Management of Oil and Gas Sector

Final Assignment

Submitted by
Tushar Batra
2013PGPUAE044

Regulations, Bidding Parameters and Fiscal

System for Upstream Oil and Gas Business
Regulations
A regulation is a legal binding prescribed by an authority to shape the conduct that is a by-product of
imperfection. Oil & gas sector is a highly regulated sector, so that the enterprises or government/private
bodies owning the upstream oil resources dont abuse their power. The objective of a host government
is to maximize wealth from its natural resources by encouraging appropriate levels of exploration and
development activity.
Regulation is broadly done in these categories:
1) Technical Regulation
Maximum petroleum recovery
Controlling depletion of petroleum reservoirs
2) Economic Regulation
Ensuring supply can respond flexibly to the change in demand
To promote market development
Reduce the cost of extraction
Ensuring monopolies dont abuse their power
Controlling oil exports
Pricing of monopoly pipeline services
3) Environmental Regulation
Ensure protection of environment
Air regulation norms
Disposal of oil and gas wastes
Water waste management

Bidding Parameters
Properly conducting negotiations for attracting oil and gas companies and properly regulating their
activities is essential to the final outcome. Indeed, resources may go undiscovered and certainly
unexploited if the appropriate approach is not followed.
A comprehensive due diligence is performed on the companies participating in the bidding of oil and gas
resources.
Following are the company based nodding parameters used for bid evaluation

Technical capability
Financial ability
Work program
Fiscal package

Others bidding parameters depending on the resources for which bidding is to take place are

Areas to be allocated
Minimum obligations
Adjudication parameter(s)
Type of license

Fiscal System
Fiscal terms for upstream investment refer to the agreement between a local government and an oil and
gas exploration company to explore, develop and produce hydrocarbons.

There are two main types of petroleum fiscal arrangements: concessionary systems and contractual
systems. In concessionary systems private ownership is allowed whereas in contractual systems
the state retains ownership. In contractual systems companies have the right to receive a share of
production or revenues from the sale of oil or gas in accordance with a production sharing contract
(PSC) or a service contract.

Fiscal System

Concessionary System

Service Contract

Pure Service Contract

Contractual System

Production Service Contract

Risk Service Contract

Since each country is characterized by variations in economic priorities, administrative capacities,

mineral/petroleum endowments, and levels of political risk, it is impossible to identify one type or mix
of fiscal instrument as best for all countries across the board. There are several types of fiscal
instruments like

Royalty Cost
Recovery Taxes
Profit Oil
Cost Oil

Managing Supply Chain of Upstream Oil and

Gas Projects

Exploration
Upstream

Production
Upstream

Refining MidStream

Marketing
Downstream

Consumer
Down-stream

Supply Chain of Oil and Gas

Supply Chain Management (SCM) can be defined as the configuration, coordination and continuous
improvement of a sequentially organized set of operations. The goal of supply- chain management is to
provide maximum customer service at the lowest cost possible. A customer is anyone who uses the output
of a process. Therefore, the customers customer is important to any organization that is focused on
customer service. In a supply-chain, a company will link to its suppliers upstream and to its distributors
downstream in order to serve its customers. Usually, materials, information, capital, labor, technology,
financial assets and other resources flow through the supply-chain. Since the goal of the firm is to
maximize profits, the firm must maximize benefits and minimize costs along the supply-chain.

Supply-chain management involves configuration, coordination and improvement. There are issues to be
considered in each case:

Configuration involves the following questions:

What product-service bundle to produce

What portions of the bundle to produce in house and what portion to purchase from others
Facility capacity
Location of facilities
Type of technology to adapt
Handling communications between suppliers and customers
Standards expected of customers and suppliers
Coordination from the perspective of each company involves the following issues:
Ensuring supplier effectiveness in cost, timeliness and quality
Setting appropriate targets for inventory, capacity, and lead time
Monitoring demand and supply conditions
Communicating market and performance results to customers and suppliers.

Supply Chain Functions

In the current era of ever increasing exploration activities combined by scarcity of rigs across the globe
make supply chain management the pivotal point of the entire oil exploration industry. The Supply chain
in upstream operation plays a very crucial role in managing the cost for operator and driller. The supply
chain function can be broadly divided into the categories as follows:

1. Procurement:
Understanding the cost structure of the suppliers (Identifying the cost escalators for long term relations)
and the underlying cost parameters for the commodity being procured. This is a strategically evaluation
for an optimized supply chain.
Understanding the position of the supplier better through several metrics like: financials, credit ratings,
project activity and Technical industry know-how. These parameters help better optimize supply chain
structure.
Scenario analysis to put up a hedging mechanism in place while designing the SCM in procurement from
supplier.

2. Logistics
As the oil and gas exploration shifts to more and more difficultly accessible places the cost of logistics
becomes major part of the P&L. The infrastructures are inadequate to make it an easy task for the
logistics providers.
Few characteristics that are crucial for logistics management in this industry are:

The nature of transportation and material transported

Control over the supply chain
Region specific supply chain

3. Inventory Management

Operational demands dictates that companies continuously manage inventory throughout multiple levels
of global supply chains to optimize performance against business objectives. The three main tasks dealt
under this function is as follows

Inventory Optimization
Demand Management
Inventory forecasting and Replenishment

Strategies for Supply-Chain Coordination

Supply-chain management requires an oil and gas company to integrate its decisions with those made
within its chain of customers and suppliers. This process involves relationship management by the
company. Both customer relations and supplier relations are the key to effective coordination of supplychains. Often, the interaction between suppliers and their customers are adversarial in nature, based on
a negotiated contract that spells out all the terms and conditions by which all parties are required to
comply. Instead, a firm can create long-term strategic relationships with their suppliers. In most cases,
it is a collaboration process between the oil and gas operating company and its suppliers.

Business Model of LNG Business

Historically, the LNG business has been a collection of independent, disparate projects. It originated in
an environment with few potential customers and no existing receiving terminals. When trying to bring
remote, stranded gas reserves to market, it was logical and unavoidable to develop each business
opportunity as a stand-alone project, essentially emulating a long-distance pipeline project. Each project
was designed to bring reserves to a dedicated overseas market through a chain of separate but integrated
stages: upstream gas production and pipeline, liquefaction, shipping and re-gasification terminals. These
steps were inter-connected by long-term contractual relationships with very limited flexibility.
The companies involved as suppliers and customers formed an exclusive club and LNG sales and marketing
were very much a relationship business. There were relatively few buyers but they bought large
quantities. When the long-term sales deals were completed, most of the projects capacity were
committed and if any new capacity was developed this was often sold to the existing buyers. After the
hectic and sometimes drawn-out negotiation process to establish the SPA's, the remaining 20 years could
be devoted to maintaining these relationships, and punctuated by the occasional price renegotiation.

Natural gas currently is the fastest-developing energy resource. Natural gas demand growth is determined
by several factors such as:

Natural gas supply is more stable

Natural gas is friendlier to environment fuel than oil
The application of natural gas liquefaction technology has become economically attractive for
transportation of natural gas

The LNG value chain may be structured into seven stages.

Gas Production
Pipeline Transportation
Processing
Liquefaction
Shipping
Regasification
Storage
Distribution & sale

With costs going down and the number of producers and off-takers on the rise, the LNG industry is quickly
becoming more commercialized. Change has been most evident in the Atlantic, but is spreading to the
Asia-Pacific region as well. With Middle East suppliers active in both regions, the historic split between
the Pacific and Atlantic markets is being replaced by global competition and arbitrage between
these regions. But export projects need to be geared up if they are to profit from this more global and
dynamic business environment. This means a substantial strengthening of the commercial teams and the
acquisition of new expertise in marketing, trading, logistics and financial risk management.

As markets open up, competition for sales is increasing. Oil and gas majors are beginning to take
important positions in these downstream markets. Open access to import terminal and pipeline capacity

allows companies (in many cases also shareholders in LNG supply projects) to buy LNG for their own
account, to import LNG and to compete for end-use sales. However, potential conflicts of interest can
arise when individual companies or their affiliates function as both the seller and the buyer of the same
LNG.

Investments in overseas Oil & Gas assets by

Indian Oil & Gas Companies
Except for coal, India is not well endowed with fossil fuel resources. A combination of aging
infrastructures, half-hearted efforts in exploration and production (E&P), regulatory inconsistencies and
dysfunctional pricing regimes have further added to its energy woes. Not surprisingly, India has
increasingly relied on imports to meet its energy requirements.
As part of their energy security efforts, Indian authorities have encouraged public and private sector
companies to compete for overseas asset acquisitions since the 1990s.
For a long time the Indian oil and gas industry was dominated by its top state-owned players: the socalled public sector undertakings 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 continuing to play the role for which they were established; ensuring that India has access to the
energy it needs.
In the 1990s, the liberalization of the industry and the introduction of the NELP started to change this
state-dominated environment. Companies such as Cairn and Reliance Industries have become prominent
private players in the upstream and down-stream sectors Reliance Industries recently completed the
worlds 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 Indias state-owned companies, has contributed significantly to the creation of a
complex and mighty service and equipment industry that is now crossing Indias borders and conquering
international markets.
PSUs to strive for international refining quality resonates with Indias desire to increase self-sufficiency
and take advantage of the relatively low cost of refinery building and operation 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.

Indias Track Record in Overseas Asset Acquisitions

1. BPCL
Bharat Petroleum Corporation Ltd. (BPCL) is one such company paving the way to Indias increased
refining capacity. Today, the companys capacity stands at 30 million tons per annum, but in order to
grow this capacity at the same rate as Indias GDP.
Activity Region: Oman, Australia, Joint Petroleum Development Area (JPDA) between Australia and East
Timor, North Sea (UK), 10 deep water exploration blocks in offshore Brazil, partnerships with some world
renowned Operators including Petrobras and Anadarko.
Partnership: BPRL has signed up partnership with Petrobas, Anadarko in Brazil, Norwest Energy NL and
Oilex in Australia and East Timor, Anadarko in Mozambique and Pertamina in Indonesia.

2. OVL (ONGC VIdesh Ltd.)

ONGC Videsh Ltd (OVL), the overseas arm of state-run Oil and Natural Gas Corp. Ltd (ONGC) is Indias
flagship company for major energy asset acquisitions abroad. 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 equivalent, 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.

3. IOCL
Activity Region: Libya, Iran, Gabon, Nigeria, Timor-Leste, Yemen and Venezuela
Partnership: IndianOil through its wholly owned affiliate IndOil Montney Ltd, Canada has signed
transaction agreements with Progress Energy Canada Ltd. (Progress Energy Canada), PETRONAS Carigali
Canada BV (PCC BV) wholly owned affiliates of Petroliam Nasional Berhad (PETRONAS) for the acquisition
of a 10 percent interest in Progress Energy Canadas LNG-destined natural gas reserves in northeast
British Columbia and in the proposed Pacific NorthWest LNG Ltd. (PNW LNG) export facility on Canadas
West Coast.

4. Oil India Ltd. (OIL)

Another PSU now looking to internationalize its exploration and production activities. Three years back
OIL had opportunities coming from everywhere, from Latin America to Africa. But we didnt have a
structured way of thinking 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 its oil, what size? The company didnt 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.

Conclusion
Indias quest for foreign assets has so far failed to contribute to its energy security. First, overseas assets
still account for a minor percentage of Indias energy imports. Moreover, the acquisition strategy of many
public sector units (PSU) has proved problematic, with improper evaluations of the assets involved both
at the technical and financial levels and risky acquisitions in unstable countries, such as Sudan/South
Sudan and Syria. Finally, it would seem that the foreign acquisition trend has not much to do with Indias
energy security, especially as very little of the oil or gas produced overseas is brought home. Indeed,
Indian energy majors prefer to sell their fuels abroad because the controlled price policy in India implies
that they have to sell oil and gas at discounted rates, i.e. at prices that are disconnected from the global
trends. In this context, energy security is just an excuse for them to justify their strategy of commercial
reinvestment overseas, rather than at home.

Indias strides towards becoming a regional

refining hub
Petroleum Refineries in India
India Imports 70% of its crude oil requirements, mostly from Middle East. However, the country is not
only self-sufficient when it comes to refining the crude oil but also is able to Export Refined Petroleum
Products. To meet the growing demand of petroleum products, the refining capacity in the country has
gradually increased over the last decade by setting up of new refineries in the country as well as by
expanding the refining capacity of the existing refineries. As of June, 2011 there are a total of 21
refineries in the country comprising 17 in the Public Sector, 3 in the Private Sector and 1 as a joint
venture of BPCL & Oman Oil Company. Besides the existing 21 refineries, 3 new refineries are proposed
to be started in the near future, one by Indian Oil Corp. - 15 MMTPA, Another by Hindustan Mittal Energy
Limited (HMEL) 9MMTPA and third by Nagarjuna Oil Corporation Limited (NOCL) with 6 MMTPA refining
capacity. Thus, adding a total of 30 MMTPA to Indias refining capacity.
India being on the cusp of new development has invested heavily to open state-of-art refineries and has
been developing a plan to refurbished the old existing ones to make them more efficient and making
India the Asias (hopefully worlds) refining hub.
Various factors play a huge role in Indias endeavour to become a refining hub

Technological Advancements
Factoring Cost
Man Power
Governance

Technological Advancements
India, as a country comprises of experienced and competitive construction companies which can support
in various E & P activities. India comprises of 19 refineries, while crude pipeline is of 3987 Km long,
product pipeline is of 9454 Km long. There are 34,500 Retail Outlets. Companies adapt state-of-theart technology for setting up and upgrading crude refineries that has a great processing flexibility with
supreme quality. Hence, the technological advancements along with infrastructure developments, has
made India, a refining hub in the South East Asian region.
Factoring Cost
With the large labour pool and GOI backed land pieces, India is the best place to achieve
economies of scale in large-scale projects as capital and operational expenditures are lowest. There is a
cost advantage in terms of procurement from indigenous companies.
Man Power
India has the second largest population in the world. Readily available skill set for setting up and
operating refineries and make it an attractive cost efficient (labour cost drivers) market.
Governance
Government has supported refining activity. Refinery sector was deregulated in 1998, which allowed
private players to set up refinery anywhere in India. India refines about 215 MMT while the domestic
requirement is 160 MMT. Government has enabled Tax holidays/SEZs/PCPIRs that offer excellent fiscal
regime and infrastructure to encourage various companies to participate in refining activity.

Refining Capacity Additions

At the beginning of 11th Plan (2007-08), the domestic refining capacity is expected to be 148.97 MMTPA.
Considering the projects under implementation and the project under various stages of approval, the
refining capacity in India is expected to go up to 235 MMTPA during the 11th Plan based on the information
furnished by the various companies. The capacity addition in 11th Plan period is expected to be about
92 MMT
However, the actual capacity additions would depend upon several factors including domestic demand,
duty structure which would impact import and export possibilities, refining margin, and export potential
for the products. However, in view of the likely surplus scenario, the companies depending upon the
commercial viability of the project may review their projects and capacity additions. We could expect
the refining capacity to turn out to be in the range of 190 MMT to 200 MMT leaving a scope of exports in
the range of 45 MMT to 55 MMT. However, the factors like setting up in SEZ areas, differential in sweet
and sour crude and import of crude oil and petroleum products being handled through large vessels to
bring down the cost of transportation may also add to the viability of the export oriented refineries.
Keeping this in view the refineries will have to make processing facilities for processing of 100 percent
heavy/sour crude.

Focus on R&D:
The need for self-reliance in the petroleum sector led to the creation of engineering, design and R&D
institutions like EIL and national laboratories (IIP, NCL). Subsequently R&D centres were created in major
Public sector oil companies like IOCL, EIL, CPCL and BPCL to enhance the technological knowledge base.
Other institutions like Oil industrial Development Board (OIDB), Centre for High Technology (CHT) were
created to ensure effective coordination and planning. All this contributed significantly towards
technological self-reliance in the petroleum refining industry.
Conclusion
India will emerge as Asias largest refined product exporter. Indias emerging refined product export
industry led by RILs Jamnagar facility but also supported by government owned refineries is
characterized by extremely large-scale, low-cost and modern plants capable of processing heavy crudes
and producing complex, clean Products. Indias refining success, besides its strategic geographical
advantage is also credited to the Government of Indias Liberal Petroleum policies, through tax holidays,
SEZs, EUO. In Future, how these policies are retained and/or change will also greatly influence Indias
petroleum industry. For Now, The Government policies has succeeded in fostering a dynamic combination
of private and public investment in refining capacity which has transformed the face of Indias petroleum
refinery sector.

Increasing Role of Renewable Energy in Oil

& Gas Basket
The challenges posed to the global community and national governments, in terms of energy security,
climate change, health impacts and poverty are pressing, making the greening of the energy sector an
imperative. The shift to renewable energy, along with major energy efficiency improvements, plays a
critical role in addressing some of the most prominent challenges the world is faced with today.
Following issues need addressing

Energy security: The growth in global population and rising incomes will increase energy demand
and result in upward pressures on energy prices and growing risks of importer dependency on a
limited range of energy suppliers.

Access to energy: Currently 1.3 billion people, one in five globally, lack any access to electricity.
Twice that number, nearly 40 per cent of the worlds population relies on wood, coal, charcoal,
or animal waste to cook their food.

Climate change and emissions: Energy-related greenhouse gas (GHG) emissions are the main
drivers of anthropogenic climate change, exacerbating patterns of global warming and
environmental degradation. Global carbon dioxide emissions from fossil-fuel combustion are
reported to have reached a record high of 31.6 gigatonnes (Gt) in 2011.

Though the world over the urge for renewable sources has been increasing, the economic viability in
establishing and developing renewable energy resources posts a challenge and is practical use depends
on the 4- A frame work - Availability, Accessibility, Affordability, Acceptability.

4A Framework:
Availability: One strand of the literature reports on availability issues, mostly estimating reserves and
resources, the relation between natural resource prices and economical viable reserves and the
development of recovery technologies Accessibility: Accessibility looks into technical questions of the
resource extraction as well but also comprises geopolitical and geostrategic aspects of access to
resources, such as ownership, markets, oligopolies and property rights. The import/domestic sources
distribution is part of the accessibility question, such as technological development within a country and
the development of human resources for energy questions.

Acceptability: Environmental acceptability connects the energy security issues with the broader
concepts of sustainability. Different fuels interfere with sustainability concepts differently. While coal,
and to a lesser extend oil and gas, combustion is in conflict with climate change policies on GHG emission
targets due to large CO2 emissions, nuclear, and all fossil fuel extraction is associated with environmental
damages such as toxic contamination to land and water resources or hazards during the mining process.
Biogenic resources impact land use and compete with food production, which is more related to social
acceptability as an extended concept of environmental acceptability.
Affordability: Affordability, as the last aspect mentioned, is related to the price risk of resources as well
as the costs of exploring alternative sources. A rather recent comprehensive treatment of the energy
security issue has been published by the Asia Pacific Energy Research Center. The countries in this region
are facing growing energy demand due to economic and population growth and heavily rely on energy
imports because of resource scarcity in their own countries. Energy Policy (forthcoming) publishes a
special issue on energy security this year. The contributions in this issue range from the theoretical
discussion on the economics of energy security to an analysis of the policy process in the United States
that thus far has led to very little policy results on improving energy security.

Conclusion
The renewable energy sector has a significant role to play in encouraging a transition to a green economy
and in addressing the challenge of access to sustainable modern energy services for all. International
trade can play a significant role in the greening of the energy sector, in particular, by acting as a vehicle
for technology transfer for renewable energy and by responding to demand for sustainably sourced energy.
This demand has led to several trade opportunities, including exports of raw materials and components
for renewable energy supply products and finished products, exports of energy from renewable sources,
exports of renewable natural resources to produce energy and the selling of carbon credits on
international markets.