TERM PAPER

ON

THE BENEFITS AND PITFALLS OF CONTROLLING

PETROLEUM INDUSTRY IN INDIA

CONTENTS
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ABSTRACT..............................................................................................................................................3
OBJECTIVE..........................................................................................................................................3
OVERVIEW..........................................................................................................................................3
GROWTH STAGES OF PETROLEUM INDUSTRY INDIA POST INDEPENDENCE..........................................5
GROWTH.........................................................................................................................................5
CURRENT SITUATION OF PETROLEUM SECTOR.....................................................................................6
BENEFITS................................................................................................................................................7
PROCESSING CAPACITY......................................................................................................................7
REFINING HUB...............................................................................................................................7
REASONS FOR INDIA TO BECOME REFINING HUUB.........................................................7
COST ADVANTAGES OF INDIA OVER IRAN............................................................................8
GOOD EXPORTS.............................................................................................................................8
DUTIES OF THE GOVERNMENT TO INCREASE EXPORTS.................................................................8
OPPRTUNITIES FOR INDIA IN THIS DOWNTURN................................................................................9
INDIA TO INCREASE DOMESTIC OIL AND GAS PRODUCTION.............................................................9
PITFALLS OF PETROLEUM INDUSTRY.....................................................................................................9
AREA’S WHERE GOVERNMENT IS WORKING...........................................................................11
FUTURE OF THE INDIAN PETROLEUM INDUSTRY..................................................................11
CONCLUSION.......................................................................................................................................12
BIBLIOGRAPHY.....................................................................................................................................13

ABSTRACT
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The topic deals with the overview of petroleum industry, growth stages of petroleum industry
since independence, current position if petroleum sector, Benefits and pitfalls of petroleum
industry, steps taken by the government to improve the industry and even deals with the
future of petroleum industry.

OBJECTIVE

The main objective is to study the benefits and pitfalls in controlling Indian petroleum
industry and to study the measures taken by the government for the growth of this industry.
Basically we intend to study the opportunities and drawbacks of petroleum industry in India.

OVERVIEW

The Indian Petroleum industry is one of the oldest in the world, with oil being struck in
Assam in 1867. The industry has come a long way since then. For nearly fifty years after
independence, the oil sector in India has seen the growth of giant national oil companies in
fairly protected environment. A process of reforming the sector begun in the mid nineties, in
phased manner focused on changing them from a state control to face open competition. The
move paved the way for India to attract funds and technology from abroad into our petroleum
sector.

There have been significant additions to its refining capacity since India’s independence. In
fifties, three coastal refineries were established by multinational oil companies operating in
India at that time. These included refineries by Burma Shell, and Esso Stanvac at Mumbai,
and by Caltex at Visakhapatnam. Today, there are a total of 18 refineries in the country
comprising 17 in the Public Sector, two in the private sector. The 17 Public sector refineries
are located at Guwahati, Barauni, Koyali, Haldia, Mathura, Digboi, Panipat, Vishakapatnam,
Chennai, Nagapatinam, Kochi, Bongaigaon, Numaligarh, Mangalore, Tatipaka, and two
refineries in Mumbai. The private sector refineries built by Reliance Petroleum Ltd and Essar
Oil are in Jamnagar. Reliance reforms the biggest oil refinery in Asia.

The foundation of the Oil & Gas Industry in India was laid by the Industrial Policy
Resolution, 1954, when the government announced that petroleum would be the core sector
industry. In pursuance of the Industrial Policy Resolution, 1954, Government-owned
National Oil Companies ONGC (Oil & Natural Gas Commission), IOC (Indian Oil
Corporation), and OIL (Oil India Ltd.) were formed. ONGC was formed as a Directorate in
1955, and became a Commission in 1956. In 1958, Indian Refineries Ltd, a government
company was set up. In 1959, for marketing of petroleum products, the government set up
another company called Indian Oil Company Ltd. In 1964, Indian Refineries Ltd was merged
with Indian Oil Company Ltd. to form Indian Oil Corporation Ltd. 

During 1960s, a number of oil and gas-bearing structures were discovered by ONGC in
Gujarat and Assam. Discovery of oil in significant quantities in Bombay High in February,
1974 opened up new avenues of oil exploration in offshore areas. During 1970s and till mid
1980s exploratory efforts by ONGC and OIL India yielded discoveries of oil and gas in a
number of structures in Bassein, Tapti, Krishna-Godavari-Cauvery basins, Cachar (Assam),
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Nagaland, and Tripura. In 1984-85, India achieved a self-sufficiency level of 70% in

petroleum products. The Refineries and marketing companies under control by foreign oil
companies were taken over by Government of India during the Seventies 

In 1984, Gas Authority of India Ltd. (GAIL) was set up to look after transportation,
processing and marketing of natural gas and natural gas liquids. GAIL has been instrumental
in the laying of a 1700 km-long gas pipeline (HBJ pipeline) from Hazira in Gujarat to
Jagdishpur in Uttar Pradesh, passing through Rajasthan and Madhya Pradesh.

By the end of 1980s, the indigenous oil production had begun to decline whereas there was a
steady increase in consumption and reduced domestic oil production was able to meet only
about 35% of the domestic requirement. The situation was further compounded by the
resource crunch in early 1990s followed by balance of payment crisis. The development of
some of the then newly discovered fields (Gandhar, Heera Phase-II and III, Neelam, Ravva,
Panna, Mukta, Tapti, Lakwa Phase-II, Geleki, Bombay High Final Development schemes etc.
In line with the economic reform process, the Government decided to go for the petroleum
sector reforms with a view to attract funds and technology from abroad into the petroleum
sector.

The sector in recent years has been characterized by rising consumption of oil products,
declining crude production and low reserve accretion. India remains one of the least-explored
countries in the world, with a well density among the lowest in the world.  With the annual
demand crossing above 100 million tonne, India is the fourth largest oil consumption zone in
Asia, even though on a per capita basis the consumption around 0.1 tonne, the lowest in the
region- This makes the prospects of the Indian Oil industry even more exciting.

Historically the years since independence have, however, seen the rapid growth of the
upstream and downstream oil sectors. There has been optimal use of resources for exploration
activities and increasing refining capacity as well as the creation of a vast marketing
infrastructure. The growing demand of oil products and opening up of the sector to private
sector, immense opportunity created for investment and demand for a pool of highly trained
and skilled manpower.

But with the consumption of hydrocarbons said to increase manifold in the coming decades
(155mmtpa by the end of the 10th plan) the liberalization, deregulation and reforms in the
petroleum sector was considered essential for the health and overall growth of our economy.

'With more than a billion people, a structural demographic shift resulting in exploding
consumption expenditure, full deregulation of a 100 m tonne market growing at twice world
averages, India represents one of the most exciting oil markets in the world today'

As the Indian Economy breaks the shackles of a hindu rate of growth to grow at a pace of 8%
or 80, the single biggest beneficiary should be the oil & energy sector. Oil and energy are
most happening sectors of the Indian economy today. PSU Oil Companies were in the
limelight over the past many years for a variety of reasons- first, the growth of the oil
companies in physical and financial terms, and recently their transformation to face the
competition from the private sector players.

The government through Ministry of Petroleum and Natural Gas has conducted regular
rounds of bidding to attract private investment in the upstream sector. In the 21st century, the
petroleum industry must prepare to address many important challenges.
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 continuing concern for the environment;

 governmental regulation and policy; higher consumer expectations for fuels and fuel
 delivery systems; and global competition. In many cases, technology research and
development will be
 Needed to meet these challenges and maintain the health and profitability of the
industry.

GROWTH STAGES OF PETROLEUM INDUSTRY INDIA POST

INDEPENDENCE

The petroleum industry in India stands out as an example of the strides made by the country
in its march towards economic self-reliance. At the time of Independence in 1947, the
industry was controlled by international companies. Indigenous expertise was scarce, if not
non-existent. Today, a little over 50 years later, the industry is largely in the public domain
with skills and technical know-how comparable to the highest international standards.

GROWTH

In the 50 years since Independence India has witnessed a significant growth in the
refining facilities and increase in the number of refineries from one to seventeen now.
There has been an increase in the refining capacity from 0.25 tonnes MMTpa to about
103 MMTpa.

The first decade of Independence (1947-57) saw the establishment of three coastal
refineries by multinational oil companies operating in India at that time, viz. Burmah
Shell, Esso Stanvac and Caltex; the first two at Mumbai and the third at
Visakhapatnam.

The second decade (1957-67) witnessed the setting up of Indian Refineries Ltd. in
1958, a wholly-owned public sector Government company. Under its banner three
refineries were set up at Guwahati (Assam), Barauni (Bihar) and Koyali (Gujarat)
essentially to process the indigenous crude discovered in Assam and Gujarat. In
addition, one joint sector refinery was set up with the participation of an American
company at Cochin, based on imported crude.

The next ten year period (1967-77) witnessed the establishment of two refineries, one
with equity participation from American and Iranian companies at Chennai and
another in the public sector at Haldia by Indian Oil.

The period 1977-87 saw the commissioning of two more refineries in the public
sector. The refinery at Bongaigaon was the first experiment in having an integrated
petroleum refinery-cum-petrochemicals unit. The other refinery was set up at Mathura
in 1982. Major expansions of the coastal refineries at Mumbai, Cochin, Chennai and
Visakhapatanam were also completed during this period. The notable feature of the
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capacity additions during this decade have been the extensive utilisation of the
process design capabilities of M/s Engineers India Ltd. and installation of Secondary
Processing Facilities to increase the production of much required kerosene, diesel and
LPG.

During the fifth decade (1987-97), a small refinery of 0.5 MMTpa at Nagapatinnam
was built in Tamil Nadu. It is based on crude from adjoining fields. In 1996, a 3
MMTpa refinery was built in the joint sector at Mangalore between HPCL and Indian
Rayon. This decade also saw significant expansions to the capacities of the existing
refineries, thereby raising the refining capacity to about 62 MMTpa. Today, with the
setting up of Panipat refinery during 1998-99 and Reliance and Numaligarh
Refineries in 1999-2000, there are 17 refineries operating in the country, 15 in the
public sector, one in the joint sector and one in the private sector, with an installed
capacity of 103 MMTpa.

This decade also witnessed major policy initiatives in the refining sector. In 1987, the
Government decided to set up refineries in the joint sector in which the equity
participation of public sector undertaking was envisaged to be 26%. 26% equity was
meant for the private sector partner and the balance 48% was to be raised from the
public.

CURRENT SITUATION OF PETROLEUM SECTOR

1) The potential market for petroleum products is well appreciated. Similarly, it is

recognized that vast unexploited resources of petroleum are probably present in
India, both onshore and offshore.
2) No exceptional physically-based operating problems have been experienced in
India. The operating problems encountered in the past have all been associated
with unsatisfactory relations with the government.
3) The business environment in India is very bureaucratic. The permitting process is
extremely slow with a consequent negative impact on recovering one’s initial
investment. The process of importing the required equipment and exporting
production is so cumbersome that unacceptable amounts of management resources
must be devoted to a project.
4) No “roadmap” exists to guide foreign companies through India’s permitting
process, and the ãgoalpostsä are moved during negotiations with the government
in the course of conducting operations.
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BENEFITS

PROCESSING CAPACITY
India has a slight surplus in petroleum refining today with installed capacity of 126
million tones a year as opposed to the demand of 111.7 million tones a year (roughly
2.5 million barrels a day processing capacity- mbd). The surplus has been exported in
last two years. Worldwide there is a huge demand for the refined petroleum products,
especially the middle distillates gasoline, jet fuel, diesel etc., but capacity to deliver
the refined products has been lacking behind demand. The latter came to a sharp focus
with the rise of crude oil prices in last one year (from about $ 35 a barrel to current
$65 a barrel) and during the hurricanes Katrina and Rita in the US Gulf Coast.
Although refining capacity had not been a public issue in last 25 years in US, lack of
capacity drove up the prices when the hurricanes shut down the refineries.

REFINING HUB
Major economies like Japan, South Korea and at times China import petroleum
products from the open market to relieve spot shortages. Hence it makes sense for
India to become a refining hub. Crude oil is expensive but it will continue to be the
basis of national prosperity for the next 40 to 50 years. Hence this opportunity i.e. to
become a merchant refiner for Asia cannot be allowed to slip by. India has the
infrastructure to build and operate enhanced refining capacity. Also India’s west coast
is not far away from the main crude oil producing centers of Persian Gulf. This is an
advantage, which will reduce the transportation costs.  

REASONS FOR INDIA TO BECOME REFINING HUUB

All over the World, national economies in past 50 years have been
built on the availability of cheap crude oil and downstream products.
Today, China and India are competing with the developed West for oil.
Both of these developing economies have their back to the wall.
Expensive oil is seriously denting their economic development and
exports. Other developing countries suffer from a double whammy i.e.
crude oil is expensive and refining capacity to refine into primary,
secondary and tertiary products does not exist. China in last 20 years
has gone from a net crude exporter to a net large importer. They have
one satisfaction i.e. they have enough refining capacity to refine both
internally and externally procured crude. India is also very much in the
same state. Although India s crude demand is half of China, yet it has
adequate refining capacity. The same is not true for the other Indian
Ocean Littoral states (excluding the Gulf region). Pakistan suffers from
perpetual shortage of petroleum products. So do other countries in the
region.
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COST ADVANTAGES OF INDIA OVER IRAN

India voted for Nuclear Energy at Vienna last month when it voted against Iran at the
IAEA meet. Hence the Iran India gas pipeline Crude is still needed to drive the other
components of the economy, which cannot use gas in place of petroleum products like
the transportation sector or the military preparedness or the current jet travel. If
India’s civilian nuclear ambitions fail then a gas pipeline from Iran is a sure bet? A
crude oil pipeline could follow the gas pipeline. Iran has plenty of both. For exports,
the crude oil pipeline could be sized to meet India’s internal as well as external needs.
The shipping cost of crude by pipeline will be halved, giving Indian refiners a definite
cost advantage.

If a medium sized 1 mbd refinery is built elsewhere in the region (Gawadar in

Pakistan or in Thailand), it will cost about 30% more, because these locations lack the
infrastructure not only to refine crude but also to deliver it to the markets. Factors like
these give India a definitive capital cost advantage

GOOD EXPORTS

In four years, India’s demand will boost to about 3.2 mbp. The capacity at that time is
expected to be about 3.6 mbd. This will allow the country to export about 0.4 mbp of
the petroleum products. It is a significant boost to the county’s value added exports
(diamond cutting and polishing industry operates on a similar value added structure,
although at a bit higher margins).

DUTIES OF THE GOVERNMENT TO INCREASE EXPORTS

If India is to be an exporter then export oriented refineries are to be
built immediately. Current export orders, to develop the supply chain
can be met from the existing refineries. But a serious effort to become
an exporter will require a serious rethink on the part of Government of
India. All impediments to this business will have to be removed. A
green field refinery on Gujarat coast will cost about $3 Billion.  It will
earn its investment back in about five years. This is a good return,
which should interest a lot of investors. Hence with financing available
these large projects should be on the same priority as the rest of the
infrastructure modernization in India. Moreover, India’s capital
involvement will be low as external interests are financing the
expansion. India will be sharing the benefits, just like China where FDI
has created a manufacturing export heaven.  
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OPPRTUNITIES FOR INDIA IN THIS DOWNTURN

The value of global oil and gas companies has decreased in the last year due to the
ongoing economic downturn making it an opportune time for Indian companies to buy
global assets as well as global wealth funds particularly from China, the Middle East
and Singapore to buy oil and gas assets in India.

“With the ongoing economic downturn and the resultant crash in oil prices, the
valuation of oil and gas companies has decreased and this offers Indian companies the
opportunity to buy global assets at more reasonable prices than earlier.

INDIA TO INCREASE DOMESTIC OIL AND GAS PRODUCTION

Reliance Industries, India's largest privately held company will start pumping oil and
natural gas off India's East Coast from early next year. Although pulling oil from
2,400 metres beneath the cyclone-prone, choppy waters of the Bay of Bengal will be a
technological feat for Reliance Industries, the company claims that this is India's
ticket to energy independence and Reliance's entry into the club of global energy
majors.

Within 18 months, oil and gas production from block D6 of the Krishna Godavari
basin will increase India's domestic production by 40 per cent; potentially saving
about US$20 billion from the nation's US$77 billion oil import bill, Reliance officials
told the Canadian Press. Canada's Niko Resources Ltd.has a 10 per cent stake in the
project. A total investment of US$8.7 billion was spent in developing the block.

PITFALLS OF PETROLEUM INDUSTRY

1. One of the major drawbacks in petroleum industry is that there is a lot of corruption in
India's petroleum industry. The government-owned oil companies are bleeding and
the private companies find it difficult to survive. The government is not allowing the
oil companies to pass through the increasing cost of high crude oil prices.  As a result
of irrational pricing of petroleum products and misused subsidies with liquefied
petroleum gas (LPG). Today the middle class consumers are enjoying a subsidy of
about $3.25 (Rs.150) per cylinder. 

2. Despite selling LPG in differently sized cylinders and greater monitoring by officials,
the government has not been able to stop the illegal practice of diverting domestic
LPG to more lucrative markets. Instead of solving the basic problem of selling the
same product at three different prices, there is a proposal to define another category of
poor that will get the subsidized LPG.
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3. The situation is different in the case of gasoline. For a market where there are more
than 42 million two wheelers, 2.5 million three wheelers and eight million cars, the
official consumption figure for gasoline is just 7.6 million tonnes based on data for
2004. This is a gross underestimation. The actual consumption is much higher and it
may be as high as 11.8 million tonnes or more. At least five percent of reported
naphtha consumption, 10 percent of reported diesel consumption and 15 percent of
kerosene distributed through the public distribution system (PDS) may be diverted to
adulterate petrol. This gives rise to the government losing at least $2.8 billion of
revenues per year.

4. When we add the total tax revenues lost to the government and the subsidies cornered
by pump owners, PDS shop owners, rickshaw owners and LPG dealers; they amount
to $8.7 billion per year. By any standard this is a staggering amount. This corruption
pie is not just shared by dealers of petroleum; it goes into the pockets of bureaucrats
and politicians. As a result there is no constituency to stop this siphoning of tax
revenues

5. “Apart from pricing policies, an environment that allows multiple players in each
element of the energy value chain to compete under transparent and level terms is
essential in realizing efficiency gain within the energy sector.”

6. The government effectively controls the pricing of the petroleum products as it has
now begun to subsidize petrol and diesel in addition to LPG and kerosene. This has
resulted in a huge loss to oil marketing companies on account of under recoveries.

7. The current state of market inequalities created by Government policy has

consequences beyond the present problems of petroleum retailing. This can
undermine investors' confidence in the country for investment, especially in the
energy and infrastructure sectors.

INCREASING DEMAND

Over the past decade, India’s domestic oil production has remained essentially
unchanged from year to year, while the country’s demand for petroleum products has
almost doubled. This has caused India’s reliance on foreign oil to grow to the point
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where more than two-thirds of the country’s petroleum supplies are now acquired
from abroad. The foreign exchange cost of the imported petroleum is in access of $10
billion per year.

INDIA’S POOR REPUTATION

India’s poor reputation as a host for international business is now recognized by the
government and that enormous strides have been taken to correct the situation. Now
that reforms have taken place, it should be possible to encourage the participation of
U.S. companies in the Indian petroleum sector, provided the Government of India is
able to persuade non-domestic companies that it really has cleaned up its act.

AREA’S WHERE GOVERNMENT IS WORKING

The government of India is implementing more initiatives to attract more foreign direct
investment in its petroleum, chemicals and petrochemical sectors by establishing specific
investment regions for this.

The government plans to set up investment regions which will offer foreign and domestic
players networking and a common infrastructure of services to provide cost benefit
opportunities suitable for new ventures and leading to growth in production, exports and job
creation.

 To provide a forum for national & international experts in oil & gas industry to
exchange views and share their knowledge, expertise and experience.
 To identify and explore new areas for cooperation and technology transfer relating to
the petroleum industry.
 To find ways to assimilate and harness the petroleum resources of the world for the
benefit of mankind.
 To meet the challenges of energy requirements, and maximize hydrocarbon resources
for the energy sector.
 To develop trained, experienced and motivated manpower for dynamic growth and
exploration of oil & gas and it’s further processing downstream.

To identify ways of adopting modern technologies as well as to apply knowledge of

relevant contemporary technologies to meet the challenges facing the oil & gas industry
the world over

FUTURE OF THE INDIAN PETROLEUM INDUSTRY

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The future of Indian petroleum industry has good potential but it needs developmental

activities in this sector to strengthen itself.

The world at present is experiencing a lot of changes of mammoth proportions. The

Petroleum Industry in India is one of the harbingers of huge economic growth. The arena for
business has now gone global since trade boundaries are fast dissolving.

These developments present India with tremendous opportunities in the future to be one of
the major players in the export of petrochemical intermediaries.

Today, India imports more than 70% of its oil requirements. The search for more oil led India
to sift through the international markets comprising of the emerging energy-trading countries
- China, Russia, and Iran. India has made new partnerships with Venezuela, Burma, Middle
East nations, and Pakistan. 

The long-term energy strategies of India have to emphasize on the methods of using energy
effectively and efficiently, and to enhance energy self-sufficiency. To lift the Indian economy
to enhanced economic standards innovation, diplomacy, creativity, and vision are the need of
the hour. 

India has to compete for conventional energy sources and for that there must be
developmental activities for energy efficient buildings and vehicles. The main problems with
the Petroleum Industry in India are related to infrastructural developments. The lack of proper
storage facilities, enhancements in refining capacities, and fluctuating import prices plays
important role in the development of the sector. The target of improvement for the growth of
the economy for India should be in the area of the petrochemical sector. The need for
intermediary products for the manufacturing of the end use products is an important sector to
tap in. With the per capita consumption for the petrochemical products in India being low and
the production of these products being high, India may become one of the leading exporters
of such intermediary products. 

The future of Indian petroleum industry depends on:

 Demand for petroleum is growing in leaps and bounds

 Shifting focus to more production of olefin - ethylene, propylene, butadiene,
 Price and availability of crude oil and gas as feedstock would still be critical factors
 The demand of the end products would affect the demand of the intermediary
products
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CONCLUSION

BIBLIOGRAPHY

 www.mapsofindia.com
 www.petroleumindia.com
 www.petroleum.nic.in
 www.economywatch.com
 www.ibef.org/industry/oilandgas.aspx