Contents

Message from MD ____________________________________________________________ 2

Overview ____________________________________________________________________ 3
E&P Industry Scenario _________________________________________________________ 4
Production __________________________________________________________________ 5
Oil ______________________________________________________________________________ 6
Gas _____________________________________________________________________________ 7
Prices _______________________________________________________________________ 8
CARE Ratings View ___________________________________________________________ 11
Message from MD

Indian economy remains the center of leading global financial institutions as one of the bright spots. The
GDP growth and expansion over the years has put India at the head of the pack of large economies.
However, rising oil prices and depreciating currency have hit the current a/c deficit hard recently while
also straining the inflation levels (though the crude prices have started cooling-off). The country benefits
from its enviable reserve of soft capital – the vast pool of talented young workforce. That is a great
advantage to have in today’s era of competitiveness.

The changing dynamics of the global economy have resulted in policy changes and challenges. It thus
becomes imperative for economies to adopt better and strong policies that would help spur their growth
prospects and avoid downside slippages. The energy needs of the nation is at all-time high, therefore, it
is necessary for us to allocate our efforts in an efficient manner to effectively utilize the scarce resources.
Nevertheless, there is little that government of India can do when it comes to crude prices. The recent
surge in the crude prices though propelled more investment activities, however, its implication on the
final output is yet to be seen since production is declining in India.

Moreover, this industry has always remained unpredictable with so many variable factors affecting the
prices, production and supply. Therefore, continuous surveillance is required in order to come at a desired
conclusion of the dynamics and projected results.

We are privileged to be the knowledge partner for PHD chamber’s ‘National Oil & Gas Summit 2018’. This
background paper provides a brief on dynamics of exploration activities and oil and gas prices in India.

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Overview

The Indian Oil & Gas Exploration can be traced back to 1889 when Assam Oil Company was formed to
commercially exploit the oil discovery in Digboi, Assam. Oil and Gas industry is one of the core industries
of India and has direct linkages with the growth of the economy. The focus on oil and gas comes from its
varied usage and applicability. The demand of energy has always surpassed the supply. Therefore the
dependency on it remains high which implies continued investment in exploration & production activities.
Alternatively, the industry requires effective and efficient mechanisms to exploit the available reserves in
a timely manner.

The upstream sector was largely a monopoly of public sector until liberalized economic policy adopted by
India in 1991 after which sector was opened to new companies in private and JVs segment. Thus, a need
to establish agencies in order to effectively supervise the activities at national level was felt. Accordingly,
DGH was set up in 1993 through government of India resolution under the administrative control of
MoPNG.

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E&P Industry Scenario

The industry is highly concentrated and has stiff entry barriers in the form of high capital cost and
regulatory requirements. The essential requirement for oil and gas exploration is the hydrocarbon-bearing
land or the exploration blocks from where they are extracted. These resources are non-renewable and
new blocks need to be identified and exploited using an efficient technology.

E&P Regime in India

Source: DGH

In order to boost domestic production, the Government had invited bids for Discovered Small Field (DSF)
in May 2016, offering 46 contract areas in 67 oil and gas fields, across sedimentary basins. The government
has launched the second round of bidding under the Discovered Small Field Policy offering oil and gas
blocks with reserves over 190 million tonnes or 1.39 billion barrels of oil and oil equivalent of
gas equivalent (O+OEG).

The 59 discoveries fields getting auctioned are being clubbed into 25 contract areas (15 onland fields and
10 shallow water areas) spread over 3,042 square kilometers and 8 sedimentary basins. The bidding for
the fields will close in December 2018. The contracts will be awarded by January 2019. Fields that have
been identified for DSF-II are in Rajasthan, Gujarat, Kutch & Cambay shallow waters, Assam and Tripura,
Mahanadi shallow water, Mumbai offshore, Andhra Pradesh onland and KG offshore. Some of the fields

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belong to Oil and Natural Gas Corp (22), Oil India Ltd (5) and 12 are relinquished discovered fields from
the New Exploration and Licensing Policy (NELP) blocks.

The main features of DSF-II include a single license for exploitation and exploration (both conventional
and unconventional hydrocarbon), no prior technical experience needed for bidders, easy entry & investor
friendly policies, easy bidding process, transparent awarding of blocks; swift processing of approvals, no
upfront signature bonus, better fiscal system through revenue sharing contracts and full pricing and
marketing freedom. The royalty rates have also been reduced to 7.5% from 10% for offshore blocks.

Furthermore, the Union Cabinet has approved the policy framework to promote and incentivize enhanced
recovery (ER)/ improved recovery (IR) methods/techniques to improve the recovery factor of the existing
hydrocarbons reserves in order to augment the production of domestic oil & gas and unconventional
hydrocarbon (UHC).

The ER includes enhanced oil recovery (EOR) and enhanced gas recovery (EGR) whereas unconventional
hydrocarbon (UHC) include shale oil and gas, tight oil and gas, oil shale, gas hydrates and heavy oil. The
policy will be applicable to all contractual regimes and nomination fields.

The contribution of the oil and gas industry to the GDP of the country and exchequer is significant. During
the year 2016-17, Rs. 1,79,014 crore was paid to the exchequer as against Rs.1,32,064 crore paid in the
previous year. An amount of Rs. 1,02,817 crore was paid to the Central Exchequer and Rs.76,197 crore to
the State Exchequer as against Rs.67,459 crore and Rs.64,605 crore paid in the previous year to the Central
and State Exchequer respectively. Therefore, the industry holds significant importance to Indian economy.

Production

At the time of independence, India’s domestic crude oil production was just about 250,000 tonnes which
has increased to around 40 million tonnes (MT) in CY17. India imports around 85% of its crude oil
requirement and around 50% of its natural gas requirement because of inadequate domestic production.
Numerous measures have been taken by Indian government to increase it, however the production is still
a slog for Indian economy. On one hand, crude oil production has been declining while natural gas has
emerged as a preferred fuel on the other. However, natural gas production has also not kept pace with
the rising demand. As a result, India’s import dependence to external price and supply shocks in energy
domain has increased.

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Oil
The US has emerged as the world leader in the crude oil production by pumping in almost 13.3 million
barrels a day overtaking Russia and Saudi Arabia during CY17. In the current calendar year US is still the
leading producer of crude oil. As per International Energy Agency (IEA) data, US oil production during
August was around 15.2 mbpd followed by Russia and Saudi Arabia at 11.6 mbpd and 10.4 mbpd
respectively.

On the other hand, the crude oil import volumes have been steadily rising in India owing to increasing
demand and decreasing production. India imports almost 87% of its total crude requirements. Iran is the
third-largest supplier of crude oil to India, after Iraq and Saudi. Currently, India imports around 10% of its
total crude imports from Iran. For Iran, India is the second-biggest buyer of crude after China. Halting of
sourcing Iranian crude could mean an increase in the import bill for India, given the discounts offered by
Iran and allowing of payments in rupee. Reduction of Iranian barrels from international markets would
bring in some supply void. It is interesting to observe till what level the US, OPEC and its allies will be able
to bridge the gap of Iranian supply of around 3.8 mbpd, almost 4% of the total world crude oil supply by
Iran. India produces around 0.9% of the world’s production of crude and around 10.76% of the total Asia
Pacific production. Indian share in the total share of consumption has been around 5% of the total world
consumption and around 13.88% of the total Asia Pacific consumption.

Source: BP Statistical Review of World Energy June 2018

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Furthermore, according to Ministry of Petroleum and Natural Gas (MoPNG), the crude oil production for
the period 2017-18 (Provisional) stood at 37.37 MMT, a marginal increase of 3.77% from than 2016-17
production. Out of the total production, around 70% of crude oil production is by ONGC and OIL under
nomination regime and the remaining approximate 30% of crude production is by Private/JVs companies
under PSC regime.

In order to streamline operations, government of India has given certain relaxation of timelines and
delegation of powers to Director General (DG), Director General of Hydrocarbons(DGH) under Production
Sharing Contracts in June 2018 to simplify the process of companies to pay for unfinished committed
exploration and drilling work to enter into next phase of production and development quickly. DGH can
also approve excusable delays in exploration phase due to any delays in government approvals and
clearances. Earlier, the extra period for excusable delays was given only after approval by the ministry.

The ease of exploration and production norms for contracts under the Production Sharing Contracts for
appraising areas outside the contract area is in line with the Government target to reduce import of oil
and gas by 10% by 2022.

Upstream companies are encouraged to undertake more seismic surveys under the National Seismic
Programme of Un-appraised areas and it makes it easier for explorers to find and produce more oil and
gas. Transfer of authority to the DG and DGH will avoid the bureaucracy involved in the norms of the
Production Sharing Contract and is in line with the Government's initiative of 'Ease of Doing Business'.

Gas
Natural Gas production is dominated by North American countries with around 26% share in CY17 in the
total world gas production followed by Commonwealth of Independent states (CIS). US holds almost 20%
share in the North American production at around 735 BCM. India is far behind and produces around 0.8%
of the total world’s production at 28.5 BCM.

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 Total Natural Gas Consumption vs Production vs Import
70.00 50.00%
45.00%
60.00
40.00%
50.00 35.00%

Import %
40.00 30.00%
BCM

25.00%
30.00 20.00%
20.00 15.00%
10.00%
10.00
5.00%
- 0.00%
2010 2011 2012 2013 2014 2015 2016 2017

Total Consumption Production Import Import %

Source: BP Statistical Review of World Energy June 2018

In terms of consumption, India consumes 1.5% of the world total consumption. The consumption stands
at around 54.20 BCM in CY17. The real demand of natural gas in India is even more. PPAC projected the
demand for natural gas for 2017-18 was around 176 BCM which is further increasing to 200-250 BCM till
FY22.

The natural gas registered the highest output of 32.65 BCM in FY18 in 3 years against 31.90 BCM in FY17
(refers to the period April 1 to March 31) driven by 6% increase in ONGC output offsetting decline in
production from Oil India Limited (FY18: 288 BCM) and other private players (FY18: 6.28 BCM). However,
gas domestic production has reduced from 48 BCM in CY10 to 28.5 BCM in CY17, consequently, imports
have increased to fill the gap between demand and supply.

Prices

Crude oil is mainly sourced by the refineries for the manufacturing of Liquefied Petroleum Gas (LPG),
naphtha, Motor Spirit (MS)-III, MS- IV, MS others, Air Turbine Fuel (ATF), Superior Kerosene Oil (SKO), High
Speed Diesel (HSD)-III, HSD- IV, HSD others, Light Diesel Oil (LDO), Lubes, Furnace Oil (FO), Low Sulphur Heavy

Stock (LSHS), Bitumen and Raw Pet Coke (RPC)/Petcoke. Crude import volumes have been steadily rising in

India, in sync with India’s total crude oil consumption.

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In 2016-17, prices of crude seemed to be headed towards south and the expectations were that the prices
shall remain in $60-$65/ barrel range. However, at the end of 2017 after the OPEC meeting, it started to
rise.

Source: Bloomberg and CARE Ratings

Crude prices rose to over USD 86/barrel owing to sanctions levied by the US on Iran, supply cuts by OPEC
and tensions between US and Saudi on the case of missing Saudi journalist. Furthermore, the crude oil
import bill during the H1FY19 (April-September) of the current fiscal had increased 56.11 per cent and in
volume terms, the oil imports rose 5.80 per cent to 113 Million Tonne (MT).

However, since October 2018, oil has dropped from $84.51

to close at $70.18 as on, 9th November, 2018 (drop of 19%)
owing to rising US crude oil inventory resulting from China
stopping its oil imports from US because of the on-going
trade dispute between the two countries. Furthermore,
Saudi & Russia are producing oil at record highs. Also, US has
allowed 8 countries (incl. India) to import oil from Iran for
180 more days.
Source: Bloomberg and CARE Ratings
The fall in oil prices is positive for India in the short term as India imports a huge portion of its oil
requirements. For many corporates too, easing crude oil prices may bring some relief on the costs front.
Determining prices is highly uncertain as Saudi Arabia announced on 12th November 2018, that they will
decrease the supply by 0.5 Mbpd in December 2018 compared to November 2018. Uncertainty is
expected to remain as cluster of factors are influencing oil prices.

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On the other hand, prices of natural gas in Japan have increased 7% so far in 2018 relative to the same
period in 2017 as a result of strong demand, while U.S. prices were little changed over the same period as
supply continued to increase rapidly, driven by shale gas. Similarly, In India, the demand for natural gas
fairly depends on the regulatory updates as domestic and imported gases are priced and marketed
differently.
The imported gas can be priced and marketed without government intervention. However, pricing and
allocation of domestic gas is regulated though there is a pricing freedom with a celling for discoveries from
difficult fields such as high pressure-high temperature areas, deep-water areas and ultra-deep water areas
(which commenced commercial production post January 01, 2016). The government has revised the
domestic natural gas price as per the New Domestic Gas policy, 2014 and the revised price will be

prevalent from 1st October 2018 till 31st March 2019. The gas price for locally produced fields has been
revised to $3.36/mmBtu from $3.06/mmBtu resulting in a 9.8% increase and the ceiling price for gas to
be produced from difficult fields has been raised to $7.67/mmBtu from $6.78/mmBtu resulting in a 13.1%
increase.
The fall in the RLNG prices have increased the demand from fertilizer and petrochemical sectors, though
its affordability remains a concern for the power sector.

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 CARE Ratings View

India needs a sustainable energy supplies to fuel country’s growth story. The demand of oil and gas is
relatively inelastic to price. Any slowdown in the economic scenario does not affect the industry to a great
extent.

Oil and gas prices play vital role in deciding the economic feasibility of the reserves. Conventional or
vertical drilling requires relatively lesser cost as compared to unconventional. Commencement of an
exploration project is highly dependent on the prices of these commodities. Therefore, E&P companies
forecast the price range of these commodities over the term of the project to derive the viability of the
project.

Rupee Price of Crude Oil

Recent rise in crude oil prices and depreciation of the Indian rupee have posed a double whammy threat
for fuel inflation in India in the past few months.

Details Unit FY17 FY18 % growth H1FY18 H1FY19(Prov) % growth

Crude oil Production + condensates MMT 36 35.7 (0.83) 18 17.4 (3.33)
Consumption of petroleum products MMT 194.6 206.2 5.96 100.7 104.4 3.67
Production of petroleum products MMT 243.5 254.3 4.44 122.6 130.8 6.69
Natural gas production BCM 31.9 32.6 2.19 16.4 16.2 (1.22)
Natural gas consumption BCM 55.5 58 4.50 28.1 29.9 6.41
Imports
Crude oil MMT 213.9 220.4 3.04 106.8 113 5.81
LNG BCM 24.6 26.3 6.91 12.2 14 14.75
Average INR rate Rs/$ 67.06 64.46 (3.87) 64.38 68.53 6.45
Imports in Rs crore (est.)
Crude oil 470,728.1 565,987.2 20.24 242,053.8 402,254.1 66.18
LNG 40,903.7 50,281.3 22.93 19,956.6 33,578.3 68.26
Total Imports (value in Rs crore) 511,631.9 616,268.5 20.45 262,010.3 435,832.4 66.34
Source PPAC and CARE Ratings

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The value of the total crude oil and LNG imports have increased around 66.34% to over 4.35 lakh crore.
Crude oil and its products have a weight of 10.4% in the WPI. Of this crude oil and natural gas have a
weight of 2.4% and mineral oils around 8%. With the exception of LPG and kerosene (with combined
weight of 0.83%), the rest would be driven by market forces. Therefore, any decrease in the price of crude
oil would tend to impact the WPI inflation number commensurately. In terms of the CPI, fuel-related items
have a weight of nearly 2.7-2.8% directly. Fall in the crude oil prices will impact the WPI more than the
CPI. The real impact will be felt across the sectors where natural gas is used as a feedstock or for energy
requirements. The 9.8% rise in the natural gas price will result in the increase in the cost of manufacturing
of urea and petrochemicals where natural gas is used as a feedstock. There will be a rise in the prices of
CNG and PNG which will affect the consumers. Increase in price of Natural gas will also affect the margins
of the power sector and sponge iron industry where it is used for the generation of energy.

Currently the government (centre plus states) is collecting around 87% taxes (Excise Duty and VAT) on the
base price of petrol and 54% taxes (Excise Duty and VAT) on the base price of diesel. With the sudden fall
in crude oil prices we do not foresee a change in the revenues of the central government but there could
be a potential decline in the revenues of the States given the extra revenue earned by them when the
prices of crude oil had risen will be negated to an extent.

On Policy front, The DSF policy framework augurs well for the upstream oil and gas exploration companies,
as it will enable the realization of small idle hydrocarbon reserves which otherwise were being
unexploited. Considering how the oil and gas output has been declining over the past 7 years, with this
policy dispensation we can expect the discovery of new hydrocarbon blocks which could augment the
domestic production and work in favour of India to attain the goal of reducing oil and gas imports by 10%
by 2022.

In coming months, the price of Brent could range between USD 65/bbl -USD 75/bbl. The rise in the US
production and the temporary waivers granted by the US government towards countries importing
Iranian oil has brought down the prices but on the flipside the prices of oil can rise given the conclusion
of the meeting held by the OPEC+ members where the committee has noted there could be a prospective
widening of the gap between supply and demand in 2019 due to the dampening of global economic
growth prospects, in addition to associated uncertainties. Saudi Arabia has decided to pump 500,000 bpd
lesser in December than it has been in November and the other members are to consider new strategies
to balance the market with regard to new production cuts in 2019. Given the spare capacity with Saudi

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and Russia and eventual removal of bottlenecks for the US shale production, we see the void to be filled
up, leading to an eventual stabilization of crude prices in the long term.

Operational constraints which affect exploration activities include timely access to resources, availability
of adequate infrastructure facilities and lack of technological knowhow.

Fiscal and macroeconomic factors need to be considered as these exploration projects are highly capital
intensive. Timely and economical availability of finance also influence E&P activities. Also, demand-supply
equation is an important risk for upstream companies.

Regulatory and political interferences in terms of receiving the required permissions, licenses, clearances
have always remained a matter of concern for the entire upstream industry. Thus, oil and gas companies
prefer countries with stable political systems and flexible and faster mechanism for granting and enforcing
long-term lease.

Geological factors are now emerging as major constraints affecting the drilling activities especially with
increasing use of unconventional methods of exploration. These methods, not only involve higher capital
requirements but also have the possibility of variance between the actual and estimated reserves. Also,
rising concern towards environmental issues in case of unconventional drilling activities impacts E&P
activities.

OPEC and its allies may not immediately increase supply in the short run on fears of facing another supply
glut in the oil economy.

Abbreviations:
 DGH: Directorate General of Hydrocarbons
 MMBTU : One Million British Thermal Unit
 MMTPA : Million Metric Tons Per Annum
 MoPNG : Ministry of Petroleum and Natural Gas
 OIDB: Oil Industry Development Board
 OISD: Oil Industry Safety Directorate
 PNGRB: Petroleum and Natural Gas Regulatory Board
 PPAC: Petroleum Planning and Analysis Cell
 RLNG : Regasification of Liquefied Natural Gas

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