Collusive oligopoly and OPEC.

What are the possible cartel formation in

petroleum companies in India?

Oligopoly market structure: An Introduction

An oligopoly describes a market situation in which there are limited or few sellers.  
Each seller knows that the other seller or sellers will react to its changes in prices and also
quantities.This can cause a type of chain reaction in a market situation. In the world market
there are oligopolies in steel production, automobiles, semi-conductor manufacturing,
cigarettes, cereals, and also in telecommunications.  
Often oligopolistic industries supply a similar or identical product. These companies
tend to maximize their profits by forming a cartel and acting like a monopoly. A cartel is an
association of producers in a certain industry that agree to set common prices and output
quotas to prevent competition. The larger the cartel the more likely it will be that each
member will increase output and causes the price of a good to be lower.
  The majority of time an oligopoly is used to describe a world market; however, the
term oligopoly also describes conditions in smaller markets where a few gas stations, grocery
stores or alternative restaurants or establishments dominate in their fields.   A distinguishing
characteristic of an oligopoly is the interdependence of firms.   This means that any action on
the part of one firm with respect to output, price, or quality will cause a reaction on the side
of other firms.  
Many times an oligopoly leads to price leadership between many firms.   A price
leadership is the practice in many oligopolistic industries in which the largest firm publishes
its price list ahead of its competitors.   Then these competitors feel the need to match those
announced prices so they lower their prices.   This is also termed a parallel pricing. Other
characteristics of an oligopoly market include:

Entry and Exit: Barriers to entry are high. The most important barriers are
economies of scale, patents, access to expensive and complex technology, and
strategic actions by incumbent firms designed to discourage or destroy nascent firm.
Number of firms: "Few"–a "handful" of sellers. There are so few firms that the
actions of one firm can influence the actions of the other firms.
Long Run Profits: Oligopolies can retain long run abnormal profits. High barriers of
entry prevent sideline firms from entering market to capture excess profits.
Product differentiation: Product may be standardized (steel) or differentiated
(automobiles)
Perfect Knowledge Assumptions about perfect knowledge vary but the knowledge of
various economic actors can be generally described as selective. Oligopolies have
perfect knowledge of their own cost and demand functions but their inter-firm
information may be incomplete. Buyers have only imperfect knowledge as to price,
cost and product quality.
 Interdependence: The distinctive feature of an oligopoly is interdependence.
Oligopolies are typically composed of a few large firms. Each firm is so large that its
actions affect market conditions. Therefore the competing firms will be aware of a
firm's market actions and will respond appropriately. This means that in
contemplating a market action, a firm must take into consideration the possible
reactions of all competing firms and the firm's countermoves.It is very much like a
game of chess or pool in which a player must anticipate a whole sequence of moves
and countermoves in determining how to achieve his objectives. For example, an
oligopoly considering a price reduction may wish to estimate the likelihood that
competing firms would also lower their prices and possibly trigger a ruinous price
war. Or if the firm is considering a price increase, it may want to know whether other
firms will also increase prices or hold existing prices constant. This high degree of
interdependence and need to be aware of what the other guy is doing or might do is to
be contrasted with lack of interdependence in other market structures. In a PC market
there is zero interdependence because no firm is large enough to affect market price.
All firms in a PC market are price takers, information which they robotically follow in
maximizing profits. In a monopoly there are no competitors to be concerned about. In
a monopolistically competitive market each firm's effects on market conditions is so
negligible as to be safely ignored by competitors.

Determining the oligopoly market structure:

Step 1: Determining the demand curve:

Consider the two demand curves. An oligopolistic might not know which of these
demand curves it faces. Suppose a firm knows that any time it raises or lowers its
prices all other firms in the industry will do the same. In this case it faces DI, the
inelastic curve. If all firms change prices together, the effect of a price change won't
have a large effect on the sales of any one of the firms. If no other firms follow its
changes in prices the firm will instead find itself on DE, a much more elastic demand
curves. If the firm is the only one to raise prices it will experience a large drop in
sales. Likewise, if it is the only one to lower prices it will find sales increase rapidly.
So DE is the relevant demand curve if others
don't follow the firms price changes.

Before it can set profit maximizing price and quantity the firm must determine which the
appropriate demand curve is. The kinked demand curve model is based on the idea that, if the
firm raises prices other firms won't follow because they don't worry about losing market
share to a firm which is raising price. However, if the firm lowers its prices other firms will
respond by lowering their prices also since they don't want to lose market share.
Step 2: Kinked demand curve of oligopolistic market:

If price increases are ignored by other firms but price decreases lead to lowering of prices by
competitors the firm will face a kinked demand curve as shown below, with the kink at the
current market price of P*

   Keep in mind that the firm's belief that it faces a kinked demand curve comes from basic
strategic considerations. It believes that competitors won't respond to price increases but that
they will respond to price decreases. This in turn, means that the elasticity of the demand
curve it faces depends on the direction of a price change. From here we use the simple logic
of profit maximization to analyze behavior.

Step 3: Determining the MR curve

If the demand curve is kinked as considered the marginal revenue curve will have an unusual
shape. As always the marginal revenue curve lies below the relevant demand curve and is
steeper, so it makes sense that the MR curve shown here has two segments with very
different slopes. What is unusual is the gap in the MR curve, shown by the dashed line.
Simply put, if the firm lowers price below P* a strong reaction from competitors occurs in
the form of industry wide price drops. This causes MR to drop dramatically, causing a gap in
the curve.

Step 4: Determining the equilibrium position:

If marginal costs fall in the gap of the MR curve P* will remain the profit maximizing price
and Q* will be the profit maximizing output.

   One of the points of the kinked demand curve model was that it provided an explanation
for a behavior that economists were well aware of within oligopoly. It had been observed that
firms in oligopolistic industries didn't change price and output often, even when production
costs were known to have changed.

   It turns out that this simple bit of strategic thinking on the part of firms in an oligopoly was
able to explain this otherwise strange phenomenon, strange because all our models have
shown that profit maximizing firms will change price and output when variable costs change.

Step 5: Profit maximizing equilibrium:

If marginal costs fall anywhere between MC1 and MC2 the firm will choose to leave price
and output unchanged. Because of its belief about how other firms will respond to a price
change the firm is better off not altering price even in the face of rather significant changes in
production costs.

   As we will see, strategic considerations can cause behavior that varies considerably from
the simple mechanistic responses predicted by profit maximization. Not that there is anything
wrong with the profit maximizing model in other industrial structures, but it doesn’t capture
the rich strategic complexity that we must allow for in our study of oligopoly.

Step 6: Individual firm to industry:

In the diagram below a producer cartel is assumed to fix the cartel price at output Qm and
price Pm. The distribution of the cartel output may be allocated on the basis of an output
quota system or another process of negotiation.

Although the cartel as a whole is maximizing profits, the individual firm’s output quota is
unlikely to be at their profit maximizing point. For any one firm, within the cartel, expanding
output and selling at a price that slightly undercuts the cartel price can achieve extra profits.
Unfortunately if one firm does this, it is in each firm’s interests to do exactly the same. If all
firms break the terms of their cartel agreement, the result will be an excess supply in the
market and a sharp fall in the price. Under these circumstances, a cartel agreement might
break down.

Having determined the kinked market demand curve of an oligopoly market, we need to
understand what a collusive oligopoly implies. Thus, a collusive oligopoly is defined in the
study of economics and market competition, when within an industry rival companies
cooperate for their mutual benefit. Collusion most often takes place within the market
structure of oligopoly, where the decision of a few firms to collude can significantly impact
the market as a whole. Cartels are a special case of explicit collusion. Collusion which is not
overt, on the other hand, is known as tacit collusion.The best example of a collusive
oligopoly is Organization of the Petroleum Exporting Countries, OPEC.  In the following
study we have found evidences that OPEC is a collusive oligopoly market where it has
formed a cartel among international petroleum exporters and controlled the market of
petroleum as a whole.

OPEC: The Oil Cartel

First of all let us define what a cartel is: A cartel is a formal (explicit) agreement among
competing firms. It is a formal Organization of producers and manufacturers that agree to fix
prices, marketing, and production.Cartels usually occur in an oligopolistic industry, where
there are a small number of sellers and usually involve homogeneous products. Cartel
members may agree on such matters as price fixing, total industry output, market shares,
allocation of customers, allocation of territories, bid rigging, establishment of common sales
agencies, and the division of profits or combination of these. The aim of such collusion (also
called the cartel agreement) is to increase individual members' profits by reducing
competition. One can distinguish private cartels from public cartels. In the public cartel a
government is involved to enforce the cartel agreement, and the government's sovereignty
shields such cartels from legal actions. Contrariwise, private cartels are subject to legal
liability under the antitrust laws now found in nearly every nation of the world. Competition
laws often forbid private cartels.

Identifying and breaking up cartels is an important part of the competition policy in most
countries, although proving the existence of a cartel is rarely easy, as firms are usually not so
careless as to put agreements to collude on paper.The example of one of the most important
and influential international cartel in the petroleum market is OPEC.

An introduction:
OPEC is a permanent, intergovernmental organization, established in Baghdad, Iraq,
10–14 September 1960.The Organization of the Petroleum Exporting Countries is a cartel of
twelve countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria,
Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC hosts regular meetings
among the oil ministers of its Member Countries. Indonesia withdrew in 2008 after it became
a net importer of oil, but stated it would likely return if it became a net exporter in the world
again.
According to its statutes, one of the principal goals is the determination of the best means for
safeguarding the cartel's interests, individually and collectively. It also pursues ways and
means of ensuring the stabilization of prices in international oil markets with a view to
eliminating harmful and unnecessary fluctuations; giving due regard at all times to the
interests of the producing nations and to the necessity of securing a steady income to the
producing countries; an efficient and regular supply of petroleum to consuming nations, and a
fair return on their capital to those investing in the petroleum industry.OPEC nations account
for two-thirds of the world's oil reserves, and, as of April 2009, 33.3% of the world's oil
production, affording them considerable control over the global market. The next largest
group of producers, members of the OECD and the Post-Soviet states produced only 23.8%
and 14.8%, respectively, of the world's total oil production.

OPEC's influence on the market has been widely criticized, since it became effective in
determining production and prices. Although largely political explanations for the timing and
extent of the OPEC price increases are also valid, from OPEC’s point of view, these changes
were triggered largely by previous unilateral changes in the world financial system and the
ensuing period of high inflation in both the developed and developing world.

Again, OPEC, as an Organization, has maintained its commitment to ensure stable

supplies of crude oil to the market at all times, undertaking an ambitious programme
of investment, aware of the importance of responding to the demand for its crude in
a timely manner, while offering an adequate level of spare capacity. However, it is not
without concern that the Organization observes a repetition of the past, where a large
drop in oil demand leads to damagingly high levels of unused capacity.

The growing need for what some term ‘counter-cyclical’ action to help offset the market’s
cyclical behavior has come to the fore, in both the global economy and the international oil
market. This can be viewed in the announced stimulus packages to counteract the recession,
and OPEC’s actions focused on maintaining oil market stability supply, demand and
investments, including such core issues as costs and human resources, over all timeframes.

This scenario also has important implication on OPEC Member Country investment
activity. Indeed, history has clearly shown the dilemma of having to make investment
decisions in a climate of demand pessimism and low oil prices. OPEC
Member Countries have concerns over the problem of security of demand, and the
risk that large investments will be made in capacity that is not needed.

The decision in Oran, Algeria, in December 2008, to further reduce OPEC supply by a total
of 4.2 mb/d against the September 2008 level reflects a decisive effort by OPEC Member
Countries to restore oil market stability. Similar action has been seen elsewhere. In the face
of falling demand, production has been cut in other industries
to try to avoid a damaging build-up of inventories.

In fact, OPEC Member Countries have a sound record of actions aimed at supporting social
and economic development in many countries around the globe. This includes through the
establishment of their own aid institutions, as well as many effective bilateral and multilateral
aid agencies. Among these is the OPEC Fund for International Development (OFID), set up
in 1976 to “reinforce financial cooperation between OPEC Member Countries and other
developing countries and promote South-South solidarity.”

In the present time,OPEC's ability to control the price of oil has diminished somewhat due to
the subsequent discovery and development of large oil reserves in Alaska, the North Sea,
Canada, the Gulf of Mexico, the opening up of Russia, and market modernization.The OPEC
Reference Basket rose to a record $141/b in early July before falling to $33/b by thend of the
year, the lowest level since summer 2004. The central element linked to this collapse in oil
prices, of course, was the global financial crisis that originated in the US, the demand for
OPEC crude oil, having fallen in 2009 in the face of the global economic contraction,
thereafter rising slowly over the medium-term, returning back to 2008 levels by around
2013.Large investments are currently underway in OPEC Member Countries to expand
upstream capacity.

Despite some recent data signaling a slowdown in the rate at which economic output is
deteriorating and a gradual return of confidence in financial markets, the consensus among
macroeconomic forecasters remains that the economic slowdown will be ‘U-shaped’ rather
than ‘V-shaped’, in other words the recovery will gather momentum only gradually.1 Much
rests on the success of the bold monetary and fiscal measures undertaken by governments to
restore confidence in the banking sector and to provide stimulus to the economy.

Challenges in the oil industry :

The high growth and low growth scenarios demonstrate the large level of uncertainty over
The needs for OPEC future upstream capacity, both in terms of volume and investment.

Financial markets and oil prices:

Oil price volatility in the recent past has been extreme.OPEC in particular, stems from the
large uncertainties about future demand levels for energy and oil. The uncertainties that lie
ahead, and the corresponding difficulties associated with making appropriate and timely
investment decisions, underline the importance of exploring other oil supply and demand
paths.In addition, there are various other challenges facing the oil industry. Clearly, for

most individuals, businesses and governments, the dramatic changes to the economic
landscape over the past year as the global financial crisis has unfolded are the current
overriding concern.

Upstream costs

Further uncertainties and challenges include those related to upstream and

downstream costs and the future availability of skilled human resources. On the cost
issue, for the past few years, the oil industry has seen costs that have been significantly
inflated, in part as a result of the low oil price environment and low margins ten years
or so ago that led to the implementation of downsizing and cost-cutting strategies.
While costs have fallen a little, the question is whether this cost behavior is structural
or cyclical.
Human resources

Regarding human resources, the past has shown that it is critical to maintain
and enhance the adequacy of the industry’s skills base, even during an economic
downturn. There is a need to advance the numbers of students taking energy-related
courses, and to make sure these are open to all students from across the world. More
work needs to be done to help make the industry more attractive to employees, as well
as to future graduates, including easing university enrolment across national boarders.
To this end, further coordinated efforts should be undertaken by international oil
companies, national oil companies, service companies, governments, regulators and
academia.

Technology and the environment

Advancements in technology have helped expand production, improved recovery rates

and at the same time facilitated a continuing increase. There is no doubt that technology will
remain pivotal to the industry’s future.Thus, it is essential that the evolution of technology
continues, so that the industry can carry on developing, producing, transporting, refining and
delivering oil to end-users in an ever more efficient, timely, sustainable and economic
manner. The oil industry has a good track record in reducing its environmental footprint. And
with the world expected to rely essentially on fossil fuels for many decades to come, it is vital
to ensure the early and swift development, deployment, diffusion and transfer of cleaner
fossil fuels technologies.

Sustainable development objectives:

It is critical that the world community makes sure access to reliable, affordable, economically
viable, socially acceptable and environmentally sound energy services is available to all.

Cooperation and dialogue

Addressing all of these challenges should involve the strengthening and broadening of the
dialogue between energy producers and consumers. Given the anticipated future growth of
investment requirements in all segments of the oil industry, cooperation among national,
international and service companies should be enhanced, taking into account the diverse
national circumstances and priorities, the permanent sovereignty of nations over their natural
resources, the interests of host countries and the objective of investors for a fair return on
their capital.

OIL INDUSTRY AS AN EVER GROWING MARKET:

 Under all scenarios, energy use is set to rise. In the Reference Case, it increases by
42% from 2007–2030. Developing countries will account for most of these increases,
by virtue of higher population and economic growth.

 Developing countries are set to account for most of the long-term demand
increase, with consumption rising 23 mb/d over the period 2008–2030 to reach
56 mb/d. Almost 80% of the net growth in oil demand from 2008–2030 is in developing
Asia.

 The transportation sector is the main source of future oil demand growth, accounting
for over 60% of the total increase to 2030.

 Oil use is at the heart of much industrial activity. In addition to the petrochemicals
industry, diesel and heavy fuel oil, in particular, are needed in construction and
other major industries such as energy, iron and steel, machinery and paper. The strongest
increase in the industry sector comes from developing Asia.

 It is estimated that around 6 mb/d of new crude distillation capacity will

be added to the global refining system from existing projects by 2015. Almost
50% of this new capacity is located in Asia, mainly China and India. To have this capacity in
place, the global refining system will require around $780 billion (2008 dollars) of
investment to 2030. The Asia-Pacific region should attract the highest portion of these
investments.

 Aviation oil demand in 2007 was less than one-sixth of that for road transportation,
accounting for a little over 6% of world demand. The OECD currently accounts
for around two-thirds of world aviation oil demand, more than double that consumed
in developing countries.

 Oil use trends in the residential sector are affected by the move away from
traditional fuels in developing countries, as a result of rising urbanization. facilitating access
to commercial energy, social progress and increasing average
personal wealth.

 For the agricultural sector, oil use continues to improve productivity in many parts of
the world in such activities as tilling, sowing, the application of fertilizers and
pesticides, harvesting and post-harvesting, and the transport of harvested crops.

 India needs to take advantage of its strategic leadership in refining and increase its
refining capacity, as demand for petroleum products is high in Asia. India's close
neighbors themselves are energy deficient countries and there is a huge potential for
exports of petroleum products to Pakistan, Myanmar and China. Besides, the huge
demand that exists in Japan could also be captured.
Prospect of Cartel formation: India
The growing need for petroleum product in the developing countries has brought about the
need for India to become self sufficient by overcoming the challenges faced by the present
cartel and the oil industry.As of July 2005, there were a total of 18 refineries in India with an
aggregate installed capacity of 127 million metric tonnes per annum. Provisional data for the
production of petroleum products for the year 2004-05 was placed at 120.47 million tonnes,
up from 115.78 million tons in the previous year.
In the year 2000-01, India was a net importer of petroleum products. However,since 2001-02,
India has become a net exporter of petroleum products. This could happen mainly due to
increase in refining capacity.
Several steps has been initiated in the same line wherein India’s government approved a new
‘Integrated Energy Policy’ in December 2008. The new energy policy reportedly focuses on
developing a road map to achieve sustainable growth and energy security. The policy would
make energy markets more competitive through the market-based energy pricing of coal and
petroleum.

The major players in the petroleum industries are:

Indian oil corporation limited:

The Indian Oil Corporation Ltd. operates as the largest company in India in terms of turnover
.The oil concern is administratively controlled by India's Ministry of Petroleum and Natural
Gas, a government entity that owns just over 90 percent of the firm. Since 1959, this refining,
marketing, and international trading company served the Indian state with the important task
of reducing India's dependence on foreign oil and thus conserving valuable foreign exchange.
That changed in April 2002, however, when the Indian government deregulated its petroleum
industry and ended Indian Oil's monopoly on crude oil imports. The firm owns and operates
seven of the 17 refineries in India, controlling nearly 40 percent of the country's refining
capacity. The oil industry in India changed dramatically throughout the 1990s and into the
new millennium. To prepare for the increased competition that deregulation would bring,
Indian Oil added a seventh refinery to its holdings in 1998 when the Panipat facility was
commissioned. The company also looked to strengthen its industry position by forming joint
ventures.
Indian Oil also entered the public arena as the government divested nearly 10 percent
of the company. In 2000, Indian Oil and ONGC traded a 10 percent equity stake in each other
in a strategic alliance that would better position the two
According to a 1999 Hindu article" The article went on to claim that "while
maintaining its leadership in oil refining, marketing and pipeline transportation, it
aims for higher growth through integration and diversification. In early 2002, Indian Oil
acquired IBP, a state-owned petroleum marketing company. The firm also purchased a 26
percent stake in financially troubled Haldia Petrochemicals Ltd. In April of that year, Indian
Oil's monopoly over crude imports ended as deregulation of the petroleum industry went into
effect. As a result, the company faced increased competition from large international firms as
well as new domestic entrants to the market.

ONGC: OIL AND NATURAL GAS CORPORATION

ONGC’s wholly-owned subsidiary ONGC Videsh Ltd. (OVL) is the biggest Indian
multinational, with 40 Oil & Gas projects (9 of them producing) in 15 countries, i.e. Vietnam,
Sudan, Russia, Iraq, Iran, Myanmar, Libya, Cuba, Colombia, Nigeria, Nigeria Sao Tome
JDZ, Egypt, Brazil, Syria and Venezuela. OVL had invested around Rs 50,000 Crores
(Approx 10 billion US dollars).

ONGC has single-handedly scripted India’s hydrocarbon saga by:

• Establishing 6.89 billion tonnes of In-place hydrocarbon reserves with more than 300
discoveries of oil and gas; in fact, 6 out of the 7 producing basins have been discovered by
ONGC: out of these In-place hydrocarbons in domestic acreages, Ultimate Reserves are 2.42
Billion Metric tonnes (BMT) of Oil Plus Oil Equivalent Gas (O+OEG).

•Cumulatively produced 803 Million Metric Tonnes (MMT) of crude and 485 Billion Cubic
Meters (BCM) of Natural Gas, from 111 fields.

•ONGC has bagged 120 of the 238 Blocks (more than 50%) awarded in the 8 rounds of
bidding, under the New Exploration Licensing Policy (NELP) of the Indian Government.
ONGC has bagged 17 out of 31 blocks awarded in NELP round VIII (14 as operator).

ONGC is the only fully–integrated petroleum company in India, operating along the entire
hydrocarbon value chain:

 Holds largest share of hydrocarbon acreages in India.

 Contributes over 79 per cent of Indian’s oil and gas production.

 Refining capacity of about 12 MMTPA.

 Created a record of sorts by turning Mangalore Refinery and Petrochemicals Limited

around from being a stretcher case for referral to BIFR to the BSE Top 30, within a year.

 Interests in LNG and product transportation business

The competitive strength of the company is:

 All crudes are sweet and most (76%) are light, with sulphur percentage ranging from
0.02-0.10, API gravity range 26°-46° and hence attract a premium in the market.
Strong intellectual property base, information, knowledge, skills and experience
 Maximum number of Exploration Licenses, including competitive NELP rounds. ONGC
has bagged 120 of the 238 Blocks awarded in the 8 rounds of bidding, under the New
Exploration Licensing Policy (NELP) of the Indian Government. ONGC has begged 17
out of 31 blocks awarded in NELP round VIII(14 as operator).
 ONGC owns and operates more than 22000 kilometers of pipelines in India, including
nearly 4500 kilometers of sub-sea pipelines. No other company in India, operates even
50 per cent of this route length.

Bharat petroleum
On 24th January 1976, the Burmah Shell Group of Companies was taken over by the
Government of India to form Bharat Refineries Limited. On 1st August 1977, it was renamed
Bharat Petroleum Corporation Limited. It was also the first refinery to process newly found
indigenous crude (Bombay High), in the country.
The core strength of Bharat Petroleum Corporation Limited has always been the ardent
pursuit of qualitative excellence for maximization of customer satisfaction. Thus Bharat
Petroleum, the erstwhile Burmah Shell, has today become one of the most formidable names
in the petroleum industry.Bharat Petroleum produces a diverse range of products, from
petrochemicals and solvents to aircraft fuel and specialty lubricants and markets them
through its wide network of Petrol Stations, Kerosene Dealers, LPG Distributors, Lube
Shoppes, besides supplying fuel directly to hundreds of industries, and several international
and domestic airlines.
The vision of the company:
 They are a leading energy company with global presence through sustained
aggressive growth and high profitability
 They are the first choice of customers, always
 They exploit profitability growth opportunity outside energy
 They are the most environment friendly company
 They are a great organization to work for
 They are a learning organization
 They are a model corporate entity with social responsibility.

Essar group:
Essar Oil's assets include developmental rights in proven exploration blocks, a 10.5 mtpa
refinery on the west coast of India and over 1,300 Essar-branded oil retail outlets across
India. Plans are under way to increase its exploration acreage in various parts of the globe,
expand its refinery capacity to 18 mtpa, and open 1,700 outlets countrywide.

Their global portfolio of onshore and offshore oil and gas blocks, with about 70,000 sq km is
available for exploration. We have over 300,000 bpsd (barrels per stream day) of crude
refining capacity that is being expanded to 750,000 bpsd, with a goal to reach a global
refining capacity of 1 million bpsd. We have a 50 percent stake in Kenya Petroleum
Refineries Ltd., which operates a refinery in Mombasa, Kenya, with a capacity of 80,000
bpsd.
 
Their Exploration and Production (E&P) business has participating interests in several
hydrocarbon blocks for exploration and production of oil and gas. This includes the Ratna
and R-Series blocks on Bombay High, and an E&P block in Mehsana, Gujarat, which has
currently started commercial production. It has also been awarded a Coal Bed Methane
(CBM) block at Raniganj in West Bengal, and two more E&P blocks in Assam, India. The
overseas E&P assets include three onshore oil and gas blocks in Madagascar, Africa, and one
offshore block each in Vietnam and Nigeria. 

They have a 10.5 mtpa refinery at Vadinar in Gujarat, which started commercial production
on May 1, 2008. It has been built with state-of-the-art technology and has the capability to
produce petrol and diesel suitable for use in India as well as advanced international markets.

It will also produce LPG, Naphtha, light diesel oil, Aviation Turbine Fuel (ATF) and
kerosene. The refinery has been designed to handle a diverse range of crude — from sweet to
sour and light to heavy. It is supported by an end-to-end infrastructure setup including SBM
(Single Buoy Mooring), crude oil tankage, water intake facilities, a captive power plant
(currently 120 MW, being expanded to 1,010 MW), product jetty and dispatch facilities by
both rail and road.

The refinery is strategically located in Vadinar, a natural all-weather,

deep-draft port that can accommodate Very Large Crude Carriers
(VLCCs). Vadinar also receives almost 70 percent of India’s crude
imports. Post its expansion to 36 mtpa, the refinery will run at a Nelson
Complexity of 12.8. This means it will be able to refine all varieties of
crude, producing Euro 5 grade fuels. It will also be among the largest
single location refineries in the world thus leveraging on economies of
scale.

Essar Oil serves retail customers through a modern, countrywide network of over 1,300 retail
outlets. We were the first private Indian company to enter petro retailing, looking beyond
urban markets and reaching out to consumers in India’s heartland.

They offer a wide range of products to bulk customers in the industrial and transport sectors.
EOL has product off take and infrastructure sharing agreements with oil PSUs, namely
Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL)
and Indian Oil Corporation (IOCL). We have received approvals to supply Aviation Turbine
Fuel (ATF) to the Indian Armed Forces.

HPCL:
HPCL is a Fortune 500 company, with an annual turnover of  Rs. 1,08,599 Cores and
sales/income from operations of Rs 1,14,889 Crores (US$ 25,306 Millions) during FY 2009-
10, having about 20% Marketing share in India and a strong market infrastructure.

HPCL operates 2 major refineries producing a wide variety of petroleum fuels & specialties,
one in Mumbai (West Coast) of 6.5 Million Metric Tonnes Per Annum (MMTPA) capacity
and the other in Vishakapatnam, (East Coast) with a capacity of 8.3 MMTPA. HPCL holds an
equity stake of 16.95% in Mangalore Refinery & Petrochemicals Limited, a state-of-the-art
refinery at Mangalore with a capacity of 9 MMTPA. In addition, HPCL is constructing a
refinery at Bhatinda, in the state of Punjab, as a Joint venture with  Mittal Energy Investments
Pte. Ltd.

HPCL also owns and operates the largest Lube Refinery in the country producing Lube Base
Oils of international standards, with a capacity of 335 TMT. This Lube Refinery accounts for
over 40% of the India's total Lube Base Oil production.
 
HPCL's vast marketing network consists of 13 Zonal offices in major cities and 101 Regional
Offices facilitated by a Supply & Distribution infrastructure comprising Terminals, Aviation
Service Stations, LPG Bottling Plants, and Inland Relay Depots & Retail Outlets, Lube and
LPG Distributorships. HPCL, over the years, has moved from strength to strength on all
fronts. The refining capacity steadily increased from 5.5 MMTPA in 1984/85 to 14.8
MMTPA presently. On the financial front, the turnover grew from Rs. 2687 Crores in 1984-
85 to an impressive Rs 1,16,428 Crores in FY 2008-09.

GAIL:
GAIL (India) Limited, is India's flagship Natural Gas company, integrating all aspects of the
Natural Gas value chain (including Exploration & Production, Processing, Transmission,
Distribution and Marketing) and its related services. In a rapidly changing scenario, we are
spearheading the move to a new era of clean fuel industrialization, creating a quadrilateral of
green energy corridors that connect major consumption centers in India with major gas fields,
LNG terminals and other cross border gas sourcing points. GAIL is also expanding its
business to become a player in the International Market.

Today, GAIL's Business Portfolio includes:

 7,847 km of Natural Gas high pressure trunk pipeline with a capacity to carry 157
MMSCMD of natural gas across the country
 7 LPG Gas Processing Units to produce 1.2 MMTPA of LPG and other liquid
hydrocarbons
 North India's only gas based integrated Petrochemical complex at Pata with a capacity
of producing 4,10,000 TPA of Polymers
 1,922 km of LPG Transmission pipeline network with a capacity to transport 3.8
MMTPA of LPG
 27 oil and gas Exploration blocks and 1 Coal Bed Methane Blocks
 13,000 km of OFC network offering highly dependable bandwidth for telecom service
providers
 Joint venture companies in Delhi, Mumbai, Hyderabad, Kanpur, Agra, Lucknow,
Bhopal, Agartala and Pune, for supplying Piped Natural Gas (PNG) to households and
commercial users, and Compressed Natural Gas (CNG) to the transport sector
 Participating stake in the Dahej LNG Terminal and the upcoming Kochi LNG
Terminal in Kerala
 GAIL has been entrusted with the responsibility of reviving the LNG terminal at
Dabhol as well as sourcing LNG
 GAIL Gas Limited, a wholly owned subsidiary of GAIL (India) Limited, was
incorporated on May 27, 2008 for the smooth implementation of City Gas
Distribution (CGD) projects. GAIL Gas Limited is a limited company under the
Companies Act, 1956.
 Established presence in the CNG and City Gas sectors in Egypt through equity
participation in three Egyptian companies: Fayum Gas Company SAE, Shell CNG
SAE and National Gas Company SAE.
 Stake in China Gas Holding to explore opportunities in the CNG sector in mainland
China
 A wholly-owned subsidiary company GAIL Global (Singapore) Pte Ltd in Singapore .

Reliance natural resource limited:

Reliance Natural Resources Limited (the "Gas Based Energy Resulting Company") was
originally incorporated on the March 24, 2000, under the Companies Act, 1956 as Reliance
Platforms Communications.Com Private Limited. The status of the Company changed from
private limited to public limited on July 25, 2005. Reliance Natural Resources Limited
(RNRL) is engaged in the business of sourcing, supply and transportation of gas, coal and
liquid fuels. The company is concentrating on building a strong foundation for the business of
fuel management and has already established itself as a contending player in the Indian
market.

RNRL has been awarded four CBM blocks, with an acreage of about 3,251 sq. kms, for the
exploration and production of coal bed methane (CBM), making it the second largest CBM
player in India in terms of acreage. The Company has applied for Petroleum Exploration
License ( PEL ) for all four blocks to the Governments of the concerned States. The company
has received the PEL for two blocks(Barmer 4&5) located in Rajasthan for which operations
have commenced.

RNRL has also been awarded an oil and gas block with acreage of about 3,619 Sq. Kms. in
the state of Mizoram under the sixth round of the New Exploration Licensing Policy (NELP–
VI) for the exploration and production of oil and gas. The Company has received PEL for this
block and has commenced exploration activities.

RNRL is actively pursuing business opportunities in the supply management of coal and
natural gas.

Scope of cartel formation:

According to Oil & Gas Journal (OGJ), India  had approximately 5.6 billion barrels of proven
oil reserves as of January 2010, the second-largest amount in the Asia-Pacific region after
China. India’s crude oil reserves tend to be light and sweet, with specific gravity varying
from 38° API in the offshore Mumbai High field to 32° API at other onshore basins.

India produced roughly 880 thousand barrels per day (bbl/d) of total oil in 2009 from over
3,600 operating oil wells. Approximately 680 thousand bbl/d was crude oil, the remainder
was other liquids and refinery gain. In 2009, India consumed nearly 3 million bbl/d, making it
the fourth largest consumer of oil in the world. EIA expects approximately 100 thousand
bbl/d annual consumption growth through 2011.

The combination of rising oil consumption and relatively flat production has left India
increasingly dependent on imports to meet its petroleum demand. In 2009, India was the sixth
largest net importer of oil in the world, importing nearly 2.1 million bbl/d, or about 70
percent, of its oil needs. The EIA expects India to become the fourth largest net importer of
oil in the world by 2025, behind the United States, China, and Japan.

Nearly 70 percent of India’s crude oil imports come from the Middle East, primarily from
Saudi Arabia, followed by Iran. The Indian government expects this geographical
dependence to rise in light of limited prospects for domestic production.

The basis on which the cartel can be formed in India are:

Sector Organization

Though the government has taken steps in recent years to deregulate the hydrocarbons
industry and encourage greater foreign involvement, India’s oil sector is dominated by state-
owned enterprises. India’s state-owned Oil and Natural Gas Corporation (ONGC) is the
largest oil company and dominates India’s upstream sector. State-owned Oil India Limited
(OIL) is the next largest oil producer. Other major state-run players include the Indian Oil
Corporation (IOC) and the Gas Authority of Indian Limited (GAIL). In addition, the private
Indian firm, Reliance Industries Limited, is becoming a significant operator in the oil sector
and is the largest private oil and gas company in the country. Cairn India, a branch of UK-
based Cairn Energy, and BG Exploration are also important private sector operators in the
industry.

As a net importer of oil, the Indian government has policies aimed at increasing domestic
exploration and production (E&P) activities. As part of an effort to attract oil majors with
deepwater drilling experience and other technical expertise, the Ministry of Petroleum and
Natural Gas created the New Exploration License Policy (NELP) in 2000, which for the first
time permits foreign companies to hold 100 percent equity ownership in oil and natural gas
projects. Despite this, international oil and gas companies currently operate a small number
of fields.

India’s downstream sector is also dominated by state-owned entities. The Indian Oil
Corporation (IOC) is the largest state-owned company in the downstream sector, operating 10
of India’s 18 refineries and controlling about three-quarters of the domestic oil pipeline
transportation network. Reliance Industries opened India’s first privately-owned refinery in
1999, and has gained a considerable market share in India’s oil sector.

Suggestion: Infrastructure creation

The demand for petroleum products in India is high in north and north- western region and
coastal locations are appropriate for refinery construction because of effective supply and
transportation facility. Strategic location of inland refineries with more effective supply and
evacuation system through pipelines nearer to the consumer market would add strength to
this sector.

Exploration and Production

Most of India’s crude oil reserves are located offshore, in the west of the country, and
onshore in the northeast. Substantial reserves, however, are located offshore in the Bay of
Bengal and in Rajasthan state. India’s largest oil field is the offshore Mumbai High field,
located north-west of Mumbai and operated by ONGC. Another of India’s large oil fields is
the Krishna-Godavari basin, located in the Bay of Bengal. Block D6 in the Krishna-Godavari
basin, operated by Reliance Industries, began oil production in September 2008.adding up.
RNRL has been awarded four CBM blocks, with an acreage of about 3,251 sq. kms, for the
exploration and production of coal bed methane (CBM), making it the second largest CBM
player in India in terms of acreage. Again, Essar Oil's assets include developmental rights in
proven exploration blocks, a 10.5 mtpa refinery on the west coast of India and over 1,300
Essar-branded oil retail outlets across India the primary mechanism through which the Indian
government has promoted new E&P projects has been the NELP framework. The latest round
of auctions, NELP VIII, was launched in April 2009 and attracted nearly $1.1 billion in
investment. India currently plans to launch the NELP IX bidding round in the third quarter of
2010.Since, these companies have such massive reach in the exploration and production
capacity a joint cartel would rather make India a self sufficient producer of petroleum
product.

Suggestions:Capacity addition through de-bottlenecking

De-bottlenecking in refinery means increasing the capacity of the refinery without much
capital expenditure. De-bottlenecking is relatively a different concept than capacity
expansion, where the capital expenditure and modifications in the plants are relatively high.
De-bottlenecking of existing facilities always has been an attractive option to enhance a
plant's capacity and profitability. Many Indian refineries, both public and private sector have
increased the capacity through de-bottlenecking.

Overseas E&P

In recent years, Indian national oil companies have increasingly looked to acquire equity
stakes in E&P projects overseas. The most active company abroad is ONGC Videsh Ltd.
(OVL), the overseas investment arm of ONGC. OVL conducts oil and natural gas operations
in 13 countries, including Vietnam, Myanmar, Russia (Sakhalin Island), Iran, Iraq, Sudan,
Brazil, and Columbia. One of OVL’s most high profile investments is its share in the Greater
Nile Petroleum Operating Company (GNPOC), which has engaged in E&P work in Sudan
since 1997. OVL acquired a 25 percent equity stake in the company in 2003, with the balance
held by the China National Petroleum Company (CNPC, 40 percent), Petronas (30 percent),
and the Sudan National Oil Company (Sudapet, 5 percent). The GNPOC acreage in Sudan
holds proved crude oil reserves of more than one billion barrels with current production
levels at roughly 300,000 bbl/d from 10 fields. In addition to the upstream activities, the
GNPOC companies operate a 935-mile crude oil pipeline that pumps oil to Port Sudan for
export.

OVL also holds a 20 percent stake in the ExxonMobil-led consortium that operates the
Sakhalin-I project in Russia. According to company estimates, the oil fields associated with
Sakhalin-I hold recoverable crude oil reserves of 2.3 billion barrels.

In addition to ONGC, other Indian companies are also actively involved in E&P projects
abroad. OIL, for example, is working on projects in Libya, Gabon, Nigeria, and Sudan.The
overseas E&P assets of Essar include three onshore oil and gas blocks in Madagascar, Africa,
and one offshore block each in Vietnam and Nigeria. 
Downstream/Refining

According to OGJ, India had 2.8 million bbl/d of crude oil refining capacity at 18 facilities as
of January 1, 2010. India has the fifth largest refinery capacity in the world. In 2009,
privately-owned Reliance Industries added another refinery to its Jamnagar complex to raise
the entire complex’s refining capacity from 660,000 bbl/d to 1.24 million bbl/d. The
Jamnagar complex is the largest oil refinery complex in the world.

Other key upcoming refinery projects include Essar Oil’s Vadinar refinery expansion of
110,000 bbl/d in 2011, 120,000 bbl/d greenfield refinery in Bina in 2011 by a joint venture
between Bharat Petroleum Corporation Limited and Oman Oil Company Limited, a 180,000
bbl/d grassroots refinery in Bhatinda in 2014 by Hindustan Petroleum Corporation Limited,
and IOC’s grassroots Paradeep refinery of 300,000 bbl/d in 2015. India is slated to add 840
thousand bbl/d of refining capacity through 2015 based on currently proposed projects.

Due to expectations of higher demand for petroleum products in the region, further
investment in the Indian refining sector is likely. As part of the country’s 11th Five Year Plan
from 2007 to 2012, the government would like to promote India as a competitive refining
destination, and industry experts expect the country to be an exporter of refined products to
Asia in the near future.

Refined Fuel Subsidies

The Market Determined Price Mechanism is notionally benchmarked to international oil

prices, but the Indian government heavily subsidizes domestic prices of oil products such as
diesel, gasoline, kerosene, and LPG. At the same time, taxes on crude and petroleum products
imposed by different layers of Indian government often exceed the subsidies. According to
industry analysts, though originally an attempt to protect economically disadvantaged Indian
consumers, fuel subsidies distort India’s domestic market by forcing India’s state owned oil
companies to accept “under-recoveries” (i.e. losses) and encouraging India’s private
companies to orient their product sales internationally. With diesel prices significantly lower
than other fuels, particularly gasoline, diesel consumption rose by nearly 20 percent from
2007 through 2009. The International Energy Agency reports that losses from fuel price
subsidies for the 2010-11 fiscal years are expected to exceed $23 billion.

Suggestions: Integration of refineries

Indian refineries have low integration with petrochemical sector. It ss attractive, in refiners'
interest, to move towards integration with Petrochemicals to capture full Synergies with
refineries. This will also help use the optimal refining capacities of respective refineries
within the country.

Strategic Petroleum Reserve

To support India’s energy security, India is constructing a strategic petroleum reserve (SPR).
The first storage facility at Visakhapatnam will hold approximately 9.8 million bbls of crude
(1.33 million tons) and is scheduled for completion by the end of 2011. The second facility at
Mangalore will have a capacity of nearly 11 million bbls (1.5 million tons) and is scheduled
for completion by the end of 2012. The third facility of Padur, also scheduled to be completed
by the end of 2012, will have a capacity of nearly 18.3 million bbls (2.5 million tons).

The selection of coastal storage facilities was made so that the reserves could be easily
transported to refineries during a supply disruption. The SPR project is being managed by the
Indian Strategic Petroleum Reserves Limited (ISPRL), which is part of Oil Industry
Development Board (OIDB), a state-controlled organization. India does not have any
strategic crude oil stocks at this time.

Suggestion: Integration of Strategic Reserves:

India is a growing economy and thus needs to improve its oil security and avoid any supply
disruptions. Integration of strategic reserve of crude oil and Petroleum products is necessary
to improve oil security in India.

Natural Gas

According to Oil and Gas Journal, India had approximately 38 trillion cubic feet (Tcf) of
proven natural gas reserves as of January 2010. The EIA estimates that India produced
approximately 1.4 Tcf of natural gas in 2009, a 20 percent increase over 2008 production
levels. The bulk of India’s natural gas production comes from the western offshore regions,
especially the Mumbai High complex, though the Bay of Bengal and its Krishna-Godavari
(KG) fields are proving quite productive. The onshore fields in Assam, Andhra Pradesh, and
Gujarat states are also significant sources of natural gas production.

In 2009, India consumed roughly 1.8 Tcf of natural gas, almost 300 billion cubic feet (Bcf)
more than in 2008, according to EIA estimates. Natural gas demand is expected to grow
considerably, largely driven by demand in the power sector. The power and fertilizer sectors
account for nearly three-quarters of natural gas consumption in India. Natural gas is expected
to be an increasingly important component of energy consumption as the country pursues
energy resource diversification and overall energy security.

Despite the steady increase in India’s natural gas production, demand has outstripped supply
and the country has been a net importer of natural gas since 2004. India’s net imports reached
an estimated 445 Bcf in 2009.

Natural Gas Imports

India’s natural gas import demand is expected to increase in the coming years. To help meet
this growing demand, a number of import schemes including both LNG and pipeline projects
have either been implemented or considered. . RNRL is concentrating on building a strong
foundation for the business of fuel management and has already established itself as a
contending player in the Indian market.

Liquefied Natural Gas

India began importing liquefied natural gas (LNG) in 2004. In 2008, India imported 372 Bcf
of LNG, nearly 75 percent of it from Qatar, making it the sixth largest importer of LNG in the
world. India imports LNG through both long-term contracts and spot shipments.

Currently, India has two operational LNG import terminals, Dahej and Hazira. India received
its first LNG shipments in January 2004 with the start-up of the Dahej terminal in Gujarat
state. Petronet LNG, a consortium of state-owned Indian companies and international
investors, owns and operates the Dahej LNG facility with a capacity of 5 million tons per
year (mtpa) (975 Bcf/y). India’s second terminal, Hazira LNG, started operations in April
2005, and is owned by a joint venture of Shell and Total. The facility has a capacity of 2.5
mtpa (488 Bcf/y), which may be expanded to 5 mtpa (975 Bcf/y) in the future.

The 5 mtpa (975 Bcf/y) LNG processing plant in Dabhol continues to face delays. Currently
operating as a power plant, the LNG receiving terminal may be operational in 2011 after
dredging operations are complete so that a breakwater can be built.

In addition, Petronet LNG has begun construction of a 2.5 mtpa (488 Bcf/y) LNG import
facility at Kochi. The facility is expected to be completed in the first quarter of 2012 and has
secured a 1.5 mtpa (293 Bcf/y) supply from Australia’s Gorgon LNG project.

In order to secure supply of natural gas to India and meet growing demand, India is currently
looking to invest in liquefaction projects abroad. For example, ONGC and the UK-based
Hinduja Group are considering service contracts in Iran to supply 5 mtpa (975 Bcf/y) of LNG
to India. The country is also exploring the possibility of investing more in the Sakhalin I
LNG project.

Long-term growth in demand for LNG remains unclear however, as price is an issue of
contention in India and increasing domestic natural gas production is expected from eastern
offshore fields. Industry analysts note that Indian companies appear unwilling to commit to
long-term LNG supply contracts at international prices. While negotiations are currently
underway for several long-term LNG supply deals, whether or not India’s bids will be
accepted is questionable in light of the low prices that India has offered to pay. Instead, India
is becoming an important destination for spot LNG cargoes.

Imports from Myanmar

A third international pipeline proposal envisions India importing natural gas from Myanmar.
In March 2006, the governments of India and Myanmar signed a natural gas supply deal.
Initially, the two countries planned to build a pipeline crossing Bangladesh. After indecision
from Bangladeshi authorities over the plans, India and Myanmar studied the possibility of
building a pipeline that would terminate in the eastern Indian state of Tripura and not cross
Bangladeshi soil. In March 2009, Myanmar signed a natural gas supply deal with China
sourced from a field invested in by GAIL and ONGC, putting any India-Myanmar pipeline
deal in question.

Suggestion: Strengthening energy diplomacy

The solution for India's energy problems lies overseas and can only be tackled through
energy diplomacy. India is a member of International Energy Forum (IEF), which provides a
biennial meeting of the ministers from the energy producing and consuming nations. India,
being a big consumer of oil, will have to ensure its oil security by strengthening the dialogue
process in such meetings. Further, such forums do provide a plethora of opportunities to
forge ahead with individual oil-surplus countries.

Iran-Pakistan-India Pipeline

India has considered various proposals for international pipeline connections with other
countries. One such scheme is the Iran-Pakistan-India (IPI) Pipeline, which has been under
discussion since 1994. The plan calls for a roughly 1,700-mile, 5.4-Bcf/d pipeline to run from
the South Pars fields in Iran to the Indian state of Gujarat. While Iran is keen to export its
abundant natural gas resources and India is in search of projects to meet its growing domestic
demand, a variety of economic and political issues have delayed a project agreement. Indian
officials have made it clear that any import pipeline crossing Pakistan would need to be
accompanied by a security guarantee from officials in Islamabad. Due to the uncertainties
involving this pipeline, the Indian government’s 11th Five Year Plan does not project any gas
supply from this route or the following two discussed pipelines.

Turkmenistan-Afghanistan-Pakistan-India Pipeline

India has worked to join the Turkmenistan-Afghanistan-Pakistan Pipeline (TAP or Trans-

Afghan Pipeline). With the inclusion of India, the project consists of a planned 1,050-mile
pipeline originating in Turkmenistan’s Dauletabad natural gas fields and transporting the fuel
to markets in Afghanistan, Pakistan, and India. In 2008, all parties agreed to induct India as a
full member into the project, thereby renaming the pipeline TAPI. TAPI is envisioned to have
a capacity of 3.2 Bcf/d, but work has not yet begun on the project. Concerns about the project
have included the security of the route, which would traverse unstable regions in Afghanistan
and Pakistan. Furthermore, a review of the TAPI project raised doubts as to whether Turkmen
natural gas supplies are adequate to meet proposed export commitments.

Conclusion:

Thus integration of various functions of the petroleum companies of India would lead to
efficient and self sufficiency in the oil industry in India, so it is a very good prospect if India
forms an oil cartel similar to OPEC.