Unnati Oil and Gas 2018

UNNATI INVESTMENT MANAGEMENT AND RESEARCH GROUP
UNNATI
SECTOR
REPORT
OIL & GAS
2018-19
Gaurav Rath | Anand Patel

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1 Contents
2 Introduction ......................................................................................................................................... 4
3 Oil and Gas Supply Chain ................................................................................................................... 5
3.1 Upstream (Exploration and Production) ...................................................................................... 5
3.1.1 Stages of Exploration and Production Business ................................................................... 5
3.1.2 Upstream Companies ............................................................................................................ 7
3.1.3 Commonly Used terms in Upstream ..................................................................................... 7
3.1.4 Crude oil and Natural gas reserves in India .......................................................................... 8
3.1.5 Seismic survey and exploration segment – developments .................................................. 11
3.1.6 National Data Repository.................................................................................................... 12
3.1.7 Hydrocarbon Discoveries.................................................................................................... 12
3.2 Midstream (Transportation and Storage) ................................................................................... 13
3.2.1 Gathering & Processing ...................................................................................................... 13
3.2.2 Storage ................................................................................................................................ 14
3.2.3 Transportation ..................................................................................................................... 14
3.3 Downstream (Refining, Marketing and Selling) ........................................................................ 17
3.3.1 Refining............................................................................................................................... 17
3.3.2 Marketing and Retailing ..................................................................................................... 18
3.3.3 Commonly used terms in downstream ................................................................................ 19
3.3.4 Refineries in India ............................................................................................................... 23
3.3.5 Petroleum Products ............................................................................................................. 25
3.3.6 Pricing of Petroleum Products ............................................................................................ 29
3.3.7 Strategic Petroleum Reserve ............................................................................................... 32
4 Crude Oil ........................................................................................................................................... 34
4.1 Types of Crude Oil ..................................................................................................................... 34
4.2 Benchmark Crude Oil................................................................................................................. 34
4.3 Major Producers of Crude Oil .................................................................................................... 37
4.4 Crude Oil: Domestic Scenario.................................................................................................... 38
4.4.1 Crude Oil Reserves ............................................................................................................. 38
4.4.2 Crude Oil Production .......................................................................................................... 39
Unnati Sector Report 2018-19 | 1

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4.4.3 Crude Oil Consumption ...................................................................................................... 40
4.5 Licensing Policies ...................................................................................................................... 40
4.6 Crude Oil Price History .............................................................................................................. 47
4.7 Crude Oil Price Forecast ............................................................................................................ 57
4.8 Deregulation of Prices of Petroleum products ........................................................................... 60
5 Natural Gas ........................................................................................................................................ 62
5.1 Types and Forms of Natural Gas................................................................................................ 62
5.1.1 Liquefied Natural Gas (LNG) ............................................................................................. 62
5.1.2 Compressed Natural Gas (CNG) ........................................................................................ 63
5.1.3 Piped Natural Gas (PNG).................................................................................................... 63
5.2 Measuring Units ......................................................................................................................... 63
5.3 Natural Gas Trade Hub .............................................................................................................. 63
5.3.1 US Based Henry Hub .......................................................................................................... 63
5.3.2 Canada Based Alberta Gas.................................................................................................. 64
5.3.3 The UK based National Balancing Point (NBP)................................................................. 64
5.3.4 Russian Gas ......................................................................................................................... 64
5.4 Natural Gas: Domestic Scenario ................................................................................................ 65
5.4.1 Natural Gas Reserves .......................................................................................................... 65
5.4.2 Natural Gas Production ....................................................................................................... 66
5.4.3 Natural Gas Consumption ................................................................................................... 68
5.4.4 Domestic Natural Gas Allocation Policy ............................................................................ 69
5.4.5 De-bundling of GAIL ......................................................................................................... 71
5.5 Pricing of Domestic Natural Gas ............................................................................................... 71
5.5.1 Administered Pricing Mechanism (APM) .......................................................................... 72
5.5.2 Non-APM Gas produced by NOCs from Nominated fields ............................................... 72
5.5.3 Pre-NELP Gas ..................................................................................................................... 72
5.5.4 New Exploration and Licensing Policy (NELP):................................................................ 73
5.5.5 Domestic Price Outlook ...................................................................................................... 76
5.6 Liquified Natural Gas (LNG) ..................................................................................................... 77
5.6.1 Sourcing of LNG................................................................................................................. 80
5.6.2 LNG Infrastructure.............................................................................................................. 81

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5.7 Piped Natural Gas (PNG) ........................................................................................................... 82
5.8 Building India‘s Oil and Gas Reserves: ..................................................................................... 82
5.9 Gas Pipeline................................................................................................................................ 84
5.10 International Gas Pipeline .......................................................................................................... 86
5.10.1 Turkmenistan-Afghanistan-Pakistan-India Gas Pipeline (TAPI) ....................................... 87
5.10.2 Iran India Gas Pipeline........................................................................................................ 87
5.10.3 Myanmar-Bangladesh-India (MBI) Gas Pipeline ............................................................... 88
5.11 Industry Wise Consumption of Natural Gas .............................................................................. 89
5.11.1 Fertilizers ............................................................................................................................ 89
5.11.2 Power Sector ....................................................................................................................... 89
5.11.3 City Gas Distribution (CGD) .............................................................................................. 89
6 Petrochemicals ................................................................................................................................... 92
6.1 Overview .................................................................................................................................... 92
6.1.1 What are petrochemicals? ................................................................................................... 92
6.1.2 Domestic Market ................................................................................................................. 93
6.2 Naphtha or Natural Gas – Future?.............................................................................................. 94
6.3 Economics of PetroChem Business: .......................................................................................... 94
7 Sector Outlook ................................................................................................................................... 96
7.1 Recent Mergers & Acquisitions In O&G Industry..................................................................... 96
7.2 Key Investment Themes ............................................................................................................. 96
7.3 Company Profiles ....................................................................................................................... 98

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2 Introduction
Oil and natural gas are the major energy fuels in the world. They are considered to be one of the most
crucial commodities in the world having global influence and significant usage in all major industries.
Crude oil, which is a compound of complex hydrocarbons, is one of the freely available form of storable
& transportable energy. It is refined and processed into other petroleum products like petrol, diesel,
naphtha, etc. Natural gas is lighter than air and is more of methane. It is primarily used in fertilizer
industry as feedstock and in power plants.
Between 2017 and 2022, global crude oil demand is projected to grow at a slower rate of 1.1%
compound annual growth rate (CAGR), compared with 1.6% CAGR over the previous five-year period.
By 2022, crude oil demand is expected to reach 103.6 million barrels per day (mbpd).
Global Crude Oil Supply and Demand

100
99
98
97
mbd 96
Crude Oil Demand
95
94 Crude Oil Supply
93
92
2015 2016 2017 2018F
Year

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3 Oil and Gas Supply Chain

Supply chain of the Oil and Gas industry consists of the following three streams of companies involved
in different activities
 Upstream – Exploration and Production
 Midstream – Transportation and Storage
 Downstream – Refining, Marketing and Selling
3.1 Upstream (Exploration and Production)

Upstream sector refers to the exploration for and production of crude oil and natural gas. Exploration
and Production involves searching for underground (onshore) and under-water (offshore) oil and gas
fields and drilling exploratory wells to extract crude oil and natural gas
3.1.1 Stages of Exploration and Production Business
The exploration and production business, by nature, is long-term, capital intensive and carries very high-
risk profile because of an element of uncertainty.
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The various stages of E&P business are given below:
Due Diligence Site Surveys Development
Pre - Exploration
Production
Qualification Drilling
Exploration
Apprisal Drilling Decommisoning
Seismic
 Due diligence & Pre-qualification – These two stages deals with complying with the necessary
rules and regulations to obtain a license.
 Exploration Seismic & Site Survey – Seismic surveys are carried out to find out the likelihood of
crude oil/natural gas presence in the licensed are, good amount of hydrocarbon presence leads to
drilling of exploratory wells. To find out the regions where exploratory wells should be drilled site
surveys are carried out where geological sample from the site is taken and seismic surveys carried
out on them. This helps to identify the regions suitable for drilling of exploratory blocks
 Exploration and Appraisal Drilling – Exploratory drilling is done to assess if the area contains
hydrocarbons as shown in seismic surveys. If significant amount of oil or gas is present, appraisal
wells are drilled to find the technical and commercial viability of the field
 Development – For technically and commercially viable fields a field development plan (FDP) is
prepared which contains all the information (e.g. - the no of wells to be drilled, the technique to be
used etc.). This FDP is submitted to relevant authorities, once the regulatory approval is received
production process can be started.
 Production – After wells are drilled, hydrocarbons are extracted, the mixture of liquid
hydrocarbons, gas, water, and solids are separated and other undesirable impurities are removed.
Production sites often handle crude oil from more than one well. The time period over which
hydrocarbons can be extracted ranges from 10-30 years depending on the quantum of discovery. As
a field matures (ages), its production rate decreases in which case advanced techniques such as
Enhanced Oil Recovery are used to extract oil.
 Decommissioning – Once an oil field stops being commercially viable for production the company
is mandated to shut the oil field by plugging the wells, dismantling all the equipment.

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3.1.2 Upstream Companies

Following are some of the Indian companies involved in E&P activities –
Public Sector Companies
 Oil and Natural Gas Corporation (ONGC)
 Oil India Limited (OIL)
 ONGC Videsh Ltd (OVL – foreign-arm of ONGC)
Private Sector Companies
 Reliance Industries Limited
 Cairn India
 Jindal Drilling
3.1.3 Commonly Used terms in Upstream
 Reserves to production ratio
This ratio is calculated by dividing the current proven amount of oil and gas reserve by the current
rate of production. The significance of this ratio is that it tells us the number of years the reserves are
going to last at current rate of production. This ratio is applicable to other natural resources as well,
but it is predominantly used in the oil & gas industry.
Source: BP Statistics
 Rig Utilization Rates
 It is a measure of an oil producer‘s capacity which is based on the proportion of operational rigs
to the total available with the producer
 A high utilization rate means that a producer is operating at or near capacity which is a positive
indication of higher near-term revenues
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 Reserve Replacement Ratio (RRR)

The ratio stakeholders use to analyze the operating performance of companies in the oil exploration
and production industry. RRR is a function of the amount of oil added to a company's
proven reserves compared to the total amount of oil the company produces during the year.
Assuming stable demand, if this ratio falls under 1:1 then the company is tapping into its reserves
and will eventually run out of oil.
 Proven and Probable Reserves
Proven reserves are quantity of energy sources estimated with reasonable certainty, from the analysis
of geologic and engineering data, to be recoverable from well-established or known reservoirs with
the existing equipment and under the existing operating conditions." A reserve is considered a
proven reserve if it is probable that 90% or more of the resource is recoverable while being
economically profitable. After an oil exploration firm conducts a seismic survey of a piece of land, it
obtains the proven and probable reserves in that area. Probable reserves are those which have a 50%
chance of being present.
Source: BP Statistics
3.1.4 Crude oil and Natural gas reserves in India

Indian hydrocarbon reserves are spread over 3.14 square kilometers and categorized under 26
sedimentary basins. The major basins are:
CATEGORY – I: 35510 MMToE
 Cambay
 Cauvery
 Krishna-Godavari
 Assam Arakan
 Assam Shelf
 Mumbai Offshore
 Rajasthan
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CATEGORY – II: 1920 MMToE
 Andaman
 Mahanadi
 Kutch
 Saurashtra
 Vindhyan
Basin-wise Hydrocarbon Resources

India currently has recoverable reserves of 1787 MMT of Oil + Oil Equivalent Gas reserves in place.
The following table shows the amount of initial-in-place reserves, ultimate reserves and balance
recoverable reserves of Oil, Gas and Oil+ Oil Equivalent Gas (O+OEG):
Source: Ministry of Petroleum and Natural Gas
Crude Oil and Natural Gas Reserve Position as on 1.4.2017

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 Major Oil and Gas Producing Fields in India – Map below shows the locations of the reserves of oil
and gas

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3.1.5 Seismic survey and exploration segment – developments

Seismic survey forms an integral part of the upstream value chain in the oil sector and most of the oil
manufacturers seek the third-party services, bringing in cutting edge sectoral technologies, expertise of
working in diverse and difficult topographies and proficiency across both 2D and 3D surveying
techniques. The size and scale of seismic surveys has increased alongside the increases in computing
power during the last 25 years. 3D technology looks at oil and gas reserves as if it is a cube with height,
width, and depth. 4D technology adds time as a component, which shows how a reservoir will change
over time. The industry‘s increasing acceptance and application of 4D seismic techniques in both
exploration and production, especially in developed markets indicates that time-lapse 3D exploration
and reservoir monitoring are coming of age as a tool to minimize drilling risk and to maximize the return
on investment
The opportunity
Exploration represents the cornerstone for enhancing domestic production. Less than 50% of India‘s
sedimentary basins are explored and with data on most of the unexplored part remaining unavailable.
India‘s rapid surge in demand for hydrocarbons has not translated proportionately into a growth in
domestic exploration and production (E&P) in the country‘s oil and gas industry, demonstrated by the
fact that only 176 MT of the 207 MT of production committed by the 11th five year plan was met. As the
government focuses on strengthening India‘s oil self-sufficiency to ‗reduce 75% of its energy
requirement by 10% by 2022 and 50% by 2030‘, state policy and assistance is expected to favour
exploration companies in a bid to accelerate India‘s oil hunt.
National Seismic Program was launched to generate seismic data for initiating E&P activities, which
envisages 2D seismic surveys of all sedimentary basins of India. The estimated cost of the project is `
2932.99 Crore. Project will be completed by 2019-20. As on date (31.12.2017), 2D seismic survey of
14,077.4 LKM has been carried out. Out of this, ONGC and OIL have conducted surveys of 13199.8
LKM and 877.6 LKM respectively. The initiative was taken to cover all onshore areas with a
preliminary 2D survey, where data acquisition lines would be close, which is the first step taken by E&P
firms before switching to 3D surveys To cover offshore areas, another program was implemented under

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‗multi-client non-exclusive’ survey through which global companies can analyze and collect seismic
data at their cost, which can then be marketed to potential investors.
This translates to unprecedented opportunities for India‘s seismic survey sector. Further, with the OALP
expected to be operational by 2019 and with companies able to select and bid any oil and gas block at
any time during the year, the governments inadequate preparedness in the form of 50% of basins being
under or un-explored (India‘s production is, again translates to opportunities for exploration and seismic
survey firms.
Seismic and exploration firms‘ key challenges lie in prudently utilizing funds / credit with bankers and
suppliers for managing heavy investment in equipment to manage this sizeable business opportunity,
sourcing long term funds at low cost which will be a challenge. Pivoting working capital requirements,
which undoubtedly are on the higher side, on cash generated from on-going operations is yet another
challenge for E&P firms while managing day-to-day operations along with acquiring, developing and
retaining globally experienced seismic personnel.
CRISIL Research projects overall domestic E&P investment (onshore as well as offshore) to decline by
4% in 2017. Global leading charter rates for rigs have fallen by 20%. With expiry of old rig contracts,
falling gas prices and absence of any major discovery in the past three-five years which can be
developed in the future (maximum capital expenditure is incurred in development of an oil and gas
field), coupled with low oil prices in the $50-55 range is expected to slow down domestic E&P
investment.
3.1.6 National Data Repository
National Data Repository is integrated data repository of Exploration and Production (E&P) data of
Indian sedimentary basins. Entire country‘s E&P data is uploaded in NDR so that any interested party
from around the globe can have access to these data and show interest to invest in India. As on 31st
December, 2017, 17.6 Lakh Line kilometer (LKM) of 2D Seismic data, 6.5 Lakh Sq. KM of 3D Seismic
data and 13,981 well log data have been loaded in NDR system.
Below are the data classes of NDR:

 Seismic Data
 Well & Log Data
 Spatial Data
 Other G&G data like Drilling, Reservoir, Production, Geological, Gravity & Magnetic
 Reports and Documents
3.1.7 Hydrocarbon Discoveries
ONGC and OIL have made 14 hydrocarbon discoveries. ONGC has made 9 hydrocarbon discoveries
comprising of 4 discoveries (1 in NELP and 3 in Nomination) in onshore acreages and 5 discoveries in
offshore acreages (3 in Nomination Shallow water and 2 in Nomination deep water). One discovery has
been monetized by ONGC. OIL has made 4 hydrocarbon discoveries in the State of Assam. Gail (India)

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Limited has made one hydrocarbon discovery in the State of Gujarat. The details of hydrocarbon
discoveries made in 2017-18 up to December, 2017 are as under:
3.2 Midstream (Transportation and Storage)

In most cases, crude oil and natural gas reserves are not located in the same geography as refineries and
key consumption regions are. Midstream sector provides the link between upstream and downstream
sectors
 It is involved in gathering & processing, storing and transporting crude oil, natural gas and
petroleum products from producers to consumers
 Midstream companies are generally considered to be less risky and do not fit the risk-profile or
complexity of other segments in the supply chain of Oil and Gas industry
3.2.1 Gathering & Processing

 Gathering refers to the pipeline infrastructure required to gather crude oil and natural gas drilled
from the wells.
 Field Processing

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 It includes measuring the production rate, separating oil, gas and water, removing impurities,
fractionating and storing the treated oil and gas temporarily
 Processing can be done Onshore on Onshore Terminal or offshore on FPSO
Typical layout of an FPSO

 Fractionating is the process of removing Natural Gas Liquids (NGL) from the produced oil and
gas. NGL is further used as a fuel or feedstock in petrochemical plants
3.2.2 Storage
 Crude oil and liquid petroleum products are stored temporarily before transportation. Commonly
available storage facilities are bulk terminals and storage tanks. The type of storage tank depends on
the type of product to be handled
 Natural Gas, because of its high pressure, is stored in underground reservoirs. Pressure vessels are
used for the purpose. LPG is always stored under pressure in spherical vessels
3.2.3 Transportation
Crude oil shall be transferred from producers to refineries and from refineries to consumer. Crude oil
and refined products are transported through water bodies in barges and tankers, whereas on land it is
transported through pipelines, trucks and trains. Crude oil is the largest transported commodity across
the world.
Tanker freight rate movement is a function of demand for crude oil and products and the capacity of
the industry to accommodate those shipments. Tanker demand is measured on tonne-miles. Tanker rates
have been highly volatile, varying from $100per tonne in April 2015 to $115 per tonne in April 2016
(CRISIL Research).

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Tanker Contracts –
 Time charter is a contract for the hire of a vessel for a specified period of time during which the ship
owner is only responsible for the technical and nautical operation of the ship (ship maintenance,
crew remuneration etc.) whereas the charterer is responsible for the commercial operation of the ship
(bunker charges, port duties etc.)
 Voyage charter is an arrangement where the charter hires the ship for a single voyage. The ship
owner and his crew manage the vessel
 Contract of affreightment (COA) is a service contract under which a ship owner agrees to transport a
specified quantity of fuel products or specialty products, at a specified rate per tonne, between
designated loading and discharge ports
Domestic tanker market – India imported nearly 80 percent of crude oil requirement in 2015-16.
Crude oil tankers were deployed to meet the demand for imported crude oil. Inland transportation is
primarily done by pipeline. Crude oil import is on the rise and hence shipping requirement is increasing.
Significant new tankers have been added to the fleet over the past decade.
Shipping Corporation of India (SCI), and the Great Eastern Shipping Company are the largest shipping
company in India.
Source: CRISIL Research

Crude oil pipeline is a key component in inland transportation of crude oil. Pipeline are cheaper to
operate than tankers because of better energy efficiency. Besides pipeline can carry large volume of
crude oil and gas quickly. Currently, most crude oil pipelines in India are located in western and north-
eastern regions. IOC holds a major share of the country's onshore crude oil pipelines, while ONGC
holds the major share of the offshore crude oil pipelines. Crude oil pipelines transport waxy indigenous
crude oil as well as low-sulphur and high-sulphur imported crude oil. Refineries use a combination of
domestic and imported crude oil. The imported crude oil is transported from various ports, and most of
the indigenous crude oil is transported from the country's north-eastern parts. The latest additions to the
country's network of crude oil pipelines are IOC's Mundra-Panipat pipeline and the Vadinar-Kandla

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pipeline commissioned in 2009 (which is used mainly to evacuate petroleum products from RIL refinery
at Jamnagar by IOC, BPCL and HPCL).
Company-wise length and capacity of products pipeline and crude oil pipeline (as of May 1, 2018)
Source: IBEF Report
Below is the map that represents the crude oil pipeline network –

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Natural Gas, since it flows at a very high pressure, is transported only through pipelines of large
diameter known as Transmission Lines. LNG, liquid form of natural gas, is transported by specially
designed ships. Petronet is responsible for arrangement of transportation of LNG from RasGas, Qatar to
its terminal at Dahej. Petronet signed Time Charter Agreements with the Consortium (Ship-owners) led
by M/s. Mitsui OSK Lines Limited of Japan a leading company in LNG shipping business, for Time
Charter of two LNG Tankers (S.S. Disha and S.S. Raahi) of 138,000 cu.m capacity each, and one LNG
Tanker of 155,000 cu.m capacity for transportation of 7.5 MMTPA LNG from RasGas, Qatar to LNG
Terminal at Dahej, Gujarat for a period ending 30th April 2028.
Existing Pipeline Network (as on 01.04.2018)

Following are some of the Indian companies involved in transportation and storage of crude oil and
natural gas:
 Gas Authority of India Ltd (GAIL)
 Indian Oil Corporation Ltd (IOCL)
 Hindustan Petroleum Corporation Ltd (HPCL)
 Bharat Petroleum Corporation Ltd (BPCL)
 Petronet LNG
 Indraprastha Gas Ltd (City Gas Distribution)
3.3 Downstream (Refining, Marketing and Selling)
Downstream sector refines crude oil into usable products and sells them to consumers. The activities of
downstream sector include crude oil procurement, refining, marketing and retailing.
Crude Oil procurement plays a huge part in downstream companies. There are various grades of crude
oil traded across the world. Refineries are built for certain specifications of crude oil. So companies has
to evaluate the grades depending on their physical properties and commercial viability
3.3.1 Refining
Refining is the key activity of a downstream company. Crude oil is refined into usable petroleum
products by the process of Distillation. The process is carried out in a fractionating column called
Crude Distillation Unit. Different petroleum products in the crude are recovered at different
temperatures depending upon their boiling points.

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Product Type Characteristics and type
Light Distillate  Recovered at low temperature at the top of the column
 Very volatile and low boiling point
 Products are LPG, Gasoline, Naptha
Middle Distillate  Recovered at the middle of the column
 Not as volatile as light distillates
 Products are HSD, SKO,ATF etc.
Heavy Distillate  Recovered at the bottom of the column
 High boiling points
 Products are Tar, Bitumen, Pet Coke
At a broad level, separation by distillation seems sufficient to refine a crude oil. However, depending on
the nature of the crude feedstock the yield output may vary. In cases where heavy crude is being
processed, the heavier products are converted to lighter products by using conversion methods such as
catalytic cracking, hydro cracking and coking.
Light Distillates
Liquefied Petroleum Gas Cooking gas and industrial applications
Motor Spirit Automotive Fuels
(Gasoline/Petrol)
Naphtha Feedstock fuel for fertilizers units, power plants and
petrochemical units
Middle Distillates
Aviation Turbine Fuel Aircraft Fuels
Superior Kerosene Oil Cooking and lighting fuel
High Speed Diesel Automotive fuel, agricultural and captive power
generation
Heavy Distillates
Fuel Oil Secondary fuel for thermal power plants, feedstock
for industrial and fertilizer units
Bitumen and Tar Surfacing for roads
Pet coke Alternate fuel for industrial units
Grease and Lubes Lubricants for automobiles and other equipment
with rotating parts
3.3.2 Marketing and Retailing

Downstream companies are also involved in distributing and selling the refined petroleum products to
consumers through their pump stations.

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There are broadly four types of ownership in service stations:
COCO – Company owned and company operated
CODO – Company owned and dealer operated, here the dealer rents the station
DODO – Dealer owned and dealer operated, the oil company has low degree of control
COFO – Company owns the site and franchisee operates it as its own risk
Following are some of the Indian companies involved in downstream activities:
 Indian Oil Corporation Ltd (IOCL)
 Hindustan Petroleum Corporation Ltd (HPCL)
 Bharat Petroleum Corporation Ltd (BPCL)
Private Sector Companies
 Reliance Industries Ltd

 Essar Oil Ltd
Downstream distribution statistics

3.3.3 Commonly used terms in downstream
3.3.3.1 Nelson Complexity Index
Nelson Complexity index (NCI) is a metric which is used to showcase the complexity of refinery.
Higher Nelson complexity index indicates the ability to process heavier and cheaper crudes. Refineries
with NCI higher than 10 is considered to be a complex refinery.
Reliance Industries Limited's Jamnagar refinery complex has a Nelson Complexity Index of
approximately 13. It points to the following characteristics:
 Ability to process inferior quality crude or heavy sour crudes. For example, the Jamnagar Refinery
generally processes crudes which are 5 API lower and 0.7wt% sulphur higher compared to Indian
peers

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 Ability to have a superior refinery product slate comprising of high percentage of light distillates and
middle distillates and low percentage of heavies and fuel oil. For example, the Jamnagar Refinery
produces very low amount of fuel oil which is unmatched by the Indian peers.
3.3.3.2 Gross Refinery Margin
 It is the difference between the value of the refined petroleum products coming out of refineries and
the cost of crude oil used
 The benchmark for Indian refineries is the Singapore GRM, which is the average gross refining
margin of major Asian refiners. In Q1 of current financial year RIL beat the Singapore benchmark
by $6.5/barrel
Some of the factors that affect GRM are:
 Complexity of the refinery: Complexity of the refinery determines the product slate of that refinery.
Complex refineries produce more percentage of light and middle distillate which has a higher crack
spread and hence generate more return
 Inventory loss & gain: Inventory loss and gain due to fluctuation of crude oil price has an effect on
refinery's overall GRM. Inland refineries have to carry more inventory for their operations and hence
they are the most adversely impacted from the crude oil price fluctuations. IOCL has 11 refineries,
out of which 6 are inland refineries. Inventory stored in the refineries and in the pipeline is about 40
days level for the company. When crude oil price declined sharply in 2014-16 the company suffered
huge inventory loss which reduced the GRM by $1.5-2/barrel
 Efficient management of operational assets
 Fuel oil loss
3.3.3.3 Refinery Throughput
 It is the total amount of crude oil that a refinery has been able to refine for a given period of time
relative to its capacity. It is a measure of a refinery‘s capacity utilization. It is usually expressed in
barrels per day or tonne per annum
 Sometimes, refineries refine more crude than their rated capacities. Continuous improvement in the
process, such as modifications to equipment, enables a refinery to refine crude oils heavier than what
the refinery was originally designed for. Heavier the crude is, lower the volume will be and hence
refineries can accommodate more crude that what they were designed for
 The refining capacity of the country was 234 MMT on 31.03.2017 which is 4 MMT higher than the
country‘s refining capacity (230 MMT) on 31.03.2016
 The Refinery production (crude throughput) achievement was 245.362 MMT during 2016-17which
marks net increase of 5.4% over 2015-16 (232.865 MMT)
 Capacity utilization of the refineries was 108.3% during 2015-16 which decreased to 106.6% during
2016-17. In the Public Sector, the maximum increase in capacity utilization (27.7%) was at ONGC,
Tatipaka, Andhra Pradesh. In the Private Sector the highest increase (9.1%) in capacity utilization
was at Essar Oil Ltd. (EOL), Vadinar

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250.0 30.0
2015-2016 25.0
200.0 20.0
15.0
150.0
10.0
5.0
100.0
0.0
50.0 -5.0
-10.0
0.0 -15.0
Refineries Capacity Utilization

 IOCL had the highest refining capacity of 69.2 MMTY. All units of IOC together processed 65.191
MMT during 2016-17 as compared to 58.007 MMT during 2015-16. The capacity utilization of
these refineries was 101.7% during 2016-17 as against 105.8% during 2015-16
 All the private refineries taken together processed 91.093 MMT during 2016-17 which is higher than
88.662 MMT processed in 2015-16. The capacity utilization of these refineries during 2016-17 was
113.90% which is 2.8% higher than its capacity utilization (110.8%) in 2015-16
Refinery Crude Throughput (MMT), Source: IBEF Report

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3.3.3.4 Fuels & Losses

 It is the cost the refineries incur due to the fuel consumed to run the refineries and the fuel lost in the
system while processing crude oil into petroleum products
 It is one of the determinants of GRM; higher the value of fuels & losses, lower will be the GRM.
Fuel consumption is more for complex refineries
3.3.3.5 Under-Recovery
 In India petroleum products such as Kerosene and LPG are sold by the oil marketing companies
(IOCL, BPCL and HPCL) at a price regulated by the Government. The resultant loss incurred by
these companies is called Under-Recovery
 Under-recovery is shared amongst the Government, state-owned upstream companies (ONGC &
OIL) and oil marketing companies in a proportion decided by the Government every quarter/year
 After reaching an all-time high of Rs. 1,600 billion in 2012-13, under-recoveries on petroleum
production have declined due to government policies, fall in oil prices and relatively lower demand.
Under-recoveries fell by 13% y-o-y to Rs 1,400 billion in 2013-14 from Rs 1,610 billion in 2012-
13 in spite of the sharp 11% depreciation of the rupee against the dollar. This was largely due
to monthly increases in retail diesel prices during the year.
The below picture depicts the amount (Rs billion) of under recoveries generated from different
petroleum products.
 In 2015-16, under-recoveries declined by 64% y-o-y to Rs 270 billion due to a 44% y-o-y decline in
global crude oil prices, coupled with diesel de-regulation in the second-half of 2014-15. Under
recovery is expected to further fall in 2017 with falling global crude prices. Under-recovery on
diesel, which accounted for about 45% of the total burden in 2013-14, was eliminated in September
2014 and domestic retail diesel sales were de-regulated in October 2014. Under-recovery on diesel
was close to Rs 100 billion in the first half 2014-15 before it was de-regulated. There was no under-
recovery on diesel in 2015-16.
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Impact of Under recoveries in OMC companies:

 Under-recoveries are paid back by the government to OMC companies typically with a time lag of
approximately 6 months - 1 year. These hurts OMC's working capital and they have to take short
term loans to run their operations. The financing cost for these short term loans have an adverse
impact on OMC's income statement.
 Until 2010-11, OMCs were able to bear some part of the under-recoveries as they were earning
adequate profits from their refining business. However, since 2011-12, when under-recoveries shot
up significantly, the OMCs shared marginal (1-3%) or no burden as profits from their refining
business were inadequate. Consequently, the under-recoveries were largely shared between the
government and the upstream companies.
Above picture shows the share of underrecoveries by GOI, Upstream and downstream companies over
the years.
 Profitability of ONGC was not as adversely impacted by reduced crude oil price as much as private
upstream players in India. As earlier ONGC had to pay a huge share of under recoveries which
decreased with reduced amount of under recoveries and reduced share of upstream companies, it
compensated a good part of reduced topline due to lower crude prices.
3.3.4 Refineries in India
 India established itself as a major hub of refineries globally. Currently India is the 4th largest refiner
in the world with refining capacity with refining capacity of 230.66 MMTPA
 Currently there are 23 refineries in India, out of which 18 are in public sector, 3 in private sector and
2 are joint ventures.
The refining capacity is not only sufficient for domestic consumption but leaving a substantial surplus
also for export of petroleum products. Since 2001-02, India is a net exporter of petroleum products.
During 2015-16 (up to Dec, 2015), the country has exported 43.779 Million Metric Tonnes (MMT) of

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Petroleum products worth US Dollars 21.438 Billion (provisional). India is the largest exporter of
petroleum products in Asia since August, 2009.
Source : PPAC
The following table shows the planned capacity expansion by ministry of petroleum and natural gas.

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The Public Sector Oil Companies, IOCL, BPCL, HPCL and EIL are planning to invest approx. Rs 1.5
lakh Crore in setting up India's biggest refinery on the West Coast. The proposed refinery would have a
capacity of 60 MMTPA which will be built in 2 phases-40 +20 MMTPA. It would be accompanied by a
petrochemical complex.
3.3.5 Petroleum Products
Petroleum products derived from crude oil include light distillates such as LPG, naphtha; middle
distillates such as kerosene; and heavy ends such as furnace, lube oils, bitumen, petroleum coke and
paraffin wax
Domestic production of petroleum products increased from 3,996 tmt in FY 07 to 4,608 tmt in FY 18.
Consumption of petroleum products in India increased to 204.92 mmt in FY18(P) from 194.60 mmt in
FY17.
Production of Petroleum Products, TMT; Source : IBEF Industry Report

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Consumption of Petroleum Products (MMT)

Light distillates with the highest growth rate grew at CAGR of 4.78 per cent, while middle distillates
and heavy end segment witnessed a CAGR of 3.93 per cent and 5.89 per cent respectively, during the
year FY08-17.
3.3.5.1 HSD
The combined effect of subdued economic activity, deregulation of bulk diesel prices and gradual
alignment of retail diesel prices with international prices significantly slowed demand in the second half
of 2012-13 and resulted in a decline in demand in 2013-14.
However, on account of better economic activity and higher industrial growth diesel demand revived in
2014-15. GST's positive impact on logistics sector is expected to boost the sale of heavy and medium
duty commercial vehicles which is expectedd to increase the demand for diesel further in future. The
increasing awareness about HSD's affect on environment might play a small deterrent to future growth
rate.

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Source : Crisil Research

3.3.5.2 LPG
In 2015-16 ,LPG demand grew by a healthy 8.6% driven by increased penetration in the domestic LPG
segment. Around 20.3 million new connections were released during the year as compared to ~15 milion
the preceding year, driving consumption growth. The low price of non-domestic LPG and curbs on
diversion of subsidised cylinders post the launch of the Direct Benefit Transfer (DBT) scheme boosted
demand. The government launched 'Give it Up' campaign under which approximately 10 million
customers have voluntarily given up their LPG subsidy.
Government's push to increase LPG connection in rural areas is expected to drive healthy growth in
coming areas. However, the growth rate will be contained by near saturation in urban areas and
increasing penetration of substitute PNG.

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3.3.5.3 Motor Spirit

The effect of deregulation of diesel price narrowed the gap between diesel and petrol and made vehicles
driven by petrol more competetive. Since market linking of diesel price demand for petrol incraesed at a
healthy CAGR of 13% to reach 21.8 MT in 2015-16.
Impact of GST is expected to affect automobile sector positively. Incraesing sell of two wheelers and
sedans are going to boost demand for motor spirit in future.
Substition by CNG and blending of ethanol with petrol are downside risks to growth of demand in
Motor Spirit.

3.3.5.4 Naptha
Naptha growth has increased by 22.9% during 2015-16 to reach 13.4 MT. The huge growth rate was
driven by new capacity addition from HPL,BPCL and higher capacity utilization by other PSU
refineries.

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Even though there are plans for future capacity additions, substitution by natural gas in fertiliser sector
and a new trend of setting up gas cracker plants by RIL, GAIL etc is expected to keep the future growth
rate moderate.
3.3.5.5 SKO
Demand for SKO decreased in 2015-16 by 4.5% to reach 6.8 MT in 2015-16. Government's push to
increase penetration of LPG connection in rural areas and Direct benefit transfer scheme to stop
adulteration of gasoil / gasoline with SKO is further going to decrease the demand . The government
also hiked the price of SKO by .25 INR / litre in April'2016 and might go the diesel way to eliminate
subsidy from SKO which currently stands at 42% of the total subsidy.

3.3.6 Pricing of Petroleum Products
Pricing policy of petroleum products have changed over the years. The following chart shows about
different policy over the years.

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• Market determined pricing system

Till 1974
• Administered pricing mechanism

1974-1998
• Import Parity price mechanism

1998-2006
2006 -
• Trade Parity price mechanism
Present
2010-
• Market price of petrol was deregulated
Present
2014-
• Market price for diesel was deregulated
Present
3.3.6.1 Administered Pricing Mechanism(APM):

 Pricing crude oil at a uniform FOB cost to all the refineries based on the pooled FOB price of
indigenous and imported crude oil irrespective of whether the refinery is processed indigenous or
imported crude oil
 Refining cost and return were also determined on the retention basis. Every three years the
government used to determine the standard refining cost and return on capital employed for each
refinery. Pricing on the final product was dependent on price of crude oil plus refining cost plus
return on capital employed.
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3.3.6.2 Import Parity pricing mechanism(IPP):

 The total cost incurred by refineries in transferring there product to oil and gas marketing division is
called refinery gate price
 The cost of crude oil has a major share in refinery gate price
 Under IPP mechanism the cost of crude oil was determined by IPP
 IPP = Freight on Board + Ocean Freight + Insurance + Custom duties + Port dues
3.3.6.3 Trade Parity pricing mechanism (TPP):
 As by 2006 India had significantly improved its capacity of refining, to reduce the burden on
consumer the government had introduced trade parity price mechanism.
 Trade parity price had two part, Import parity price and Export parity price
 Import Parity Price = Freight on Board + Ocean Freight + Insurance + Custom duties + Port dues
 Export Parity Price = Freight on Board price
 By 2006 India was exporting 20% of its total petroleum products, government took this into account
while deciding the trade parity price formula
 Trade Parity Price = .8 * Import Parity Price + .2 * Export Parity Price
3.3.6.4 Market linking of Prices :
 Petrol and diesel prices were linked to market on 2010 and 2014 respectively. However the indian
consumer didn't see the price reducing in a similar fashion with that of crude oil. That is because the
OMC's has passed on various excise duty levied by government to consumers. This is a cushion
government is using to counter the uncertainities that may arise when crude oil price start an upward
revision. Market linking of prices has reduced underecovery and the price cushion is now attracting
private refiners in retail and marketing business.
 In a recent reform GOI is trying to take the diesel route to eliminate the subsidy on LPG and SKO as
well. The price of LPG was hiked approximately 2 Rs/ 14 kg cylinder for last three consecutive
months. SKO prices was hiked by 25paise/ liter and this trend is expected to be seen in the future as
well.

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140.0
Petroleum Products Prices In India
120.0
100.0
80.0
Price Rs
60.0
40.0
20.0
0.0
Petrol Kero-sene Aviation High Speed Bitumen Furnace Oil Lubri-cants Liquified
Turbine Fuel Diesel Oil Petroleum
2012-13 2013-14 2014-15 2015-16 2016-17(p) Gas
3.3.7 Strategic Petroleum Reserve

Strategic Petroleum Reserves (SPR) refers to crude oil that is stored in underground storage facilities.
Countries whose requirements are high and that rely on imports to meet their requirements stock crude
oil in these reserves to isolate themselves from supply disruptions in case of emergencies. Member
countries of International Energy Agency should hold oil stocks equivalent to minimum 90 days of
oil imports.
 To ensure energy security, the Government of India had decided to set up strategic crude oil storages
at three locations namely, Visakhapatnam, Mangalore and Padur (near Udupi). These strategic
storages would be in addition to the existing storages of crude oil and petroleum products with the
oil companies and would serve as a cushion during any external supply disruptions. The construction
of the Strategic Crude Oil Storage facilities is being managed by Indian Strategic Petroleum
Reserves Limited (ISPRL), under the Ministry of Petroleum & Natural Gas. Engineers India Limited
(EIL) is taken as the Project Management Consultant for all three projects
 The crude oil storages are constructed in underground rock caverns and are located on the East and
West coast of India. Crude oil from these caverns can be supplied to the Indian Refineries either
through pipelines or through a combination of pipelines and ships. Underground rock caverns are
considered the safest means of storing hydrocarbons. The estimated cost of the project was around
Rs.2400 crore at September 2005 prices. This excluded the cost of filling the crude oil in the caverns
 India, paying heed to oil security concerns, had approved building reserves of total capacity 5.33
MMT, equivalent to 10 days of current oil imports, at three locations; Vishakhapatnam, Padur
and Mangalore of capacities 1.33 MMT, 2.5 MMT and 1.5 MMT respectively
 The facility at Vizag was commissioned in May 2015 and filling was started in July 2015. As on
March, 2015, the one at Mangalore was 99 % complete and the other one at Padur was 96%
complete. Both facilities are expected to be operational by October, 2015. At current levels, it takes
three years to fill all these storage facilities and ensure 13 days reserve

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 Government has announced to construct SPRs under Phase II at two new locations (Chandikhol in
Odisha and Padur in Karnataka) and the Ministry is working towards obtaining required approvals
 India's ultimate goal is to have an SPR that provides 90 days of net import coverage. The Indian
government unveiled plans to add another 91 million barrels of SPR capacity in a second phase by
2020, although these facilities are still in the planning phase
 The significant drop in international oil prices since mid-2014 provides India with an incentive to
speed up construction and filling of its SPR. India is seeking to finance the second phase of its SPR
partially through commercial agreements with foreign oil producers who can lease storage. India is
currently negotiating with the United Arab Emirates' national oil company, ADNOC, to lease 5.5
million barrels of the Mangalore facility. Two-thirds of this volume would be available for India,
and ADNOC could store the remaining volumes or sell the oil in the domestic market
 On a comparative basis, SPR of the US currently holds 727 million barrels (as on Dec, 2014)
equivalent to 130 days of oil imports. China has built and filled reserves of capacity 103 million
barrels and is currently building reserves that can store 207 million barrel of oil. China intends to
increase SPR capacity to at least 500 million barrels

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4 Crude Oil
4.1 Types of Crude Oil
Depending on the mixture of hydrocarbon molecules, crude oil varies in color, composition and
consistency. Different oil-producing areas or even different depths in the same oilfield yield
significantly different varieties of crude oil. Crude oil's different properties are used to design the right
kind of refineries and also to determine the appropriate price for the oil. Two main properties of crude
oil which determines the type are density and sulphur content.
Crude oil is classified as sweet and sour on the basis of its sulphur content. Crude oil with a sulphur
content of 0.5% and above, by weight is considered to be of sour type. Oil containing less than 0.5% of
sulphur, by weight is called sweet crude.
Sulphur compounds are toxic, have odor and promote tar sedimentation; in compounds with water, it
causes intensive metal corrosion. Sulphur content determines the kind of treatment the oil will need to
go through in a refinery. Moreover, the higher the sulphur content in oil, the bigger and corrosive effect
it will have on environment.
Crude oil is classified as light, medium, heavy and very heavy on the basis of its relative density, also
known as specific gravity, and API (American Petroleum Institute) gravity. The higher the API number,
expressed as degree API, the lesser the density (lighter, thinner) of crude. The API gravity of a crude oil
varies from 0 to 47.
API gravity can be calculated from the following formulae
API Gravity, degree API = (141.5/ Specific Gravity) – 131.5
Type of Crude Oil Relative Density API Gravity
Light 0.800 - 0.870 47 - 31.1
Medium 0.870 - 0.920 31.1 - 22.3
Heavy 0.920 - 1.000 22.3 - 10
Very Heavy Over 1.000 < 10
The density of oil determines whether a specific type of crude oil has a higher or lower boiling range (or
distillate yields), which is important for separating and extracting different parts (or fractions.) Oil that is
high in metal and sulphur content is considered as low-grade oil. It generally has high amount of carbon
content and not enough hydrogen. This makes the crude oil more time consuming and hard to refine.
4.2 Benchmark Crude Oil
A benchmark crude oil serves as a reference for buyers and sellers. There are several varieties and
grades of crude oil that are being traded. The use of benchmark crude oil makes it easier for buyers and
sellers to price the crude oil across varieties and grades. Other types of crude oil are compared to

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benchmarks on factors such as API gravity or relative density, sulphur content, transportation costs from
production areas to refineries, and regional and global supply and demand conditions.
Some of the most significant benchmarks used in the oil market are
 West Texas Intermediate (WTI)
 Brent Crude
 OPEC Reference basket
West Texas Intermediate (WTI) is a light, sweet crude oil with API density of 39.6 degree, relative
density of 0.827 and sulphur content of 0.24%. It is produced in the United States and is priced at the
crude oil trading hub of Cushing, Oklahoma. WTI is the benchmark for other types of crude oil
produced in Gulf of Mexico and North Dakota. WTI is also used as a benchmark for imported crude oil
that is produced in Canada, Mexico, and South America. WTI is usually refined in Gulf Coast and
Midwest regions of the United States.
Brent is a light, sweet crude oil with API density of 38.06 degree, relative density of 0.834 and sulphur
content of 0.37%. It is produced in the North Sea and is heavier and less sweet than WTI crude. Brent
Crude is primarily refined in North-Western Europe and almost 2/3 of world‘s oil is priced against it.
OPEC Reference Basket is a weighted average of prices of 13 different blends of oil produces by
OPEC countries. With the present mix of light and heavy crudes, it averages an API gravity of 32.7
degree and a sulphur content of 1.77% making it heavier than both WTI and Brent Crude
The price of Indian Basket of Crude Oil takes the average of Dubai and Oman benchmark for sour
crude and Brent benchmark for sweet crude in the ratio at which sour and sweet grade crudes were
procured and refined by the Indian refineries in the previous fiscal year. The current ratio of sour grade
to sweet grade is 72.3: 27.7.
120
OPEC Brent WTI
100
80
60
Price $
40
20
0
2013 2014 2015 2016 2017 2018E
Year (Till July 2018)
Crude oil price of different benchmarks

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WTI crude despite being of a superior quality sells at a discount to Brent crude. The premium that Brent
traded at relative to WTI used to run in the double digits. The spread was the result of surging shale
output that ended up trapped in the U.S. because of a ban on crude exports. The spread, however, shrank
in recent years after the broader oil market meltdown in 2014, combined with the inauguration of U.S.
crude exports at the end of 2015 and into 2016.
U.S. exports, however, really began to pick up last year. U.S. crude exports bounced around between 0.5
million barrels per day (mb/d) and 1 mb/d in the first half of the year, a level that jumped to a range
between 1 and 2 mb/d in the third and fourth quarters.
Hurricane Harvey interrupted a major portion of refining in the U.S. for a few months, leading to the
Brent-WTI differential to open up once again as crude stocks built up along the Gulf Coast. That helped
spark the higher levels of exports at the end of the year as the arbitrage opportunity played out.
But while the Brent-WTI spread jumped over $7 per barrel between September and December, it has
sharply narrowed more recently.
Some reasons for narrowing of the spread are:
 U.S. crude exports remain elevated, although down a bit from the fourth quarter. Meanwhile, the
Keystone pipeline was temporarily knocked offline at the end of 2017 and is still operating
below full capacity. That has trimmed volumes flowing into the U.S.
 New pipelines have increased connections around the U.S., easing bottlenecks and allowing
more U.S. oil to reach its destination. For instance, the Diamond pipeline started up in
December, opening a route from Cushing, OK to Memphis, TN. That has led to a sharper
drawdown in crude inventories at Cushing, helping to push up the WTI benchmark.
 The recent startup of the Louisiana Offshore Oil Port (LOOP), which is the only port capable of
handling the oil industry‘s largest oil tankers, has raised expectations of a flood of U.S. oil
reaching the global market. LOOP can handle very large crude carriers (VLCCs), which can
carry as much as 2 million barrels. Not only does LOOP mean that more volume can be moved,
but using larger but fewer tankers could also cut transit costs, adding to the appeal of American
crude.That means rather than the U.S. becoming awash in oil once again as shale drillers ramp
up production, much of the additional barrels could be shipped abroad.
All of that has helped push up WTI. Meanwhile, refinery maintenance in Europe has dampened demand
for Brent, causing the two benchmarks to converge. The ―price gap between the two oil types has
narrowed to its lowest level in six months. This is due to the pronounced fall in crude oil stocks at
Cushing, the delivery point for WTI,‖ Commerzbank wrote in a note on Tuesday. ―For one thing, less
crude oil is being transported from Canada to Cushing due to the restricted capacity of the Keystone
pipeline. And for another, new pipeline capacities mean more crude oil is leaving Cushing.‖
Prices for front-month contracts between Brent and WTI has shrunk to less than $4 per barrel, and the
spread between spot prices recently dipped below $3 per barrel, the lowest since Hurricane Harvey.

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Price variation of Crude and Brent Crude in $/barrel

4.3 Major Producers of Crude Oil
Million barrels of crude oil per day (mbpd)

18
15.59
16
14
12.09
12 11.2
10
6 4.984 4.779 4.669 4.462

3.721 3.363
4 2.928
0
US Saudi Russia Canada China Iran Iraq UAE Brazil Kuwait
Arabia
US produced the most oil in 2017, with output increasing from 14,855,000 barrels per day (bpd) in 2016
to 15,599,000 bpd in 2017 on account of increased extraction of oil from the shale rock with superior
technology. It has already overtaken Saudi Arabia and Russia in the process.

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Region-wise Crude Oil Demand, Source: CRISIL Research

4.4 Crude Oil: Domestic Scenario
4.4.1 Crude Oil Reserves
As on 1.4.2017, In-place hydrocarbon volume of 10454 million tonnes of oil and oil equivalent gas
could be established through exploration by ONGC, OIL and Private/JV companies.
Out of 10454 MMT of oil and oil equivalent gas of In-place volumes, the ultimate reserves which can be
produced are about 4017 MMT of oil and oil equivalent gas since inception.
Crude Oil Reserves Distribution In India

Assam
7%
27% Gujarat
Rajasthan
40%
Tamil Nadu
20%
4% Andhra Pradesh
Western Offshore
1% 1% Eastern Offshore

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4.4.2 Crude Oil Production

The crude oil production for the year 2016-17 is at 36.01 Million Metric Tonnes (MMT) as against
production of 36.94 MMT in 2015-16, showing a decrease of about 2.53%. 70.8% of crude oil
production is by ONGC and OIL from nomination regime and remaining 29.2% of crude production is
by Private/JVs companies from PSC regime. The projected crude oil production in 2017-18 is 37.37
MMT.
Shortfall in production by ONGC was mainly due to natural decline in matured fields of Western
Offshore.
Production by OIL is mainly from matured fields where decline rate encountered which was more than
expected, contribution from work-over and new well drilling was also not commensurate with fall in
production as well as bandhs, blockades, miscreant activities contributed to direct loss of production.
Shortfall in production under PSC Regime was mainly due to underperformance of Cauvery fields,
natural decline in Cambay wells and closure of multiple wells in KGD6.
Production from MA field in KGD6 basin of RIL is supposed to stop from September‘18, which will
further reduce total gas production from KGD6. But some new projects are underway, which will
tentatively start producing in 2020.
Import of crude oil during 2016-17 was 213.93 MMT valued at ` 470159 crore as against import of
202.85 MMT valued at ` 416579 crore in 2015-16 which marked an increase of 5.46% in quantity terms
and 12.86% in value terms as compared to the import of crude oil during 2015-16.
In 2017-18, the share of offshore crude oil production is about 51.1%. The remaining crude oil
production was from 6 States viz., Andhra Pradesh (0.9%), Arunachal Pradesh (0.1%), Assam(12.2%),
Gujarat (12.8%), Rajasthan (21.9%) and Tamil Nadu (1.0%).

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Imports and Domestic production of crude in India
4.4.3 Crude Oil Consumption

Oil consumption has expanded at a CAGR of 4.78 per cent during 2007–17 to reach 4.69 mbpd by 2017.
Due to the expected strong growth in demand, India‘s dependency on oil imports is likely to increase
further. Rapid economic growth is leading to greater outputs, which in turn is increasing the demand of
oil for production and transportation. India‘s crude oil demand is expected to increase over 150 per cent
to 10.1 million tonnes per day by 2040.
In FY18, total crude oil imports were valued at US$ 87.37 billion as compared to US$ 70.71 billion in
FY17. In FY18, crude oil imports increased to 4.41 mbpd from 4.27 mbpd in FY17. Crude oil imports
during Apr-May 2018 stood at 0.74 mbpd.
Oil Consumption in India (mbpd)
4.5 Licensing Policies

India has had different policies of awarding blocks to companies for exploration and production of
conventional natural gas and oil over time. It can be broadly categorized into four categories:
 Nomination Basis
 Pre - National Exploration Licensing Policy
 National Exploration Licensing Policy
 Hydrocarbon Exploration Licensing Policy

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4.5.1.1 Nomination Basis:

 The Government awarded Petroleum Exploration Licenses (PEL) on nomination basis to National
Oil Companies, ONGC and OIL. Under Administered Pricing Mechanism, the gas produced for
these were set by the Government.
 The gas produced from these were priced at $ 1.79 per mm British Thermal Units till May 2010, post
which it was increased by the government to $4.2 per mm BTU. The gas produced from these fields
in majorly allocated to power and fertilizer sector. The gas produced from North-Eastern regions is
priced at $2.52 per mm BTU under the mechanism.
 The losses these companies incur as a result is compensated by the Government which usually
comes with a lag of three to six months thereby increasing the short-term borrowings and hence, the
interest cost of these companies This led to investors becoming reluctant to commit huge
investments in exploration and production activities
4.5.1.2 Pre - NELP:
 Indian economy liberalized in 1991 allowing Private participation
 Small/Marginal Sized fields discovered by ONGC and OIL were awarded to Private Companies with
ONGC, OIL having participating interests
 During 1990 and before the introduction of NELP, 28 blocks were awarded to private companies
with ONGC and OIL having the right to participate in the block if hydrocarbon discovery was made
In order to encourage private participation, the government invited private participation in the upstream
sector through competitive bidding for:
 Speculative survey of blocks
 Exploration of blocks
 Development of already discovered fields
Speculative survey
Companies could enter into a speculative survey contract by signing a profit-sharing contract with the
Government of India (GoI) through their nominee, the Directorate General of Hydrocarbons (DGH).
The contract could be for any type of geophysical survey, and the companies were free to bid for any
number of blocks on their own or by forming a consortium.
Features of the policy were:
 Provision for risk sharing by DGH/GoI up to 50 per cent
 In the case of taxes and duties, the Income Tax Act, 1961, will apply. However, companies will be
entitled to customs duty exemption on goods imported for use in petroleum operations under the
contract
 Foreign companies can remit amounts out of India, which are due to the company under the contract
Exploration of blocks

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Companies or consortiums could participate in exploration rounds by competitive bidding. Successful
companies or consortiums had to sign production-sharing contracts with the government.
 ONGC or OIL will have a participating interest of 25-40 per cent in the joint venture, thus sharing
exploration costs
 The contract will be on a production-sharing basis for 25 years, from the date of commencement of
the contract (with a possible extension of 5 years) in the case of associated gas. For non-associated
gas, the contract shall be for 35 years from the date of signing the contract
Development of already discovered fields
Companies or consortiums could participate in the development of medium-sized and small-sized fields
offered under various rounds:
 The joint venture to be formed for development of medium-sized fields can either be an incorporated
venture, with equity participation of up to 51 per cent and the interest of ONGC or OIL being 40 per
cent. ONGC or OIL would have no participating or carried interest in the case of small-sized fields
 The percentage of annual production of crude oil and gas expected to be allocated for cost recovery
purposes need to be indicated
 As against the first round of development, where private players had to supply natural gas to the
government, the second round allowed private players to market their natural gas. However, the
domestic market would get first priority for the natural gas produced from any field. Arrangements
for marketing the gas produced could be negotiable between the government and the company. The
pricing formula for gas would be based on internationally accepted principles
4.5.1.3 National Exploration Licensing Policy:
Under the New Exploration Licensing Policy (NELP), exploration blocks were awarded to Indian
private and foreign companies through bidding process where national oil companies like ONGC and
OIL are competing on equal footing with the private and foreign players
The major features of this NELP policy are:
 100 per cent foreign participation allowed
 No excise or cess levied on PSCs
 Option to amortise exploration and drilling expenses for 10 years from first commercial discovery
 Operating experience mandatory to bid for deep water blocks
 Royalty at the rate of 12.5 per cent for onland areas and 10 per cent for offshore areas
 Cess to be exempted for production from blocks offered under NELP
 A model production-sharing contract (MPSC) which is reviewed for every NELP round

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The following chart gives details of the exploratory blocks awarded so far:
Blocks Awarded under NELP

80
70
70
60 55 57
52 52
48
50 44
41
40 34 32 34
30 25 24 25 23 23 27
23 23 24
21 20 20 20 20 19 19
20
10
0
NELP-I NELP-II NELP-III NELP-IV NELP-V NELP-VI NELP-VII NELP-VII NELP-IX
No. of Blocks Bid Offered No. of Blocks awarded No. of PSC Signed
Production Sharing Contract: The terms and conditions for development of field are governed by
Production Sharing Contracts (PSCs) where in the E&P companies are allowed to recover cost before
they pay the government its share of revenue.

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4.5.1.4 Hydrocarbon Exploration and Licensing Policy:

Hydrocarbon Exploration Licensing Policy (HELP) for Award of Hydrocarbon Acreages with New
Contractual System and Fiscal Model along-with the open acreage policy approved by cabinet on
10.03.2016 is designed in such a way that it will usher a new era in the exploration and production of
hydrocarbons in India. The salient features of this policy are as under:
 Single license for conventional and non-conventional hydrocarbons: A uniform License will
enable explorers to extract all hydrocarbon resources covered under Oilfields Regulation and
development Act, 1948 and Petroleum and Natural gas rules, 1959. Under this regime, bidding
of blocks will be conducted on a continuous, demand-based process, and the government won't have
to group blocks, as under the NELP scheme
 Opening up of India's sedimentary basins through Open Acreage Policy: This will provide option
for the companies for selection of Exploration blocks. They will also not be required to wait till the
formal bid round is launched by the government as the open acreage area will be available
throughout the year for bidding. A National Data Repository is being constructed where all the
relevant data regarding the oil fields will be uploaded. This will save time and cost of inspection.
Any company can use this data to bid at any point of time
 Discovered Small Field Policy (DSF) is aimed at monetizing hydrocarbon resources locked-in for
years in a time bound manner to boost domestic production of Oil and Gas. 31 contracts areas have
been awarded through international e-bidding in 1st bidding round of DSF, while 34 contracts areas,
60 fields across 8 basins were covered in Round-II. Based on the success of DSF Bid Round-I, DGH
has further identified 60 un-monetised discoveries / fields of ONGC and OIL in nomination regime
and relinquished blocks of PSC regime

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 Revenue sharing model: Under the revenue-sharing formula, contractors will share the revenue
from the time first drop of oil/gas starts flowing from the field. Issues related to cost recovery in a
production-sharing contract have resulted in a long and protracted legal dispute between the
government and Reliance Industries Ltd over the KG-D6 block in the Krishna Godavari basin.
Under the new regime, the Government will not be concerned with the cost incurred and will receive
a share of the gross revenue from the sale of oil, gas etc. The new model is easy to administer and
does not involve micro-management by the government
 Marketing and Pricing Freedom: Freedom in pricing, subject to a ceiling price limit, for new gas
production from Deepwater, Ultra Deepwater and High Pressure-High Temperature Areas. The
policy provides marketing and pricing freedom to the gas production from existing discoveries
which are yet to commence commercial production as on 1.1.2016 as well as for future discoveries.
Considering the imperfections in gas markets in India, and to protect the interests of the consuming
sector, a ceiling based on the landed cost of the alternate fuels has been imposed. The ceiling price
shall be the, lowest of the following:
 Fuel oil import landed price
 Weighted average import landed price of substitute fuels (0.3 x price of imported coal + 0.4 x
price of imported fuel oil + 0.3 x price of imported naphtha) and
 LNG import landed price.
 However, companies which have an arbitration going on with government can't avail the benefits of
price sharing model. Few days after the policy was launched Reliance Industries Limited dropped
the prolonged arbitration
 Reduced Royalty rates: Royalty rates for onland blocks is at 12.5 per cent for oil and 10 per cent
for gas, at par with NELP. However, in order to incentivize offshore exploration which involves
higher risks and costs, a graded system of reduced royalty rates will be applicable. The royalty rates
under HELP are as follows:
4.5.1.4.1 Open Acreage License Policy

Over the last 20 years, India has attempted energy sector reforms to move from government owned and
fully regulated systems towards more of a market based one. But still, state owned companies continue
to dominate. It is proven that India has exploited only 3% of its proven natural gas reserves and 5% of

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its crude oil reserves. More than half of the commercial infrastructure that India needs by 2030 needs to
be built (Studies forecast that India will become the largest growth market for oil by 2030 (4.2%
growth))
Till 2016, the exploration process was limited to only those blocks that were put on tender by the
government rendering companies that had additional information or interests regarding areas to be
tapped waiting until government put together bidding processes. Open Acreage License Policy (OALP)
is a part of the HELP which came out last year. The Director General of Hydrocarbons, an arm of the oil
ministry has drafted the procedure to operationalize the OALP. It is expected to be operational by 2019
and an inflection point in Indian‘s search for critical fossil fuel. With OALP, the opportunity to express
interests via oil and gas acreages will be available throughout the year instead of cyclic bidding rounds.
Government will accept the ‗expression of interests from investors in two six monthly windows –ending
in June and December, following which evaluation will take place. Government will offer incentives to
companies that take the lead in proposing and developing oil blocks under OALP. As well as allowing
companies to take the initiative, OALP allows to keep alive the previous practice of government carving
out blocks and offering them to investors in the auction round.
In FY18, Cabinet has awarded 31 Oil blocks (44 fields) to 23 companies so far – these areas have 88
million tonnes of oil equivalent that could reduce the oil import bill by 3500 crores annually. For the
blocks awarded the expected reserves are ~ 40 billion tonnes and 23 million cubic metres which can be
monetised over 15 years. Number of offshore bids is lesser than the number of onshore bids
predominantly owing to the higher costs and technological leverage associated with the latter.
OALP-1 Round Highlights:
A total of 55 blocks were put on offer, 49 blocks from Category-I, 4 blocks from Category-II and 2
blocks from Category-III across a total area of 59282 sq km. Out of these, 46 blocks were Onshore, 8 in
Shallow water and 1 block in Deepwater.

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4.6 Crude Oil Price History

Like most other commodities, crude oil prices have experienced dramatic price swings over time due to
periods of acute shortage and oversupply. Geopolitical and other events across the world, especially in
oil-producing nations, have significant implications on the demand and supply of crude oil. Events that
disrupt supply or increase uncertainty about future supplies tend to push prices up.
The major events that shaped the price of crude oil over the years are explained below:
OPEC was established in 1960 with five founding members: Iran, Iraq, Kuwait, Saudi Arabia and
Venezuela. By the end of 1971, six other nations had joined the group: Qatar, Indonesia, Libya, United
Arab Emirates, Algeria and Nigeria.
In 1972, the price of crude oil was below $3.50 per barrel. The Yom Kippur War started with an attack
on Israel by Syria and Egypt on October 5, 1973. The United States and many countries in the western
world showed support for Israel. In reaction to the support of Israel, several Arab exporting nations
joined by Iran imposed an embargo on the countries supporting Israel. While these nations curtailed
production by five million barrels per day, other countries were able to increase production by a million
barrels. The net loss of four million barrels per day extended through March of 1974. It represented 7
percent of the free world production. By the end of 1974, the nominal price of oil had quadrupled to
more than $12.00.

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Source: Goldman Sachs commodity research

From 1974 to 1978, the world crude oil price was relatively flat ranging from $12.52 per barrel to
$14.57 per barrel.
In 1979 and 1980, events in Iran and Iraq led to another round of crude oil price increases. The Iranian
revolution resulted in the loss of 2.0-2.5 million barrels per day of oil production between November
1978 and June 1979. At one point production almost halted.
In September 1980, Iran already weakened by the revolution was invaded by Iraq. By November, the
combined production of both countries was only a million barrels per day. It was down 6.5 million
barrels per day from a year before.
The loss of production from the combined effects of the Iranian revolution and the Iraq-Iran War caused
crude oil prices to more than double. The nominal price went from $14 in 1978 to $35 per barrel in
1981.
The rapid increase in crude prices from 1973 to 1981 would have been less was it not for United States
energy policy during the post Embargo period. The U.S. imposed price controls on domestically
produced oil. The obvious result of the price controls was that U.S. consumers of crude oil paid about

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50 percent more for imports than domestic production and U.S. producers received less than world
market price. In effect, the domestic petroleum industry was subsidizing the U.S. consumer.
OPEC tried to control the declining oil price by imposing member quotas. But it failed repeatedly
between1980-90 to control the price as the several members exceeded their quotas. The production
increased by 2 million barrels per day and by mid1986 price declined to less than $10 / barrel the price
of crude oil spiked in 1990 with the lower production, uncertainty associated with the Iraqi invasion of
Kuwait and the ensuing Gulf War.
The price cycle then turned up. The United States economy was strong and the Asian Pacific region was
booming. From 1990 to 1997, world oil consumption increased 6.2 million barrels per day. Asian
consumption accounted for all but 300,000 barrels per day of that gain and contributed to a price
recovery that extended into 1997. Declining Russian production contributed to the price recovery.
Between 1990 and 1996 Russian production declined more than five million barrels per day.
The price increases came to a rapid end in 1997 and 1998 when the economic crisis started to make an
impact in Asia.
The price again started an upward revision from mid-1999 as US economy was booming. Till 2001
prices continued to move up. By this time Russia again started producing oil in higher quantities. In Sep
11, 2001 on the wake of terrorist attack price plummeted instantly. WTI was down 35% by November.
By 2002 crude oil price trend was again reversed. Problems in Venezuela led to a strike at PDVSA
causing Venezuelan production to plummet. The world supply was reduced by 2.6 million barrels per
day.
On March 19, 2003, just as some Venezuelan production was beginning to return, military action
commenced in Iraq. Meanwhile, inventories remained low in the U.S. and other OECD countries. With
an improving economy U.S. demand was increasing and Asian demand for crude oil was growing at a
rapid pace.
Problems in Iraq and Venezuela wiped out almost 6 million barrels of crude oversupply in the market.
The 2005 hurricanes and U.S. refinery problems associated with the conversion from MTBE to ethanol
as a gasoline additive also contributed to higher prices. This resulted in oil price in excess of $50 a barrel
by 2005.
In 2008, after the beginning of the longest U.S. recession since the Great Depression the oil price
continued to soar. Spare capacity dipped below a million barrels per day and speculation in the crude oil
futures market was exceptionally strong. Trading on NYMEX closed at a record $145.29 on July 3,
2008. In the face of recession and falling petroleum demand the price fell throughout the remainder of
the year to the below $40 in December.
Following an OPEC cut of 4.2 million b/d in January 2009 prices rose steadily in the supported by rising
demand in Asia. In late February 2011, prices jumped as a consequence of the loss of Libyan exports in
the face of the Libyan civil war. Concern about additional interruptions from unrest in other Middle East
and North African producers continues to support the price.

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Oil price saw a sudden up rise in the first half of 2012 as Iran threatened to block the Strait of Hormuz as
a protest to the sanction imposed on them due to enrichment program. This was a strategically important
narrow sea corridor through which one fifth of the world's oil passed. US intervened and announced to
deploy military in the region so that the pass way remains open, this caused the oil price to fall.
With the increase in Oil price commercial oil production from unconventional sources became feasible.
Many companies started production using the advanced and expensive technology like horizontal
drilling and fractionating from shale formations of Texas and North Dakota in US. The production in the
U.S increased by 90% since 2008 to 12.5 million barrels per day in 2014. In Canada, companies were
heating Alberta's gooey oil sands with steam to extract usable crude.
These led to a sudden increase in production from unconventional oil sources, U.S added 4 million
barrel per day from 2011.However the price of the oil was not impacted very much from these increase
in supplies. This was mainly due to geopolitical conflict in other oil producing nations. Civil war in
Syria was going on, Iraq faced constant threats from ISIS. The US and EU had imposed sanctions on
Iran and pinched its oil exports. These factors resulted in taking away from the global market 3 million
barrels per day.
However my mid 2014 there were other economic factors which to decline of demand even more.
Economic slowdown in China and Germany, China's increasing shift to service industry had reduced its
percentage of change in oil consumption/ percentage of change in GDP ratio significantly. Also the cars
in U.S become more efficient in terms of mileage which stagnated the gasoline demand. But the supply
kept on increasing as Saudi Arabia was adamant to keep its market share intact, it used the spare
capacity and the oil output was unchanged. These factors led to steady decline in oil price since 2014.
Global Crude Oil Supply and Demand

100 99.2
98.8
99 98.1
98 97.4
96.9
97 96.5 96.5
mbd
96
95
95
94
93
2015 2016 2017 2018F
Year
Crude Oil Demand Crude Oil Supply
Source: Data from IEA

Crude oil price reached their lowest level in 3Q of 2016 as the gap between supply and demand was
widened most. Indian Basket Crude dropped below $26 a barrel in mid-February 2016. However
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following a huge wildfire in Alberta region of Canada which reduced the supply by 700,000 barrels a
day, constant attack by militants in Nigerian oil fields and political unrest in Venezuela reduced the
supply and consequently the demand supply gap was reduced. This started a small upward rally and
brought the price back to $50 a barrel region. However as the oil mils in Canada and Nigeria started
working again and OPEC'S output reached record high in August'2016 the crude price again reduced to
$40-$45 a barrel.
Crude oil supply trend, Source: BP Statistics, CRISIL Research Report

4.6.1.1 Baker Hughes Rig Count
Baker Hughes Rig Count, reported by Baker Hughes corporation since 1944 reports weekly count of
total rig drilling activity in the US and Canada. The number is released every Friday noon CST.
The rig count acts as a proxy for information on drilling, completing, producing and processing
hydrocarbons. It can be used in gauging where the price of West Texas Intermediate (WTI) crude is
headed to, and even as a general supply demand proxy. Many of the rigs shut down during the 2014
supply glut are coming back online, which is indicating a market revival. Albeit the rig counts to be
increasing over the recent past, the US Oil fund and US Brent oil Fund took a great hit after the energy
administration reported over 528.4M barrels of stockpile.
US‘ growing investment in tight oil wells aligns with the country‘s increasing shale production over the
last couple of years. The fact that falling international prices have led to increased operational and
production efficiency in the US oil economy in a bid to remain viable as well as the oil prices remaining
in the $50-$55 range owing to OPEC‘s production cuts has resulted in a constantly increasing rig count
(Baker Hughes) in the US which points to a possible future where US shale supply and Chinese
economy will also be key drivers of crude oil prices.
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Impact on Oil prices – Demonstration

The weekly data release by BHGE, unless drastic has little impact on oil price changes, ranging from an
increase of ~ 1-1.5% increase in crude price owing to decrease in number of rigs reported. US shale
producers are considered as major headwinds in the OPEC‘s effort to reduce global production
following a supply glut, in the wake of which reduction in rig count is generally perceived well by
global markets, although US has been reducing the number of rigs and increasing production per rig off
late.
The Baker Hughes GE merger creates synergy in multiple ways via creating an entity that does
everything ranging from finding the oil, brining it on to production and also providing the right
equipment. In other words, the new company is the first and only to bring together industry-leading
equipment, services and digital solutions across the entire spectrum of oil and gas development.
Applying digital and advanced technologies to oil and gas could bring approximately five percent
productivity improvements across the entire industry. GE claims that it can monitor customer progress
via the equipment it sells and provide follow in services based on performance on factory floor and now
in oil fields, with the Baker Hughes merger, although GE stands heavily exposed to offshore drilling
with this merger and it has been hit hard since 2014 downturn of oil prices.
4.6.1.2 FPSO Hire Count
FPSOs are Floating, Production, Storage and Offloading Vessels which are deployed to aid in
production from crude oil and natural gas from deep offshore wells. The number of FPSOs hire over a
period of one year is an indirect indication of sentiment within the industry regarding the crude oil
fluctuations. If crude oil prices fall beyond a range, it becomes unfeasible for O&G players to invest in

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FPSOs in the near future. As a result, the rate of deployment of FPSOs fall. The reverse is true in case of
increase in Crude oil prices. It provides E&P companies with enough capital to invest in FPSOs.
4.6.1.3 OPEC Meetings – Impact and US Shale oil production

Oil prices have historically been volatile per OPEC meeting previews, mood in the industry prior to
OPEC meetings as per speculative previews and conclusions arrived post important meetings. The
market reactions are mostly ‗knee-jerk‘ and not based on strong fundamentals, reasoning or rationale.
That the oil prices exhibit interim fluctuations during the meetings is reflective of the influence exerted
by key OPEC decisions on market sentiments.
OPEC‘s initial decision to counter increasing US production with increased supply to retain its share
backfired in early 2016 with oil prices plunging to as low as $26 a barrel which led to the
conceptualization of a ‗production freeze‘ and thereby creating a price ‗floor‘ which almost doubled oil
prices. When prices again fell below $43 in November, OPEC enacted production cuts for the first time
which led to a 9% increase in market prices for oil.
The recent OPEC meeting conclusions to extend production restrictions by 9 months in a bid to remove
supply glut at the rate of 1.8 Billion barrels a day immediately reflected on the oil prices which recorded
a fall as the decisions from the meeting did not meet investor expectations of a much longer restriction
on production. The fact that increasing outputs from Nigeria and Libya which are exempted from the
cuts as well as little being concluded about the constantly increasing production boom from the United
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States reflected strongly on the prices speak of the influence of OPEC meetings on oil prices across the
globe. On the trading front, the fact that net long positions have fallen by over 17% reflect of the oil
trading fraternity having either sufficiently anticipating or reacting to OPEC‘s decisions of a relatively
subdued production cut.
The following diagram shows impact of OPEC meetings‘ immediate reflection on oil price trends:
Although the meetings‘ history demonstrate good compliance, the global markets are expected to be
well supplied till end of 2017 at least with OPEC shipments to its biggest customers (US and China)
showing a 10% growth. Energy Information Agency (EIA) predicts surpluses to increase in the first half
of 2018 especially with the recent talks of selling half of US‘ strategic oil reserves that may put another
300 million barrels of oil in the market, which may render it difficult for OPEC to stick with production
cuts beyond 2017.
Shale vs. Crude oil production
Conventional oil production generally refers to the pipe and pump production off a vertical well. This
means a hole has been drilled straight down into a deposit and a pump jack is put on it to help pull the
deposit to the surface where it can be sent on for further refining. The cost-per-barrel of conventional
deposits varies, per capital spending, production costs, administrative and transportation costs and gross
taxes. Saudi Arabia is able to produce oil the most cheaply, sometimes under $10 a barrel. The Middle
East and North Africa are also very efficient, producing oil as cheaply as $20 per barrel down.
Worldwide, conventional oil production typically costs between $30 and $40 a barrel. Saudi Arabia‘s
location near the surface of the desert and pooled with vast fields ensured just a capital cost of $3.5 and
transportation cost of ~2.49 per barrel. The lack of taxes is a significant competitive advantage for Saudi
Arabia. That said, while these Middle Eastern nations don't tax oil production, they still get their cut
because oil profits support a large percentage of their federal budgets.

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For years, Saudi Arabia had been the undisputed world leader in the oil market. However, thanks to
advances in shale drilling technology, oil production in the U.S. recovered from years of declines, and at
one-point America overtook Saudi Arabia as the world's largest producer. In fact, shale drillers pumped
out so much oil that the world became vastly oversupplied, which caused prices to crash. The Saudis
didn't help matters, choosing to leverage their low costs into higher volumes to drive as many shale
producers out of the market as it could. That move, however, backfired, because it forced shale
producers to become much more efficient, which led to a significant reduction in costs. That said, cash
costs for U.S. shale are still more than twice those of Saudi Arabia due to higher expenses across the
board.
Metric Crude Oil – Saudi Arabia US Shale ($/b)

($/b)
Gross Taxes 0 6.42
Administration & Transport 2.49 3.52
Production costs 3.00 5.85
Capital expenditure 3.50 7.56
The costs have come down significantly over the recent past, even as high as 42% in terms of capital
costs. This increased efficiency in production is aiding the US in terms of glutting the global market
with supplies at a time when oil prices are on the wane. The breakeven costs for shale players range
from $41-$49 per barrel, which is still keeping operating margins at just breakeven levels, considering
the price of WTI crude.
The following graph shows the operating margins of shale gas producers in comparison with trending
benchmark West Texas Intermediate (WTI) prices.

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The number of rigs as mentioned earlier is on the rise with private equity players backing shale oil
producers, especially in locations where the breakeven costs are in the $41 - $42 range. The fact that
service costs in terms of drilling and exploration are expected to rise by 10% -12% in the wake of
increased demand from the increase in number of rigs coupled with limited scope in the increase in
efficiency will force players to move from the so called ‗sweet spots‘ in oil production to other locations
which will bring down the volume produced.
4.6.1.4 Oil pricing updates - India
Dynamic pricing – Impact on oil companies
Introduction of dynamic fuel pricing is a key development which leads to fluctuating pricing on a daily
basis based on global crude prices and currency conversion rates which reflects international oil price
movement rather than using a fortnightly average. Dynamic or real-time pricing ensures that the cost of
the product is kept flexible based on the location / outlet and the time of the day. Oil companies will
benefit from this development in not only being better positioned to forecast their revenues and losses,
but from the fact that most of the oil companies had previously maintained a hedge fund to absorb losses
/ differences from the cost of global crude oil prices to the price at which it is sold to consumers. The
calibration of both will enable the elimination of maintaining this fund which is forecast to bring savings
in the range of 5-7%. Given that purchase of crude happens on a contractual basis and other key costs
remain mostly constant, the key fluctuating factor for oil manufacturing companies in pricing has been
the currency risk. Depending upon the movement of the rupee, OMCs will be able to pass this risk on to
the consumers and in case of a strong shift in market fundamentals or major geopolitical events that may
affect the international prices of oil this can be smartly managed by OMCs with short term managing
capabilities to pass on these competitive prices to consumers. The impact of dynamic pricing on dealers‘
is subject to fluctuations as inventory losses or gains and thereby profitability directly depends on oil
prices which were catered to by companies by smartly raising dealers‘ commissions.
4.6.1.5 GST Impacts on Oil and Gas Industry of India
The following impacts have been noted as a result of the implementation of the GST system in India.
1. Double compliance cost: Since GST is applicable only to a few oil/gas products while others are
excluded, the industry has to comply with both the new as well as previous tax regime. This
increases the compliance needs and the cost of operations.
2. Continuation of C form: C form at CST 2% continues to be issued to purchase GST excluded
petroleum products, including Natural Gas, HSD, Crude, ATF, and MS, for manufacture and
resale of goods, generation or distribution of power and telecommunication mining or
networking. However, C form cannot be issued for other manufacturer goods.
3. Input Credit Reversal: The credit is available only for tax paid on input Capital Goods (CG) for
manufacturing of taxable or exempt petroleum products.
4. No credit of GST paid on machinery and services, plant and other input expenses for
manufacturing of excluded products.

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5. Adverse Impact on upstream companies: The tax rate has increased from 15% to 18% on
services, which is having an adverse impact on the CapEx and OpEx of the upstream companies
which significantly rely on services.
6. Double tax on imports: Import of goods such as ocean freight and time charter will be taxable
under Reverse Charge Mechanism (RCM). There is also a customs duty on freight cost for such
imports.
7. GST on gas transmission tariffs: While the supply of natural gas is out of GST purview, the gas
marketers have to pay GST on transmission tariffs which leads to complexities for them.
8. GST on transportation:
 GST on transportation of natural gas via pipeline is 12% with credit and 5% with no credit.
 GST on transportation via road or railways is 5%.
 GST on bunker fuel used by coastal and foreign-going vessels is now 5%.
 GST on transportation of crude oil, HSD and MS through pipeline is 18%.
 Export of petroleum-related services is zero-rated under the GST.
9. Impact on PNG sales: The piped natural gas (PNG) continues to be taxable under VAT at a
higher rate of 26-28% as compared to 18% GST on other competing liquid fuels. This is likely to
negatively affect the sales of PNG.
10. GST on Stock Transfer: GST is levied on the stock transfer of petroleum products between two
separately registered parties for which credit is not available. This increases the cost.
11. GST on payments for land acquisition and refinery setup/expansion: GST is applicable to
payments made to the farmers, registered/unregistered persons or the government for acquisition
of land for refinery construction or pipeline laying, etc.
4.7 Crude Oil Price Forecast
Worldwide crude oil prices will average $72 a barrel in 2018 and $71 /bbl in 2019. That‘s according to
the Short-term Energy Outlook by the U.S. Energy Information Administration.
In July 2018, global oil prices averaged $74/b. It‘s $3 a barrel lower than in May. Prices are easing after
traders bid them higher in response to the November 30, 2017, OPEC meeting. The oil cartel‘s members
agreed to keep production cuts through 2018.
On May 10, 2018, global oil prices reached $80/b. On May 8, the United States pulled out of the Iran
nuclear agreement and reinstated sanctions. It may also sanction companies who continue to deal with
Iran. Investors believe Iran‘s oil supply will dwindle once sanctions are re-imposed. HSBC said the
move could have raised oil prices by $10 per barrel.
Oil prices were almost triple the 13-year low of $26.55/b on January 20, 2016. Six months before that,
prices had been $60/b. A year earlier in June 2014, they had been $100.26/b. With several fluctuating
factors influencing today‘s oil price, it changes daily.

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There are two grades of crude oil that serve as benchmarks for other oil prices. West Texas Intermediate
comes from, and is the benchmark for, the United States. Brent North Sea oil comes from Northwest
Europe, and is the benchmark for global oil prices.
The price of a barrel of WTI oil is $6/b lower than Brent prices. In December 2015, the difference was
just $2/b. That was right after Congress removed the 40-year ban on U.S. oil exports. Commodities
traders also predict the price of oil in their futures contracts. They predict the WTI price could be
anywhere between $54/b and $84/b by November 2018.
Four Reasons for Volatile Oil Prices:

Prices have been volatile thanks to swings in oil supply. Oil prices used to have a predictable seasonal
swing. They spiked in the spring, as oil traders anticipated high demand for summer vacation driving.
Once demand peaked, prices dropped in the fall and winter. So why are oil prices no longer as
predictable? The oil industry has changed in four fundamental ways.
1. U.S. production of shale oil and alternative fuels, such as ethanol, began increasing in 2015. The
EIA estimates U.S. fuel production will average 10.8 million b/d in 2018, the highest annual
average production in U.S. history. It would beat the previous record of 9.6 million b/d set in
1970. Production averaged 9.4 million b/d in 2017. The EIA forecast that oil production will
average 11.8 million b/d in 2019. By the end of 2019, U.S. production will top 12 million b/d.
Why is the United States producing so much oil at historically low prices? Many shale oil
producers have become more efficient at extracting oil. They've found ways to keep wells open,
saving them the cost of capping them. At the same time, massive oil wells in the Gulf began
producing in large quantities. They couldn't stop production regardless of low oil prices. As a
result, large traditional oil enterprises stopped exploring new reserves. These companies include
Exxon-Mobil, BP, Chevron, and Royal Dutch Shell. It was cheaper for them to buy out the less
efficient shale oil companies.
The International Energy Administration predicts that the United States will become the world's
largest oil producer by 2023. The U.S. oil industry will grow enough to meet domestic demand.
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To do so, it must find the right balance. It must increase supply slowly enough to keep prices
high enough to pay for increasing exploration.
2. OPEC reduced output to put a floor under prices. On November 30, 2016, its members agreed to
cut production by 1.2 million b/d by January 2017. Prices began rising right after the OPEC
announcement. On November 30, 2017, OPEC agreed to continue the production cuts through
2018. OPEC's cuts lowered production to 32.5 million b/d. The EIA estimates OPEC will
produce 32.8 million b/d in 2018. But both figures are still higher than its 2015 average of 32.32
million b/d.
Throughout its history, OPEC controlled production to maintain a $70/b price target. In 2014, it
abandoned this policy. Saudi Arabia, OPEC's biggest contributor, lowered its price to its largest
customers in October 2014. It did not want to lose market share to its arch rival, Iran. These two
countries' rivalry stems from the conflict between the Sunni and Shiite branches of Islam. Iran
promised to double its oil exports to 2.4 million b/d once sanctions were lifted. The 2015 nuclear
peace treaty lifted 2010 economic sanctions and allowed Saudi Arabia's biggest rival to export
oil again in 2016.
Saudi Arabia also did not want to lose market share to U.S. shale oil producers. It bet that lower
prices would force many U.S. shale producers out of business and reduces its competition. It was
right. At first, shale producers found ways to keep the oil pumping. Thanks to increased U.S.
supply, demand for OPEC oil fell from 30 million b/d in 2014 to 29 million b/d in 2015. But the
strong dollar meant OPEC countries could remain profitable at lower oil prices. Rather than lose
market share, OPEC kept its production target at 30 million b/d.
The lower prices caused 2016 U.S. oil production to fall to 8.9 million b/d. Less efficient shale
producers either cut back or were bought out. That reduced supply by around 10 percent,
creating a boom and bust in U.S. shale oil.
3. Foreign exchange traders drove up the value of the dollar by 25 percent in 2014 and 2015. All oil
transactions are paid in U.S. dollars. The strong dollar helped cause some of the 70 percent
decline in the price of petroleum for exporting countries. Most oil-exporting countries peg their
currencies to the dollar. Therefore, a 25 percent rise in the dollar offsets a 25 percent drop in oil
prices. Global uncertainty is one factor that makes the U.S. dollar so strong.
The dollar's value has been falling since December 2016, according to the DXY interactive chart.
On December 11, 2016, the USDX was 102.95. In early 2017, hedge funds began shorting the
dollar as Europe's economy improved. As the euro rose, the dollar fell. By April 11, 2018, it had
fallen to 89.53.
4. Global demand grew more slowly than anticipated. It only rose to 99.3 million b/d in 2018, from
97.8 million b/d in 2017, according to the IEA. Most of the increase was from China, which now
consumes 12 percent of global oil production. Since its economic reforms slowed its growth and
fear of trade war between the USA and China, global demand growth may continue sluggish.

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4.8 Deregulation of Prices of Petroleum products

Historically, the price of petrol and diesel in India was regulated, i.e. the government was involved in
the deciding the retail price. The government deregulated the pricing of petrol in 2010 and diesel in
2014. This allowed oil marketing companies to determine the price of these products, and revise them
every day.
Over the last five years, the global price of crude oil (Indian basket) has come down from USD 110 in
January 2013 to USD 64 in March 2018, having touched a low of USD 26 in January 2016. While there
has been a 42% drop in the price of global crude over this five-year period, the retail price of petrol in
India has increased by 8%. During this period, the retail price of diesel increased by 33%. The two
figures below show the trend in prices of global crude oil and retail price of petrol and diesel in India,
over the last five years:
Excise duty on petrol and diesel has changed over the last few years
Under the Constitution, the central government has the powers to tax the production of petroleum
products, while states have the power to tax their sale. Petroleum has been kept outside the purview of
the Goods and Services Tax (GST), till the GST Council decides. Over the years, the central government
has used taxes to prevent sharp fluctuations in the retail price of diesel and petrol. In the past, when
global crude oil prices have increased, duties have been cut. Since 2014, as global crude oil prices
declined, excise duties have been increased.

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As a consequence of the increase in duties, the central government's revenue from excise on petrol and
diesel increased annually at a rate of 46% between 2013-14 and 2016-17. During the same period, the
total sales tax collections of states (from petrol and diesel) increased annually by 9%. The figure below
shows the trend in overall collections of the central and state governments from petroleum (including
receipts from taxes, royalties, and dividends).
But in mid-2018 crude oil price touched $80/barrel, because of which retail Petrol and Diesel prices
touched historical high since 2014. And in India general election is due in 2019. As the consequences
we need to see if the government is able to maintain the deregulation for Diesel, as it has direct impact
on CPI and inflation.
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5 Natural Gas
It primarily consists of methane, with smaller quantities of ethane, propane, butanes and pentanes which
are usually removed. Large amount of natural gas is burnt as flare during oil extraction process in order
to release the pressure in the equipment. According to World Bank estimates 150 billion cubic meter per
year of natural gas is still being burnt as flare. World Bank aims to end routine gas flaring by 2030.
Natural gas is comparatively less polluting, it produces 29% less CO2 compared to oil and 44% less
compared to coal. In order to improve the environment in Indian cities, vehicles are being mandated to
use CNG. All the taxis and bus are required to run on CNG in Delhi NCR region. The natural gas is
expected to be widely used in transportation. However, CNG automobiles requires higher compression
ratio compared to petrol engine and hence it is a challenge for automobile companies to manufacture
automobile that could cater to both petrol and CNG.
Natural Gas Supply, Source: Ministry of Petroleum and Natural Gas

5.1 Types and Forms of Natural Gas
5.1.1 Liquefied Natural Gas (LNG)
 Natural Gas is liquefied by cooling it to -161 degree Celsius as a result of which its volume reduces
by 600 times
 Hence, large volumes of natural gas can be transported through specially designed cryogenic carriers
across places where pipelines cannot be laid
 LNG needs to be re-gasified at the receiving terminal before transporting to end consumers

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5.1.2 Compressed Natural Gas (CNG)

 Natural Gas is compressed under pressure of 200-250 kg per cm2 (it still remains in gaseous form) so
that it can be transported through cryogenic carriers and stored in CNG dispensing stations.
 CNG is used as an alternate fuel to petrol and diesel and is more environment friendly.
5.1.3 Piped Natural Gas (PNG)
 Natural Gas can also be supplied through pipes to domestic users for to be used as an alternate fuel
to cooking gas.
 It is also used by commercial and industrial players as an alternative fuel or feedstock.
5.2 Measuring Units
 Natural gas is being measured volume, mass and heat energy (calorific value)
 By volume, billion cubic meter (BCM), trillion cubic feet (TCF) are usually used to indicate the
production level from a well. Volume is measured at 16 degrees Celsius and 1 bar pressure.
 By mass, kg is used to measure CNG at retail outlet since pressure is not uniform across the gas
station and hence gas is being sold by mass. 1 kg of natural gas is 1.406 cubic meter.
 By heat energy, calorific value (BTU) is used as a measure for the sake of comparison with other
source of energy. 1 British Thermal Unit (BTU) is the amount of heat needed to raise 1 pound of
water by 1-degree Fahrenheit. 1 cubic foot of natural gas generates 1000 BTU‘s.
 Gallons of Gasoline equivalent (GGE) – Equivalent amount of natural gas that generate same energy
as 1 gallon (3.78 liters) of Gasoline. 1 gallon of gasoline equals to 114,000 BTU which is equal to
126.67 SCF. CNG is at 3,600 psi and 0.51 SCF of CNG is equal to 1 GGE.
Natural Gas Conversion
25.2 SCM @10000
1 Standard Cubic Meter 35.31 cubic feet 1 MMBTU kcal/SCM
1 BCM/year of Gas 2.74 MMSCMD GCV (Gross Calorific value) 10,000 kCal/SCM
1 TCF of Gas Reserve 3.88 MMSCMD NCV (Net Calorific Value) 90% of GCV
Gas required for 1 MW
3.60 MMSCMD 4,541 SCM/day
1 MMTPA of LNG power generation
Power generation from
1314 SCM 220 MW
1 MT of LNG 1MMSCMD of gas
5.3 Natural Gas Trade Hub

5.3.1 US Based Henry Hub
Henry hub is a distribution hub on the natural gas pipeline system in Erath, Louisiana, US owned by
Sabine Pipe Line LLC. Price are set in $/MMBTU (million metric British thermal unit). Henry hub is

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the pricing point for natural gas futures on the New York Mercantile Exchange. The settlement price at
Henry Hub are used as a benchmark for the entire North American natural gas market.
5.3.2 Canada Based Alberta Gas
The AECO hub gas storage facility in southern Alberta is one of the largest natural gas hubs in North
America. Natural Gas Exchange (NGX), headquartered in Calgary, Alberta, Canada has developed into
one of most liquid spot and forward energy markets in North America. Alberta‘s gas prices are based on
NYMEX contract prices discounted to reflect province‘s supply basin, foreign exchange rates between
Canada and US. The daily spot price is determined by NGX trading system and is referred to as the
―AECO C/NIT‖ spot price.
5.3.3 The UK based National Balancing Point (NBP)
The UK NBP gas market is a virtual trading point and is Europe‘s longest established gas market in
operation. Gas is priced in pence per therm. In the NBP model gas anywhere in the country within the
national transmission system counts as NBP gas. National Grid plc is the network operator responsible
for the physical transmission of gas.
5.3.4 Russian Gas
Russian Gas price is controlled by the government. The Federal Tariff service of Russia approves
specific regulated wholesale prices for various price zones with due regard to consumer remoteness from
gas production areas and to consumer categories. Retail gas prices for the population are set by
administration of the Russian constituents.
Outlook on international gas prices, Source: CRISIL Research

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5.4 Natural Gas: Domestic Scenario

5.4.1 Natural Gas Reserves
 India has 1289 billion cubic meter of recoverable natural gas reserve as on 31.03.2017
 Gas reserves has increased at a rate of 5.08 per cent since last year
The following table shows amount of the natural gas reserve in India:
Crude Petroleum (million tonnes) Natural Gas (billion cubic metres)
31.03.2016 31.03.2017 31.03.2016 31.03.2017
States/ UTs/ Region Estimat Estimat Estimat Estimat
ed Distributi ed Distributi ed Distributi ed Distributi
Reserve on (%) Reserve on (%) Reserve on (%) Reserve on (%)
s s s s
Arunachal Pradesh 1.73 0.28 1.52 0.25 0.95 0.08 0.93 0.07
Andhra Pradesh 10.90 1.75 8.15 1.35 42.03 3.42 48.31 3.75
Assam 160.78 25.88 159.96 26.48 153.76 12.53 158.57 12.29
Cold Bed Methane
0.00 0.00 0.00 0.00 126.48 10.31 106.58 8.26
(CBM)
Eastern Offshore1 36.39 5.86 40.67 6.73 451.46 36.78 507.76 39.37
Gujarat 121.16 19.50 118.61 19.63 63.06 5.14 62.28 4.83
Nagaland 2.38 0.38 2.38 0.39 0.09 0.01 0.09 0.01
Rajasthan 31.72 5.11 24.55 4.06 35.66 2.91 34.86 2.70
Tamil Nadu 8.99 1.45 9.00 1.49 31.68 2.58 31.98 2.48
Tripura 0.07 0.01 0.07 0.01 28.28 2.30 36.10 2.80
Western Offshore2 247.13 39.78 239.20 39.60 293.96 23.95 302.35 23.44
Total 621.28 100.00 604.10 100.00 1227.40 100.00 1289.81 100.00
Note:
1. Proved and indicated Balance Recoverable Reserves.
2. Western offshore includes Gujarat offshore.
Source: Ministry of Petroleum & Natural Gas.
 Approximately, two thirds of the natural gas reserve are located in offshore region with 23% being
in western region and 39% being in eastern region. Mumbai High is the major offshore field in the
western region and KG basin is the major offshore field in the eastern region
 Onshore reserves are primarily located in Rajasthan and north eastern state of Assam, Nagaland,
Arunachal Pradesh and Tripura

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The following chart represent region wise distribution of the Natural Gas Reserves in India –
Distribution of Natural Gas Reserve
Natural Gas Reserve In India

Andhra Pradesh
4%
Assam
23% 12%
Cold Bed Methane (CBM)
8%
3% Eastern Offshore
Gujarat
3%
39% Rajasthan
3%
5% Tamil Nadu
Tripura
Western Offshore
Source: Ministry of Petroleum and Natural gas

5.4.2 Natural Gas Production
Natural Gas production during the year 2016-17 is at 31.90 Billion Cubic Meters (BCM) which is 1.09%
lower than production of 32.25 BCM in 2015-16. 78.5% of natural gas production is by ONGC and OIL
from nomination regime and remaining 21.5% of natural gas production is by Private/JVs companies
from PSC regime. The projected natural gas production in 2017-18 is 35.24 BCM.
Natural Gas (BCM)

70
59 59
60 53 52 52 52
48 50
50 46 46 45 47
41
38 38
40 35 34
32 33 32 32 33
30
20
10
0
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Production Consumption
Source: Petroleum Planning and Analysis Cell

 The following chart represents offshore natural gas production, it can be concluded that reduction in
the gas production is due to reduction in production of JV/private companies (Primarily RIL)
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operating in offshore gas field in the eastern offshore region. Gas pricing in India is linked with the
international market and with the reduction in prices in international market, domestic gas price fell
below $4.2/mmbtu level and this price level, gas production no longer attractive for private players.
Offshore Natural Gas Production (BCM)

30
26
25
21
19
20 17 18 18 18 18 17 18
16 17 16 17
15 14
10 8 8
7 7 7
5 4
5
0
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
ONGC Offshore JV/Private Offshore

Below pie chart represent the share of companies in production of natural gas. National oil companies
(ONGC and Oil India) accounted for three fourth of total domestic production. Also, ONGC offshore
production is majorly from Mumbai High.
Share of Gas Production Onshore Vs Offshore
12%
33%
55%
Onshore ONGC - Offshore Private/JV - Offshore
Source: Petroleum Planning and Analysis Cell (Based on 2017-18 production level)

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5.4.3 Natural Gas Consumption

India‘s natural gas consumption has increased at a CAGR of 3.40 per cent between 2007 and 2017.
Demand is not likely to simmer down anytime soon, given strong economic growth and rising
urbanization. Gas consumption is projected to reach 143.08 bcm by 2040.
India‘s natural gas imports increased at a CAGR of 10.64 per cent during FY10–FY18. Auto LPG
consumption advanced 0.2 per cent during Apr-May 2018.
Natural Gas Consumption (BCM)

70
60 13 18
50 12 17
17 25 26
19 21
40 11 11
30
52 48
46 41
20
32 33 35 34 32 32 33
10
0
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Production LNG Import

 Fertilizer and power sectors are the major consumer of natural gas with 59% of the total gas
consumption in the country.
Sector Wise consumption mix in FY17
Fertiliser 22
28
Power
CGD
6
Refinery
Petrochemicals 10
Others 21
13
Source: Crisil Research

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 The fall in the domestic gas production and low-price affordability of imported gas in power sector
has resulted in gas-based power plants remaining under-utilized. Effective plant load factor (PLF)
for FY17 was 25% and nearly two thirds of the total gas-based installed capacity was stranded.
Below graph represent the share of sectors in FY17 and estimated share in coming years.
Sector-wise break up of gas consumption; Source: CRISIL Research

 Government has taken the following initiative to revive the stranded gas-based capacities in the
power and fertilizer sectors by making imported LNG affordable –
 In the power sector, it is providing subsidy through a reverse bidding scheme, to allow stranded
power assets to operate at 30% PLF and service the lenders
 In the fertilizer sector, it aims to increase urea production by 3.7 million metric tonnes per annum
(mmtpa) by FY19 through gas pooling policy (uniform delivery cost by averaging domestic and
LNG gas prices)
 Currently more than 50 cities have been covered by retail gas distribution. However, the full
potential of these network will be achieved over the next three-five years. At present, the retail
gas sector has more than 3 million homes, 1,015 CNG stations, 2.5 million CNG vehicles,
22,786 commercial and 6087 small industrial users
5.4.4 Domestic Natural Gas Allocation Policy
Domestic gas produced in India is allocated to various sectors as per guidelines issued by the
government from time to time. Natural gas produced in India can broadly be classified into three
categories
 APM & Non-APM gas available from Nominated blocks of National Oil Companies

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 Pre-New Exploration Licensing Policy (NELP) gas

 NELP gas
Currently, fertilizer plants are the largest consumers of domestically produced gas followed by power
units. Since February, 2014, 100% of CNG and PNG requirements are being met through domestically
produced gas following an order by the Gujarat High Court
Following chart shows the current allocation of domestically produced gas across sectors –
Natural Gas Allocation 2016-17 (P)

Miscellaneous,
4.32
Power
Generation,
Refinery, 5.37 11.62
Domestic
fuel/TransportDi
stribution
Network, 7.35
Industrial
Tea Plantation,
Fuel, 0.69
0.18
Gas produced from each category is allocated under different gas allocation policies. The Government
seeks to remove this anomaly by proposing a new uniform gas allocation policy wherein the order of
priorities remains same irrespective of the source of gas.
 The Government has proposed to put City Gas Distribution companies at the top of its priority as
expansion of city gas network through replacement of diesel and LPG by CNG and PNG is not
viable at the price of imported LNG.
 Strategic sectors such as atomic energy and space research have been accorded high priority as their
absolute requirement in quantitative terms is not very high but their requirements have to be met at
top priority. Currently, their requirements are not met under non-APM and NELP gas because of low
priority accorded to them. Increase in allocation to priority sectors will be compensated by cut in
supply to non-priority sectors
Existing List Proposed List
Urea Manufacturing Fertilizer Plants City Gas Distribution Companies
LPG Plants Strategic Sectors
Power Plants LPG Plants
City Gas Distribution Companies Urea Manufacturing Fertilizer Plants

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Power Plants
5.4.5 De-bundling of GAIL

India plans to split state-run gas utility GAIL by March next year to create two companies: one
marketing gas, and another operating pipelines that can be used by consumers who buy direct from
producers. A splitting of GAIL (India) into pipeline and gas-marketing entities will help create a gas-
trading hub in the country and bring in transparency in price determination through an exchange.
GAIL (India) Ltd is the country‘s biggest gas marketing and trading firm and owns most of the nation‘s
pipelines, giving it a stranglehold on the market for the fuel.
By splitting GAIL, the regulator of India‘s oil and gas sector hopes to increase the number of gas
consumers and attract the billions of dollars needed to expand the pipeline network and build more
liquefied natural gas (LNG) terminals.
GAIL already keeps separate accounts for its gas pipeline and marketing businesses, making it easier to
split them into two entities before a change of ownership.
By unbundling GAIL and opening the sector, the government hopes to increase gas use and meet its
objective of raising the share of a cleaner, cheaper fuel as a part of the energy mix to 15 percent, from
6.2 percent, in the next 12 years.
Many power plants and small industries like ceramic, glass and cement makers rely heavily on more
expensive or dirtier fuels such as naphtha, diesel and coal. In future, though, even small companies will
be able to buy gas via pipelines, without having to go through GAIL.
The regulator was also looking at how to open access to the pipeline network for smaller buyers.
India‘s gas demand is constrained by low domestic output, a small number of LNG terminals - just four
- and a pipeline network that does not reach enough customers.
GAIL owns more than two-thirds of India‘s existing 15,000 km (940 miles) of pipelines, but the
government wants to more than double the network to expand gas deliveries.
While the new pipeline company created by the division of GAIL would be expected to lead the way,
the government also wants other companies to bid for rights to build and operate pipelines.
Three LNG import facilities are also under construction, and there are proposals for many more.
Domestic gas production is also expected to rise.
In long-term government want to attract the private player to invest in Gas sector and for that the
government is planning create GAS hub in India, which will help the government to achieve its target of
15% of Natural gas usage in energy mix by 2030.
5.5 Pricing of Domestic Natural Gas

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The pricing regime of natural gas has evolved over a period of time. There were separate price regime
for nominated blocks viz. Administered Pricing Mechanism (APM), Non-Administered Pricing
Mechanism (Non-APM) and production sharing contracts.
5.5.1 Administered Pricing Mechanism (APM)
Gas produced under from existing fields of the nominated blocks of National Oil Companies (NOCs)
viz. OIL & ONGC, were covered under this mechanism. These gas-producing blocks were allotted to
National Oil Companies on a nomination basis under the tax royalty regime. This gas is being supplied
predominantly to fertilizer plants, power plants, court-mandated customers, and customers having a
requirement of less than 50,000 standard cubic metres per day at APM rates. The price for APM gas was
initially fixed on cost plus basis. However, with effect from 01.06.2010, the Government fixed APM gas
price in the country at $ 4.2/mmbtu (inclusive of royalty), except the Northeast, where the APM price is
$ 2.52/mmbtu, (60% of the APM price elsewhere). The balance 40% is paid to the NOCs as subsidy
from the Government Budget.
5.5.2 Non-APM Gas produced by NOCs from Nominated fields
National Oil Companies (NOCs), viz., ONGC & OIL, are in principle free to charge a market
determined price for gas produced from new fields in their existing nominated blocks. However,
Government had issued a pricing schedule & guidelines for commercial utilization of non-APM gas
produced by NOCs from such new fields in their nominated blocks. Pricing in these zones were as
follows –
Area/Zone Price ($/mmbtu)
Western & Northern Zones (covering Maharashtra, 5.25
Gujarat and other States covered by HVJI DVPL, viz., Rajasthan, M.P.,
U.P., Haryana& Delhi)
Southern Zone -- KG Basin 4.5
Southern Zone -- Cauvery Basin 4.75
North-East 4.2
Identified onshore fields in Gujarat & Rajasthan 5.0
Further, a premium of $ 0.25/mmbtu for production of non-APM gas from offshore fields had been
provided, as higher investment is required for development and production from offshore fields.
5.5.3 Pre-NELP Gas
Certain blocks where discoveries were made by NOCs were auctioned under a Production Sharing
Contract (PSC) to private sector E&P companies to overcome funding constraints and lack of advanced
technologies. In 2013-14, these blocks supplied 9.85 MMSCMD (12.31% of the total) gas to various
customers. Under these PSCs, viz., Panna-Mukta, Tapti (PMT) and Ravva, the entire gas produced has
to be sold to the GOI nominee (viz., GAIL), as per the price formula specified in the PSC. It may be

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noted that the prices of gas for these PSCs were discovered through limited tender and GAIL as
Government nominee, in every case, matched the highest price bid. The PSCs for Panna-Mukta & Tapti
were executed on December 12, 1994 and that of Ravva on October 28, 1994. In case of Panna-Mukta &
Tapti PSCs, the price formula for gas was linked to an internationally traded fuel oil basket, with a
specified floor and ceiling price of US$ 2.11/mmbtu and US$ 3.11/mmbtu respectively. These PSCs
further have a provision to revise the ceiling price after 7 years from the date of first supply. With this
revision, the revised ceiling price in case of Panna-Mukta gas was US$ 5.73/mmbtu and in case of Taptl,
it is US$ 5.57/mmbtu. GAIL, as 'the Government nominee, is buying gas from the PMT JV at this rate.
Out of the total allocation 17.3 mmscmd, 5 mmscmd of PMT gas has been allocated to power &
fertilizers sectors, which is being supplied at the APM rate to consumers. The difference in price is
recovered from the gas pool account. As regards Rawa & Ravva Satellite fields, under the provisions of
their PSC, on expiry of five years from the date of first delivery of gas, the JV and the Government were
required to enter into good-faith negotiations to determine the basis for calculation of the purchase price,
taking into account all reasonably relevant factors.
5.5.4 New Exploration and Licensing Policy (NELP):
Under NELP, gas pricing has formally been approved only in case of RIL's KG Basin discovery, which
supplied 13.53 MMSCMD, (16.91% of the total) of domestic gas in 2013-14. In May 2007, the
Contractor of KG-DWN-98/3 block, viz., RIL submitted a proposal of price formula/basis for approval
by the Government. In the proposal, the price formula was benchmarked to international crude price,
with a floor and a ceiling price, and also with a constant factor "C' to take care of bidding. The price
formula proposed was as under:
SP (Rs. /mmbtu) = 2.5*K + (CP-25)0.15*ER+ C
Where
SP is the sale price of gas in Rs/mmbtu.
CP is the annual average Brent crude price for the previous financial year, with a cap of $65/bbl. and a
floor of $25/bbl.
ER is the average $/Rs. exchange rate for the previous financial year.
K is 1 for ER between 25 and 65, or ER/25 when ER is less than 25 or ER/65 when ER is more than 65.
C is the premium quoted by the customer.
RIL, in its proposal, stated that bids were received from 10 customers (5 each from the power and
fertilizer sectors), and based on the bids received, at a value of C=4, most of the gas stood picked up by
the bidders.
The matter was considered by an empowered group of ministers (EGoM), to examine and decide issues
relating to gas pricing and commercial utilization of gas under NELP. The price formula finally
approved by the EGoM was as follows –
SP (US$/mmbtu) = 2.5 + (CP-25) o.15

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SP is the sales price in $/mmbtu (on Net Heating Value / NHV basis) at the delivery point at Kakinada.
CP is the average price of Brent crude oil in US$/barrel for the previous financial year, based on the
annual average of the daily high and low quotations of the FOB price of dated Brent quotations as
published by Platts Crude Oil Market wire. CP is capped at US $ 60/bbl., with a floor of US$ 25/bbl. CP
is fixed for each contract year and is based on the CP for the preceding financial year.
Revised Domestic Gas Prices
Rangarajan Committee Report – In April 2009, production from KG-D6 field commenced. Therefore,
as per GoM decision (2007), next price revision was due from April 2014. In early 2012, government set
up a committee under Dr. C Rangarajan, chairman, prime minister‘s economic advisory council
(PMEAC) to recommend a formula.
The formula recommended by Rangarajan committee takes average prices of global benchmark at Henry
Hub (USA) and NBP (National balancing Point), UK on one hand and producers net back from
suppliers of liquefied natural gas (LNG) to India and Japan in preceding 6 on the other.
After new government took charge in May 2014, a new committee was formed to look at the pricing
formula proposed by the Rangarajan committee. Government approved new pricing policy on 18th Oct
2014. The following has been approved by the (cabinet committee of economic affairs) CCEA –
Under the new mechanism, domestic gas price is the weighted average price of four global benchmarks
— the US-based Henry Hub, Canada-based Alberta gas, the UK-based NBP, and Russian gas.
While approving the new formula, the government had committed to price the gas from new deep-water,
ultra-deep sea, high temperature and pressure fields at a premium over and above the approved price
The revised domestic natural gas price formula is as follows
Domestic gas price = (VHH*PHH + VAC*PAC + VNBP*PNBP + VR*PR) / (VHH + VAC +
VNBP + VR)
Where,
VHH = Total annual volume of natural gas consumed in the US and Mexico.
VAC = Total annual volume of natural gas consumed in Canada.
VNBP = Total annual volume of natural gas consumed in the EU and FSU, excluding Russia.
VR = Total annual volume of natural gas consumed in Russia.
PHH and PNBP are the annual average of daily prices at Henry Hub (HH) and National Balancing
Point (NBP) less the transportation and treatment charges.
PAC and PR are the annual average of monthly prices at Alberta Hub and Russia, respectively, less
the transportation and treatment charges.
 The periodicity of price determination/notification shall be half yearly. The price and volume data
used for calculation of applicable price shall be the trailing four quarter data with one quarter
lag. The first price was determined on the basis of price prevailing between 1st July, 2013 and 30th
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June, 2014. This price came into effect from 1st November, 2014 and was valid till 31st March,
2015. Thereafter, it was revised for the period 1st April, 2015 to 30th September, 2015 on the basis
of prices prevalent between 1st January, 2014 and 31st December, 2014, i.e., with the lag of a
quarter and so on. The prices would be announced 15 days in advance of the half year, for which it
is applicable
 The price so notified applied prospectively with effect from 1st November, 2014 and on GCV basis
as input prices in the formula are on GCV basis
 The revised gas price, so determined would be applicable to all gas produced from nomination fields
given to ONGC and OIL India, NELP blocks, such Pre-NELP blocks where PSC provides for
Government approval of gas prices and CBM blocks. The following are the exceptions to which this
policy would not apply:
a) Small and isolated fields in nomination blocks, given their peculiar conditions, guidelines for
pricing of gas were issued in 2013 would continue to apply.
b) Where prices have been fixed contractually for a certain period of time, till the end of such
period.
c) Where the PSC provides a specific formula for natural gas price indexation/fixation.
 Such Pre-NELP blocks where Government approval has not been provided under the Production
Sharing Contract (PSC)
 The matter relating to cost recovery on account of shortfall in envisaged production from D1, D3
discoveries of Block KG-DWN-98-3 is under arbitration. Hence the operator would be paid the
earlier price of US $ 4.2/MMBTU till the shortfall quantity of gas is made good. It is proposed that
the difference between the revised price and the present price (US $ 4.2 per million BTU) would be
credited to the gas pool account maintained by GAIL and whether the amount so collected is payable
or not, to the contractors of this Block, would be dependent on the outcome of the award of pending
arbitration and any attendant legal proceedings
 For all discoveries after this decision, in Ultra Deepwater Areas, Deep Water Areas and High
Pressure-High Temperature areas, a premium would be given on the gas price to be determined as
per the prescribed procedure
 In the NER region, the 40% subsidy would continue to be available for gas supplied by
ONGC/OIL. However, as private operators are also likely to start production of gas in NER, and
would be operating in the same market, this subsidy should also be available to them to incentivize
exploration and production
The figure shows the application of the mentioned formula for the period November, 2014 to March,
2015

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The current price of domestically produced gas is US$3.06/MMBTU on gross calorific value (GCV)
applicable from 1st April 2018 to 30th September 2018. The new price would not impact Reliance
Industries, as the price the company is allowed to charge from its gas reservoirs in the eastern offshore
KG-D6 block is capped at $4.2 per MMBTU, pending resolution of the arbitration over cost-recovery on
account of shortfall in production from the D1 and D3 discoveries. The difference between the two
prices is currently credited to a gas pool account.
Also, gas price ceiling for discoveries in Deep-water, ultra-deep water and high pressure-high
temperature areas, the gas price ceiling for the period 1st April 2018 to 30th September 2018 is US$
6.78/MMBTU on gross calorific value (GCV) basis.
5.5.5 Domestic Price Outlook
Gas prices in India are determined based on natural gas prices prevailing at the international hubs, as per
an approved pricing formula. CRISIL Research believes gas prices will remain under pressure at about
$2.8-3.2 per mmbtu (million metric British thermal units) in fiscal 2019, given the oversupply in the
global LNG market.
Global energy prices have been under pressure since their mid-2014 highs. The primary competing fuel
for natural gas, crude oil, saw its price plummet from $99 per barrel (dated Brent) in 2014 to just $34 per
barrel in January 2016. Gas demand from the European market has also been tepid, given the increasing
penetration of solar and wind energy and the availability of cheaper coal. Crude oil prices are expected
to move upward, but remain at sub-$70/bbl in fiscal 2019, and their medium-term price outlook remains
stable.
In the latest half-yearly price revision, for the period from April 2018 to September 2018, domestic gas
price has been increased from $2.89 per mmbtu in October, 2017 -March, 2018 to $3.06/mmbtu on a
gross calorific value basis.

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Outlook on domestic gas price

Oil Price
5 4.3
3.8
4
2.8 2.8 2.9
$\MMBTU
2.7
3
2
1
0
FY 15 FY 16 FY 17 FY 18 FY 19F FY 20F
Year
Source: CRISIL Research Report

Spot LNG prices are expected to remain under pressure over the next two years, because of sluggish
demand and rising supply, resulting in oversupply in the global market. We expect prices (delivered ex-
ship) to hover around $7.0-7.4 per mmbtu in fiscal 2019.
Outlook on LNG price

30
25
20
$\MMBTU 15
10
5
0
FY 15 FY 16 FY 17 FY 18 FY 19F FY 20F
Spot LNG Price Contracted LNG Price
Source: CRISIL Research Report
5.6 Liquified Natural Gas (LNG)

Natural gas can be converted into liquid form by bringing the temperature of the gas down to -161
degree Celsius, this reduces the volume of the natural gas by 600 times. The gas so obtained is called
liquified natural gas (LNG). It helps in transporting the natural gas across countries through ships.
Special cryogenic ships are used to transport LNG. LNG is re-gasified at terminal country and
distributed. As the key producing and consuming countries are wide apart, demand for LNG has been
continuously increasing.

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Global trade of liquefied natural gas (LNG) grew at a CAGR of 6.5 per cent to 247 million tonnes in
2014 from 180 million tonnes in 2008. Demand was driven by Asian nations such as Japan, South
Korea, China and India, which increasingly shifted to gas from alternate energy sources such as crude
oil, nuclear power and coal. LNG availability also improved on account of large-scale capacity additions
by Qatar, which accounted for one-third of the 67 MTPA of new liquefaction capacities commissioned
over the last 5 years.
LNG Value Chain:

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Outlook on global spot LNG demand versus supply, Source: GIIGNL, CRISIL Research
India being a natural gas deficit country, LNG import is important to meet its demand for natural gas.
However, high cost of LNG and transportation limits its use in the country. At the same time availability
of other alternatives in the light of lower crude oil price makes LNG less attractive option. Power and
fertilizers sector constitute two third of the total consumption of natural gas, demand of gas of these two
sectors is primarily met by LNG. Cost of LNG make the power production compared to other sources
costlier, similarly fertilizer sector can‘t afford the high cost of LNG limiting the scope of growth of LNG
sector in India.
Trend in Imports & Exports of Petroleum Products and imports of LNG
Source: Ministry of Petroleum and Natural Gas

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5.6.1 Sourcing of LNG

Qatar and Nigeria are the preferred source for the import of LNG to meet the Indian demand.
Traditionally, buying LNG on long term contract was the preferred option but with the downward trend
in the price of LNG, there has been a shift in buying LNG through spot market. Across Asia, LNG
contract prices are linked to Japanese Custom Cleared Crude Price.
Major long-term contract of Indian importers are as follows –
There has been a revision in December 2015 in the pricing formula to import LNG from Qatar with
which price of LNG has come down to $5/MMBTU from earlier price level of $12/MMBTU. The
revised formula is based on a three-month average figure of Brent Crude oil, replacing a five-year
average of a basket of crude imported by Japan, with a rider that Petronet LNG Ltd (PLL) buys an
additional 1 million of LNG annually from RasGas for 12 years with effect from 1st Jan 2016. Besides
the long-term contracts, Petronet also buys LNG on spot and short-term basis from many international
players. In 2016-17, India imported about 18.6 million tonnes of LNG. LNG imports, over and above
the contracted quantity, are made on a spot basis, with prices being determined by the prevailing demand
supply scenario. Given weak demand and ample supplies, spot prices during the year stood at $6.6 per
mmbtu in 2016-17 from $7.3 mmbtu in 2015-16, but remained similar to contracted LNG prices ($6.6
per mmbtu) during the year. Below is the build-up of delivered gas in India in 2016-17:

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Note: N.A.: Not applicable

1. Gas prices are on a delivered Gujarat basis
2. Landfall Price inclusive of royalty.
3. CIF price of contracted LNG has been linked to JCC (Japanese Crude Cocktail) price as per agreed formula
3. Transportation charges is calculated as weighted average of Rs. 19.83 per mmbtu for the first contract of 5 mtpa and Rs. 42.46 per
mmbtu for subsequent contract of 2.5 mtpa
4. Exchange rate for 2016- 2017: USD / INR @ 65.9
*State sales tax varies from state to state
Source: Crisil Research
5.6.2 LNG Infrastructure

As on 31-Mar-2016, India has a total regasification capacity of 21.692 MMTPA. Dahej terminal has a
capacity of 10 MMTPA with an expansion plan of 15 MMTPA. As per the Petronet‘s annual report,
94% of the work is completed by 31-Mar-2016 and is expected to be completed by the end of the year.
Petronet is also planning to increase the Dahej terminal capacity further to 17.5 MMTPA with addition
of one storage tank. LNG Terminal at Kochi operated at 5% level due to lack of evacuation pipeline to
Bangalore and Mangalore and BPCL-Kochi refinery was the only major consumer. There has been a
little progress in the development of pipeline since pipeline to Bangalore to connect via Tamil Nadu was
under litigation and pipeline to connect to Mangalore is under re-tendering stage.
A new LNG terminal at Ennor in Tamil Nadu, being built by state run Indian Oil Corporation with a
capacity of 5 million tonne, is expected to operation in next three years. Adani group is also developing
5 million tonne capacity at Dharma in Odisha. GMR group also planning to invest to set up a LNG
terminal of the capacity of 1.75 million tonne at Kakinada sea port on the east coast.
Existing LNG terminal as on 01.01.2017
capacity LNG
Utilization in % Handled
Existing Promoters Capacity (MMTPA) (in Apr-Dec‘16) (MMTPA)

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Petronet LNG Ltd Existing 10 MMTPA to be increased
Dahej (PLL) to 15 MMTPA by 2016 80.4 11
Hazira LNG Pvt Ltd
Hazira (HLPL) 5 MMTPA 75.8 3.52
1.692 MMTPA in phase-1 without
Ratnagiri Gas & Power
Dabhol break water to be increased to 5
Ltd. (GAIL-NTPC JV)
MMTPA 56.3 1.37
Petronet LNG Ltd
Kochi (PLL) 5 MMTPA 5.6 0.28
5.7 Piped Natural Gas (PNG)

In a mission to do away the hassles associated with LPG cylinders domestic piped natural gas (PNG)
connections is or expected to rapidly rise in the near future with infrastructure for the same being swiftly
laid across key cities in the country. The Bengaluru City Gas Distribution project laid at a cost of 6000+
crores is expected to cater to 1.32 households by 2022. GAIL Gas Ltd claims as many as nine industries
and 22 commercial units to benefit from PNG supply arising from the above project.
With the Kochi Mangalore pipeline to be active by 2018, large scale establishments like the Mangalore
Chemicals and Fertilizers which run on crude oil at present, will witness a complete shift to clean gas. In
what is a big boost to PNG, the ministry of urban development may most likely include gas pipeline
infrastructure in the ‗builders‘ construction plans‘ in the same way as electricity and water supply
facilities are part of such plans, which comes in the immediate aftermath of awarding city gas
distribution the status of a public utility.
Under Prime Minister Narendra Modi‘s ―Urja Ganga gas pipeline project‖ — which aims to meet the
energy requirements of 40 districts and 2,600 villages across five eastern states by December 2020 —
seven eastern cities, namely, Varanasi, Bhubaneswar, Cuttack, Kolkata, Patna, Ranchi and Jamshedpur,
will be getting PNG and compressed natural gas stations. In addition, think tank NITI Aayog in its three-
year action agenda released recently has mentioned City Gas Distribution being extended to 326 cities
by 2022 through suitable changes in bidding or regulatory practices of the regulator Petroleum and
Natural Gas Regulatory Board.
5.8 Building India’s Oil and Gas Reserves:
In line with the government‘s vision to reduce import dependence by 10% by 2022 in the oil and gas
sector and the target to raise the share of gas in primary energy to 15%, this is the right time for
industries to boost production capacities and reserves in the natural gas space. ONGC has reported to 23
hydrocarbon finds in 2016-17 with a total reserve accretion of 65 million tonnes of oil equivalent in
2016-17. Onshore assets of the country‘s largest player have produced 5.97 MMT of oil in 2016-17 vs.
5.87 MMT in 2015-16, reversing a long-standing declining trend.
17 projects with a combined capital expenditure of Rs 76,000 crore have been approved in the last three
years which is believed to produce 69 MMT of crude oil and 118 BCM of natural gas during the
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profiling period and cumulative production is expected to hit a peak during 2020 with a production of
6.65 MMT of crude and 13.38 BCM of natural gas, which is about 45% of ONGC‘s current production
in 2017. The flagship project at Cluster II in Bay of Bengal block alone is expected to produce 25MMT
of oil and 50 BCM of gas over the life of the project with peak production 4 MMT of oil and of 5.5
BCM of natural gas.
The government has announced plans of building two more oil reserves as a part of the second phase of
the strategic oil reserve setup, at Chandikode in Orissand Bikaner in Rajasthan in addition to the ones in
Visakhapatnam, Mangalore and Padur set up in the first phase, which will increase India‘s capacity to
15.33MMT. The latest amendment in the income tax act released as a part of the annual budget 2017
will facilitate in foreign companies investing in utilising strategic oil reserves setups in the country (eg:
ADNOC is storing ~ 6M barrels at the Mangalore reserve). The amendment, which will come into
operation from April 1, 2018 states that foreign companies will be awarded complete tax exemption on
the sale of any left over crude oil from its strategic reserves to an Indian citizen post the period of
agreement.
Potential Breakthrough – ONGC has discovered a huge gas hydrate in the KG basin off the Andhra
Pradesh coast. A gas hydrate is an ice-like form of water, which contains gas molecules in its molecular
activities. The reserve is estimated to be 134 trillion cubic feet, which could make India energy self –
sufficient. The persisting issue is that the world is yet to discover technology that can turn gas hydrates
into commercial gas. Japan and Canada claim that they are five years away from perfecting the
technology.
The East – Attracting Investment and building reserves
Discoveries establishing the superior efficiency in terms of fuel quality and thermal output of Coal-Bed-
Methane (CBM) as a source of natural gas along with its smaller carbon trail and reduced pollution
impacts have not only resulted in small and medium scale enterprises (SMEs) using CBM, but also new
industries emerging in the eastern region attracting more investment. Oil ministry proposing to the
cabinet on more flexibility in natural gas pricing at market rates to increase investor interest in coal seam
beds. CBM production volume building up over recent years reflects the great significance of this
development to manufacturers as well considering the vast reserves in coal possessed by the country and
the opportunity available to exploit an alternate source of natural gas production.
Further investment in the eastern region was vindicated with the interest shown by Belarussian firm
Belorusneft with core competencies in geological exploration, extraction and transportation of
hydrocarbons and natural gas on resuming oil production in the now defunct Digboi, Asia‘s first and one
of world‘s oldest oil fields. Hindustan Oil Exploration Company (HOEC) has also granted petroleum
mining leases to Assam‘s Dirok field which was developed by the joint venture (JV) of Oil India, Indian
Oil Corporation (IOC) and HOEC. Facilities are developed to the range of 36 mmscf, almost doubling
the Field Development Plan (FDP) volume of 20 mmscf. That global best practices in research and
Development expertise is deployed in processing and interpretation of seismic survey data, compilation
of geological and hydrodynamic models as well as employing recipes and reagents like polymer

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flooding to enhance oil recovery and reducing water fraccing is testimony to the potential held by the
eastern region in oil and gas production and enhancing the country‘s reserves.
5.9 Gas Pipeline
There are presently three major pipeline entities in gas transportation across the country namely GAIL,
RGTIL and GSPCL. GAIL is operating HVJ & DVPL trunk pipeline to evacuate gas like APM , JV gas
from ONGC and R-LNG from PLL, consisting about 11,077 km (about68.16%). RGTIL is operating
1480 km (about 9.04%) East West pipeline (EWPL) to evacuate gas from KG-D6 gas in Andhra
Pradesh.
This pipeline passes through Andhra Pradesh, Maharashtra and Gujarat and integrated with GAIL‘s and
GSPL‘s network to reach Northern and Western Indian market. GSPL is mainly focused in the state of
Gujarat consisting about 2540 km (about 15.63%). In addition GAIL also operates regional gas pipeline
networks across India in Maharashtra, K.G.Basin, and South Gujarat. Below is the detail of pipeline
network in India and their operator –
Major Natural Gas Pipeline Network
Companies GAIL Reliance GSPL AGCL IOCL ONGC Total
Natural Gas Length (km) 11,077 1,480 2,612 816 140 24 16,150
(as on
31.03.2017) Cap (MMSCMD) 242 80 43 3 10 6 384
Below map represent the current gas pipeline network in India. East west pipeline from Kakinanda
(Andhra Pradesh) to Bharuch (Gujarat) connects the natural gas sourced from KG basin to national
pipeline network of GAIL.
Pradhan Mantri Urja Ganga (PMUG): As a commitment to provide the clean energy in the Eastern
part of the country, the Government has envisaged developing an additional 15,000 km of gas pipeline
network, with a capital grant of Rs 5,176 Crore (40 per cent of the estimated capital cost of Rs 12,940
Crore) under Pradhan Mantri Urja Ganga. These gas pipeline will pass through 50 districts in the State
of Uttar Pradesh, Bihar, Jharkhand, Odisha & West Bengal. The construction work on the Phase-I of the
project from Phulpur (Uttar Pradesh) to Dobhi (Bihar) with spurlines to Varanasi, Gorakhpur, Patna &
Barauni is at advanced stage and is scheduled to be completed by December 2018.
Further, the same pipeline has been approved for extension upto Guwahati to form the National Gas
Grid. Efforts are also underway to create a North East region Gas Grid by Oil PSUs to provide pipeline
connectivity to all states in the North-Eastern region.

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The following table enlist the projects under execution for expansion of gas pipeline in the country:
S No. Name of the Name of the authorized Length Status
pipeline entity
(in kms)
1. Jagdishpur- GAIL 2050 Inaugurated by PM in July

Phulpur-Haldia 2015, execution for phase -1 in
progress
2. Shadol-Phulpur Reliance Gas Pipelines 312 Project progressing as per

pipeline Limited (RGPL) schedule. Expected to be
completed by July, 2016
3. Kakinada-Vizag- Andhra Pradesh Gas 391 Project progressing as per

Distribution Corporation schedule. Expected to be

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Srikakulam Limited (APGDCL) completed by July, 2017
4. Mallavaram- GSPL India Transco 2042 These projects were to be

Bhopal-Bhilwara Limited (GITL) completed by July, 2014.
via Vijaipur However, the projects have
been delayed on account of
5. Mehsana-Bhatinda GSPL India Gasnet 2052 project clearances/legal cases
Limited (GIGL) and the absence of demand tie-
ups with customers.
6. Bhatinda-Jammu- GSPL India Gasnet 725
Srinagar Limited (GIGL)
7. Surat-Paradip GAIL 2112 Expected to be completed by

2020.
8. Ennore-Nellore KEI-RSOS 430 Expected to be completed by

end of 2017.
9. Ennore- 1175 PNGRB is under process to

Thiruvallur- grant authorization.
Bengaluru-
Puducherry-
Nagapattinam-
Madurai-Tuticorin
13. Kochi-Koottanad- GAIL 1062 The completion of this pipeline

Mangalore is contingent upon resolution of
Right of Use (RoU) acquisition
in the State of Tamil Nadu and
Kerala. Presently, the
construction work is on hold as
matter is sub-judice before the
Supreme Court.
14. Spur-lines to Dadri- GAIL 100

Bawana-Nangal
15. Spur lines to GAIL 193

Chhainsa-Jhajjar-
Hissar Main trunk lines have been
Spur lines to GAIL 410 commissioned. Spur lines are
16. under construction.
Dabhol-Bangalore
Total 13054
Source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=116618 (Press Information Bureau)

5.10 International Gas Pipeline

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5.10.1 Turkmenistan-Afghanistan-Pakistan-India Gas Pipeline (TAPI)

TAPI pipeline also known as Trans-Afghanistan Pipeline is a proposed natural gas pipeline running
through four countries being developed by Asian Development Bank. Cost of the project is estimated to
be $10 billion. Construction of the project started in Turkmenistan on 13th December 2015. The pipeline
is expected to be operational by 2019. The length of pipeline will be 1814 kms with a capacity of 33
billion cubic meter of natural gas per year of which 5 billion cubic meter will be provided to
Afghanistan and 14 billion cubic meter to India and Pakistan each. The source of gas will be Galkynysh
gas field (previously known as South Yoiotan Osman) in Turkmenistan. The field holds gas reserves of
16 tcf and the pipeline will supply gas for 30 year period. The route of the pipeline will be Herath-
Kandhar-Quetta-Multan (Pakistan)-Fazilka (Punjab). The project will be co-owned by the four
participating nations. TurkmenGaz, state owned company of Turkmenistan will lead the project with
ONGC taking representing India.
5.10.2 Iran India Gas Pipeline

With the lifting of sanctions on Iran by the western countries, it was expected that talk on Iran-Pakistan-
India gas pipeline will resume. However, India is now not interested in taking forward the project
because of security concern. India and Iran are now mulling over undersea gas pipeline from Chabahar
port to Gujarat coast. The project is expected to cost $4.5 billion with a length of 1400 km undersea
pipeline bypassing Pakistan. India is also likely to fund a rail link between Chabahar port and Zahedan
in Iran. Zahedan is located at the tripoint of borders of three countries – Iran, Afghanistan and Pakistan.
It will also connect India to Afghanistan, given the fact Zahedan is closer to the Afghanistan's strategic
Zaranj-Delaram road (Route 606), which was built by India. Oman is also expected to join the Iran-India
gas pipeline at a later stage. Oman has positive and close relationship with both Iran and India.

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5.10.3 Myanmar-Bangladesh-India (MBI) Gas Pipeline

The proposed 900 km pipeline was supposed to carry 5 bcm of gas from southern Myanmar to West
Bengal in India through Tripura, Mizoram and Bangladesh. The MBI pipeline could help India meet its
natural gas demand. However, the project was stalled in 2005 after Bangladesh withdrew from the
project after a disagreement with India over the contract details. Myanmar later signed an agreement
with China to setup a 2388 km pipeline to supply gas to China. There have been fresh talks recently to
renew the project as India-Bangladesh is working on improving the trade ties.

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5.11 Industry Wise Consumption of Natural Gas

5.11.1 Fertilizers
Nitrogen fertilizer are made from Ammonia (NH3). Ammonia can be produced from hydrocarbon
feedstock such as natural gas, coal and oil. In this energy intensive process, hydrocarbon supplies the
hydrogen, and the nitrogen (N2) is derived from the air. Natural is the preferred feedstock for the
production on ammonia primarily on account of:
 It is the most hydrogen rich hydrocarbon and hence contributes more hydrogen compared to other
hydrocarbons on a per unit weight basis
 The heavier feedstock like coal and gas are more complex to process, therefore, the capital cost is
higher compared to natural gas
Ammonia is not directly used as a fertilizer since farmers prefer a solid fertilizer and hence ammonia is
converted into urea. Urea is an organic compound with the chemical formula CO (NH2)2. It is formed by
combining two ammonia molecules with a carbon dioxide (CO2) molecule.
IFFCO, National Fertilizer Limited (NFL) and KRIBHCO are major player for the production of
fertilizers. IFFCO‘ plant at Kalol (Gandhi Nagar), Phulpur (U.P.) and Aonla (UP) lie on national gas
grid. NFL has plant in Nangal & Bathinda in Punjab, Panipat in Haryana and two at Vijaipur. All of the
plants are connected to GAIL cross country gas pipeline. KRIBHCO has the plant at Hazira, Gujarat
which is also on the gas network.
5.11.2 Power Sector
Total installed capacity of gas-based power plant in the country is 24,150 MW of which 14,305 MW has
no supply of domestic gas. The remaining capacity is operating at sub-optimal level for the want of
domestic gas. The cost of generating electricity by R-LNG makes other alternatives a better option. The
average PLF for gas-based power plants remained low at 22 percent in FY2016 (CRISIL Research).
Also, because of new gas allocation policy where power sector has been accorded a low priority, it is
expected that there would be a shortfall of domestic gas for gas-based power plants. However, with the
decline of price of LNG (LNG prices coming down to $5/mmbtu from $11-12/mmbtu on negotiation
with Qatar) R-LNG may be used for the generation of power.
5.11.3 City Gas Distribution (CGD)
CGD network supplies natural gas as Piped Natural Gas (PNG) and Compressed Natural Gas (CNG).
PNG is being distributed for domestic consumption, industrial and commercial use. CNG is being used
in the transportation sector. Domestic gas consumption in CNG and PNG was recorded to be 22
MMSCMD in FY 2017-18. There are 31 CGD entities involved in 81 Geographical Areas (GAs) in 22
States/UTs. 98 cities are being approved to have CGD network under smart city plan stage -1. PNG in
domestic use competes with its alternative of LPG, government is pushing for the expansion of PNG in
major cities so that LPG cylinders could be further used for distributing in rural area. CNG faces a direct
competition with its alternate of petrol and diesel. Higher energy efficiency of CNG and less cost of
CNG kit compared to diesel vehicle are the driving factor for the growth. Also, court has mandated

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public transport to use the CNG. In February 2014, government announced that it will allot domestic gas
to meet 100% demand from domestic users of CNG and PNG.
State Major Entity CNG Station PNG Station No. of CNG Vehicles
as on 31.3.2018 as on 31.3.2018 as on 31.3.2018
Gujarat Gujarat Gas Co. Ltd 396 1,672,629 1,094,973
Delhi Indraprastha Gas Ltd 446 8,95,738 10,26,900
Maharashtra Mahanagar Gas Ltd. 219 11,60,000 6,40,000
Total 1062 3,421,145 2,720,331

Source: Petroleum planning & analysis cell
Gujarat Gas (GGCL) is the largest CGD Company in the country. GGCL has been allocated 2.1
mmscmd natural gas from Panna-Mukta-Tapti, 0.5 mmscmd from APM gas and 0.6 mmscmd from KG-
D6 fields. And now with the government making CGD as the priority sector, GAIL has been directed to
fulfil the requirement by allocating gas from other non-priority sector. As of 2014, GGCL supplies
413,000 customers through its pipeline network of 4,628 km. It further supplies compressed natural gas
to over 200,000 users.
IGL is the largest retail gas distributor accounting for 20 percent of the total sales volumes in 2014-15. It
supplies compressed natural gas (CNG) to transport sector and piped natural gas (PNG) to domestic,
industrial & commercial sectors in Delhi and NCR. For the year 2017-18 IGL recorded a sales of 5.18
MMSCMD compared to 4.59 MMSCMD last year. IGL has allocated 3 mmscmd of natural gas out of
which 0.3 mmscmd has been allocated from KG-D6 basin. As on March 2018, IGL had 919 km of steel
pipelines and 10,755 km of MDPE (medium density polythene) pipeline.
Mahanagar Gas Ltd. (MGL) has operation in Mumbai, Thane and Navi Mumbai. It supplies PNG
to 11.6 lakh households and 2,655 commercial and industrial users and CNG to more than 6.4 lakh
vehicles. Total natural gas sale is 2.87 mmscmd for FY 2017-18. The company has been allocated 2
mmscmd from APM gas and 0.4 mmscmd from KG-D6 fields. MGL has set up 219 compressed natural
gas (CNG) stations, and a total of 5,100 km of pipelines.
9th CGD Bidding Round: PNGRB launched 9th CGD Bidding Round on 12th April, 2018, for
development of City Gas Distribution (CGD) networks for the 86 Geographical Areas (GAs) which
includes 174 districts (156 complete and 18 part), spread over 22 States and Union Territories (UTs),
thereby covering 24% of India‘s area. E-bidding has also been introduced.
Of the 86 cities offered for retailing of CNG to automobiles and piped cooking gas to households in the
9th CGD bid round, IOC bid for 34 cities on its own and another 20 in partnership with Adani Gas Ltd.
Adani Gas on its own bid for 32 cities. Bharat Gas Resources Ltd bid for 53 cities while GAIL Gas Ltd
put in offers for 34 cities. Gujarat-based Torrent Gas Pvt Ltd bid for 31 cities while Gujarat Gas Ltd put
in offers for 21 areas. Petronet LNG Ltd bid for the first time for the licence in 7 cities. Indraprastha Gas
Ltd put in bids for 11 cities.

Oil & Gas
Adani won rights to retail CNG to automobiles and piped cooking gas to households in 6 cities on its
own and another 5 in JV with IOCL. Torrent Gas Pvt Ltd and Bharat Gas Resources Ltd both won bids
for 6 GAs each. Indraprastha Gas Ltd won one GA which consists of Meerut, Muzaffarnagar and
Shamali districts. Mahanagar Gas Ltd failed to win a single bid.

Oil & Gas
6 Petrochemicals
6.1 Overview
6.1.1 What are petrochemicals?
Petrochemicals are derived from natural gas, natural gas liquids, or refinery products like naphtha
(derived from the distillation of crude oil). These are hydrocarbon compounds, which are converted into
primary petrochemicals, such as methanol, olefins, and aromatics. Primary petrochemicals are obtained
through the application of heat and pressure, in the presence of a catalyst, or by reaction with other
chemicals. The primary petrochemicals are then separated from the compounds through the process of
distillation and extraction.
Primary petrochemicals are further processed into intermediates such as vinyl chloride and styrene and
its derivatives. Polymers are among the most important derivative of primary petrochemicals. During
polymerization, ethylene, propylene, vinyl chloride, and styrene (unsaturated molecules) react in the
presence of a catalyst. The polymerization process involves the breaking up of their double bonds and
the formation of a long chain compound, known as a polymer.

Oil & Gas
6.1.2 Domestic Market

6.1.2.1 Market Size:
The domestic market size of polymers is estimated to have increased by about 2 per cent y-o-y to Rs.
1,060 billion in 2015-16, as against Rs. 1,035 billion in 2014-15. Overall domestic demand for polymers
grew at a CAGR of 7 per cent between 2010-11 and 2015-16 mainly led by healthy demand growth
from Film and Sheet (Packaging), Raffia (Cement), Injection and Blow Molding. Over the next few
years, demand growth in India is expected to be much higher than that in most other countries. Thus, the
presence of a large captive market for petrochemicals benefits domestic petrochemical companies.
6.1.2.2 Companies:
Public sector companies
• GAIL
• IOCL
Private sector companies
• Reliance Industries Ltd - At present, Reliance Industries dominate the industry.
• Haldia Petrochemicals Ltd
Currently, the domestic petrochemical industry is oligopolistic in nature with four to five large
producers. However, competition has been increasing gradually, with existing producers expanding
capacities and thus trying to eat into each other‘s market share
6.1.2.3 Factors affecting competitiveness of the Indian petrochemicals industry:
• Availability of feedstock and its costs - Naphtha and natural gas are the two major feedstock of the
Indian petrochemical industry. In terms of feedstock, India is significantly uncompetitive as compared to
the Middle East producers and marginally uncompetitive or comparable with other Asian producers.
• Investments Needs - Various factors that contribute to the cost of setting up a cracker.
Interest rates – Higher than most other countries
Labour costs - lower than most other countries
Import duties on capital goods - Higher than most other countries
Scale of operations - India is comparable to Asian countries in terms of scale of operations.
Government policies - Incentives offered by the Indian government to the domestic
petrochemical industry are marginally lower than those in most other Asian countries; they are
significantly lower than those in the Middle East.
• Size of the domestic market - The presence of a large captive market for petrochemicals will benefit
domestic petrochemical companies.

Oil & Gas
6.2 Naphtha or Natural Gas – Future?

Until recently, naphtha was being pre-dominantly used as a feedstock for ethylene cracking. Going
forward, we expect a change in the preferred feedstock, from naphtha to natural gas. Until 2005, most of
the planned global ethylene capacities were naphtha-based. However, owing to the continual increase in
prices of naphtha on the one hand, and the increasing availability of natural gas on the other, most of the
new capacities that will come on stream or are expected in the future, especially in the Middle East, are
planned to be fuelled by gas. However, in Asia, naphtha would continue to be the preferred feedstock, as
availability of gas continues to be a cause for concern in the region.
Naphtha is a light distillate forming part of the refinery throughput. Refining capacities are added based
on the expected demand for its main products, namely gasoline (light distillate), diesel and kerosene
(middle distillate). Globally, the focus on controlling pollution by using cleaner, less polluting fuel is on
the rise. Europe and the US have already issued new gasoline regulations. Other regions, including Asia,
are also following suit (BS norms). Over the medium term, significant refinery capacity is expected to
come on stream. This coupled with the severe slump in demand for naphtha due to the global economic
slowdown and the increase in availability of natural gas, condensates (condensate is a liquid obtained
while recovering natural gas from gas fields; it largely contains C2/C3 and higher compounds). etc., are
likely to lower the importance of naphtha as the preferred feedstock for the petrochemicals industry.
Thus, it will lead to softer prices in the medium term.
The use of ethane and propane is expected to be higher with the increasing usage of natural gas as
feedstock. The use of ethane will increase with the buildup of capacities in the Middle East, Africa,
Latin America, Canada and Asia (except Japan, and North East Asia, where plants will be based on
naphtha). Most new ethylene units will be designed for cracking heavier feedstock (naphtha / gas oil /
condensates) with some flexibility to crack lighter feedstock like LPG. Availability of LPG for the
petrochemicals industry is expected to be limited due to the high growth in demand for propane and
butane for cooking and heating purposes.
Case in favour of Natural gas:-
• Ethane is more environment friendly as compared to Naphtha.
• Ethane is easier to crack
• Cracking ethane gives more amount of ethylene as compared to naphtha
• Using gas in replacement of naphtha increases the operating profit
• Naphtha‘s is expensive than natural gas.
6.3 Economics of PetroChem Business:
• Capital intensive: - The petrochemical industry is capital intensive, resulting in high interest and
depreciation costs. Hence, plants need to operate at high rates, in order to reduce the fixed cost per unit
of production.

Oil & Gas
• Feedstock Prices: - Naphtha prices have become highly volatile over the last few years, owing to
increased volatility in crude oil prices.
• Product Prices: - Product pricing is complex, as a single feedstock yields many co-products, prices of
which are correlated. Moreover, different feedstock can be used to produce the same product.
• Cyclicality: - The petrochemical industry, like most capital-intensive commodity industries, is cyclical
in nature. Demand for petrochemicals is linked to economic growth.
• Operating rates – affected by turnaround schedule and thus affecting supply and thus cracker margins

Oil & Gas
7 Sector Outlook
7.1 Recent Mergers & Acquisitions In O&G Industry
Some major M&A deals in recent history are:
1. RIL – Sun Pharma Deal: Reliance Industries Ltd (RIL) has agreed to sell its entire 70% stake
Gujarat‘s Cambay Basin block to Dilip Shanghvi-promoted Sun Petrochemicals Pvt. Ltd (Sun Oil and
Natural Gas) for an undisclosed amount. Reliance has a 70% participating interest in the oil and gas
block CB-ONN-2003/1 (also called CB-10) while BP India holds the balance 30%.
2. ONGC-HPCL Deal: ONGC has acquired 51.11% stake in HPCL through an all cash deal worth
Rs 36,915 crore. This acquisition has paved the way for the country‘s first vertically-integrated oil
major. The Government's objective was to combine the various central public enterprises to give them
capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more
value for the stakeholders and create and 'Oil Major' which will be able to match the performance of
international and domestic private sector oil and gas companies. Post-acquisition, HPCL will act as a
subsidiary, not as a merger.
3. GSPL stake in GGL: GSPL has approved to acquire 3.91 crore shares or 28.4% equity of
Gujarat Gas Ltd. (GGL) from its parent entity GSPC. The acquisition is expected to be worth ~ Rs 3240
cr. With this acquisition, GSPL will now own 54% stake in GGL. The reason behind this deal is to lower
the debt of GSPC.
7.2 Key Investment Themes
The Oil & gas industry in 2018 received stimulus through upward oil and gas price corrections resulting
in renewed interest in upstream investment. Downstream companies generated desirable returns to
remain in the hunt for growing business. Oil price showed less volatility in 2017, presented rising signs
primarily owing to production cuts of around 1.8 million barrels per day (bpd) by both OPEC and some
Non-OPEC producers. Moody's and S&P predict average oil price to be around $55 per barrel, whereas
Goldman Sachs and Credit Suisse are predicting Brent price to be $62 and $60 per barrel in 2018. EIA
forecasts Brent spot prices to average $57/b in 2018, up from an average of $54/b in 2017 and West
Texas Intermediate (WTI) crude oil prices are forecast to average $4/b lower than Brent prices in 2018.
Based on emerging geopolitical factors, OPEC and some Non-OPEC oil producers‘ cohesive agreement
to production cuts throughout 2018, Hedge funds are backing higher oil prices in 2018. On 3 January
2018, WTI crude (Nymex) and Brent crude (ICE) were trading at $ 60.89/bbl and $67.09/bbl
respectively, registering a rise of 23 percent and 16 percent over the previous year. The World Bank
predicts Oil prices to average $56/b in 2018, higher than the average price in 2017. On the contrary,
BofA Merrill Lynch 2018 predictions for WTI and Brent prices are $52/b and $56/b respectively, lower
than their 2017 predictions. BofA Merrill Lynch predicts U.S. natural gas prices to average
$3.30/million BTU in 2018.
EIA projects US oil production to reach 10.0 million b/d in 2018, which could balance out production
cut by the OPEC and Non-OPEC allies. Despite higher production from US, emerging global demand-

Oil & Gas
supply scenario suggests that crude oil buyers will have to pay higher price in 2018 compared to 2017.
Oil price recovery started towards the end of 2016 continued through 2017 and most likely stay on
course in 2018.
Major factors which influenced price of crude in 2017 include unified decision by OPEC to maintain
production cut, shutdown of the 400,000 barrel/day Forties line in the North Sea, and declining
production in Venezuela.
Riding on rising oil price exploration and production (E&P) activities gathered momentum in the USA,
which is evident from the fact that rig count rebounded to 747 by 29 December 2017 from 525 in 30
December 2016, registering a staggering 42 percent growth. As expected the oil & gas companies in US
accelerated upstream activities to boost production in 2017. Early signs in 2018 indicate that oil & gas
companies will continue to boost invest in E&P activities. OPEC upstream investment plans suggest that
in 2017, over $40 billion invested in upstream projects or field developments and a similar invest pattern
may continue in 2018.
Upstream merger activities were intense in the USA with upstream transaction value reaching $64 in
2017 in line with 2016. The private equity firms were involved in 15 of the 20 largest deals, participated
in nearly $15 billion each in acquisitions and in divestitures during the year. The investors were fairly
confident and excited about future return on their investment.
The OPEC Bulletin (Oct. 2017) highlights that the oil & gas industry, especially the upstream faces
several challenges including global economic uncertainty; overcoming current market cycle; geopolitical
dynamics; building investor confidence, restoring investment; developing cooperation and meaningful
dialogue; adopting technology for efficient exploration and production; and environmental and
sustainable development. These challenges will continue to remain in 2018 and beyond; therefore a
comprehensive mechanism should be developed to integrate all stakeholders‘ perspective and address
emerging market dynamics.
Rising oil prices started to impact net import and balance of payment of India. Crude import value
increased from $64 billion in 2015-16 to $70 billion in 2016-17. During April-November, 2017 crude
import value already reached $53 billion, which may exceed $80 billion by the end of 2017-18. It is to
be noted that liquefied natural gas (LNG) import value was $6 billion in 2016-17 lower than $6.7 in
2015-16, which might increase in 2017-18 and beyond.
Indian Government has been seriously infusing natural gas to complement the existing fuel mix and
spread natural gas network across the country. For a long time the eastern states like Odisha, West
Bengal, and Bihar had been waiting for gas infrastructure. The Indian government is committed to
increase gas accessibility in the eastern states. The current government fast tracked projects to make
natural gas available in Bhubaneswar. Government sets target to reach 10 million households and
additional thousands of industrial and commercial customers across the country by 2019. The Petroleum
& Natural Gas Regulatory Board will have to give a strong push to expand city gas distribution beyond
cities. There is no doubt in my mind that 2018 is going to be the defining year for natural gas in India.

Oil & Gas
In 2017, the Government implemented many transformative initiatives to improve availability,
accessibility, and affordability of clean fuel. Pradhan Mantri Ujjwala Yojana scheme launched in May
2016 was intensified in 2017. During April-November, 2017, 46.2 lakh double bottle connections and
206.9 lakh new connections were released out of which 115.8 lakh were released under PMUY.
Aggressive push for green, affordable, and environment-people friendly fuel in the rural India is going
to be the focus area for the government in 2018. By 2019, the Government intends to achieve close to
100% penetration of clean cooking fuel in India.
Global oil & gas industry is on the recovery path which will strengthen in 2018. Oil price is forecasted
to be in the zone of $55-65/b, which would reduce stress on E&P sector. Indian downstream companies,
consumers and government should be prepared to counter rising oil prices. On the contrary, the
upstream companies may rejoice escalating oil price. Recent reforms in the upstream sector may start to
deliver positive results in 2018 and beyond.
We can see that Indian upstream companies are going to increase their E&P activity due to the higher oil
price forecast and recovery of the Global growth, which is going to resulted in higher oil demand to near
future.
Simultaneously Indian government is focusing on creating City Gas Distribution network across the
major cities of the India and for those purpose selected 100 cities. Indian government is planning to
increase Gas import terminal to 15 from existing 4, and for some of the gas terminal work is already is
going on and the government is planning to create the Gas hub in India so that it can attract more private
player in country and achieve its objective to increase share of the Natural gas to 15% in energy mix.
7.3 Company Profiles
Indraprastha Gas Ltd:
Incorporated in 1998, IGL is a Joint Venture of GAIL and BPCL. Govt. of NCT of Delhi is also holding
5% equity IGL started its operations in NCT of Delhi in 1999 with only 9 CNG stations and 1000 PNG
consumers Today IGL has its operations in NCT of Delhi, Noida, Greater Noida and Ghaziabad with
446 CNG stations, 8.92 lacs residential consumers and 3.4 thousand industrial / commercial customers
and is currently fueling the largest CNG Bus fleet in the World in Delhi.
IGL Board is fairly well diversified with ten members including two each from GAIL and BPCL, one
from Govt. of Delhi and five independent directors. The company is beneficiary of its strong parentage
and gets significant support from GAIL and BPCL relating to operations and management.
In Delhi, where all public transport vehicles have to be necessarily run on CNG in view of the directions
of the Hon. Supreme Court of India, IGL is the predominant CGD player.
IGL has started sale of CNG at two outlets in Rewari and sale of PNG to Domestic households. IGL
plans to add 6 more CNG outlets and to connect 1500 Domestic households in FY19. IGL has recently
got entry into Gurugram to lay infrastructure. IGL has been authorized for Karnal geographical area in
the 8th round of bidding by PNGRB. Infrastructure building activity already started. In the latest bidding
round, IGL won one GA which consists of Meerut, Muzaffarnagar and Shamali districts.

Oil & Gas
There has been firm allocation from Govt. of India for domestic gas to CNG and PNG Domestic
segment. Lower prices of domestic gas make the economics of switching to gas more attractive driving
growth in CNG & PNG- domestic segments which constitute around 80% of the total sales volumes.
In addition, IGL has made long term contract for RLNG to meet PNG Industrial & Commercial demand,
and short-term contract from the open market (Shell, IOCL, Petronet, GSPC, BPCL etc.).
Segment-wise Sales Volume

Commercial/Indu
stries, 11, 11%
Sale to other
CGD cos., 9,
9%
Residential, 6,
6%
CNG, 74, 74%
IGL has acquired 50% equity share capital of Central UP Gas Limited (CUGL) for Rs. 68 crores. CUGL
is engaged in the CGD in the cities of Kanpur and Bareilly, Unnao & Jhansi in Uttar Pradesh.
IGL has acquired 50% equity share capital of Maharashtra Natural Gas Limited (MNGL) at a price of
Rs.38 per equity share aggregating to Rs. 190 crores. MNGL is engaged in the CGD in the city of Pune
and nearby areas.
These acquisitions have resulted in diversification of geographical areas and consolidated earnings of
IGL to improve by approx. 10 %.
Key Figures:
CNG Stations – 446
CNG Vehicles – 10,26,900
PNG Users – 8,95,738
Total Pipeline (Steel + MDPE) – 11674 kms
Key Rationales:
1. Credit Strength - Healthy profitability with strong cash generations from operations, zero debt
company, credit ratings of AAA (Stable) for term loan and A1+ for short term loan.

Oil & Gas
2. Backed by Govt - By virtue of the presence of Govt. of Delhi as a minority shareholder, the
company gets support for speedy administrative approvals. Also, Govt has been pushing for
transition to gas-based economy, which bodes well for CGD.
3. Growth Outlook – IGL has been expanding into areas adjacent to Delhi, such as Rewari,
Gurugram, Karnal, Greater Noida and Ghaziabad. In 9th CGD Bidding round, IGL won one GA
which consists of Meerut, Muzaffarnagar and Shamali districts.
Oil and Natural Gas Corporation:
ONGC is the largest O&G player in India, contributing around 70 % to Indian domestic production.
ONGC has a unique distinction of being a company with in-house service capabilities in all areas of
Exploration and Production of oil & gas and related oil-field services. ONGC has discovered 6 out of the
7 oil and gas producing basins in India. ONGC owns and operates around 25,500 km of pipelines in
India, including sub-sea pipelines. Its closest competitors are Oil India and Reliance. It has multiple
subsidiaries such as OVL and MRPL. Recent acquisition of stakes in HPCL has turned it into a fully–
integrated oil and gas company in India, operating along the entire hydrocarbon value chain.
Key Highlights:
 Domestic
o Producing 25+ MMT crude and 24+ BCM natural gas per annum.
o Assets spread across the country with 2P reserve accretion at ~ 70 MMTOE in FY18
 Overseas
o Overseas E&P arm with 40+ projects in 20 countries producing 14+ MMTOE in FY18.
o 15% YoY growth in last 5 years
 Downstream
o 15.8 MMTPA Refinery and 48.99% stake in 11.3 MMTPA HMEL refinery &16.96%
share in MRPL.
o India's 2ndlargest oil marketing company with a strong petrochemical vertical.
o 15,000+ retail outlets across India for marketing lubricants, auto fuel & non-fuel.
o Highest-ever throughput during FY18 -16.31 MMT
 Petchem
o Largest Dual feed cracker in south Asia and 2ndlargest in the world.
o 1.1 MMTPAEthylene Cracker
In 2018 Q1 report, ONGC‘s revenues rose 14 percent at Rs 27,212 crore against Rs 23,970 crore on a
quarter on quarter basis. It has reported a rise of 4 percent in net profit for the June quarter. As a result of
increase in gas price from $2.89/MMBTU to $3.06/MMBTU, the company‘s sales are up. Natural gas
production is expected to increase 10% annually.

Oil & Gas
Parameters Value
Gross Revenue, mil 14,21,489.57
EBITDA, mil 4,97,677.82
Reported Net Profit, mil 2,04,081.86
Earnings Per Share (Rs) 15.97
RoE (%) 9.74
ROCE (%) 12.16
Debt-Equity Ratio 0.26
Reserve Replacement Ratio 1.48
Oil Reserves, MMToE 801.41
Gas Reserves, bcm 1,062.04
Crude Production, MMT 22.25
Gas Production, bcm 22.09
Face Value, Rs 5.00
Current Ratio 1.08
Quick Ratio 0.86
Asset Turnover Annual % 36
(Source: Ace Analyzer)

Oil & Gas
Key Rationales:
1. Vertically-Integration – Recent acquisitions across multiple domains shows the progressive
outlook of ONGC. It most recently acquired 51.11% stakes in HPCL in January‘18, paving the
way for the country‘s first vertically-integrated oil major. The acquisition has been undertaken
with the objective to create an ‗oil major‘ which will be able to match the performance of
international and domestic private sector oil and gas companies. ONGC performance will thus be
less affected by the volatility of crude prices due to diversification of its cash flows to midstream
and downstream presence through HPCL, lower earnings volatility, diversified cash flows and
lower business risk resulting in better valuation and higher shareholder value. ONGC will also
gain access to marketing network of HPCL which could be synergistically utilised for projects
such as MRPL, OPaL.
2. Growth Outlook – ONGC has spent a total of Rs 148,937 Cr from FY‘14 to FY‘18 in E&P
projects. ONGC has approved three new offshore projects in Mumbai. In total, they are
anticipated to produce nearly 15 million metric tons of oil (16.5 tons) and 2.972 bcm of gas. Its
overseas arm OVL has recently acquired 10 per cent stake in UAE's oil offshore concession.
ONGC expects to start natural gas and crude oil production from KG-DWN-98/2 or KG-D5 field
in Bay of Bengal by 2019. ONGC also has plans to buy out gas utility GAIL India Ltd in its
Dahej mega petrochemical project in Gujarat to take full control of the recently commissioned
plant. In total, ONGC is aiming to raise its output to 42 billion cubic meters (BCM) of natural
gas and 27 million metric tonnes (MMT) of crude oil. This bodes well for investors as it displays
robustness of the company and its growth-oriented outlook.

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UNNATI INVESTMENT MANAGEMENT AND RESEARCH GROUP

Gaurav Rath | Anand Patel

Unnati Sector Report 2018-19 | 1

Unnati Sector Report 2018-19 | 2

Unnati Sector Report 2018-19 | 3

Global Crude Oil Supply and Demand

Unnati Sector Report 2018-19 | 4

3 Oil and Gas Supply Chain

3.1 Upstream (Exploration and Production)

Due Diligence Site Surveys Development

Unnati Sector Report 2018-19 | 6

3.1.2 Upstream Companies

 Reserve Replacement Ratio (RRR)

3.1.4 Crude oil and Natural gas reserves in India

Basin-wise Hydrocarbon Resources

Crude Oil and Natural Gas Reserve Position as on 1.4.2017

Unnati Sector Report 2018-19 | 9

Unnati Sector Report 2018-19 | 10

3.1.5 Seismic survey and exploration segment – developments

Unnati Sector Report 2018-19 | 11

Below are the data classes of NDR:

Unnati Sector Report 2018-19 | 12

3.2 Midstream (Transportation and Storage)

3.2.1 Gathering & Processing

Unnati Sector Report 2018-19 | 13

Typical layout of an FPSO

Unnati Sector Report 2018-19 | 14

Source: CRISIL Research

Unnati Sector Report 2018-19 | 15

Unnati Sector Report 2018-19 | 16

Existing Pipeline Network (as on 01.04.2018)

Unnati Sector Report 2018-19 | 17

3.3.2 Marketing and Retailing

Unnati Sector Report 2018-19 | 18

 Reliance Industries Ltd

Downstream distribution statistics

Unnati Sector Report 2018-19 | 19

Unnati Sector Report 2018-19 | 20

Refineries Capacity Utilization

Unnati Sector Report 2018-19 | 21

3.3.3.4 Fuels & Losses

Impact of Under recoveries in OMC companies:

Unnati Sector Report 2018-19 | 23

Unnati Sector Report 2018-19 | 24

Production of Petroleum Products, TMT; Source : IBEF Industry Report

Unnati Sector Report 2018-19 | 25

Consumption of Petroleum Products (MMT)

Unnati Sector Report 2018-19 | 26

Source : Crisil Research

Source : Crisil Research

3.3.5.3 Motor Spirit

Source : Crisil Research

Unnati Sector Report 2018-19 | 28

Source : Crisil Research

Unnati Sector Report 2018-19 | 29

• Market determined pricing system

• Administered pricing mechanism

• Import Parity price mechanism

3.3.6.1 Administered Pricing Mechanism(APM):

3.3.6.2 Import Parity pricing mechanism(IPP):

Unnati Sector Report 2018-19 | 31

3.3.7 Strategic Petroleum Reserve

Unnati Sector Report 2018-19 | 32