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INDIAN OIL AND GAS INDUSTRY - AN OVERVIEW

Article · January 2011

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Indian Oil & Gas Industry – An Overview

 
 
Industry Note

 
The Industry note was written by Sanjay Sakariya, School of Petroleum
Management, Pandit Deendayal Petroleum University, Gandhinagar (India). It is
intended to be used as the basis for class discussion rather than to illustrate
either effective or ineffective handling of a management situation.

The industry note was compiled from published sources.

© Sanjay Sakariya

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 311-096-1

Indian Oil & Gas Industry – An Overview

Author: Mr. Sanjay Sakariya

Abstract: The Indian Oil & Gas industry is growing rapidly and playing an important role for the
development of Indian economy. Being major consumer of energy resources, India has limited
supplies of oil. The demand-supply gap however is very high. The structured industry note gives
an overview and insights of the Indian Oil & Gas industry as a whole. It also appraises emerging
current scenario of Indian Oil & Gas industry. It further measures the progressive step taken by the
government towards India’s energy security through creation of conductive policy and regulatory
framework to promote Exploration & Production, Refining and Retailing of Oil and Gas for
competitive and healthy growth of the industry and country as a whole.

Pedagogical Objectives:

The industry note helps to understand and analyse:

 Oil & Gas Industry Value Chain Proposition

 To understand Insights and emerging scenario of Indian Oil & Gas Industry
 To analyse the growth drivers and demand factors.

Industry Note:

The Indian Oil & Gas industry has been instrumental in fueling the rapid growth of the Indian
economy. The sector meets more than two third of the total primary energy needs of the country.
The oil & gas sector has been actively involved in putting India on the world map. With high rate of
economic growth, India has become a major consumer of energy resources. India is fourth largest
consumer of oil in the world.1 Despite the economic crisis, India’s energy demand continues to rise
steadily. India ranks 21st in terms of global oil reserve.2 However, demand-supply gap is very high.
The country imports more than one-third of its oil requirements.

The Indian Oil & Gas Industry is broadly classified into upstream, midstream and downstream
segments (Exhibit I). There are large number of key players including public sector, private sector
and foreign players actively involved into Indian Oil & Gas value chain.

                                                            
1 “Nations with the world's largest oil reserves”, http://www.rediff.com/business/slide-show/slide-show-1-nations-with-
the-worlds-largest-oil-reserves/20110128.htm, January 28th 2011
2 Ibid.

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Exhibit I
Indian Oil & Gas Industry Value Chain

Segment Brief about Segment Leading Players

Oil Gas
Upstream The upstream sector involves the searching for and ONGC, OIL, GSPC, ONGC, OIL,
the recovery and production of crude oil and natural RIL, ESSAR, Cairn, Cairn, GSPC,
gas. The upstream component of oil & gas sector BG Energy, Niko RIL, Prize
includes the searching for potential underground or Resources, Shell Petroleum &
underwater oil and gas fields, drilling of exploratory Geo Global, Jubilant various, JV
wells, and subsequently operating the wells that Energy, Oilex Companies
recover and bring the crude oil and/or raw natural gas
to the surface. The upstream oil sector is also known
as the exploration and production (E&P) sector.
Midstream The midstream segment processes, stores, markets RIL, MRPL, IOCL, GAIL, GSPL,
and transports commodities such as crude oil, natural BPCL, HPCL, Essar RGTIL (East
gas, Liquefied Natural Gas (LNG) like ethane, propane, Oil, Public Sector JV West Pipeline),
butane and sulphur. Midstream operations are usually Refinery Companies PLL, Shell, PIL
included in the downstream category.
Downstream The downstream segment involves the refining of IOC, BPCL, HPCL, GGCL, GSPC
petroleum crude oil & processing of raw natural gas and RIL, Shell, BP, Gas, IGL, MGL,
the selling & distribution of processed natural gas and ESSAR Adani, MNGL,
the products derived from petroleum crude oil. The Bhagyanagar
downstream sector includes oil refineries, Gas, SGL, GAIL
petrochemical plant, petroleum product distribution, Gas
retail outlets and natural gas distribution companies.

The Emerging Scenario of Indian Oil & Gas Industry

Pre-independence Period

The origin of Oil & Gas industry in India tracked back to 1867, when oil struck at Makum near
Margherita, about 8 miles from Digboi, Assam. However, Exploration and Production (E&P) started
in a systematic way only in 1899, after the Assam Oil Company (AOC) was formed. AOC was a
subsidiary of British owned Burmah Oil Plc. In the early stage, Oil & Gas industry in India was
dominated by Burmah Oil & other companies.

During the World War II, petroleum supplies to India were regulated by a committee in London
while the prices were set in India by a committee chaired in India by Burmah-Shell Oil Storage and
Distribution Company of India Ltd (Burmah-Shell). During the era of pre-independence, Kerosene
was the most important petroleum products in India as it was widely used for domestic purposes.
Prior to independence, it was believed that India lacked large scale deposits of Oil and Gas.
However at the time of partition in 1947, India lost its most significant oil blocks to Burma and
Pakistan and left with only one major oil producing field at Digboi.

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Post-independence Period

At the time of Independence in 1947, the Oil & Gas industry in India was controlled by the
international companies and domestic oil production was just 250,000 tonnes per annum.3 The
entire production was from one state-Assam only. World’s industry experts had believed and
written off India as far as discovery of new petroleum reserves was concerned. In 1954,
government of India announced in the Industrial Policy Resolution that petroleum would be the
core sector industry. The government has developed the Geological Survey of India, which carried
out extensive reconnaissance surveys and mappings, to locate structures suitable for exploration
of oil & gas. A number of foreign companies have entered the Indian E&P sector since the early
50’s. However, petroleum exploration in India received the real push only after the setting up of Oil
and Natural Gas Commission (ONGC), in 1955.4 Meanwhile other government-owned National Oil
Companies (NOCs) including Indian Oil Corporation (IOC) and Oil India Ltd. (OIL) were formed.
For the marketing of petroleum products, the government has set up another company called
Indian Refineries Ltd. in 1959. During 1960, ONGC has discovered number of oil and gas-bearing
structures in Gujarat and Assam. In 1964, Indian Refineries Ltd. was merged with Indian Oil
Company Limited to form Indian Oil Corporation Ltd. (IOCL).

In the early 1970, NOCs were supplied about 70% of the domestic requirement in the country.5 In
1974, discovery of oil in significant quantities in Bombay High opened up new avenues of oil
exploration in offshore areas. During 1970 to mid 1980, ONGC and OIL had taken major
exploratory efforts, which yielded discoveries of oil and gas in number of structures in Bassein,
Tapti, Krishna-Godavari-Cauvery basins, Cachar (Assam), Nagaland, and Tripura. However, by
the end of 1980, the supply reached at diminishing stage due to decline in oil production and
steady increase in consumption of petroleum products. The domestic oil companies were able to
meet only 35% domestic requirement in India.6 This was further compounded by the resource
crunch in the beginning of the early 90s. The Indian government had no money to give NOCs for
the development of some of the newly discovered fielsd like Gandhar, Heera (Phase-II and III),
Neelam, Ravva, Panna, Mukta, Tapti, Lakwa (Phase-II), Geleki, Bombay High Final Development
schemes etc. Though, some of these fields were developed by ONGC (Gandhar, Neelam, Bombay
High, Lakwa, Heera, Geleki etc.), for others, there was no money available for indigenously
developing fields. Different factors such as the administered oil price, non-availability of
appropriate technology, logistics etc. were also a main problems. The situation forced government
to go for petroleum sector reforms to attract funds and technology from abroad.

                                                            
3 “Oil & Gas Industry in India”, http://www.iloveindia.com/economy-of-india/oil-gas-industry.html, July 21st 2007
4 “Oil & Gas Market & Opportunities”, http://www.ibef.org/download/Oil_Gas_210708.pdf, 2008
5 “Indian Refinery Industry”, http://www.ukessays.com/essays/economics/indian-refinery-industry.php

6 “Evolution of Indian oil and Gas Sector”, http://www.dnb.co.in/IndiasEnergySector/GasIndustry.asp

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Post-liberalization Period

The Indian Oil & Gas industry underwent major changes throughout the 1990s due to introduction
of liberalization policies. Afterward, three rounds of exploration bidding had been initiated but gone
through with no success in finding a new oil/gas deposits by the foreign companies, who were only
allowed to bid. The government of India, further liberalized the petroleum exploitation and
exploration policy in 1991, and invited private companies, both foreign and Indian, to participate in
the E&P and Refine and Marketing (R&M) activities in Oil & Gas sector. Some of the global
companies that entered India in the R&M segment were ExxonMobil, British Petroleum and
Marathon while the companies in E&P were Shell, Geopetrol, Niko Resources Ltd., Conoro
Resources Ltd., and Cairn Energy Plc. During 1991-1994, government announced fourth, fifth,
sixth, seventh and eighth rounds of exploration bidding under the petroleum sector reforms.
Starting from the fourth round of exploration bidding, for the first time Indian companies were
allowed to bid with or without previous experience in E&P activities. Lack of previous experience,
forced the Indian companies to seek foreign partner to work as operator and to share costs.

In order to increase exploration activities, government formulated New Exploration Licensing Policy
(NELP) in 1997-98 to provide level playing field on which all parties including private and public
sector companies would compete in all fiscal and contract matters. NELP conceived to address the
increasing demand supply gap of energy in India, has proved to be successful in attracting the
interest of both domestic private sector players and some foreign players with eight rounds of
bidding, with Reliance Industries and Cairn being particularly active in this arena. Since its
operationalization in 1999, NELP has completed eight rounds of bids and 239 Production Sharing
Contract (PSC) have been signed7 (Exhibit II). In addition, 28 exploration blocks were signed prior
to NELP under various bidding rounds with private Indian and foreign companies and National Oil
Companies as Licensee. After the implementation of NELP, India’s oil and gas E&P scenario has
been changed significantly in terms of both exploration and investment. NELP has created healthy
competition between public and private sector companies, which is good sign for Indian economy
as well as upstream oil sector. NELP IX has been announced in October 2010 with various road
shows being planned in major Indian and international cities by the government to attract private
investment.

                                                            
7 “Oil and Gas Overview 2010”, https://www.in.kpmg.com/SecureData/aci/Files/Oil_gas_2010.pdf, 2010

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Exhibit II
Progress under New Exploration License Policy (NELP)
Parameter NELP NELP NELP NELP NELP NELP NELP NELP
I II III IV V VI VII VIII
No. of blocks offered 48 25 27 24 20 55 57 70
No. of blocks bid for 28 23 24 21 20 52 45 36
No of bid received 45 44 52 44 69 185 181 76
No of blocks awarded 25 23 23 21 20 52 44 31
Source: “Oil and Gas Overview 2010”, https://www.in.kpmg.com/SecureData/aci/Files/Oil_gas_2010.pdf, 2010

The Governance Framework

The Oil & Gas industry in India is closely regulated by the Ministry of Petroleum and Natural Gas,
Government of India subjected to each link in the chain including E&P, refining, marketing and
distribution; and import, export, and conservation of petroleum products and Liquefied Natural Gas
(LPG). There are several leading Public Sector Undertakings (PSUs) and private players across
the value chain. The pricing of petroleum products and natural gas continued to be controlled and
regulated by the government. The Petroleum & Natural Gas Regulatory Body (PNGRB) is the
regulatory body, responsible to regulate the refining, processing, storage, transportation,
distribution, marketing and sale of petroleum, petroleum products and natural gas excluding
production of crude oil and natural gas so as to protect the interest of consumers and entities
engaged in specified activities and to ensure uninterrupted & adequate supply and to promote
competitive markets.

Leading Players

Both public and private players are playing an important role in Indian Oil & Gas industry. IOC,
ONGC, HPCL, BPCL, OIL and GAIL are the leading public sector companies where as RIL, Essar
Oil Limited, Adani Gas, Petronet LNG, Cairn, Shell, BG Group and BP are the leading private
sector firms playing a major role in the industry. The industry players are mainly involved in
different range of operations, from exploration to production, refining, marketing, infrastructure and
diverse multi-sector operations. Cut-thought competition among the existing service providers have
been scaling up their activities and capabilities, enhancing their fleet size and widen their portfolio
by offering different specialised services and developing their manpower. Some of the local firms
are also planning to offer their service to E&P firms across the world. The Indian refineries are also
focusing on integrating horizontally to venture into the production of more value added products to
gain additional revenues.

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Role towards the Economy

The Oil & Gas Industry has been actively involved in stimulating rapid growth of the Indian
economy, comprised over 15% of the GDP.8 During past few years, India’s economy witnessed a
healthy 7% to 9% growth rate, which led to current growth in energy demand across industrial,
commercial, transportation and residential sectors.9 The government has also been doing its bit in
recent times to deregulate the industry and encourage greater foreign participation to create level
playing field and healthy competition in the industry.

Growth & Demand Drivers

To maintain this high economic growth, India needs substantial quality of crude oil and natural gas.
The energy needs are growing at a faster rate as income levels and population both are showing
rising trends in the country. Increasing automobile sales in India has led to significant investment
being made for development of oil exploration and production and to expand the petroleum retail
market in the country. According to US-based consultancy firm Keystone, automobile sales are
likely to grow from present 1 million to about 20 million by 2030, making India as the third largest
automobile market in the world.10 The Ministry of Petroleum has estimated that the demand for oil
and gas is likely to increase from 186.54 million tonnes of oil equivalent (mmtoe) in 2009-10 to
233.58 mmtoe in 2011-12.11 The national attempt is to bridge the ever-increasing gap between
demand and supply of petroleum products by intensifying exploratory efforts for oil and gas
products. To meet this ever increasing petroleum demand, Indian petroleum sector heavily
investing abroad. The government owned firms already have a stake in oil and gas field in Russia,
Iraq, Sudan, Egypt, Libya, Qatar, Ivory Coast, Australia, Vietnam and Myanmar.

Being third-largest global coal producer, India has limited supplies of oil. Currently, India imports
around 75% of its oil requirements. India have reserves of 791 million metric tonnes (MMT) of
crude oil and 112 trillion cubic metric (TCM) of natural gas.12 An extensive increase in the domestic
supply of natural gas and reduced prices of Liquefied Natural Gas (LNG) in the country, are likely
to encourage the consumption of gas in power, fertilizers, city gas distribution and other industrial
segments. Given the commencement of production from RIL's KG Basin fields, the
commencement of Cairn India's production and the potential development of the discoveries
announced by GSPC and ONGC, the E&P sector is poised to see considerable activity in the near
future.

                                                            
8 Pithauria Rohit, “The great revival”, http://indiatoday.intoday.in/site/Story/77111/Aspire/The+great+revival.html,
December 30th 2009
9 “Petroleum Exploration and Production Activities”,

http://www.dghindia.org/site/pdfattachments/e_p_reports_2007_08.pdf, 2007-2008
10 “Energy: An Overview’, http://www.indiaafricaconnect.in/energy-include.php, accesses on February 17th 2011.

11“Oil and Gas – Sector Profile”, presentation at Vibrant Gujarat 2011, 12-13 January,

http://www.infraline.com/ong/presentations/Vibrant_Gujarat.pdf
12 “Oil and Gas – Sector Profile”, op.cit.

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To meet the future demand, there would be a huge amount of money required for investment
behind E&P, refining, marketing and distribution of petroleum products in the country. According to
the Investment commission of India, the total opportunity in the oil and gas sector is expected to
reach US$ 35 billion to US$ 40 billion by 2012.13 The government has been focusing more on
expansion of oil and gas refining capacity in the country to drive output and export of petroleum
products. However, this could broaden the gap between domestic demand and supply as far as
crude oil is concern.

Refining

After USA, China, Russian federation and Japan, India is the world’s fifth largest consumer of
energy which accounts for approximately 3.9% of world consumption.14 India already became a
world’s fifth largest country in terms of refining capacity, with a share of 3% of the global capacity.
With its current capacity of around 180 million tonnes per annum (mtpa) is poised to emerge as a
major refining hub, with considerable capacity additions being planned over the next few years.15
Today there are 20 refineries in the country; 17 in the public sector having capacity of 107.5
MMTPA, and 3 in the private sector have a capacity of 72 MMTPA.16 The country has further large
expansions planned and is aiming to emerge as a refining hub even as global refining markets
have tightened with the closure of small refineries in North America and Europe mainly due to
challenges in investing in cleaner fuels and high compliance costs. Capacity addition as well as
Greenfield refineries announced by public and private sector players indicates that almost 40-50
MMTPA of additional refining capacity will be added by 2013-14 bringing the total available
capacity to nearly 240 MMTPA (Exhibit III).
Exhibit III
Refinery Capacity Addition in India

Source: KPMG, “Oil and Gas Overview 2010”, https://www.in.kpmg.com/SecureData/aci/Files/Oil_gas_2010.pdf, 2010

                                                            
13 “Oil & Gas: Commodities that fuel India's growth”, http://www.commodityonline.com/news/Oil--Gas-Commodities-
that-fuel-Indias-growh-20893-2-1.html, September 4th 2009
14 “Petroleum Exploration and Production Activities”, op.cit.

15 KPMG, “Oil and Gas Overview 2010”, https://www.in.kpmg.com/SecureData/aci/Files/Oil_gas_2010.pdf, 2010

16 Ibid.

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Retail & Distribution

 Fuel Retailing – Until 2002, private sector was not allowed fuel retailing in India.
Subsequently, the government has decided to open the fuel retailing market for private
players with certain restrictions. The government was insulting the Indian consumer from
volatility of crude oil prices in the international markets, has been subsidizing end-user
prices. The huge amount of subsidy provided to the domestic consumer being shared by
the Oil Marketing Companies (OMCs) and the upstream PSU firms. In June 2010, a major
step was taken in the area of moving towards fuel price deregulation. Government has
decided to give free hand to oil companies to determine petrol prices in the line with the
market price. However, diesel prices were not allowed the same freedom due to fear of
significant inflationary impact on Indian economy.

Fuel retailing in India is still dominated by the PSUs. Accounting for about 50% market
share, Indian Oil is a leading player in Indian fuel retailing market, while the other PSU
retailers like HPCL and BPCL holds about 5% and 25% market share respectively.17
Private sector players like RIL, Essar and Shell have entered the market, but they have
found it difficult to sustain operations given the price deregulation in place. However, there
are indications that private sector interest has renewed in this space. Currently, private
sector firms operates its retail outlets successfully through providing a customer centric
service across the value chain. Petro-retail outlets are also helping in the sales of other
petroleum products like automotive lubricants. In addition to buying fuel, walk into petrol
pump today one could, buy automobile accessories, groceries, ice cream, coffee and
snacks, medicines, send a courier, access the Internet, draw cash at an ATM, make a bill
payment, buy a cell phone SIM card and more.

 Gas Transmission & Distribution – The transmission and distribution segment of the
natural gas sector remains relatively under-developed, but this is to change in medium
term. The existing pipeline capacity of about 220 mmscmd is expected to increase to
about 660 mmscmd in the near future. The expansion in gas transmission would definitely
lead to better gas availability, better tapping of demand and thus in turn increase the
natural gas demand. The City Gas Distribution(CGD) space in India have been steadily
increasing and government is playing an important role to provide a level playing field for
both domestic and foreign entities in competitive bidding process – to grant licenses for
CGD service in different cities and geographical areas. Increasing urbanization and strict
environment norms around the urban centres is likely to increase the demand for piped
natural gas as a clean and efficient fuel.

India’s main focus is to enhance the energy security of the country. The government has been
taking many progressive measures to create a conductive policy and regulatory framework, to
                                                            
17 KPMG, “Oil and Gas Overview 2010”, op.cit.

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promote E&P, to meet the rising consumption of oil and gas in the country through attracting
investment from more number of domestic private and foreign players. Considering an important
strategic action of different industry segment like E&P, Refining, LNG, CGD, R&M, etc. the trend of
Oil & Gas industry is on changing track.

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