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Oil and natural gas sector - Introduction

Value chain

The oil industry can be divided into three major components: upstream, midstream and
downstream. The upstream industry includes exploration and production activities, hence is also
referred as the exploration and production (E&P) sector. The midstream industry processes, stores,
markets and transports commodities including crude oil, natural gas, natural gas liquids (NGLs) like
ethane propane and butane and sulphur. The downstream industry includes oil refineries,
petrochemical plants, petroleum products distributors, retail outlets and natural gas distribution
companies. The downstream industry provides consumers thousands of products such as gasoline,
diesel, jet fuel, heating oil, asphalt, lubricants, synthetic rubber, plastics, fertilizers, antifreeze,
pesticides, pharmaceuticals, natural gas and propane. Both internationally and within India the oil
and gas sector is characterized by existence of "integrated" companies, which are present in all
these three sectors.

The flow chart below shows oil value chain depicting the entire process under which both upstream
and downstream segments are covered (Figure 2). To start with, crude oil is explored and produced
(Upstream) and then transformed into various petroleum products with different end uses (see table
for end uses) in refineries and finally marketed to retail customers (Downstream). Except Aviation
Turbine Fuel (ATF) and Liquefied Petroleum gas (LPG), all the end products are sent to intermediate
storage plants through terminal/depots and finally to retail customers. As regards ATF it is
distributed directly to the Airfields or Air stations and refined LPG is dispatched to LPG
storage/bottling plants for liquefaction and marketing to retail customers. Pipelines are mostly used
to transfer the petroleum products and by products. For onshore fields, coastal tankers are used.

Figure 1: oil value chain

Upstream sector: Exploration and production

Upstream sector, the first part of the oil and gas industry, deals with exploration and production of
oil and gas. Oil exploration takes place at oil wells in four stages. The first stage is drilling, act of
boring a hole through which oil or gas may be produced if encountered in commercial quantities.
The second stage is completion, process in which the well is enabled to produce oil or gas. The third
stage is production, production time of oil and gas and the final stage is abandonment, where the
well no longer produces or produces so poorly that it is a liability to its owner and is abandoned. An
oil field is a region with an abundance of oil wells extracting petroleum (oil) from below ground.
Because the oil reservoirs typically extend over a large area, possibly several hundred kilometres
across, full exploitation entails multiple wells scattered across the area. There are more than 40,000
oil and gas fields of all sizes in the world (BP statistical Review,2006) and the largest discovered
conventional oil field is the Ghawar Field (75-83 billion) is Saudi Arabia.

In tandem with the stagnated reserves, the production of oil has also been sluggish over the last
decade, as a matter of fact in last ten years oil production has increased by only 1.6%.

Reserve to production ratio

Reserve to Production Ration (R/P Ratio) is the portion of the identified resource from which usable
natural resources can be economically and legally extracted out of the ground. Production can be
offshore as well as onshore. An offshore system of production is defined with a platform raised
above the water to support a number of producing wells whereas onshore is a platform at the sea
level. R/P ratio for the world at the end of 2005 is 40.6 implying that natural resources that has been
identified subject to pull out till date is about 40 times the amount already taken out of the ground.

Downstream: Refining and marketing

Refining, the second part of the oil industry after exploration and production, is related with
manufacturing petroleum products by a series of processes that separate crude oil into its major
components and blend or convert these components into a wide range of finished products, such as
gasoline or Aviation Turbine Fuel. Refining capacity depends on the technology used in refineries,
capable of processing crude production into clean fuels. In the recent age of decreasing oil
production refining capacity have to have well supportive technology, which meet increasingly more
stringent environmental Standards. With the increase in global oil demand and stagnant reserve,
refining capacity deserves new capacity addition to meet demand. But the graph shows slightly
increasing trend of refining capacity till date in last decade. Refinery throuput, as opposed to
designed capacity, is computed by dividing the number of refined barrels of oil processed by the
actual number of days the refinery was in operation. Refined capacity is lower than refined throuput
in the graph below implying underutilisation of capabilty of processing crude in the existing
refineries and lack of upgradation.

Global oil & gas scenario

Oil and gas together account for majority of the total primary energy requirements of the world.
Nearly 60% of the total primary energy consumption the world over is accounted by oil and gas (BP
Stats). Even with this high proportion of consumption, the reserves for the same have remained
almost stagnant for the last 15 years.

Key oil suppliers

The Organization of the Petroleum Exporting Countries (OPEC) is a cartel made up of Algeria,
Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and
Venezuela countries hold about two-thirds of the world's oil reserves. In 2005, OPEC accounted for
41.7% of the world's oil production, compared with 23.8% by OECD members and 14.8% by the
Former Soviet Union (BP statistics).

Indian oil and gas sector

The Indian Oil and Gas sector is one of the six core industries in India and has very significant
forward linkages with the entire economy. The oil & gas sector meets more than two third of the
total primary energy needs in the country. The sector has been instrumental in putting India on the
world map. At present India is the sixth largest crude oil consumer in the world and the ninth largest
crude oil importer. The country is also increasing its share in the global refining market. At present
Indian refining sector is the sixth largest in the world. This position is expected to be strengthened
with plans of Reliance Petroleum Limited to commission another refinery with a capacity of 29 MTPA
next to its 33 MTPA refinery at Jamanagar, Gujarat. As a result of this the Reliance refinery would be
world?s largest single place refinery.

Reserves
At the end of 2005, India had 0.5 % of the Oil and Gas resources of the world and 15 % of the world?
s population whereas the reserve to production ratio is 20.7 (BP statistics 2006). At the end of 1995
India had the 5.5 thousand million barrels of reserves, grown only 1% till the end of 2005 whereas
crude oil consumption has grown more than 10% over the last 5 years.

Indian economy and international oil prices

Oil intensity - the ratio of oil consumed per unit of GDP- in India is almost three times higher than
that of the OECD countries while that of China is a little higher than twice the oil intensity of OECD
countries(Integrated Energy Policy, Planning Commisssion, 2005). However, according to the FICCI
estimates of oil intensity based on GDP (on purchasing power parity basis), India and China had the
lowest oil intensity across most major developing and developed countries. The oil intensity of the
Indian economy has slowed down from 0.05 in 1999 to 0.04 in 2004.

Onshore and offshore oil and gas fields in India

In India crude oil is produced in Onshore and Offshore. Onshore fields are in Assam/Nagaland,
Arunachal Pradesh, Gujarat, and Tamil Nadu/ Andhra Pradesh. Oil India Limited (OIL) and Oil and
Natural Gas Commission (ONGC) have the onshore field for crude oil production. Offshore
production occurs at Bombay High run by ONGC and Private/Joint Venture companies. For the
natural gas onshore fields are the same for Crude oil in addition with Rajasthan as an onshore field.
For the offshore Bombay high is the one for the production.

Market design

Public sector corporations dominate the Indian exploration and production sector. In terms of the
percentage share in total production Oil and Natural Gas Corporation (ONGC) accounts for the
highest share. The second major player in the sector is also a public sector undertaking Oil India
Limited (OIL). Both of these undertakings account for about 87% of the total market. The remaining
share of the pie is cluttered with various private players in the market. In aggregate, private players
account for about 13% of the total.

During Tenth Five year Plan period (2002-07), ONGC and OIL are likely to achieve Tenth Plan target
of 2D Seismic, 3D Seismic survey and exploratory drilling.
New Exploration and Licensing Policy (NELP)

India has a total of around 3.14 million sq. km sedimentary basins and in last eight years significant
steps have been made to increase exploration activities. Consequent to these efforts the total
unexplored area has come from 50% in 1995-96 to 30% at present. One landmark policy, which was
introduced by the Government of India to enhance exploration activity in the country, was
introduction of New Exploration Licensing Policy (NELP) in 1997-98. The aim of the policy is to
provide a level playing field to all the parties, private and public, to compete on equal terms for the
award of exploration acreage.

Various measures are being taken to substantially accelerate exploratory activities for enhancing
domestic oil and gas production. These measures include the following: - (i) Improving the recovery
factor from existing major fields by implementing Enhanced Oil Recovery (EOR)/Improved Oil
Recovery (IOR) schemes-in particular, Oil and Natural Gas Corporation Ltd have taken up 15 fields for
this purpose at an estimated investment of Rs 10,972 crore, which would also help in accelerating oil
production from these fields; (ii) Exploring new areas, especially in deep waters and difficult frontier
areas, as also the deeper layers of already producing fields; and (iii) Developing newly discovered
fields speedily and stepping up the use of new technologies for seismic surveys, work over,
stimulation operations, drilling of wells etc. in producing areas.

Till date five rounds have been completed under the NELP under which 144 blocks were offered of
which 108 have been awarded to various public and private companies or consortia. The bids are
then evaluated by the Government on the basis of transparent quantitative bid evaluation criteria,
the key criterion being technical capability, financial capability, work programme and fiscal package.
Substantial discoveries have been in the awarded blocks. The most prominent among them are first
the gas discovery at the Krishna Godavari basin in the deep-water block KG- DWN-98/3 by Reliance
and Niko consortium in 2002. The accepted reserves from the field are around 12-14 TCF. This was
the largest gas find in the world for 2002. Second prominent gas find was the gas find by Gas State
Petroleum Corporation in the KG Basin in 2004. According to GSPC?s estimates the field has reserves
of around 20 TCF. During 2005-06 and 2006-07 (till July 2006) a total 24 oil and gas discoveries have
been made under the Production Sharing Contracts (PSCs) regime. ONGC and OIL have made 5
hydrocarbon discoveries each during 2005-06 in their nomination blocks. These discoveries are
under various stages of appraisal. The amount of production will depend on their commerciality and,
thereafter, their development plans. Since all production is meant for domestic sale and
consumption it will entirely go toward meeting the domestic demand. Under the latest NELP round,
NELP VI, the Government of India has offered 55 blocks -24 deepwater, 6 shallow water and 25
onshore blocks. It has received an over whelming response for this round with 165 bids for 52
blocks.

Exploration overseas
In keeping with the objectives of the Energy Security section of the National Common Minimum
Programme, ONGC Videsh Ltd. (OVL), wholly owned subsidiary of ONGC, as well as other national oil
companies such as IOC, OIL and GAIL, have been pursuing the acquisition of equity oil abroad, as
well as the acquisition abroad of oil and gas exploration acreages and producing properties. These
companies have participating interests in oil and gas projects located in Vietnam, Sudan, Russia, Iraq,
Iran, Myanmar, Libya, Syria, Australia, Ivory Coast, Qatar and Egypt. OVL, in association with other oil
sector PSUs, is aggressively scouting for E&P opportunities in countries such as Venezuela,
Kazakhstan, Kuwait, Yemen, Chad, Niger, Nigeria, Angola, Cuba, Sierra Leone and Ecuador in addition
to efforts to acquire more E&P assets in the countries where it is operating currently.

Production

Domestic production of crude oil has been a reason of worry for the Indian economy for some time
now. For more than 16 years the total production of crude has stagnated around 32-33 MMT. This
has been particularly disturbing given the crude oil consumption in the country implying an
increasing dependence on imported crude. At present India?s crude dependence is around 78%.
According to TERI estimates, by 2030 India?s import dependency may shoot up to a disturbing 93%.
In the current year, the production of crude oil in the country during the first half (April-Sept.? 06)
was 16.14 MMT as against 17.00 MMT during the corresponding period of 2004-05, a shortfall of
about 5% (MoPNG, GOI).

Refining

Oil refining is a continuous process and the cost of refining of individual petroleum products is not
worked out separately because all products are produced together. The cost of refining crude oil
depends upon a number of factors including the type of crude oil, size of refinery, refinery
configuration, age of equipment, technology used, etc. The technology for producing the petroleum
products from the crude oil differs from one refinery to another. The hydro cracker and catalytic
hydro cracker technology are the two major technologies through which petroleum products are
yielded.

There are 18 refineries operating in the country, 17 in the Public Sector and one in the Private
Sector, with a total installed capacity of 127.37 million metric tonnes per annum (MMTPA).

Natural gas
Natural gas is a gaseous fossil fuel consisting primarily of methane. In India production of natural gas
has increased over 3 times in the last two decades though the share of the production of natural gas
with respect to world natural gas production wais only 0.6% at the end of 2005 and reserve to
production ratio of 36.2.

Petroleum and Natural Gas Regulatory Board (PNGRB) Act

Petroleum and Natural Gas Regulatory Board (PNGRB) Act came into force on April 03, 2006 to
protect the interest of consumers and entitles engaged in specified activities to ensure
uninterrupted and adequate supply of petroleum, petroleum products and natural gas in all parts of
the country and promote competitive markets in Oil and Gas sector of India.