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Industry profiling-Petroleum

Evolution of Oil & Gas Industry in India

At Independence, India's domestic oil production was just 250,000 tones per annum. The entire production was
from one state-Assam. Most foreign experts had written off India as far as discovery of new petroleum reserves
was concerned. The Government announced, under Industrial Policy Resolution, 1954, that petroleum would be
the core sector industry.

Preamble

Petroleum exploration & production was controlled by the Government-owned National Oil Companies (NOCs),
ONGC and OIL, in pursuance of the Industrial Policy Resolution, 1954. In the early 70s, they supplied nearly
70% of the domestic requirement. However, by the end of the 80s, they had reached the stage of diminishing
returns. Oil production had begun to decline whereas there was a steady increase in consumption and today the
two NOCs are able to meet only about 35% of the domestic requirement. This was further compounded by the
resource crunch in the beginning of the 90s. The Government had no money (FE) to give to the NOCs for the
development of some of the then newly discovered fields. While some of these fields could be developed by
ONGC (Gandhar, Neelam, Bombay High, Lakwa, Heera, Geleki etc.), for others there was no money available
for indigenously developing the fields. The problem had elements such as the administered oil price, non-
availability of appropriate technology, logistics etc.

Petroleum Sector Reforms, 1990

The Government launched the Petroleum Sector Reforms (PSR) in 1990. Till then, three rounds of exploration
bidding had been gone through with no success in finding new oil/gas deposits by the foreign companies who
only were allowed to bid. Under the PSR, the Fourth, Fifth, Sixth, Seventh and Eighth Rounds of exploration
bidding were announced between 1991 and 1994. For the first time Indian companies with or without previous
experience in E&P activities were permitted to bid starting with the Fourth Round.

The Government then announced the Joint Venture Exploration Program in 1995. The exploration blocks were
in those areas for which the Petroleum Exploration License was with the NOCs and they were required to have
a 25% to 40% Participating Interest from day one.

Foreign Companies in Exploration in India

Foreign companies entered the Indian E&P scene since early fifties (Indo Stanvac Project- A Joint Venture
between Government of India and Standard Vacuum oil Company for West Bengal onland in early fifties,
Carlsbons Natomas for Bengal offshore in early seventies, Assamerc for Cauvery offshore and Reading and
bates for Kutch offshore also in early seventies and later since the first round in 1980; Shell for Kerala offshore
and Chevronn- Texaco in Krishna - Godavery Offshore). This was certainly not as much as elsewhere in the
world.

Indian E&P Companies

Most of the Indian companies barring HOEC have been riding piggyback on the foreign companies for
exploration and development ventures in India. In this regard, Reliance Petroleum Ltd. has taken the first step
by joining up with ONGC in bidding for exploration as well as development ventures in India and abroad. Some
of the downstream companies like IOC, GAIL has entered also upstream in consort with ONGC and OIL.

Opening of the Oil/Gas Fields for Development by Private Companies

The Indian oil/gas fields discovered by the two NOCs, were first offered in 1992 under the First Offer. The
second such offer was made in 1993. Development of fields is characterized by a comparative lack of business
risk but is a cost intensive venture. Only those companies who have previous experience of field development
can undertake such ventures. Unlike the Exploration blocks, field development contracts have upfront payments
to be made to the NOCs for past costs as well as in the form of signature bonus. At the stage of oil/gas
production, companies are also required to make production bonus payments. Lack of previous experience
forces the Indian companies to seek foreign partners not only to work as Operator but also to share costs. It

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would help Indian cause if the government were to introduce the practice of Pure Service Contract like in some
of the other producing countries.

Today 74 Exploration Contracts and 28 Development Contracts are in operation. There are a total of 103 PSCs
in operation. This is a sizable number but unfortunately this is not made known to a large number of
people/enterprises. The Development Contracts are likely to add about 150,000 barrels of oil per day (or about
7.5 MMT per year) and about 7 million cubic meters per day of gas production. In terms of money about 4 billion
dollars are expected to be pumped into these ventures over the next 10 to 15 years.

Major Players

ONGC

It is a public sector petroleum company in India, contributing 77% of India’s crude oil production.
Revenue (2006): $ 10.5 billion
Employees: 41000

Recent news:

 India's ONGC lags in global oil race. ONGC's setbacks in acquiring major oil resources are made worse by
the Indian government's order to help shoulder the burden of subsidised fuels earlier this year, which
pushed the country's biggest refiners into the red.
 ONGC has gained junior shares in a host of projects, from Russia's Sakhalin-1, Iran's Yadavaran Field
and Sudanese properties abandoned by Western investors.
 But it has yet to take a lead role that would give it more say and a bigger share of future production. The
race is gaining urgency both for India and ONGC as Chinese and other Asian competitors snap up plum
properties in the face of stagnating domestic production.
 The 50-year-old firm has acquired interests in 16 overseas projects since it started looking abroad in
2001.
 ONGC has not met the most basic measure of an explorer's success: finding more oil than it pumps out. For
three years in a row, the firm has failed to replace the reserves it produced. Its last major oil discovery
was in 1974.
 Government officials say ONGC must boost its reserve-to-production ratio - the number of years its
reserves will last with the current level of output - by improving its drilling technology and management
practices. ONGC's ratio is 22 years. In some onland areas the ratio is 57 years.
 ONGC lost a major offshore platform at Bombay High, India's largest oilfield, reducing the company's
output by 123,000 barrels per day (bpd) after an errant rig crashed into the facility during the monsoon,
setting it on fire. It has since restored half that production.
 Oil Minister Mr Aiyar has pushed for Indian and Chinese firms to cooperate not compete, for overseas
assets, but his efforts appear to have met with little interest in Beijing, where the oil majors are gaining
ground abroad, despite some hiccups.

IOCL

It is India's largest commercial enterprise, with a sales turnover of US $36.537 billion.

 A wholly owned subsidiary company, IndianOil Technologies Ltd. is the 19th largest petroleum company
in the world
 IndianOil's world-class R&D Centre has developed over 2,100 formulations of SERVO brand lubricants
and greases for virtually all conceivable applications meeting stringent international standards and bearing
the stamp of approval of all major original equipment manufacturers.
 IndianOil is also strengthening its existing overseas marketing ventures and simultaneously scouting new
opportunities for marketing and export of petroleum products to new energy markets in Asia and Africa.

BPCL

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It is the 3rd largest oil company in India owned by the Government of India.
Revenue (2005): $17.613 billion
Employees: 12400

 In 1976, the Burmah Shell Group of Companies was taken over by the Government of India to form
Bharat Refineries Limited.
 In 1977, it was renamed Bharat Petroleum Corporation Limited.
 It was the first refinery to process newly found indigenous crude (Bombay High), in the country.

Global Oil Prices

 From the foundation of the Organization of Petroleum Exporting Countries in 1960 through 1972
member countries experienced steady decline in the purchasing power of a barrel of oil. In March 1971,
the balance of power shifted.
 Arab Oil Embargo: 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 strong support for Israel. As a
result of this support several Arab exporting nations imposed an embargo on the countries supporting Israel.
Arab nations curtailed production by 5 million barrels per day (MMBPD). Prices increased 400 percent in
six short months.
 Events in Iran and Iraq led to another round of crude oil price increases in 1979 and 1980. The combination
of the Iranian revolution and the Iraq/Iran War resulted in crude oil prices more than doubling.
 The higher prices also resulted in increased exploration and production outside of OPEC. From 1980 to
1986 non-OPEC production increased 10 million barrels per day. OPEC was faced with lower demand and
higher supply from outside the organization. Crude oil prices plummeted below $10 per barrel by mid-
1986.

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 The price of crude oil spiked in 1990 with the uncertainty associated Iraqi invasion of Kuwait and the
ensuing Gulf War, but following the war crude oil prices entered a steady decline until in 1994 inflation
adjusted prices attained their lowest level since 1973.
 From 1990 to 1997 world oil consumption increased and the price cycle then turned up. The United States
economy was strong and the Asian Pacific region was booming.
 Until the March 28, 2000 adoption of the $22-$28 price band for the OPEC basket of crude, oil prices
only exceeded $23.00 per barrel in response to war or conflict in the Middle East.
 With limited spare production capacity OPEC has abandoned its price band and for close to three years
was powerless to stem a surge in oil prices which was reminiscent of the late 1970s.
 During much of 2004 and 2005 the spare capacity to produce oil has been less than one million barrels per
day. A million barrels per day is not enough spare capacity to cover an interruption of supply from
almost any OPEC producer. In a world that consumes over 80 million barrels per day of petroleum
products, that adds a significant risk premium to crude oil price and is largely responsible for prices in
excess of $40 per barrel.
 2004 to 2006:
oSupply: Oil traders felt that oil supplies might be reduced because of turbulence in the Middle
East (war in Iraq, Iran's nuclear program, and internal instability in Saudi Arabia) and issues outside
Middle East like political problems in Venezuela and potential instability in West Africa. Another
important cause is the US dollar's slump against the Euro. Since oil is traded in dollars, the price
must increase for OPEC to maintain purchasing power in Europe.
oPeak Oil Theory and Speculation: Peak oil refers to a singular event in history, the peak of the
entire planet's oil production. Some argue that the increase in price is due to oil speculation
extending into the long term. A July 14, 2005 Morgan Stanley report suggests that opinions of the oil
market could burst just like a bubble if indications of declining Asian demand continue.
oDemand: World crude supply is not meeting ever-increasing demand, as witnessed by oil
shortages in Africa, India, and China.
 Today: Oil Prices went into a downward spiral of more than 20 percent since the middle of July. While energy prices
remain high, they have not risen to heights that many analysts had feared, in part because of a light
hurricane season this summer, the cease-fire between Israel and Hezbollah and the fact that UN has not
imposed sanctions on Iran. While there is no sense of urgency about oil price increases, some members
of Opec are beginning to express anxiety about further price declines.

How is India Combating Price Hike?

• The oil price is increased without which the Oil companies would suffer a revenue loss of Rs 73,512 crore
in 2006-07 fiscal.
• Recent news like that of the failed exploration attempt in Rajasthan has caused a major scare within Indian
Government. The hope was that enough oil will be found so that the artificial subsidy that the Government
provides for domestic Petroleum products can be maintained.
• India's ONGC Videsh has teamed up with Spanish Oil Company Repsol YPF and Norway’s Norsk Hydro to
explore six offshore blocks in Cuba.
• India's ONGC Videsh Ltd and GAIL together hold 30 per cent stake in A-1 field operated by Daewoo of
South Korea. Myanmar has agreed to sell gas from offshore A-1 field to India through a land route
bypassing Bangladesh.
• India is considering joining a Central Asian gas pipeline that originates from Turkmenistan.

• China National Petroleum Corporation (CNPC) and India's Oil and Natural Gas Corporation (ONGC),
the two largest oil companies in the respective countries, jointly won a bid to acquire 37% of Petro-Canada's
stake in Syrian oilfields for US$573 million. ONGC and CNPC, both state-owned, will have equal stakes in
the al-Furat oil and gas fields.
• India is seeking the revival of Iran-Pakistan-India pipeline deal which reached a setback on July 16, 2006
when Iran demanded a price of 7.2 dollars per mBtu of gas against India's offer of 4.2 dollars per mBtu.

• Reliance Petroleum Ltd.( an 80-per cent subsidiary of Reliance Industries) is working on a new 29-million-
tonne (5,80,000 barrels-a-day) refinery which will be housed in a special economic zone adjacent to the

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existing Jamnagar refinery of Reliance Industries and supply exclusively to the export market, specifically
the United States and Europe. This project is designed to capitalize on the twin aspects of rising demand in
the West for high quality fuels that meet stringent emission standards and the widening price gulf between
heavy and light crude oils.

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