias crude and product pipeline capacity is reasonably adequate, it has inadequate gas pipeline infrastructure. The country has a very low pipeline penetration as compared to the rest of the world. India currently has three LNG re-gasification terminals, one each at Dahej, Hazira and Kochi. In addition, new LNG terminals are planned in Dabhol, Gangavaram, Ennore and Mundra. Although LNG imports have increased over the years, its share in total gas supplies has decreased. This is mainly due to the increase in domestic gas production and transmission capacity constraints. However, this trend is likely to reverse over the long term due to increased domestic demand and the inability of domestic production to satisfy the demand.

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Fig. 5 LNG Imports and contribution to domestic supply (Source: Petroleum Planning analysis cell)
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22 November 2013 Gas demand is expected to grow in the country at a much higher rate than domestic production, since major consumers such as fertilizer units and power plants are switching to natural gas from naphtha. As a result, the demand for LNG is expected to remain high, which is likely to lead to capacity augmentation of existing LNG terminals as well as commissioning of new ones.LNG supplies are estimated to account for around 26% of the total demand for natural gas by FY20. (Ernst and Young, 2011) .The expansion of existing LNG terminals and commissioning of new terminals at Ennore, Mundra and Dabhol are expected to result in an increase in supply. Despite the increase in LNG re-gasification capacity in the country, it may continue to witness a shortage of natural gas. According to industry estimates, India is expected to face shortage of gas of 130140 mmscmd by FY20, which is more than current domestic production levels. This shortfall can be met by setting up additional LNG terminals or transnational pipelines. In the current scenario, LNG terminals are more attractive as geopolitical factors, and disagreements on gas pricing may discourage investments in transnational pipelines. Therefore, ramping up additional LNG capacities may be a long-term solution for increasing gas supplies in India. Furthermore, the increase in LNG re-gasification capacity is expected to create opportunities for companies operating LNG terminals and providing EPC services. Downstream Sector The downstream segment consists of activities related to petroleum refining and retailing of petroleum products. The two segments within the downstream sector that we shall focus is Petroleum refining and City gas distribution. Indian refining industry has done exceedingly well in establishing itself as a major player globally. India is emerging as a refinery hub and refining capacity exceeds the demand. The last decade has seen a tremendous growth in the refining sector. The countrys refining capacity has increased from a modest 62 Million Metric Tonnes Per Annum (MMTPA) in 1998 to 215.066 MMTPA at present, comprising of 22 refineries - 17 under Public Sector, 3 under private sector and 2 in Joint Venture (JV). During 2011-12, two new JV refineries of 6 MMTPA and 15 MMTPA were commissioned in Bina, Madhya Pradesh and Bathinda, Punjab. Exhibit 1 lists the refineries in the country along with their capacity. City gas distribution in India has grown, despite no new licenses/authorizations and despite uncertainty about price and supply. Between 2009 and 2011, the CGD network more than doubled in size, from 11,000 kilometers to almost 27,000 kilometers. Total gas consumption in the CGD segment rose from just under 14 mmscmd in 2009-10 to about 22 mmscmd in 2011-12. The total number of CNG stations grew from 637 in December 2010 to 783 in March 2012. Almost 80 cities in over 50 geographic areas now have operational networks or authorized licensees. This growth is likely to continue over the next couple of years, driven by expansion of existing older networks and commencement of operations by "recently authorized" operators. The growth will also continue to be driven by the competitive advantage natural gas has vis--vis other fuels and by judicial interventions dictating a switchover from other fuels because of environmental concerns. The development of new cross-country pipeline networks and the addition of LNG terminal capacity will also aid CGD growth. To be sure, the sector faces many challenges. The supply of cheaper domestic natural gas has been much lower than expected because of a fall in production in the KG Basin gas fields. This means that CGD operators have to buy more of costlier R-LNG from international markets. But, as the experience of Gujarat shows, CGD can still be competitive. Moreover, global gas prices have recently been trending in a downward direction. There are other issues as well with setting up CGD networks, relating to right-of-way for pipeline networks, lack of municipal cooperation, land for CNG stations, availability of manpower, etc. 1

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22 November 2013 Player Profile The major players in the oil and gas industry in India can be divided into five categories Integrated energy companies These are energy giants that have operations across the hydrocarbon value chain, right from exploration and production to refining and in some cases even retail operations. The two major integrated energy companies in India are Reliance Industries Limited and ONGC Pure-Crude Play These are the companies that are exclusively involved in the exploration and production of hydrocarbons. The major firms in this category are Cairn India Ltd and Oil India ltd. Refiners It includes the major players in the petroleum refining segment of the oil and gas industry. Apart from the refineries owned by MRPL and Reliance, other major players include IOCL, HPCL, and BPCL in the public sector and Essar oil in the private sector. Transportation and Processing The companies included in this section are either operators of natural gas and crude oil pipelines or operators of LNG terminals. The main companies in this category are Gas Authority of India Ltd, Gujarat State Petronet Ltd and Reliance Gas Transmission Infrastructure limited City Gas Distribution These companies are involved in retailing of natural gas in their respective geographical area in the form of either PNG or CNG. The major players are Adani gas, Indraprasth Gas Limited, Mahanagar gas Limited, GSPC Gas Limited and Haryana Gas Limited. References Ministry of Petroleum and Natural Gas ,(2011-12) Basic Statistics on Indian Petroleum and Natural Gas, pp 1-51. (2013) City Gas Distribution in India, Infraline Energy, pp 1-4. Western Australia Trade Office, (2011) An overview of Indias Oil and Gas Market , pp 1-27. (2013), U.S. Country Report: India, U.S. Energy Information Agency, pp 1-19 (2013), Refineries of India, Ministry of Petroleum and Natural Gas. V O Y A G E

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