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Project Guide


In Partial Fulfillment of the Requirements of the Two-Year Full-Time PGPM Programme of the SMVIM (St. Mira Vishwakarma Institute Of Management) Pune

AY: 2007-08

It gives me great pleasure in presenting the Project Report that gives the Details of my project in INVESTMENT OPPORTUNITY IN STOCK MARKET WITH SPECIAL FOCUS ON OIL SECTOR .I thank the college guide Prof.

VAISHAMPAYAN for his kind and consistent guidance and help during the project work. It is impossible to list all the people who have helped me during my project. I take this opportunity to express whole hearted NITIN SHRIVASTAVA thanks BRANCH to Mr.


INDIAINFOLINE, KALAYANI NAGAR BRANCH. I would also like to thank Mr. PRADEEP RAMPAL who guided me at every step in the execution of the project & their experience and valuable guidance were very helpful. I would like to express my deep sense of gratitude towards all Staff and workers and to all those who directly or indirectly helped me in successful completion of project.


CHAPTER NO. TOPIC EXECUTIVE SUMMARY INTRODUCTION OF THE STUDY 1.Introduction 2.Importance & scope of study PAGE NO. 6 7-8


COMPANY PROFILE 1. Introduction the company 2. Vision of company 3. Management of the company


4. Products and Services of company

5. Geographical presence 6. Investment Highlights 7. Investment Concern 8. ON-JOB-TRAINING


FINANCIAL SYSTEM OVERVIEW 1. Capital Formations and Economic Development 2. Indian Financial System 3. Stock market 4. Trading in India




27-28 29-85


1.4. Stock Market Trends 1.5. Currency System 1.6. Foreign Trade 1.7. FDI (Foreign Direct Investment) 1.8. Foreign Exchange Reserves 1.9. Trends in Exchange Rates 1.10. Key Industry Check 2. INDUSTRY ANALYSIS 2.1.International crude oil market scenario 2.2. Major crude oil producers 2.3. OPEC 2.4. S P R -Strategic Petroleum Reserves 2.5. Indias Crude Oil Market Scenario 2.6. Reserves 2.7. Industry Structure 2.8. Oil Crises 2.9. Step Taken By The Government 2.10.Government Policies For FDI 2.11.Financial Year '06 For Oil Industry 2.12.Prospects Of Oil Industry 2.13.Analysis Of Oil Industry Under Porters Five Forces Model 3. COMPANY ANALYSIS 3.1. About ONGC 3.2. Strategic Vision 3.3. Management 3.4. Shareholding Pattern 3.5. Projects & Investments 3.6. Credit Rating 3.7. Recognitions 4

3.8. ONGCs Subsidiaries 3.9. Prospect 3.10. Enviromental Analysis a.) ETOP b.) SAP c.) SWOT Analysis 3.11. Financials of ONGC





Executive Summary
This project is an attempt to understand the basics of stock market. A project, which will make me well, versed with the market happenings ups & downs in the stock market. The first chapter gives a brief description about the company where I did my internship from, which is 5paisa.com, which is a trading arm of Indiainfoline Securities Pvt Ltd. The following chapter explains about the formation & company composition of Indiainfoline Securities Pvt Ltd. The chapter also gives a detailed report of my summer internship done at the company. It gives the jobs assigned to me at work, followed by the methods, which I undertook in going about my internship. The following chapter two will give the details & explain in brief the basics of capital market. It will show in details the way stocks are traded, cleared & settled in the market using different techniques. Further the chapter covers the trading in India the importance of stock market to the economy. The next chapter gives the detail as to how I went about completing my project. The steps taken to understand my topic & researching the oil sector companies have been given in the chapter Body Methodology. The chapter four is data presentation, analysis & interpretation on Fundamental Analysis helps us to understand the importance of the analysis. It shows us the steps taken to complete the analysis & the findings to be analyzed in the analysis. The chapter summarizes the reason why I have selected the oil sector for analysis. The huge investments & growth opportunities in the oil sector makes it an important sector & all the more reason why we should keep an eye on the progress of it. The sub chapter on Economy of the Country helps us to know the current scenario of our country in terms of economy which taken into a/c GDP levels along with future predictions, current inflation rate, Currency of the country, service industry of the India & FDIs in India. The next sub chapter explains the oil industry as a whole. From the huge oil market in gulf, to the current scenario of oil sector in India, the chapter will give a details insight into the ever in demand sector. The industry is further analyzed by porters five-force model. The company analysis of oil sector will have a detail research & study of Indias largest E&P Oil & gas Company viz. ONGC.The techniques of SAP, ETOP and SWOT have being followed to analysis the companys fundamentals. The chapter conclusions and suggestions is on my take on the company & their financial positions. It also helps us take a prediction as to how strong the stock is for future investments. Further it also helps the investors to be cautious in investing in the company by giving the risk factors associated with the company.


The following project is a study of the Indian Stock Market & an investment opportunity in the oil sector in India. The capital market (securities markets) is the market for securities, where companies and the government can raise long-term funds. The capital market includes the stock market and the bond market. A stock market is a market for the trading of company stock and derivatives.

The objectives of my internship are as follows: Understanding the various activities in an E- Broking firm. To get acquainted with all the workings of online trading. To gain practical knowledge in share trading

To analyze the financial market & the share movements in order to study the prospects of investing
in a particular stock or sector. The aim of the project is to understand the overall equity market, to get to know the trading, clearing & settlement aspect of the equity market. As far as this project is concerned, it will help me to understand the overall working of the equity market & its importance to the economy of the India. A huge amount of money flows & millions of shares exchange hands in a single market day. This exchange of shares enables the flow of money in & out of a firm. The company whose shares are listed & the government who plays a pivotal role through the policies formed in the market, helps them to raise long term funds which can be used for the benefit & the growth of the companies & also give back some part of their profit to the investor in the form of dividends. Also through this project what I am trying to derive is the analysis of oil sector concluding with the opportunities of investing in the sector. The reason why I have selected oil sector is because of the Oil sector is the base for the growth of other sectors and with that the growth of the economy in general and also there is huge investment opportunities in the sector & also to understand this sector for my future growth as a equity advisor for the sector.

SCOPE: The scope of this project is limited to only one sector i.e. oil sector. This project is concerned with only one sector in the stock market. The project does not extend its scope to any other sector of companies. Source of information for this project is only secondary data. The data about the oil sector, the government policies with respect to the sector, and the Information about the companies is all gathered from secondary sources, available on the websites, annual reports, business magazines.

Chapter 1 Company profile

India Infoline Securities Pvt Ltd is a 100% subsidiary of India Infoline Ltd, which is engaged in the businesses of equities broking and portfolio management services. It holds memberships of both the leading stock exchanges of India viz. the stock exchange, Mumbai (BSE) and the national stock exchange (NSE). India Info line Ltd is listed on both the leading stock exchanges in India, viz. the Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE). The India Infoline group, comprising the holding company, India Info line Ltd and its subsidiaries, straddles the entire financial services space with offerings ranging from Equity research, Equities and derivatives trading, Commodities trading, Portfolio Management Services, Mutual Funds, Life Insurance, Fixed deposits, GoI bonds and other small savings instruments to loan products and Investment banking. India Infoline also owns and manages the websites, www.indiainfoline.com and www.5paisa.com . India Infoline Ltd, being a listed entity, is regulated by SEBI (Securities and Exchange Board of India). It undertakes equities research which is acknowledged by none other than Forbes as 'Best of the Web' and 'a must read for investors in Asia'. It also undertakes research, customized and off-the-shelf. Launched on 11 May 1999, www.indiainfoline.com is Indias leading and most comprehensive business and financial information website. The site provides quality information and analysis - earlier restricted to a few people - to the common man, absolutely free! The site has met with an overwhelming response and has been reviewed as the most comprehensive financial content website in India by BBC World. The company also won the Golden Mouse Award in India Internet World 2000 for the "Best Finance" site. In May 2001, the website was included in the Top 200 Best of the Web list by Forbes Global under the Asia Investing category. This is the only website from India to be featured in this category. Since then it has been nominated twice to this list. In its last review, Forbes editors have said, "www.indiainfoline.com is a must read for the investors in South Asia..." India Infoline is a growing organization, which is an ideal place for individuals with high ambitions. The working atmosphere is highly charged with a young and energetic team of qualified professionals. The average age of the team is 28. Further it provides an environment where conventions, protocols do not come in the way of good ideas. Individuals who are dynamic and result oriented will find their own niche in this environment.


To be the premier provider of investment advisory and financial planning services in India To be a leading investment intermediary for transactions through both online and offline medium 10

Mr. Nirmal Jain Nirmal Jain is the founder and Chairman of India Infoline Ltd. He holds an MBA degree from IIM Ahemdabad, and is a Chartered Accountant (All India Rank 2) and a Cost Accountant. In 1995, he founded his own independent financial research company, known as India Infoline Ltd. Mr. R Venkataram R Venkataram is the co-promoter and Executive Director of India Infoline Ltd. He holds a B. Tech degree in Electronics and Electrical Communications Engineering from IIT Kharagpur and an MBA degree from IIM Bangalore. He has varied experience of more than 14 years in the financial services sector.

The Board of Directors Apart from Nirmal Jain and R Venkataram, the Board of Directors of India Infoline comprises:

Mr. Sat Pal Khattar Mr. Sanjiv Ahuja Mr. Nilesh Vikamsey Mr. Kranti Sinha

India Info line Ltd (IIL) started in 1995 with providing Online Media and Content services. Mr. Nirmal Jain and Mr. Venkataram, the founder members of the company sensed the growing opportunities in the market and increased the horizon for IIL from time to time. IIL with an aim to become 'One stop for all financial needs' started with equity and commodity broking, distribution of financial products and now with investment banking. IIL has a huge branch network across 95 cities, which it leverages for customer acquisitions, relationship building, retail advisory and distribution services.


IIL is in the expansion mode and plans to set up 350 branches by FY07E.It also plans to set up branches in cities like Dubai, Singapore and London to serve the NRI's for PMS service. It has recently opened up a branch in Kuwait and expects this branch to contribute to the equity broking business.


IIL a one-stop financial services shop, most respected for quality of its advice, personalized service and cutting-edge technology

Equities Indiainfoline provided the prospect of researched investing to its clients, which was hitherto restricted only to the institutions. Research for the retail investor did not exist prior to Indiainfoline. Indiainfoline leveraged technology to bring the convenience of trading to the investors location of 12

preference (residence or office) through computerized access. Indiainfoline made it possible for clients to view transaction costs and ledger updates in real time. PMS Portfolio Management Service is a product wherein an equity investment portfolio is created to suit the investment objectives of a client. Indiainfoline invest the resources of the investors into stocks from different sectors, depending on ones risk-return profile. This service is particularly advisable for investors who cannot afford to give time or don't have that expertise for day-to-day management of their equity portfolio. Research Sound investment decisions depend upon reliable fundamental data and stock selection techniques. Indiainfoline Equity Research is proud of its reputation for, and wants to find the facts that the investors need. Equity investment professionals routinely use the research and models as integral tools in their investments strategy. Commodities Indiainfoline extension into commodities trading reconciles its strategic intent to emerge as a onestop solutions financial intermediary. Its experience in securities broking has empowered it with requisite skills and technologies. The Company was among the first to offer the facility of commodities trading in Indias young commodities market. Mortgages Indiainfoline acquired a 75% stake in Money tree Consultancy Services to mark its foray into the business of mortgages and other loan products distribution. The business is still in the investing phase and at the time of the acquisition was present only in the cities of Mumbai and Pune. Indiainfoline now has plans to roll the business out across its pan-Indian network to provide it with a truly national scale in operations. Insurance An entry into this segment helped complete the clients product basket; concurrently, it graduated the Company into a one-stop retail financial solutions provider. To ensure maximum reach to customers across India, IIL have employed a multi pronged approach and reach out to customers via its Network, Direct and Affiliate channels. Following the opening of the sector in 1999-2000, a number of private sector insurance service providers commenced operations aggressively and helped grow the market.


Wealth Management Service IIL is leading wealth Management Company that sits down to understand the needs and goals. IIL offers a dedicated group for giving the most personal attention at every level. Newsletters The Daily Market Strategy is a morning dose on the health of the markets. Five intra-day ideas, unless the markets are really choppy coupled with a brief on the global markets and any other cues, which could impact the market. Occasionally an investment idea from the research team and a crisp round up of the previous day's top stories. The Indiainfoline Weekly Newsletter is a flashback for the week gone by. A weekly outlook coupled with the best of the web stories from Indiainfoline and links to important investment ideas, Leader Speak and features is delivered in investors inbox every Friday evening.


IIL has pan-India presence across 94 cities. It started off with major branches in metros and now it is focusing on Tier II and III cities. In Q1-FY07 the company opened 56 branches, taking the total number of branches to 233 branches. Almost 50%of the revenue comes from centers in Maharashtra and Delhi. Followed by other regions.


Strong growth in Industry volumes and rising retail participation Average daily volumes in the equity markets (cash and derivative combined) have increased by 72%from to Rs.167bn in FY 05 to Rs.288bn in FY 06.With the economy growing at 7-8% a mounting per capita income and growing BPO culture, there is a new class of young investors, which are moving towards the equity market. IIL is majorly present in the retail segment. With the rising income levels, risk- taking ability of people and the confidence in the India Inc, participation from the retail crowd is increasing y-o-y. IIL is 14

aggressively increasing its presence by opening branches in different cities. In FY QI-07, they roll out 56 new branches and acquired 25000 new customers. And it expects them to have 350 and 430 branches by FY 08 respectively.

1.7 INVESTMENT CONCERN High reliance on equity segment

In FY06, 67%of IILs earnings are derived from the equity broking business. Any volatility in the market has direct impact on the earnings of the company. Sensing this possibility IIL's diversified into other business segments like distribution of financial products, commodity broking and recent entry into investment banking. These segments will take time to drive the earnings of the company. There is an expectation that earnings from equity broking to be 62%and 54%of the earnings by FY07E and FY08E respectively.



Working In Depository Participant

Introduction Objective Task Assigned Achievements Limitations


I have been done my summer internship in India Infoline Securities Private various activities undertaken by an E broking firm (Depository Participant). Limited to perform

India Infoline Securities Pvt. Ltd. (5paisa.com) performs as intermediary between stock exchange and clients. Various task related to e broking has been assigned to me.

The main objectives are as follows :

To understand various activities in E-Broking firm. (D P). To get familiar with the working of online trading. To gain practical knowledge in share trading. To get an exposure

Market observation Customer acquisition. Technical Issues Administrative tasks Customer follow-up

Market observation:
It was the basic task assign during the SIP. While working with an e broking firm it very essential to be aware about the current market issues like current market news, Current market position, stock watch, global market condition, past trend of the market etc.


It was also imperative to target particular stocks & track their daily movements. By targeting & tracking individual stocks & scripts, it helped me understand the various factors that lead to stocks price movements. Also taking with clients during market hours helped me to understand the investment psychology of the client.

Customer acquisition:
To acquire new customers for the company it was the task given to me. 8 new Demat accounts have been opened in this duration.

Strategy in acquiring new customers

Reference by existing customers. Lead by company guide Tele calling (by lead data) Cold callings :

Technical tasks

Various technical tasks has been performed like, software down loading, to give software demonstration to the clients, solving various problems of the clients regarding software handling etc.

Administrative task:
These were the secondary task given bellow, which has been performed during the training period. Completion of account opening form Collection of requires documents form existing clients Margin funding form

To transfer shares

Customer follow-up:
Follow-up has been given to newly acquire as well as existing clients for various issues. Trading for offline clients under the relationship managers guidance. To give markets updates to newly acquire as well as existing clients in market duration, etc.

Stock Market observation has been done during internship period. 8 new clients have been acquired. Companies trading software has been downloaded. Software demonstration has been given to newly acquire as well as Various administrative activities have been performed. Follow-up to the customer has been given. 17 existing clients.

Company generated brokerage from the newly acquired customer by me during the internship period. Offline customers orders have been taken in regular market schedule.

It was hard to acquire knowledge about this field in such short span of time Share market is very vast & fast sector, it was very difficult to cope-up with the environment in such short span of time. This field is requiring with very deep fundamental & technical knowledge. Acquiring new clients it was the tough task to perform High risk involve while trading on behalf of the clients under the guidance of RM.

Learning Experience:
In my summer training, I knew about the stock market and its nitty-gritty. And now I am confident about equity knowledge. Although nobody can claim complete expertise but there is a sea change at least from our point of view. I have learnt what are the various indices and their significance in market. I have learnt about various fundamentals and technical aspects, which affect the stock prices in short run and long run.

Selling Experience:
Apart from this my specific task is to sell the Demat accounts. During this period across many people who came from different walks of life. I learnt how to deal with them, how to persuade them and guide them in trading. Selling an online trading account requires special focus on targeting the customers. Each and every person does not trade / invest in the stock market. Actually what I had to do was to identify the prospect and then convince them. As I met more and more people, I came to know more about how to talk to them, how much time be given to each person met. Even, by solving the customer queries, my own understanding was enhanced. While selling our product in the market, I also came to know more about the competitors product like, icicidirect.com, India bulls and their strategy of marketing and the consumers preference towards the competitors product. After forms were filled clients after the procedures were given client Id. After that, I was required to show the customer how to make a transaction and how to get access to the terminal. Also, other queries, which the customer faced, had to be solved by us. So, it was all a very good learning experience for me.




In world of commerce, apart from money equally revolutionary concept was the concept of limited liability. Before the industrial revolution economy was self-sufficient village economy. The artisans produced goods and services on demand. It was industrial revolution, which paved the way for production in anticipation of demand, and along with it came the economies of large-scale production and to support this was needed huge finance. Innovative forms of business establishment, incorporating the principle of Limited liability emerged. Form the highly imaginative world of business, a novel form of business organization viz. Joint Stock Companies, with the features like limited liability and the separation of ownership and management was born. Risk is an important and inherent part of any business. Risk cannot be avoided. You can only try to manage it. This was the best example of risk management by spreading it in small proportions amongst large number of shareholders. This was achieved by a concept called shares or stock and the need for trading in these stocks was felt.


Multiplicity of wants and scarcity of means to satisfy these unlimited wants has continued to be the fundamental of economic problem. Money resources are required to move physical resources. Mobilization of resources for economic development was and continues to be the major problem with all developing and developed nations. The capital might be from within the country or outside the country. But one of the greatest challenges of nations today is creating conditions conducive for capital formation as also for attracting capital from various countries. A growing economy with vibrant capital and money market with rules and regulations in place is a of capital formation Prerequisite for attracting capital. Stock market plays a key role in the entire gamut of financial system. Having broadly discussed the developments and the basic issues involved, we will now try to review the Indian Financial System. India has come a long way during the last decade of the 20th Century. With the path-breaking budget of 91-92 presented by Dr. Man Mohan Sign an era of globalization, liberalization, decontrol and de-regulation was adhered in. Since then a lot of water has flown from under the bridge and lot of Development has taken place. The focus all along has been to faster economic development.



The financial system comprises a variety of intermediaries, markets, and instruments. It provides the principal means by which savings are transformed into investments. Given its role in the allocation of resources, the efficient functioning of the financial system is critical to a modern economy.

A conceptual Framework of how the financial system works: The Financial System

A financial system is a set of institutional arrangements, through which financial surpluses are mobilized from the units generating surplus income to others in need of them. Financial markets, financial instruments, financial services and financial institutions constitute the financial system. Financial market provide channels for allocation of savings to investment, that is how the savings are channelised into investments thus generating further income, cash or assets. Financial market has two major components 21

viz. money market and capital market. Money market refers to the market where borrowers and lenders exchange short-term funds, to solve their liquidity needs. Money market instruments have low default risk, maturities under one year and high marketability (liquidity). Low default risk implies that generally the risk of non-payment of money is low. Maturities under one year imply that all contracts are of maximum one year. Capital market comprises of institutions and mechanisms through which medium to long term funds are pooled and made available to business, government and individuals. It facilitates investment in fixed assets. Capital market consists of securities or stock market. Securities market consists of primary market and secondary market. Primary market consists of channel for sale of new securities, while secondary market deals in the securities already issued. Primary markets involve the following methods of issue. IPO Further issue of capital Rights issue Offers to public Secondary market enables those who already hold securities to adjust their investment in response to change in their assessment of risk and return, the statement implies that those who already holds the securities may want to sell them in case if those securities are not paying off, or if he needs to adjust his liquidity or for any other reason. Secondary market refers to the stock exchanges, a stock exchange provides mechanism to buy and sell the securities already issues in primary market. There are at present 23 stock exchanges in India.

Bonus issue


The term the stock market is a concept for the mechanism that enables the trading of company stocks (collective shares) and other securities. The size of the 'stock market' is estimated at about $51 trillion. The stocks are listed and traded on stock exchanges which are entities specialized in the business of bringing buyers and sellers of stocks and securities together. Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order. Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry (e.g.: -New York stock exchange). This type of auction is used in stock exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders at computer terminals (e.g. -Nasdaq). 22

Actual trades are based on an auction market paradigm where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any bid price or ask price for the stock.) When the bid and ask prices match, a sale takes place on a first come first served basis if there are multiple bidders or askers at a given price. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a market place (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.

Market participants
Many years ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, hedge funds, investor groups, and banks). The rise of the institutional investor has brought with it some improvements in market operations.

The First Stock Market

The Dutch started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602,The Dutch East India Company issued the first shares on the Amsterdam Stock Exchange It was the first company to issue stocks and bonds. Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to introduce continuous trade. The Dutch "pioneered short selling, option trading, debt-equity, merchant banking, unit trusts and other speculative instruments ". There are now stock markets in virtually every developed and most developing economies, with the world's biggest markets being in the United States, Canada, China, India, UK, Germany, France and Japan

Importance of stock market

Function and purpose The stock market is one of the most important sources for companies to raise money. This allows businesses to go public, or raise additional capital for expansion. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate. History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central bank tends to keep an eye on the control


and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the important outlook of central banks. Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security. The smooth functioning of all these activities facilitates economic growth in that lower cost and enterprise risks promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity. Relation of the stock market to the modern financial system

The financial system in most western countries has undergone a remarkable transformation. One feature of this development is disintermediation. A portion of the funds involved in saving and financing flows directly to the financial markets instead of being routed via banks' traditional lending and deposit operations. The general public's heightened interest in investing in the stock market, either directly or through mutual funds, has been an important component of this process. Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in many countries. The major part of this adjustment in financial portfolios has gone directly to shares.


Following are the changes due to the existence of Stock Exchange: 1. Mobilization of savings The savings of the individuals are easily mobilized in various types of industries. Therefore the amount of investments in the stock exchange increases. 2. Increase in rate of return on investment The investors get more rate of return i.e. the market rate and not the normal bank rate, which is much lower. 3. Availability of funds for growth of industries. The amount of funds required for the growth of the industries is easily available whereas there was always shortage of capital. 4. Diversification of industries Due to the availability of funds the industry becomes financially strong and have scope or diversification due to which they can become more strongly in the market. 5. Increase in employment Growth and diversification of industries leads to increase in the amount of work and thus increase job opportunities for the unemployed. 6. Increase in standard of living The increased job opportunities and the availability of goods of higher quality have increased the standard of living of people. 24

7. Increase in GDP Increase in business in overall all industries has automatically leaded to the rise in GDP of the country and thus its prosperity. 8. Decrease in Trade Deficit. Due to growth in industries the country is becoming self-sufficient leading to decrease in trade deficit.

2.4 TRADING IN INDIA: The trading on stock exchange in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time consuming and inefficient. This imposed limits on trading volumes and efficiency. In order to provide efficiency, liquidity and transparency, NSE introduced a nationwide online fully automated screen based trading system (SBTS) where a member can punch into the computer quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds matching sale or buy order from a counter party. SBTS electronically matches order on strict time/price priority and hence cuts down on time, cost and risk of error, as well as on fraud resulting in improved operational efficiency. It allows faster incorporation of price sensitive information into prevailing prices, thus increasing the information efficiency of markets. It enables market participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth of liquidity market. It also provides a perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety. Today India can boast that almost 100% trading take place through electronic order matching. Technology was used to carry the trading platform from the trading hall of stock exchanges to the premises of brokers. NSE carried the further platform further the PCs at the residence of Clients through the Internet for Users in geographically vast country like India.


Conceptual framework Trading Network

The trading network is depicted in the above figure shows NSE has main computer, which is connected through very small Aperture Terminal installed at the office. The main computer runs on falls tolerant STRATUS mainframe computer at the exchange. Brokers have terminals installed at their premises, which are connected through VASTs/ leased lines/ modems. Investors inform broker to place an order on behalf of them. The broker enters the order through his PC, which runs under Windows NT and sends signal to the satellite via VAST/ leased line/ modem. The signal directed to mainframe computer at NSE The system also provides complete market information online. The market screens at any point of time provide information on total order depth in a security, the five best buys and sells available in the market, the quantity traded in the day security, the high and the low, the last traded price, etc. investors can also know the fate of the orders almost as soon as they placed with the trading members. The trading system is normally made available for trading on all days except Saturdays, Sundays and other holidays.


Chapter 3 Research Methodology


Research Methodology
My first task before starting the process was to understand what fundamental analysis is all about & what the steps to achieve it are. For this my first step was going through various Internet sites & reading about the methods of fundamental analysis & the usefulness of the whole process. After reading through the whole data I analysis then with went the about help understanding fundamental of my coordinator, Mr.

Pradeep Rampal & my manager Mr. Nitin Shrivastava. Once I got to know about the basics about the fundamental analysis, my task was to select one company in the oil sector, one major company on which I can conduct the analysis. After doing a thorough research on the oil sector in India, the company that I short-listed was Oil & Natural Gas Corporation (ONGC), the big guns of oil sector. The next step lead me to knowing the history about the companies along with the growth prospects that the possess for the future. Internet research & one on one interview with the branch manager helped me in this task. Once this was done I went ahead & started my analysis on the companies & concluded the project with my say on the future investment prospects in the following company.




FUNDAMENTAL ANALYSIS ON OIL SECTOR Objective: To study the oil industry and find out the growth opportunities. To carry out the company analysis of the selected company and to suggest whether it is a viable investment option.

Fundamental analysis is the examination of the underlying forces that affect the well being of the economy, industry groups, and companies. As with most analysis, the goal is to derive a forecast profit from future price movements. At the company level, fundamental analysis may involve examination of financial data, management, business concept and competition. At the industry level, there might be an examination of supply and demand forces for the products offered. For the national economy, fundamental analysis might focus on economic data to assess the present and future growth of the economy. To forecast future stock prices, fundamental analysis combines economic, industry, and company analysis to derive a stock's investment opportunity. Fundamental analysis is a method used to determine the value of a stock by analyzing the financial data that is 'fundamental' to the company. Fundamental analysis does not look at the overall state of the market nor does it include behavioral variables in its methodology. It focuses exclusively on the company's business in order to determine whether or not the stock should be bought or sold. To buy a share of stock a investor is buying a proportional share in a business. As a consequence, to figure out how much the stock is worth, one should determine how much the business is worth. Investors generally need to assess the company's financials in terms of per-share values in order to calculate how much the proportional share of the business is worth. Some knows this as fundamental analysis, and most who use it view it as the only kind of rational stock analysis.


Strengths of Fundamental Analysis

Long-term Trends
Fundamental analysis is good for long-term investments based on long-term trends. The ability to identify and predict long-term economic, demographic, technological or consumer trends can benefit patient investors who pick the right company in the right industry groups.

Value Spotting
Sound fundamental analysis will help identify companies that represent a good value. Some of the most renowned investors think long-term and value. Graham and Dodd, Warren Buffet and John Neff are seen as the champions of value investing. Fundamental analysis can help uncover companies with valuable assets, a strong balance sheet, stable earnings, and staying power.

Business Acumen
One of the most obvious, but less tangible, rewards of fundamental analysis is the development of a thorough understanding of the business. After such painstaking research and analysis, an investor will be familiar with the key revenue and profit drivers behind a company. Earnings and earnings expectations can be potent drivers of equity prices. A good understanding can help investors avoid companies that are prone to shortfalls and identify those that continue to deliver. In addition to understanding the business, fundamental analysis allows investors to develop an understanding of the key value drivers and companies within an industry. Its industry group heavily influences a stocks price. By studying these groups, investors can better position themselves to identify opportunities that are high-risk (tech), low-risk (utilities), growth oriented (computer), value driven (oil), non-cyclical (consumer staples), cyclical (transportation) or income-oriented (high yield).

Knowing Who's Who

Stocks move as a group. By understanding a company's business, investors can better position themselves to categorize stocks within their relevant industry group. Business can change rapidly and with it the revenue mix of a company. Knowing a company's business and being able to place it in a group can make a huge difference in relative valuations.


Crude Oil & Natural Gas are the core pillars that support the development of economy worldwide. There is hardly any nation that does not seek these indispensable natural resources. The country, which possesses oil & gas, wants more & more. Nations struggle hard to explore for it and are ready to pay any cost to import it. Today Crude Oil and Natural gas has found its importance in almost every field and without them almost nothing in the modern world will move. Name any industry and you will find the application of these resources. Oil is a fossil fuel that can be found as deposits beneath the earths surface. These fuels were formed when organic matter (such as the remains of a plant or animal) died in ancient seas around 10 million to 600 million years ago. The task of finding oil is assigned to geologists. As demand for oil and natural gas increased, so did the necessity for more accurate methods of locating deposits. The liquid that comes out of the ground is unprocessed crude oil, which is generally called petroleum. It varies in color, from clear to tar-black, and in viscosity. The composition of crude oil differs from one oil field to another. Unlike other fossil fuels raw oil or unprocessed ("crude") oil is not very useful in the form it comes out of the ground. The oil needs to be separated into parts and refined before use in fuels and lubricants, and before some of the byproducts could be used in petrochemical processes to form materials such as plastics, and foams. Crude Oil and Natural Gas satisfy around 62% of the global energy requirement and it is expected that this share will increase in the coming decades. It is estimated that the entire global crude oil reserve would end up in the next 40.6 years. Saudi Arabia, Iran, US, Russia, Canada are some of the major Crude Oil producers. OPEC contains the worlds largest reserves and produces around 40% of the world production. In the coming future its share will increase to 50%. India is the sixth largest consumer of primary energy in the world. In 2006 oil and natural gas together accounted for 40% of total consumption and this figure is expected to increase to 45% by 2025. As the domestic production of crude is not adequate to meet the demand of this thirsty nation, nearly 70% of crude is imported and this figure may rise to 86% in 2025. This shows the dependence of the country on the imported crude. India is among one of the top 10 oil consuming countries in the World. With nearly 40% contribution of Oil and Gas in the total energy consumption and with inadequate crude production, India is heavily dependant on Crude import. Crude is the single largest item on Indias import list. And with a projected growth of 10% in GDP over the next decades demand is likely to increase at a faster pace. Keeping this in mind Government announced a New Exploration Licensing Policy in 1997 1998 in order to encourage in house production of Oil and Gas by inviting bidding from the domestic and foreign companies. There has been a gradual transformation in Indian refining sector; from a product deficit


country to a product surplus country, India has come a long way. Now the refining capacity is such that India can import raw crude, refine it, and export the end products to the international market. Indias Crude Oil and Natural Gas pipeline sector has a huge potential and government is taking various investor friendly steps so as attract more and more investment in this sector, future of Indian crude & gas pipeline industry seems to be very lucrative. India is heavily dependent on the imported crude oil. As such the fluctuations of international crude prices can be felt in India. In the wake of rising crude price the government here has adopted various means to insulate the consumer from the price volatility. Form the administered price mechanism (APM) earlier to Trade Parity Pricing mechanism now, Indian crude & gas prices has saw many ups and down but its impact was borne by the consumers and companies rather than the government. The total revenue to the center not only consists of customs duty and excise duty they also constitute of royalties, corporate tax, dividends and others.

The history of Crude Oil and Natural Gas has been dominated by the time and place of discoveries with enormous results on the history of the 20th century. Crude Oil, Petroleum Products and Natural gas have always been the major components in international trade for thousand of years. 1914, World War I can be said to be a remarkable year though not for the war nations but for the Global Crude Oil and Natural Gas industry. This war made the whole world realize about the importance of the Crude Oil and Natural Gas and since then things have never remained the same. Today these resources have become the major source of revenue earners for various producing countries in the form of export. In Russia nearly half the hard earned currencies come from the crude and gas exports, whereas the figure goes up to 80% for Venezuela and 95% for Algeria and Nigeria. Today Crude Oil is found its importance in almost every field and without them almost nothing in the modern world will move. Name any industry and you will find the application of these resources. Be it transportation or wheels of industry, agriculture or households, plastic or artificial fibres, chemical fertilizers or pesticides, chemicals or medicine we will find the footsteps of crude oil almost every where.


Fundamental analysis by EIC model

First and foremost in a top-down approach would be an overall evaluation of the general economy. The economy is like the tide and the various industry groups and individual companies are like boats. When the economy expands, most industry groups and companies benefit and grow. When the economy declines, most sectors and companies usually suffer. So it is important to study the economy Economic experts and various studies conducted across the globe envisage India and China to rule the world in the 21st century. For over a century the United States has been the largest economy in the world but major developments have taken place in the world economy since then, leading to the shift of focus from the US and the rich countries of Europe to the two Asian giants- India and China. The rich countries of Europe have seen the greatest decline in global GDP share by 4.9 percentage points, followed by the US and Japan with a decline of about 1 percentage points each. Within Asia, the rising share of China and India has been increasing since 1990. According to experts, the share of the US in world GDP is expected to fall (from 21 per cent to 18 per cent) and that of India to rise (from 6 per cent to 11 per cent) in 2025, and hence the latter will emerge as the third pole in the global economy after the US and China. Since independence Indian economy has thrived hard for improving its pace of development. Notably in the past few years the cities in India have undergone tremendous infrastructure up-gradation but the situation in not similar in most part of rural India. Similarly in the realm of health and education and other human development indicators India's performance has been far from satisfactory, but showing a wide range of regional inequalities with urban areas getting most of the benefits. In order to attain the status that currently only a few countries in the world enjoy and to provide a more egalitarian society to its mounting population, appropriate measures need to be taken.



Development Indicators:
The productivity scenario of Indias economy is experiencing a faster rate of growth today. Some of the development indicators of the Indias economy are as follows: Both the savings and investment rates in the country are experiencing a faster rate of growth recently. Both the indicators are expected to rise very fast in the coming years. The age profile in India among the global population over the world is considered to be a better dividend for the countrys economy. Young population group of Indias economy has significantly added to the countrys growth.

The Government of India in the same direction has undertaken many steps to train and educate its masses for getting employment. Policy measures undertaken in India recently have helped a lot in the economic progress. Economic growth has created huge employment opportunities on the one hand and reduced poverty on the other. With manifold objectives in mind, the Government has come forward with high investments on social sector development particularly on health, education and infrastructure related developments.

2.) GDP
India's GDP recently crossed the trillion-dollar mark for the first time and with this India has joined the elite club of 12 countries with a trillion dollar economy. Countries that have breached trillion- dollar GDP level in the past are the US, Japan, Germany, China, UK, France, Italy, Spain, Canada, Brazil and Russia. The GDP or Gross Domestic Product is the primary indicator used to gauge the health of a country's economy. The GDP of a country is defined as the market value of all final goods and services produced within a country in a given period of time. It is also considered the sum of value added at every stage of production of all final goods and services produced within a country in a given period of time. 35

GDP tries to capture all final goods and services that are produced within the political and geographical frontiers of the country, thereby assuring that the final monetary value of everything that is created in a country is represented in the GDP. GDP is calculated for a specific period of time, usually a year or a quarter of a year. According to the data released for the year 2006-2007, India's GDP grew at an impressive 9.2 per cent. The share of different sectors of the economy in India's GDP is as follows: Agriculture - 18.5 per cent, Industry - 26.4 per cent, and Services - 55.1 per cent. The fact that the service sector now accounts for more than half the GDP is a milestone in India's economic history and takes it closer to the fundamentals of a developed economy. At the time of independence agriculture occupied the major share of GDP while the contribution of services was relatively very less. It has clearly been the best year of economic growth for India since Independence. Vigorous growth with strong macroeconomic fundamentals has characterized developments in the Indian economy in 2006-07 so far. Bringing this out with compelling facts and figures, the Economic Survey 2006-07 presented by Finance Minister P. Chidambaram in the Parliament says that growth of 9.0 % and 9.2 % in 2005-06 and 2006-07, respectively, by most accounts, surpassed all expectations. Not only is that, despite apprehensions about rising prices, the growth momentum likely to be sustained and maybe even improved upon in the new financial year. While the up-and-down pattern in agriculture continued with growth estimated at 6.0 % and 2.7 % in the two recent years, and services maintained its vigorous growth performance, there were distinct signs of sustained Services sector growth has continued to be broad based. The three sub-sectors of services - trade, hotels, transport and communication - have continued to boost the sector by growing at double-digit rates for the fourth successive year. Growth in financial services (comprising banking, insurance, real estate and business services) after dipping to 5.6 % in 2003-04 bounced back to 8.7 % in 2004-05 and 10.9 % in 2005-06. The momentum has been maintained with a growth of 11.1 % in 2006-07. The impressive growth of industrial sector, propelled by robust growth in manufacturing has continued unabated during the current year so far. Year-on year industrial growth of 10.6 % in the first nine months of 2006-07 was the highest recorded since 1995-96. A notable feature of the current growth phase is the sharp rise in the rate of investment in the economy reflecting a high degree of business optimism. This sharp increase in the investment rate has sustained the industrial performance and reinforces the outlook for growth. improvement on the industrial front.



Inflation in India is at an acceptable level and remains much lower than in many other developing countries. But off late prices of essential commodities such as food grain, edible oil, vegetables etc have risen sharply and in the process driving up the inflation rate. Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, the value of currency goes down. Thus the purchasing power of the currency, i.e. the goods and services that can be bought in a unit of currency, too goes down. The current rise in inflation has its roots in supply-side factors. There was shortfall in domestic production vis--vis domestic demand and hardening of international prices, prices of primary commodities, mainly food items. Wheat, pulses, edible oils, fruits and vegetables, and condiments and spices have been the major contributors to the higher inflation rate of primary articles. The inflation was also accompanied by buoyant growth of money and credit. While the GDP growth zoomed to 9.0 per cent per annum. Demand for nearly everything from housing to fast moving consumer goods is outpacing supply in part because white-collar salaries are rising faster in India than anywhere else in Asia. One of the daunting tasks before the government is to reconcile the twin needs of facilitating credit for growth on the one hand and containing liquidity to tame inflation on the other. On looking at the trend of inflation so far, it can be said that average inflation for this fiscal will remain under control. However the growing inflation above 6.0 per cent will be a matter of concern for the growing economy. The present union budget 2007-08 has made an attempt to address the issues of inflation by empowering the neglected agriculture sector. Several other measures in the direction of taming inflation have been taken using the monetary instruments.


The 30-stock index BSE Sensex crossed 15000 points on July 2007.The NSE Nifty also touched new heights crossing 4000 points. Robust growth in the Industry, high credit growth and better quarterly earnings boosted the sentiments of the investors further leading to bullish trend in the stock market. Rising of the stock market indices is further attracting FII investment, which increases the liquidity in the stock market. This liquidity makes the market more volatile. FIIs are coming to India because they see that there is huge potential in the economy for capital gains. When FII are getting the expected returns, the funds inflows increase. But there are positive and several negative effects of this fast inflow of funds.


1.) Foreign Exchange Reserves: Because of increasing inflow of funds, the Foreign Exchange Reserves increases which further appreciates the currency and this appreciation of currency makes the exports more costly which puts pressure on current account. 2.) Volatility in the stock market Increasing inflow of the funds makes the stock market more volatile. And too much volatility in the market is also a cause of concern.


Indian bank notes depicting M. K. Gandhi, The 1000-rupee note is the highest denomination printed. The Rupee is the only legal tender accepted in India. The exchange rate as of July 24, 2007 is about 40.15 to a US dollar, 55.50 to a Euro, and 82.81 to a UK pound. The Indian rupee is accepted as legal tender in the neighboring Nepal and Bhutan, both of which peg their currency to that of the Indian rupee.


The numbers released for the month of January 2007-show moderation in exports. In the first quarter of this fiscal Indias merchandise exports grew at 30 per cent (in US dollar terms), growth in exports further increased to 40 per cent in the second quarter and in the third quarter growth slid below 30 per cent. The third quarter slowdown was on account of relatively low exports in the month of October and December 2006. Merchandise exports from April- January 2006-07 grew by 32.2 percent at $ US 99.13 billion as against $ US 74.9 billion. However growth in exports slowed to 5.5 per cent in January 2007. There was a 36.4per cent increase in the Crude oil imports during Apr-January 2007 at $48.6 billion than the imports at $35.6 billion in the corresponding period last year. Cumulatively, non-oil imports during Apr-January 2007 at $ 101.11 billion were 23.3 per cent higher than the level of imports at $82.0 billion in Apr-Jan 2006.

7.) FDI (Foreign Direct Investment)

Foreign direct investment (FDI) into India has increased significantly during the current financial year. The inflows are likely to be more than double the amount recorded in 2006. FDI equity inflows during April 2006 to November 2006 were $7.2 billion, which is the highest ever for equity capital since economic liberalization. The higher inflows as well as the new credit rating reflected growing investor confidence in India. As the third-largest economy in the world, India is undoubtedly one of the most preferred destinations for foreign direct investments (FDI); India has strength in information technology and other 38

significant areas such as auto components, chemicals, apparels, pharmaceuticals and jewellery. India has always held promise for global investors, but its rigid FDI policies were a significant hindrance in this regard. However, as a result of a series of ambitious and positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India has a large pool of skilled managerial and technical expertise. The size of the middle-class population at 300 million exceeds the population of both the US and the EU, and represents a powerful consumer market. India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. In March 2005, the government amended the rules to allow 100 per cent FDI in the construction business. This automatic route has been permitted in townships, housing, built-up infrastructure and construction development projects including housing, commercial premises, hotels, resorts, hospitals, educational infrastructure. institutions, recreational facilities, and city- and regional-level


1 00 0 8 0 1 00 0 6 0 1 00 0 4 0 1 00 0 2 0 1 00 0 0 0 800 0 0 600 0 0 400 0 0 200 0 0 0 1 YEA S R

Ma 96 rMa 97 rMa 98 rMa 99 rMa 00 r1-Mar 2-Mar 3-Mar 4-Mar 5-Mar 6-Mar 6-Dec

From the above graph it is clear that from year 96, there have been a continuous growth in the foreign investment in India, which increased the Foreign Currency Assets. But this kind of continuous increase in foreign reserves has become the reason of appreciation of rupee. This appreciation of rupee has made the exports more costly which reflects in balance of payment. The exports are not increasing as fast as they should be. The imports are increasing more than the increase in exports further putting pressure on current account.



It is to be noted that appreciation of Rupee to such an extent (Rs 41.00) against the USD has led to low realizations to the exporters. This is reflected in low growth posted by the countrys merchandise exports. Indian Rupee against the USD still remains in the range of discomfort for the Indian Exporters. Experts have different opinions about the rising exchange rates. The appreciation that the rupee has seen over the past few weeks has evoked several reactions from different sector the economy. They claim that the industry will be affected at least at the two fronts. Firstly they will not be able to meet their export targets. Secondly the burden of rupee appreciation will be borne by the exporters only. On the other hand, appreciation of rupee has made the imports cheaper.


The growth rate of manufacturing sector in a country truly reflects its economic potentiality. Most of the developed countries are strong enough in their manufacturing sector. Though the services sector in India has brought faster economic success, still the manufacturing sector plays an important role on the ground of sustainability. In India, though the manufacturing sector is growing at a faster pace still it has failed to some extent with regards to its percentage share in the total GDP. The growth rate of manufacturing sector in the country has reached at a two-digit percentage growth in the year 2006-07 from April-August.

Both Government as well as the private sectors has come forward for the development of the manufacturing sector of the country. More investments are being proposed in the sector particularly capital goods, consumer durables, and some non-durable goods.


The impressive growth of industrial sector, propelled by robust growth in manufacturing has continued unabated during the current year so far. Year-on year industrial growth of 10.6 % in the first nine months of 2006-07 was the highest recorded since 1995-96.


The service sector of Indian Economy has brought much success in the recent years. It constitutes a larger share in the total Gross Domestic Product. The growth rate of services sector in India is faster than any other sectors. It constitutes more than 50 percent of the total GDP in the country. The services sector in India has become a larger source of revenue for the country. The Government of India introduced service tax in the year 1994 and presently it constitutes a major source of revenue for the Government. Collection of Services tax in India has reached at Rs. 23,000 Crores in 200506 from Rs. 2072 Crores in 1999-00. For the year 2006-07, the target is being fixed at Rs. 34,500 Crores. From time to time Government is trying to bring more items under the service tax net. The Government announced Taxation of Services Rules 2006 and Service Tax Rules 2006. The Government has also formed a committee for reviewing the services tax circulars since 1994. Growth in financial services (comprising banking, insurance, real estate and business services) after dipping to 5.6 % in 2003-04 bounced back to 8.7 % in 2004-05 and 10.9 % in 2005-06. The momentum has been maintained with a growth of 11.1 % in 2006-07. Thus it can be concluded India's economy is on the fulcrum of an ever-increasing growth curve. With positive indicators such as a stable 8-9 per cent annual growth, rising foreign exchange reserves of over US$ 222 billion, a booming capital market with the popular "Sensex" index topping the majestic 15,000 mark, the Government estimating FDI flow of US$ 15.5 billion in this fiscal, and a more than 20 per cent surge in exports, it is easy to understand why India is a leading destination for foreign investment.



When stocks move, they usually move as groups; there are very few lone guns out there. Many times it is more important to be in the right industry than in the right stock. To assess an industry groups potential, it would be consider the overall growth rate, market size, and importance to the economy. While the individual company is still important, its industry group is likely to exert just as much, or more influence on the stock price.


" Oil is the one commodity absolutely essential to this tidal wave of global growth. It's literally the blood supply of global growth. If it is a developing country, it need all the oil it can get to drive its trucks, may it be cars, planes or ships. It needs oil to run the factories, machines and power plants so necessary to a modern industrial economy. Due to newly industrialized countries are joining the party and importing an unending procession of super-tankers laden with black gold the demand for is increasing continuously. Since decades Crude Oil is playing key role in the global energy supply and it will continue to remain so for the half of 21st century. Crude Oil and Natural Gas satisfy around 37.5% of the global energy requirement and it is expected that this share will increase in the coming decades It is however surprise to notice that though crude oil is required by every country for the development of their economy but majority of these resources are lying in the unstable country like Iran, Iraq and others. Although world crude oil reserves have been increasing over the years but their reserve to production (R/P) ratio is decreasing. It is estimated that the entire global crude oil reserve would end up in the next 40.6 years. What surprised the most is though the reserve and consumption has seen an upward movement, the production figure is lower. It means to say global crude oil consumption figures are higher than the production figures.



Oil was first struck in 1938 in Saudi Arabia by Chevron and with this discovery it has turned around the whole Oil industry. Today Saudi Arabia contains worlds largest amount of Oil reserves and it is also the world largest producer of crude oil. With around one-fourth of the global proven oil reserves, it produces over 4 billion barrels of crude oil every year. It is likely to remain as the worlds largest Exporter of oil for the foreseeable future. However the biggest challenge for Saudi Arabia is that there existing fields sustain annual declining rates of 5 12 percent .The field is now running into problems and there are rumors that it is producing more water than oil.

Iran accounts for worlds 2nd largest proven conventional oil reserves and also the 2

largest producer of crude oil in the world. However its production saw a major decline and now it averages at 1.5 billion barrel per year. However Iranian production has suffered a lot because of the US, which is prohibiting imports from Iran.

Canada has occupied a substantial position in the world crude market. From 8.7 billion barrels in 1980 to 16.7 billion barrels of crude oil reserves in 2005.

United States
It is the demand from the United States, which made the world realize about the importance of Crude Oil and Natural Gas. Since the 19th century United States is using Crude Oil and Natural Gas for various purposes and from then till date United States Crude Oil reserves and production both have reached its peak and now seeing a continuous downward trend. There is no need to go back much, if we consider 1980 and 2005 end, reserves have declined by 20%. In 1980 US had a reserve of 36.5 billion barrels and as on 1st January 2006 it is 29.3 billion barrels. Since 1980 reserves were continuously declining and it is declining at a much faster rate, which indicates the rate, at which the consumption is increasing. United States production figures are also seeing a downward trend, in 1980 production was 4 billion barrels whereas as on 1st January 2006 it is 2 billion barrels i.e. a decline of 50%. The above figures indicates that over the years US consumption is increasing and it will continue to do so at a faster rate in the future and to satisfy the demand US is now banging on the imported crude oil in much larger quantity. Canada is the major source of import for US. Around 90% of the production in Canada is exported to US, but as said earlier that Canada domestic consumption is increasing year after year and it will leave less space for the US export in the future. It is interesting to note that US has the largest concentration of Oil Shale in the world, according to Bureau of Land Management and holds around 800 43

billion barrels of recoverable oil which huge enough to meet current US demand for another 110 years. However the main constraint in developing the Oil shale reserves is the easy access to cheap Canadian Oil sands which they has under the NAFTA (North American Free Trade Agreement). Not only this, there are also various environmental factors which does not allow the development of Oil Shale.

Russia deserves a special place on the world map because of its crucial role in the world supply of Oil. Outside OPEC, Russia is the single largest holder and producer of Crude oil. Russias reserves (74.4 billion barrels) accounts for 6.2% of the global crude oil reserves and its R/P ratio is 21.4 years. In terms of production also Russia is the largest non-OPEC producer. It produces 9551 thousand barrels of oil per day as on 1st January 2006, which is 12.1% of the global production. This recent increase in production is largely associated with the introduction of modern technologies, following an influx of western expertise and practices.

3.) OPEC - Organization of Petroleum Exporting Countries

Though it was from 1914 (after World War I) when world starts realizing about the importance of Oil and starts exploring for it, but it was the great 1960 when World saw the emergence of a new body OPEC and since then World Oil market never remain the same as it was before. After the formation of OPEC world crude oil prices starts fluctuating in a manner as the waves of music fluctuate and starts reaching a new high every now or then. OPEC was founded in Baghdad, Iraq, in September 1960, in order to unify and coordinate its members Crude policies, so as to secure fair and stable prices for petroleum producers; efficient, economic and regular supplies of petroleum to consuming nations and a fair return to those investing in the industry. So it is clear that it is formed not to help the world market but to help its members. Originally it includes Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela as its members, but as time passed by it keeps on expanding and as of today it includes 12 members. Today OPEC accounts for almost 76% share of world oil reserves but it accounts for mere 40% of the world oil production. Oil prices are rising day after day not because the world is running out of Oil but because the bulk of reserves are in countries where market incentives cannot work fully or in the hands of monopolists who have may be exercising their power by restraining investments. World crude oil reserves are estimated at more than 1 trillion barrels of which OPEC are estimated to hold more than 75%. Since OPEC holds the major portion of Oil reserves/output it exerts strong influence on global oil prices. When OPEC decides to cut down production level it increases the world oil prices whereas when it boost oil production in order to increase supplies it drives down the price but this hardly happens. As of January 2007, world recoverable oil reserve is estimated at 1317 billion barrels, OPEC contribute 910 billion barrel and Rest of the world contribute 407 billion barrel 44

World crude oil demand is increasing year after year and it will continue. OPEC being the major will always play a strong role in World Crude supply. According to Fatih Barol (former statistical analyst of OPEC) Share of OPEC in World supply will rise to around 50% by 2030 from its present level of 42%.

As said already that OPEC has been formed with an objective of making billions of money from this liquid gold market. It means OPEC nations sell there crude at this price, but whereas their cost of production is not even cost more than $10 per barrel; in some nations like Middle East it cost only $2 per


barrel whereas for Nigeria & Venezuela it is just $7 per barrel. Well it can clearly be ascertained about the motive for which OPEC has been created.

4.) S P R - Strategic Petroleum Reserves

Many countries use SPR, controlled by the government as well as by the private players, for both economic and national security reasons. These are the reserves, which are maintained so as to meet any future supply disruptions. SPR has been made exclusively for crude oil reserves and not to pile stocks of refined petroleum products. The need for SPR was start building in the minds of many countries especially U.S.A and construction of first surface facilities was began June 1977 in U.S.A and on July 21, 1977, the first oil approximately 412,000 barrels of Saudi Arabia light crude was delivered to the SPR. According to a March 2001 agreement, all 26 members of the International Energy Agency (IEA) must have a strategic petroleum reserve equal to 90 days of oil imports for their respective country. Currently U.S SPR is one of the largest strategic reserves, with much of the remainder held by the other 25 members of the IEA. Also recently non IEA members have also started building their own SPR, with China being having the largest among them.

Most countries SPR are still in its construction stage viz. India, Iran, China (also planning to expand by building another SPR with a size of 209.44 million barrels), and Russia. U.S.A is planning to double its size whereas South Korea is planning to expand its size by 65 mbbl. Some of the countries are also maintaining a SPR of petroleum products viz. Singapore. Where U.S & Japan can meet 60 and 169 46

days of consumption respectively, India can meet only 2 weeks of consumption with its size of SPR. However the move by the Indian Government towards SPR is commendable and in the near future we can expect an increment in the size of SPR.


The origin of oil & gas industry in India can be traced back to 1867 when oil was struck at Makum near Margherita in Assam. At the time of Independence in 1947, international companies controlled the Oil & Gas industry. India's domestic oil production was just 250,000 tonnes per annum and the entire production was from one state - Assam. The Industrial Policy Resolution laid the foundation of the Oil & Gas Industry in India, 1954, when the government announced that petroleum would be the core sector industry. In pursuance of the Industrial Policy Resolution, 1954, Government-owned National Oil Companies ONGC (Oil & Natural Gas Commission), IOC (Indian Oil Corporation), and OIL (Oil India Ltd.) were formed. ONGC was formed as a Directorate in 1955, and became a Commission in 1956. In 1958, Indian Refineries Ltd, a government company was set up. In 1959, for marketing of petroleum products, the government set up another company called Indian Refineries Ltd. In 1964, Indian Refineries Ltd was merged with Indian Oil Company Ltd. to form Indian Oil Corporation Ltd. During 1960s, a number of oil-bearing structures were discovered by ONGC in Gujarat and Assam. Discovery of oil in significant quantities in Bombay High in February 1974 opened up new avenues of oil exploration in offshore areas. During 1970s and till mid 1980s exploratory efforts by ONGC and OIL India yielded discoveries of oil and gas in a number of structures in Bassein, Tapti, Krishna-Godavari-Cauvery basins, Cachar (Assam), Nagaland, and Tripura. In 1984-85, India achieved a self-sufficiency level of 70% in petroleum products. The early oil fields discovered in India were of modest size. Oil production in India amounted to 200,000 tons in 1950 and 400,000 tons in 1960. By the early 1970s, production had increased to more than 8 million tons. In 1974 the Oil and Natural Gas Commission discovered a large field--called the Bombay High--offshore from Bombay. Production of Indian oil from that field was responsible for the rapid growth of the country's total crude oil production in the late 1970s and throughout the 1980s. In FY 1989, oil production peaked at 34 million tons, of which Bombay High accounted for 22 million tons. In the early 1990s, wells were shut in offshore fields that had been inefficiently exploited, and production fell to 27 million tons in FY 1993. That amount did not meet India's needs, and 30.7 million tons of crude oil was imported in FY 1993. India has thirty-five major fields onshore (primarily in Assam and Gujarat) and four major offshore oil fields (near Bombay, south of Pondicherry, and in the Palk Strait). Of the 4,828 wells, in 1990 2,514 were producing at a rate of 664,582 barrels per day. The oil field with the greatest output is Bombay 47

High, with 402,797 barrels per day production in 1990, about fifteen times the amount produced by the next largest fields. The government has sanctioned ambitious exploration plans to raise production in line with demand and to exploit new discoveries as rapidly as possible. In the late 1980s and early 1990s, there were encouraging finds in Tamil Nadu, Gujarat, Andhra Pradesh, and Assam; many of these discoveries were made offshore. Officials estimated that by the mid-1990s these new fields could contribute as much as 15 million to 20 million tons in new production and that total crude oil production could increase to 51 million tons in FY 1994. In the early 1990s, the government renewed attempts, which had begun in the early 1980s, to interest foreign oil companies in purchasing exploration and production leases. These efforts drew only a modest response because the terms offered were difficult, and foreign companies remained suspicious of India's investment climate. One response, agreed on in January 1995, was an Indian-Kuwaiti joint venture to invest in a new oil refinery to be built on the east coast of India.

The most remarkable of them was the offshore discovery of crude at Bombay High and the KG basin gas discovery recently done by Reliance and others. The first refinery was setup at Digboi in 1901; currently 19 refineries (17 PSU and 2 private) are in operation. The oil and gas reserves in this country are limited, but demand for over the year dependence on oil and gas has meet from increased. About 44.9 percent of the commercial energy is this source. It implies that at that current

rate consumption oil may last for only about 20-25 years The gap between the demand for petroleum products and domestic production of oil is expected to within and will have to be filled by imports. This extent of reliance on imports of oil and petroleum products makes India vulnerable to the changes to the international oil prices. By the end of 1980s, the petroleum sector was in the doldrums. Oil production had begun to decline whereas there was a steady increase in consumption and domestic oil production was able to meet only about 35% of the domestic requirement. The situation was further compounded by the resource crunch in early 1990s. The Government had no money for the development of some of the then newly


discovered fields (Gandhar, Heera Phase-II and III, Neelam, Ravva, Panna, Mukta, Tapti, Lakwa Phase-II, Geleki, Bombay High Final Development schemes etc. This forced the Government to go for the petroleum sector reforms, which had become inevitable if India had to attract funds and technology from abroad into the petroleum sector. The government in order to increase exploration activity approved the New Exploration Licensing Policy (NELP) in March 1997 to ensure level playing field in the upstream sector between private and public sector companies in all fiscal, financial and contractual matters. This ensured there was no mandatory state participation through ONGC/OIL nor there was any carried interest of the government. To meet its growing petroleum demand, India is investing heavily in oil fields abroad. India's stateowned oil firms already have stakes in oil and gas fields in Russia, Sudan, Iraq, Libya, Egypt, Qatar, Ivory Coast, Australia, Vietnam and Myanmar. Oil and Gas Industry has a vital role to play in India's energy security and if India has to sustain its high economic growth rate. India is the sixth largest consumer of primary energy in the world. In 2006 oil and natural gas together accounted for 40% of total consumption and this figure is expected to increase to 45% by 2025.As the domestic production of crude is not adequate to meet the demand of this thirsty nation, nearly 70% of crude is imported and this figure may rise to 86% in 2025. This shows the dependence of the country on the imported crude. The latest India Oil & Gas Report from BMI forecasts that the country will account for 10.8% of Asia/Pacific regional oil demand by 2010, while providing 10.2% of supply. India has significant amounts of oil and natural gas, and five of India's top six revenue-generating companies are in the oil and natural gas business.

Five Indian oil companies have been listed in the Fortune Global 500 lists for the year 2006. They are:
Rank 153 - Indian Oil Corporation Ltd (IOCL)
A wholly owned subsidiary company, Indian Oil Technologies Ltd. is the 19th largest petroleum company in the world Indias largest company by sales. Indias flagship Downstream company - Along with subsidiaries accounts for 47% of Petroleum market share among Public Sector Oil Companies, 41% of National refining capacity and 51% downstream pipeline capacity Operates the largest and widest network of petrol and diesel stations in the country Indian Oils world-class R&D Center 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.


Indian Oil 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.

Rank 342 - Reliance Industries Ltd.

Indias largest private sector company on all major financial parameters Presence in Upstream, midstream and downstream segment

Rank 368 - Bharat Petroleum Corporation Ltd. (BPCL)

It is the 3rd largest oil company in India owned by the Government of India. 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.

Rank 378 - Hindustan Petroleum Corporation Ltd.

HPCL a Fortune 500 Company, with an annual turnover of over Rs 74,044 crores, 20% refining & marketing share in India and a strong market infrastructure. The Corporation operates 2 major refineries producing a wide variety of petroleum fuels & specialties, one in Mumbai (West Coast) of 5.5 MMTPA capacities and the other in Vishakhapatnam (East Coast) with a capacity of 7.5 MMTPA. HPCL holds an equity stake of 16.95% in Mangalore Refinery & Petrochemicals Limited, a refinery at Mangalore with a capacity of 9 MMTPA. In addition, HPCL is progressing towards setting up of a refinery in the state of Punjab.

HPCL also owns and operates the largest Lube Refinery in the country producing Lube Base Oils of international standards. With a capacity of 335,000 Metric Tones this Lube Refinery accounts for over 40% of the country's total Lube Base Oil production.

The vast marketing network of the Corporation consists of Zonal offices in the 4 metro cities and
85 regional offices facilitated by a supply & distribution infrastructure.

Rank 402 - Oil and Natural Gas Corporation Ltd. (ONGC)

It is a public sector petroleum company in India, contributing 74% of Indias crude oil production. Revenue (2006): $ 10.5 billion Employees: 41000 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. 50

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.

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.

The proved reserve of crude is about 5.9 billion barrels (bnbbl) it is merely 0.5% of the worlds total proved reserve. The current production rate is 0.28616 billion barrels. The reserve to production (R/P) ratio stands at 20 i.e. at the current rate of production Indian reserve would last for 20 more years.

Over the year consumption has increased many folds where as the domestic production is almost constant since 1990, similarly there has been not much change in the proved reserves. The energy sector has been given a significant share of 14.23% in the Wholesale Price Index (WPI), which is a measure of inflation in the country. This figure implies that for every 10% rise in the prices of energy products, the inflation would go up by 1.4 percentage points.



Indian oil and gas sector can be divided into three segments namely 1) Upstream oil companies, 2) Midstream oil companies and 3) Downstream oil companies.

The upstream oil companies are involved in the process of exploration and production (E&P) of crude and natural gas. These companies are high capital intensive. They are involved in site identifying; soil testing, drilling, exploring, pumping and transferring oil to the refineries. In India, ONGC is the largest public sector upstream company.

The midstream oil companies are those, which procure, crude from the upstream companies and then refine and process it into the end products which can be used by the end consumers.

These are the companies, which collect the end products from the midstream companies at the refinery gate and market them to the end consumer. IOC is the major marketing company in India and it also feature in Fortune 500.



Major oil crises develop in India in the 70s and 80s, which was basically because of hike in global oil prices. While the demand for all fuels is rising the supply has not been rising adequately. ONGC and OIL have been following vigorous policies of exploration. But the consumption of oil and petroleum product far exceeds the indigenous production forcing the country to go for import. Indias reserves are only 0.5% of worlds oil reserves. Thus oil cannot be the main source of commercial fuel in India Further the policy of the OPEC to continuously raise the price of petroleum products push the economies of oil importing countries into the era of cost push inflation. Thus as oil shortages affects adversely the transport sector, which takes 56 % of the total oil consumption in India .The oil crises, has hurdles in the economic development. With prices of crude oil rising, it is essential to keep the imports of these items limited and step-up the production and refining capacity of crude oil.


N E L P ------ New Exploration Licensing Policy
India is among one of the top 10 oil consuming countries in the World. With nearly 40% contribution of Oil and Gas in the total energy consumption and with inadequate crude production, India is heavily dependant on Crude import. Crude is the single largest item on Indias import list. And with a projected growth of 10% in GDP over the next decades demand is likely to increase at a faster pace. Keeping this in mind Government announced a New Exploration Licensing Policy in 1997 1998 in order to encourage in house production of Oil and Gas by inviting bidding from the domestic and foreign companies for the various blocks. So far as 6 rounds of bidding have been done and a total of 162 production-sharing contracts (PSC) have been signed and around Rs.97000 crores have been The main objective of NELP is to attract latest technology and investment to the exploration and production sector (E&P sector) from the national and international E&P companies. Launch of NELP made a quantum leap forward in award of blocks to private and multinational companies. It resulted in increase in participation of various private & foreign E&P companies in India. The most prominent discovery under NELP was made by the Reliance Niko consortium in late 2002 in Krishna-Godavari basin in the East Coast of Andhra Pradesh. Since then more and more sizeable amount of discovery has been made in the same basin. Krishna Godavari basin discovery has changed the fortune of whole Reliance Industries. Not only Reliance almost all the companies which were awarded blocks under NELP has added substantial amount of Oil or Natural gas under their reserves. invested.


Less competition impacting Private participation introduced by providing licenses in 1979

Post- NELP
Foreign participation up to 100%. No minimum expenditure commitment during exploration period No carried interest by National Oil Companies (NOCs) Income Tax Holiday for 7 years from start of commercial production No customs duty on imports for petroleum operations. No cess Royalty: limited to 12.5%, half the rate for deep-water blocks Biddable cost recovery limit up to 100% Freedom to contractor for marketing of oil & gas in domestic market Companies are free to bid for any number of Blocks

Achievement of NELP
Increase in private participation -Under 6 rounds, 162 blocks awarded and secondly 56 blocks to private companies & Joint ventures Impressive Reserve Accretion - Reserve Increased from 63 MMTOE (Million Metric Tonnes Oil Equivalent) in 1999- 2000 to 217 MMTOE in 2004- 05


Exploration & Production
Up to 100% FDI through automatic route Through incorporated/ unincorporated Joint Ventures or directly

Up to 100% FDI if set up as a private Indian company Up to 26% in case of state owned companies

Up to 100% FDI through automatic route

Product pipelines
Up to 100% FDI through automatic route



The year witnessed a steep climb in crude prices as they touched record highs. Price of Indian basket of crude rose by as much as 36% YoY, prices which were US$ 49 per barrel at the end of FY05, closed the year with US$ 69 per barrel. Petroleum products consumption increased by 0.7% in FY06 significantly lower than the growth registered in the previous two years. Petrol sales were higher by 4.8% in FY06. Amidst a commendable top line growth, the bottom line performance across oil companies was muted owing to lack of price revisions. In order to secure the energy security of the country, government has laid increased thrust on exploration in terms of competitive bidding in NELP, buying oil equity outside the country and encouraging private participation in the exploration segment. There have been some significant discoveries in oil and gas space, with discovery of oil in Rajasthan by Cairns and discovery of gas by Reliance in KG basin. OVL (ONGC Videsh Limited), the overseas investment arm of ONGC has also bought stake in oil blocks in as many as 14 countries. Thus, post 2009; we can see enhanced production of oil and gas in the country. On the demand side, petroleum products are expected to grow at the rate of 3%-4% over next couple of years. During the year, the competition in the retail fuel market started to show its results with RIL capturing more than 14% of the diesel sales of the country, however it lost due to higher prices vis- -vis its peers. Further both PSU and private oil companies are expected to increase their outlets.


High investment opportunities are there in the Indian oil sector. As the economy is growing, the thirst for energy is also increasing; to fulfill this thirst the government is expanding the scope for investments in the oil and gas sector. Lately government has opened this sector for private players so that they can bring-in their expertise and modern technology. This effort is very well highlighted by the fact that many of the large discoveries has been made by the private companies, e.g. crude found by Cairn Energy India Ltd. in Balmer, Rajasthan and natural gas in KG basin by Reliance Industries. In order to secure the energy security of the country, government has laid increased thrust on exploration in terms of competitive bidding in NELP, buying oil equity outside the country and encouraging private participation in the exploration segment. OVL (ONGC Videsh Limited), the overseas investment arm of ONGC has also bought stake in oil blocks in as many as 14 countries. On the demand side, petroleum products are expected to grow at the rate of 3%-4% over next couple of years.



Threat Of New Entrants: The threat of new entrants in Oil & Gas Sector is Low due to following reasons: High Gestation Period: - High capital costs and long gestation periods is also an important factor for an entry in an oil industry. Capital Intensive: - It is a capital-intensive sector. Large investments are required to be made for meeting the rapidly growing demand for energy from different consuming sectors. There are High Sunk Costs for setting up Oil Companies. Thus capital requirement acts as a major entry barrier in the upstream segment. In the downstream segment, it takes about Rs 5 bn - Rs 10 bn per m tonnes to set up a refinery. Also, the size of refinery and its location does matter for the economic viability of refinery. The new players wanting to enter the retail segment need to pump in a minimum of Rs 20 bn in the sector in order to be eligible for the retail marketing business. Regulations: -There is very much Govt. Regulations in case of Oil & Gas sector, some of them are as follows: The P&NG Rules provide that no person shall prospect and/or mine petroleum unless it has been granted Petroleum Exploration License (PEL) and Petroleum Mining Lease (PML) under the Petroleum and Natural Gas Rules, 1959 and petroleum mining lease. Petroleum Act, 1934 read with Petroleum Rules, 2002 All oil Companies have to comply with the provisions of the Petroleum Act, 1934 which, inter alia, provides that no person shall produce, refine, blend, store or transport petroleum unless in accordance with the provisions of this Act. They also have to comply with the provisions of the Petroleum Rules, 2002 which, inter alia, provides for permission from the Chief Controller of Explosives for the purpose to refine, crack, store, reform or blend petroleum. 56

Regulation of Refining and Marketing of Refined Petroleum Products MoPNG (Ministry Of Petroleum & Natural Gas) is the regulator in respect to refining and marketing of petroleum products, and operates directly and through organizations under its administrative control, including the Petroleum Planning and Analysis Cell (PPAC). The PPAC took over certain functions of the Oil Coordination Committee (OCC) as of April 2002 and is responsible for analysing market and price trends, maintaining an information database and administering Government subsidies in the petroleum industry. The Government strictly controlled retail Marketing Prior to April 1, 2002, the opening of new retail outlets. Each year the Government approved a marketing plan submitted by the oil marketing companies setting out the number and locations of new dealerships to be built throughout the country. Allocation of such dealerships was made to oil marketing companies pursuant to the Sales Plan Entitlement (SPE). The Sales Plan Entitlement apportioned marketing rights to the various PSU oil marketing companies according to historical and projected market shares of the total petroleum products market. The Dealer Selection Boards selected dealers. Petroleum Pipeline Guidelines: -The Petroleum Product Pipeline Policy, announced by the Government in December 2002, provides a mechanism for common carriage of petroleum products transportation. Pursuant to the policy, any company planning to lay a pipeline originating from a port or a pipeline exceeding 300 km in length originating from a refinery must publish its intention and allow other interested companies to take a capacity in the pipeline on a take or pay or other mutually agreed basis. Companies laying new pipelines would be required to provide at least 25 percent extra capacity beyond that needed by itself and interested companies for other users. Further, Minimum investment of Rs 2000 crores required entering marketing of transportation fuels Cost advantages by existing companies: - Due to cost competitiveness of existing PSUs in the Oil & Gas sector, the threat of new entrants in case of Oil & Gas sector is low.

Bargaining Power of Buyers: Upstream Segment: -In the upstream segment, government allocates the crude oil produced by the players. Thus, in an indirect way acts as a bargaining arm for OMCs. Moreover, ONGC is forced to share under-recoveries on the sale of petroleum products by way of giving discounts to OMCs. Thus, the lack of transparency and government regulations increase the bargaining power of customers. So, bargaining power in case of upstream segment of government on behalf of refining companies is high. Downstream Segment: - For the companies operating in downstream segment, the buyers are mainly the customers. Government has set up a Petroleum and Natural Gas Regulatory Board to oversee the downstream petroleum sector in the country. This Bill has been later amended and renamed as Petroleum and Natural Gas Regulatory Board Bill. One of the basic objectives of this Bill is to provide for a 57

regulatory mechanism that would facilitate uninterrupted and adequate supply of petroleum, natural gas and petroleum products in all parts of the country, including remote areas at, fair price, promote competitive markets and access to monopolistic infrastructure in the nature of common carrier on non- discriminatory basis by all entities. In the downstream segment, the standalone refineries had to share the subsidy burden (though currently the burden for LPG and SKO is removed again). Given the surplus refining capacity in the country and OMCs increasing their refining capacities, standalone refineries stand to lose. On the retail front, government acts as a strong bargaining arm of customers, with OMCs having to sell the sensitive petroleum products at losses. In the industrial and consumer segment, the competition is moderate and is expected to intensify with the increase in the refining capacity of the country.

Bargaining Power of Suppliers: In the upstream segment, supply from the domestic market caters to only 30% of the total demand for crude oil in the country. Thus, the supply of the crude is largely met through import. Since India still imports70% of its crude oil requirements from abroad so, bargaining power of suppliers is high. OPEC, a group of major oil producing countries, accounted for 42% of the total crude oil produced in 2005, thus the group has a greater bargaining power and a major say in the determination of the international crude oil prices. However, in order to mitigate the risk of supply disruptions and short-term price spikes, the Government proposes to build strategic reserves of crude oil to provide for additional 15 days consumption equivalent storage. For the petroleum products on the other hand, given the surplus capacity in the country and the commodity nature of the product, the bargaining power is on the lower side.

Threat of Substitute Products

Although, coal and crude oil form a major part of the primary energy consumption in India, this is largely due to the fact that other sources of energy have been relatively untapped. Natural gas, as a source of primary energy accounts for a meager 8%. This could largely be attributed to supply constraints. However with Shell setting up its terminal at Hazira, along with recent gas finds by Reliance and ONGC have come as an encouraging development, which are likely to change the dynamics of energy consumption in the long run. Following are basically the substitutes in Oil & Gas Sector. Alternate Fuels Given the substantial gap between supply and demand in the energy sector in India and the limited amount of crude oil and natural gas reserves globally, the Government has focused its attention on alternate hydrocarbon extraction technologies such as coal-bed methane, underground coal gasification and gas hydrates. 58

Coal Bed Methane Coal-bed methane, or CBM, is natural gas derived from coal that can be extracted by depressurization. The Government has awarded 16 CBM blocks as of January 15, 2004 and will likely continue to encourage domestic and foreign companies to pursue CBM opportunities in India in the future. Consequently, coal bed methane technology has attracted significant attention from the Government and a variety of public and private sector companies, given Indias extensive coal deposits. Underground Coal Gasification Underground coal gasification is the process by which one extracts a coal gas from otherwise unminable coal reserves. Still in its early stages of development, underground coal gasification could provide India with a significant source of energy in the future given the countrys sizable coal deposits. Gas Hydrates Gas hydrates constitute molecules of methane gas surrounded by water molecules. The tremendous volumes of gas present in marine sediments, together with the richness of the deposits, make gas hydrates an unconventional yet possibly valuable energy resource. In recent years, the Government has focused its attention on initiating gas hydrate exploration and development in India.

Inter - Firm Rivalry: The interfirm rivalry in different segments of Oil & Gas sector is as follows: -


a) Upstream Segment Ltd.

: -The national oil companies (NOCs), Oil & Natural Gas Corporation

(ONGC) and Oil India Ltd. (OIL) dominate upstream segment with more than 80 percent contribution of oil & natural gas production of India. Other major players of this segment are RIL, British Gas, Cairn Energy and Niko Resources. However, in last five years, more than 100 E&P blocks have been awarded. Over 30 blocks are expected to be offered in the sixth round under NELP in January 2006. The Government is also making the terms of NELP and the format more investor friendly through constant interaction with the industry. The Government of India is proposing 30-35 blocks under NELPVI, which is expected in January 2006. Upstream segment has been made competitive with introduction of NELP, however the dominance of ONGC in the segment is there to exist for some time to come. b) Downstream Segment - In the downstream marketing segment, the competition intensified during the year with private players (like reliance) capturing as much as 14% of the market share in the sales of diesel and also accounted for more than 75% of the incremental sales in petrol. (Government granted transport fuel marketing rights to private and foreign players and thereby allowed retail stations to be opened up by other than existing PSU OMCs. The new entrants were NRL, MRPL, ONGC, Essar Oil, RIL and Shell, of which the former five have commenced retail operations. New licenses have been awarded to oil companies for putting up retail stations on the basis of minimum US$ 450 million investment criteria. Demand for transportation fuels is growing at over 4 per cent per annum and is creating opportunities for existing players and potential investors to set up modern retail outlet facilities that also include forecourt retailing.


Porters Five Forces Model & ONGC: ONGC is the company which mainly operates in upstream segment of the Oil & Gas sector so, following can be the implications of Porter's Model to ONGC: Threat Of New Entrants:-ONGC and Oil India dominate the upstream segment. Together they contribute 87% to India's total oil production. However, with the exploration getting renewed thrust, private players will increase their share in the segment. In an effort to secure the supplies of crude oil, government is trying to get oil equity across the globe Bargaining Power of Buyers: -Since the Govt. allocates the crude oil produced by ONGC; ONGC is forced to share under-recoveries on the sale of petroleum products by way of giving discounts to OMCs. (Oil Marketing Companies). So, the bargaining power of buyers is high. Bargaining Power of Suppliers: -Since the 70% of the requirement of crude oil is met by imports from OPEC countries so; their bargaining power is high. Threat of Substitutes: - It is low for ONGC due to the fact that in addition to traditional oil and gas business, ONGC is engaged in the development of alternative hydrocarbon extraction technologies such as coal-bed methane, or CBM, gas hydrate production and underground coal gasification. Using CBM technology, methane, a type of natural gas that is considered to be a relatively clean fuel, can be derived from coal seams. They have budgeted a total of Rs. 2,200 million for investment in CBM exploration and development through fiscal 2007.With the growing demand for energy, demand for alternative fuels such as LNG, CNG and CBM (coal bed methane) is likely to rise. ONGC has been awarded CBM fields during the fourth round of NELP and plans to start commercial production in 1QFY05. Inter - Firm Rivalry: -The Oil and Natural Gas Corporation Limited (ONGC) enjoys a dominant position in the country's hydrocarbon sector with 84 per cent market share of crude oil & gas production. Around 57 per cent petroleum exploration licenses in India for over 588 thousand sq. km belonged to ONGC. Further, it has acquired management control of MRPL, which marks its entry into the refinery business. Due to near monopoly position of ONGC, the inter - firm rivalry is low.



Once the industry group is chosen, an investor would need to narrow the list of companies before proceeding to a more detailed analysis. Investors are usually interested in finding the leaders and the innovators within a group. The first task is to identify the current business and competitive environment within a group as well as the future trends. How do the companies rank according to market share, product position and competitive advantage? Who is the current leader and how will changes within the sector affect the current balance of power? Success depends on an edge, be it marketing, technology, market share or innovation. A comparative analysis of the companies within a sector will help identify the company with an edge, and those most likely to keep it.

Oil and Natural Gas Corporation (ONGC) was set up in 1956 with significant contribution in industrial and economic growth of the country, is a leading National Oil Company of India engaged mainly in exploration, development and production of crude oil, natural gas and some value added products. It was subsequently converted into a public limited company in Jun.'93 following new liberalized economic policy adopted by the Government of India in July, 1991 sought to deregulate and delicense the core sector (including petroleum sector) with partial disinvestments of Govt. equity in Public Sector Undertakings and other measures. ONGC is one of the Navratna PSUs.It is India's largest producers of Crude Oil, Natural Gas and LPG. It also produces other value added petroleum products such as NGL, C2-C3, Aromatic Rich Naphtha and Kerosene. Since its inception in 1956 the company has made four basin discoveries in India and presently produces from 108 oil & gas fields located in six sedimentary basins. The company is active in 16 of the 26 sedimentary basins and in others knowledge-building efforts at various stages are in progress. Its activities are spread over both land and offshore areas of Indian sedimentary basins. 62

During March, 1999, ONGC, Indian Oil Corporation (IOC) a downstream giant and Gas Authority of India Limited (GAIL) the only gas marketing company, agreed to have cross holding in each other's stock to pave the way for Long-term strategic alliance amongst themselves, both for the domestic and overseas business opportunities, in the energy value chain. In March 2004, the government of India has disinvested its stake in company through Offer for sale of up to 142593300 equity shares of Rs. 10 each at a price of RS. 750. ONGC is pursuing a strategy of downstream integration to diversify its revenues and establish presence in higher-margin segments. Through MRPL, it has a major presence in oil refining (capacity: 9.69 million TPA - 8% of total refining capacity in India), and is looking to establish up to 1600 retail outlets to get into oil marketing directly. ONGC stake in MRPL, a subsidiary company was 71.62% during 2005.


On a long-term basis, ONGC has drawn out a four-pronged strategy for the next twenty years. This includes1. Doubling reserves from 5.77 billion metric tonne (bln Mt) oil plus oil equivalent gas (O+OEG) to 12 bln Mt in the next 20 years. 2. Improving average recovery factor to 40% from 28% currently. Notably, while some of the wells have a recovery factor of over 30%, some have a recovery factor of less than 10% also. 3. Souring 20-mln Mt pa Oil/Oil-equivalent Gas from Equity Assets abroad. 4. Sustainable growth as a Global Integrated Energy Provider. The focus of management will be to monetised the assets as well as to assetise the money.

The Company is managed by the Board of Directors, which formulates strategies, policies and reviews its performance periodically. The Chairman & Managing Director and six Whole-time Directors manage the business of the Company under the overall supervision and guidance of the Board. The Functional Directors, Statutory Auditors, were also invited to attend the Audit & Ethics Committee Meetings, as and when required. The Board has 16 members, comprising of 7 Functional Directors (two vacant), including the Chairman & Managing Director, 1 Director from ONGC Videsh Ltd. (vacant), and 8 nonexecutive Directors comprising of: 3 part-time official Directors (one vacant) and 5 part-time non-official Directors (one vacant), all nominated by Government of India. The Board of Directors thus, has an adequate combination of executive and non-executive Directors.


Mr. R.S. Sharma, a Fellow member of the Institute of the Cost and Works Accountants of India and Indian Institute of Bankers. Mr. Sharma has attended Advance Financial Management programme in Oil and Gas from University of Texas, Dallas, USA. Mr. Sharma has experience of thirty years in Finance, Accounts, Management, Insurance and Banking. Mr. R.S. Sharma has been on the Board of ONGC since March 1, 2002. Mr. Sharma was earlier Director (Finance), OVL and before that he was with ONGC for a period of twenty years. Prior to this he was with Union Bank of India. Dr. Ashok Kumar Balyan joined the Board of ONGC as Director (Human Resources) on August 23, 2003. He holds a Doctorate degree in Chemistry from Technische Hochshule fur Chemie, Merseburg, Germany; an alumnus of IIT, Delhi. He has thirty years of experience and has held several field and staff assignments in various disciplines including Analytical Geo- Chemistry Lab, Mud Engineering, Planning, and Monitoring of Exploration activities, Project Management and Basin Manager and Head of Exploration. He has been with ONGC since 1976 and prior to that he was with Shriram Institute for Industrial Research. Mr. Y.B. Sinha joined the Board of ONGC as Director (Exploration) on May 5, 2000. Sh.Sinha holds a Masters degree in Geology from Lucknow University. He has experience of 37 years in ONGC. He has been involved in installation of reservoir simulation facilities and in development of the Companys exploration and exploitation strategy. He played a major role in evolving the exploration strategy for the Company and was instrumental in the transformation of the operational entities through planning of acreage specific and areas requisite exploration programme, when the Government of India introduced the NELP regime. He also has evaluated oil and gas fields in Russia, Sudan, and Kazakhistan. Mr. Sinha joined the Company as a field geologist and has been with us since 1966. Mr. Sinha is on the Boards of ONGC Videsh Ltd, Petronet LNG Ltd. and Petro Technical Open Software Corporation, Houston. He is member of Human Resource, Project Appraisal, Health, Safety & Environment and Policy & Planning and Mumbai High Re development Project Committees. Mr. Rajesh V. Shah, Master in Business Administration from University of California, Berkeley and has attended programme for Management Development from Harvard Business school in 1983. Mr. Shah joined ONGC Board on September 11, 2003. Currently, he is Managing Director of Mukund Limited. Mr. Shah has served on various business councils and is a past president and has been a member of National Council of the apex Indian business body, the Confederation of Indian Industry (CII) since1986. Mr. U Sundararajan, former Chairman and Managing Director of Bharat Petroleum Corporation Limited, joined the Board of ONGC on September 11, 2003. He is a Fellow member of the Institute of Cost and Works Accountants of India and has experience of thirty years in petroleum industry. He is 64

Chairman of Project Appraisal, Policy & Planning and Health, Safety & Environment Committees of the Company and is Member of Audit & Ethics, Mumbai High- Re-development Project, Human Resource Management and Remuneration Committees. He is also on the Boards of Thirumalai Chemicals Ltd. and Cochin Shipyard Ltd.

Shareholding Pattern




% OF

No SHAREHOLDER SHAREHOLDERS OF SHARES SHARES (A+B+C) (A) SHAREHOLDING OF PROMOTER AND PROMOTER GROUP (1) INDIAN (a) Individuals/ Hindu 0 0 0.0 Undivided Family (b) Central 8 1,585,740,673 74.14 Government/ State Government(s) (c) Bodies Corporate (d) Financial Institutions/ Banks Sub-Total (A)(1) (2) (a) Individuals (NonResident Individuals/ Foreign Individuals) Sub-Total (A)(2) Total Shareholding 0 0 8 FOREIGN 0 0 0 1,585,740,673 0 0.0 0.0 74.14 0.0

0 8

0 1,585,740,673

0.0 74.14


of Promoter and Promoter Group (A)= (A)(1)+(A)(2) (B) PUBLIC SHAREHOLDING (1) INSTITUTIONS (a) Mutual Funds/ UTI 188 24,374,927 (b) Financial 45 3,346,533 Institutions/ Banks (c) Central 0 0 Government/ State Government(s) (d) Venture Capital 0 0 Funds (e) Insurance 15 71,041,054 Companies (f) Foreign 311 185,371,320 Institutional Investors Sub-Total (B)(1) 559 284,133,834 (2) NON-INSTITUTIONS (a) Bodies Corporate 2680 226,893,749 (b) Individuals (i) Individual 386726 38,544,824 shareholders holding nominal share capital up to Rs. 1 lakh (ii) Individual 57 2,009,784 shareholders holding nominal share capital in excess of Rs. 1 lakh (c) Any Other Sub-Total (B)(2) Total Public Shareholding (B)= (B)(1)+(B)(2) GRAND TOTAL (A)+(B) 9336 398799 399358 1,549,666 268,998,023 553,131,857

1.14 0.16 0.0

0.0 3.32 8.67

13.28 10.61 1.8


0.07 12.58 25.86


2,138,872,530 100.00



ONGC is actively involved in Increased Oil Recovery (IOR) and Enhanced Oil Recovery (EOR) projects in 15 of its major fields to augment recovery from the matured fields. These involve a substantial Capital Expenditure (Capex) Capex: ONGC has spent 99.75 of its CAPital EXpenditure (Capex) on Exploration and Production (E&P). In the last 5 years, ONGC has spent a record Capex of around forty thousand Crore rupees, highest among Indian corporates during this period.

A total of 22 Discoveries were made which include 9 New Prospects (3 Deep waters, 1 Shallow water, 5 Onshore) and 13 new pools. First ulta-deepwater gas discovery of the country established in KG offshore in well UD-1 (water depth: 2841 m) in NELP block KG-DWN-98/2. Highest In-place Oil & Gas reserve accretion of 169.52 MTOE in 11 years; 9th time crossed the 150 MTOE milestones in 51 years of operation. ONGC Videsh Limited (OVL), the 100% owned subsidiary of ONGC, recorded the highest ever production of 7.95 MTOE of Oil + Oil Equivalent Gas in 2006-07, up 25% from 6.34 MTOE in FY06. With the addition of 9 more properties in FY07, OVL now has 26 projects spread in 15 countries. OVLs ties in Brazil further strengthened with signing of an agreement between ONGC and Brazilian Oil Major Petrobras to swap interests in offshore blocks in India and Brazil. Crude Oil production went up by 9% to 26.05 MMt in FY07, from 24.4 MMt in FY06. Natural Gas production was maintained at 22.44 billion cubic meters (BCM) compared to 22.57 BCM in FY06, despite massive disruptions of operations in Hazira Plant due to flood. ONGC & GAIL signed Gas Sales Agreement (GSA) on 7th July 2006.

ONGC has been awarded the highest-ever Credit Rating for any Indian corporate by the International Credit Rating Agency Moodys Investors Services. ONGC secured - Baa1 (Indicative Foreign Currency debt rating. CRISIL and ICRA have also assigned ONGC the highest domestic credit ratings of AAA and LAAA, respectively with a stable outlook.


ONGC is on top of global E&P companies, ranked by Platts 250 Global Energy Companies List for 2006, based on Assets, Revenues, Profits and Return On Invested Capital (September 2006). ONGC has been ranked 15th among Global Integrated Oil and Gas companies, as per PFC-50 Energy listing, in terms of Market Capitalization. ONGC is in 256th position in Forbes Global 2000 list (March 2006); Topper from India ONGC has been ranked 158th among the worlds largest companies, in terms of Market Capitalization, in the 10th annual Financial Times Global 500 listing (June 2006); Topper from India. ONGC scaled up to 402nd position in Fortune Global 500 (from 454th last year) in terms of revenues, notwithstanding a large chunk of revenues going as subsidies to Oil Marketing Companies. It leads all Indian companies in the Fortune List (115th) in terms of Profits. Motilal Oswal CNBC ONGC is the Biggest Wealth Creator among Indian companies (Nov 2005) Most Valuable Company in India as per (i) Business Today (November 2005), (ii) Economic Times 500 by Market Cap (February 2006) ONGC is number one in Business Indias Super 100 list (November 2005) Business World IMRB Survey (June 2006) ONGC is the Most Respected PSU ONGC is the Best PSU Peoples Award for Excellence in Business & Economy 2006, by Planman Media (June 2006) ONGC bagged the prestigious NDTV Profit Business Leadership Award in the Oil and Gas category. The Honble Prime Minister Dr. Manmohan Singh gave away the Award to ONGCs C&MD Mr. R S Sharma.

ONGC Videsh Ltd. (OVL)
ONGCs wholly-owned subsidiary ONGC Videsh Ltd. (OVL) the biggest Indian multinational in terms of overseas investment recorded another round of impressive results: - OVL has 26 Projects (31 Blocks) in 15 countries - OVL is the Sole Operator in 8 Blocks and Joint Operator in 2 Blocks - Highest-ever Oil and Gas production (6.34 million tonnes Oil equivalent (mtoe) Highest-ever Turnover (Turnover up 36% in 2005-06 to Rs. 8,171 Crore) - Highest-ever Profits (Net profit up 18% to Rs. 901 Crore) 68

- Maintained status of 2nd-largest Indian Exploration & Production (E&P) company, after parent ONGC - OVL holds around 1.519 billion barrels of proven Oil and Gas reserves.

Mangalore Refinery and Petrochemicals Ltd. (MRPL)

Highest Capacity Utilization of 125% achieved in fiscal 2005-06, with Best-in-Class Energy Management, improving the Distillate yield, and with Highest-ever accident-free working days. Turnover in 2005-06 was up 36% to Rs. 28,243 Crore, with Export Sales registering an increase of 94%. MRPL has declared a dividend of 7% for 2005-06. Refinery Up gradation and expansion from 9.69 mmtpa to 15 mmtpa (at an investment of Rs. 8000 Crore) will lead to: (i) 84% distillate yield out of crude run (ii) Improved yield pattern/product range (iii) Increased capability to use cheap, heavy, sour & high TAN crude oil


ONGC is entering LNG (regasification), Petrochemicals, Power Generation, as well as Crude & Gas shipping, to have presence along the entire hydrocarbon value-chain. While remaining focused on its core business of oil & gas E&P, it is also looking at the future and promoting an applied R&D in alternate fuels (which can be commercially brought to market). These efforts in integration are basically to exploit the core competency of the organization knowledge of hydrocarbons, gained over the five decades. ONGC has also ventured into Coal Bed Methane (CBM) and Underground Coal Gasification (UCG); CBM production would commence in 2006-07 and UCG in 2008-09. ONGC is also looking at Gas Hydrates, as it is one possible source that could make India self-sufficient in energy, on a sustained basis. ONGC tried to overcome the declining production of oil and natural gas by focusing on new domestic production enhancement programs, offshore exploration and technology up gradation. To improve productivity and financial performance, ONGC concentrated on human resources development and financial restructuring. ONGC planned to spend approximately Rs 100 bn on capital expenditure relating to exploration and development of domestic oil and gas properties. As part of production enhancement, redevelopment of Bombay High oil wells was given top priority. This involved two projects called Bombay High North Redevelopment and Bombay High South Redevelopment, which were expected to cost around Rs 82 bn. The program aimed to achieve an additional 76mn tonnes of


producible reserves of oil and gas. ONGC expanded its global operations through its subsidiary OVL, by making sizeable capital investments in Vietnam, Sakhalin (Russia) and Sudan.

ENVIROMENTAL ANALYSIS:Environmental Threats & Opportunities Profile(ETOP) :Environmental Sector Market Nature of Impact Planning Commissions low estimate of demand of the energy in the year 2030 is 1,341 MMTOE which is 4 times and the high estimate is of 1,620 MMTOE which is 5 times the requirement in base year 2003-04. The above leads to 4 to 5 times requirement of coal, 2.7 to 3.5 times of petroleum products and 6.5 to 7.8 times of natural gas in 2030 in comparison to requirements of 2003-04. Impact of each sector


Technological innovations make it possible to extract significant quantities of oil and gas from abandoned and marginal fields not being considered earlier. ONGC has taken initiativeto seek partnershipfrom private and foreign companies in abandoned /marginal fields. Since only 30% of Crude Oil Requirement is met Domestically, So major requirements of OPEC countries meet Crude Oil. India is Ninth largest crude oil importer in the world. Since the Indian economy is growing above 9% ,It presents a huge demand for all the petroleum products A large quantum of energy in the form of Coal, refined fuels and natural gas would be required to fuel such high GDP growth rates. A substantial increase in LPG customer enrolment is expected with oil Companies attempting to penetrate the rural market and strengthen urban markets. Growing demand of gas As per the India Hydrocarbon Vision 2025, the demand of gas is expected to be 20 per cent of the energy mix. India is the sixth largest crude oil consumer in the world.



Political & Regulatory

Excise Duty Cuts by Govt. Govt. move to allow petroleu m compani es to raise prices of petrol within a broad range of 10%. Introduction Of The New Exploration Licensing Policy (NELP). 100 per cent FDI is being allowed in petroleu m refining, petroleu m product and gas pipeline s and marketin g/retail 70

through the automatic route. Socio culture International Customers Rising Global crude oil prices. In upstream segment , Govt. acts as a bargaining power for Oil Marketing Companies. On the retail end, Govt. bargain for customers with Oil Marketing Companies. Due to increase in Per capita Income of Indians, Changing Lifestyles, Increase in Standard of Living the demand for Petroleum & its Products is likely to increase.

SAP(Strategic Advantage Profile)

Core Competencies: Large proved reserves of high-quality crude oil and natural gas, with significant exploitation opportunities. Extensive crude oil and natural gas exploration, development, production, refining, and gas processing and fractionation experience. Sizeable exploration area. Significant exploration, production, refining, gas processing and fractionation, transportation and storage infrastructure. Strong research and development and training network.


STRENGTHS: Large proved reserves of high-quality crude oil and natural gas, with significant exploitation opportunities. ONGC has the highest proved reserves in India of any oil and gas company, which provide with a more abundant and stable, long-term production base relative to its major competitors. Based on production for fiscal 2003 and proved developed reserves of ONGC as of April1, 2003, their ratios of proved developed reserves to production for domestic crude oil and natural gas were approximately 16.0 years and 14.1 years, respectively. In addition to extensive domestic proved reserves, they also have significant proved reserves of crude oil and natural gas in foreign countries.


Extensive crude oil and natural gas exploration, development, production, refining, and gas processing and fractionation experience. Over the nearly five decades since inception of ONGC, they have amassed substantial exploration, development and production expertise, in particular with respect to the geological conditions in India. They believe that they have accumulated an extensive collection of raw and proprietary geological data on offshore and onshore regions in India, and that this knowledge and database represent an advantage over other foreign and domestic oil and gas companies seeking to compete with ONGC in India for exploration licenses, in production and in other areas. In addition, this advantage makes ONGC more attractive to prospective joint ventures and production-sharing partners, which further improves their ability to pursue domestic exploration, development and production opportunities, and to obtain access to advanced technologies and techniques. They also benefit from a highly skilled workforce and a senior management team with extensive industry experience. They have historically been a technology leader in the domestic market. For example, they were a pioneer in introducing natural gas processing and fractionation technology to India. ONGC also devote significant resources to in-house research and development to improve the knowledge and database, industry expertise and use of advanced technology, and in particular to develop enhanced recovery and other exploration and development techniques and to improve the efficiency of production operations. Sizeable exploration area. ONGC has independent domestic exploration licenses cover a total area of approximately 680,800 square kilometers, representing a majority of the total area licensed for exploration in India. In addition, they are members of production sharing consortia with exploration Indian Government in 1999, they have been awarded approximately 50 percent of the total number of blocks granted under that program. They also have an extensive amount of proved undeveloped oil and natural gas reserves and a considerable area of under explored sedimentary basins. With the significant financial resources results from operations and ONGC low debt levels, the company is well positioned financially to exploit these exploration opportunities. contracts covering 75,000 square kilometers in foreign countries. Since the establishment of the New Exploration Licensing Policy, or NELP, by the









transportation and storage infrastructure. They have an extensive installed infrastructure of drilling and work over rigs, onshore and offshore production facilities, well stimulation services, sub sea and land pipelines, gas processing and fractionation facilities, refineries, exploration and transport vessels, storage facilities and other infrastructure located throughout the main oil- and gas-producing regions of India, which provides them with an advantage over the existing principal


competitors in India as well as new entrants into the upstream and refining sectors of Indias oil and gas market. Attractive cost structure. ONGCs average finding costs and all-in production costs benefit from low manpower costs, lack of net interest expense, relatively high use of in-house services in place of more expensive third-party contractors, utilization of depreciated infrastructure and equipment, adoption of cost-saving technology in exploration and production operations, and effective use of large store of geological data and expertise. Their cost structure allows ONGC to compete effectively even in an environment of low crude oil prices.

Strong research and development and training network. ONGC prospects for success are dependent on access to advanced technologies and expertise. Overcoming the challenges of operating in developing a diverse range new of and environmental ongoing improved and geographical of in conditions and in and highly competitive markets requires upgrades technology existing technology

and adopting



production, refining and other areas of business. Their research and development, or R&D, institutes form an integral part of business and are instrumental in providing much of the technological and analytical support and scientific, engineering and technical know-how that are critical to ONGC success. Likewise, affiliated training institutes provide educational services and skills training crucial to effectively develop human resources and maintain competitive edge.

Near monopoly and high entry barriers: geographical

ONGC currently accounts for 84% of the

domestic natural gas and crude supply, which can be largely attributed to its vast presence across the country. To put things into perspective, ONGC's domestic exploration licenses cover a total area of approximately 6,80,800 sq. kms and has been awarded almost 50% of the total blocks that have been granted under NELP. Further, the segment requires a large capital commitment and also a long gestation period. For instance, ONGC spends almost Rs 40 m per day on its three exploration ships in the Porbandar coast and two ships in the Krishna Godavari delta.

Strong Financials:-ONGC continues to maintain unique distinction in Indian Corporate Sector of having the Highest Net Worth (614099 million)and highest Net Profit(156429 million),despite allowing subsidy sharing discounts to the tune of 170,239 million to Oil Marketing Companies in prices of Crude Oil, PDS Keroseneand Domestic LPG as per administrative orders of Ministry Of Petroleum & Natural Gas,Government Of India.Also, the company remains undisputed leader in terms of dividend Payout(Rs.66305 million). ONGC has been reaffirmed as the highest ever


Credit Rating for an Indian Corporate by International Credit Rating Agency,Moody's Investor Services. Benefits of downward integration: ONGC has been granted license to set up 1,100 retail outlets for the purpose of marketing petroleum products and motor spirit. Further, it has acquired management control of MRPL, which marks its entry into the refinery business. All this augurs well for ONGC, with demand for petroleum products likely to give a fillip to the revenue side and stable supply of crude to its own refinery being the advantage on the cost side.

OVL's encouraging business model:

ONGC through its wholly owned subsidiary, ONGC

Videsh (OVL), has picked up stake in oil equities abroad (eight countries) and has a target to expand its oil equity base to 20 MT by 2010. This shall to an extent reduce India's dependence on crude imports. Also, OVL plans to further venture in African and Latin American countries for the purpose of exploration of oil and gas. It should be noted that this move by ONGC is of utmost importance given that its domestic oil fields have been in the mature stage of production and the company planning to redevelop these fields and upgrade technologies. With OVL, the company has diversified its exploration and production business rather than depending on domestic produce.

WEAKNESESS: Government control on allocation: Post APM, ONGC has been independent to sell its product at international crude prices to its customer refineries. However, the GOI continues to allocate most of the crude oil produced in the industry to other PSU refineries. As a result, ONGC, as per MOU, has limited power to sell its produce independently in the open market at international prices.

LPG and kerosene subsidies: GAIL and ONGC have been roped in to share the subsidy on LPG and Kerosene and this shall have adverse impact on the financials. Further, the share of the Government's contribution in the subsidy is decreasing, thereby adding onto the already heavy burden on these companies. Also, ONGC, being a GOI controlled company, is not in a position to increase LPG prices due to political considerations .

OVL's venture into politically unstable areas: OVL has its presence in 8 international regions, namely, Iraq, Iran, Sudan, Vietnam, Myanmar, Syria, Libya and Russia. Most of these regions have witnessed instability in the recent past due to geo-political reasons or otherwise. It should be noted that governments worldwide have influenced the oil and gas industry and any such untoward


incident shall impact OVL's business causing delay in operations or even resulting in cancellation of contracts due to reasons such as environmental controls, hostilities, etc. High contingent liabilities: ONGC has a high component of contingent liabilities amounting to Rs 183 bn and is also a defendant in many legal proceedings. The company is facing claims to the tune of Rs 7.2 bn from excise, customs and income tax authorities among others. In case these claims do materialize, the company shall witness a dent in its financials

OPPORTUNITIES: Developing economy: Historically, demand for petroleum products has traced the economic growth of the country. With GDP expected to grow at near 9-10 % in the long-term, the energy sector would benefit from the same, going forward. To put things in perspective, diesel sales grew by nearly 12% (which constitutes 40% of the entire petro-products basket), petrol sales by 9% and a double-digit growth in LPG (liquefied petroleum gas) .Primary Energy Consumption in india increased at a C.A.G.R of 5.5% against a global C.A.G.R of 3%. Government decisions: The recent price increases and also the decision to allow oil companies to increase prices within a band of 10% augurs well for the industry. This step is likely to reduce government interference and provide some autonomy to oil companies when it comes to increasing petrol and diesel prices in order to protect margins. Further, the duty cuts are also likely to result in reduced under-recoveries by way of subsidies.

Excise duty old (%) new (%) Petrol 26 23 Diesel 11 8 Kerosene 16 12 Customs duty old (%) new (%) crude oil 10 10 petrol 20 15 diesel 20 15 Kerosene 10 5 Abolishment of subsidies: Over the past few years, the government has been reducing its share in the LPG and SKO (superior kerosene oil) subsidy bill and it is likely that in the next 2 to 3 years, the GOI's share will become zero. As of now, ONGC is one of the companies, which is contributing to the subsidy bill. Going forward the oil companies shall not bear the burden and are likely to pass it on to the end users. This shall not only reduce ONGC's current outflow by way of 75

subsidies, but shall also give the company a reasonable return on the products as per market determined rates and a further advantage over its competitors since it is diversifying into the downstream segment as well. Year Subsidies (Rs) LPG/cylinder Kerosene/litre 2002-03 67.75 2.45 2003-04 45.17 1.63 2004-05 22.85 0.81 Introduction of NELP(New Exploration Licensing Policy): The main objective of NELP is to attract latest technology and investment to the exploration and production sector (E&P sector) from the national and international E&P companies. Launch of NELP made a quantum leap forward in award of blocks to private and multinational companies. It resulted in increase in participation of various private & foreign E&P companies in India.

Competition: Until FY04, oil-marketing companies had complete control over the downstream marketing business while private sector players were restricted to only refining. However, with entry of private players such as Reliance, Essar Oil and Shell (in the waiting), the sector is likely to witness increased competition going forward. Since private players will not be bound to provide for these subsidies, PSU marketing players are likely to suffer from lower throughput per outlet. Government deregulation: The GOI recently allowed 100% FDI through the automatic route in the petroleum sector. Also, foreign and private players have now been allowed to set up retail outlets, thereby marking their entry into the downstream segment. With the growing auto sector and also the increasing acceptability of LPG as a cooking medium, it is expected that it will increase competition in the downstream segment to increase in the long term. Also, ONGC shall have to compete against established marketing players such as IOC, BPCL, HPCL and IBP, together sharing a retail base of 20,000 outlets.

Continuing government interference: During the first six months of the current fiscal year, the oil marketing companies were refrained from increasing product prices due to political reasons. This affected margins of downstream players. Going forward, if the government interference continues, oil-marketing companies will be at a disadvantage. Although there is a believe that industry is likely to witness increased competition, the initial retail rush by private sector players has slowed down. PSU marketing companies have already stepped up their expansion plans and to


that extent, have created significant entry barriers for private players. Although throughput per outlet (sales per outlet) is likely to decline in the future, any substantial entry of the private players would indirectly benefit the PSUs, as the government's pricing policy will not hold much water and the market forces would determine pricing Crude prices: Nearly 70% of India's crude requirements are fulfilled by imports and this figure is likely to increase going forward. Crude prices have breached the $45 barrier again and are likely to remain at around $40 per barrel range. As per IEA, India is one of the most inefficient countries among developing nations as far as energy usage is concerned. Such high crude prices are likely to impact margins of oil marketing companies. Given the political implications, retail prices may continue to lag the rise in input cost. Lack of freedom: Although the government has decided to provide autonomy to oil companies to increase petrol and diesel prices within a 10% band, other products such as LPG and kerosene continue to remain under the government controlled price mechanism. As per the current estimates, the subsidies on LPG amount to Rs 90 per cylinder after factoring in duty cuts and that on kerosene is over Rs 6 per litre. While the government has managed to reduce its share in subsidies, select oil companies are being forced to absorb the losses.

Foreign Exchange Rate Fluctuation: The internationally traded prices of crude oil and value- added products, which account for the substantial majority of sales revenues, are denominated in U.S. Dollars. The substantial majorities of expenditure, as well as their accounts as a whole are denominated in Indian Rupees. The substantial majority of the revenues and expenditure of OVL are denominated in U.S. Dollars, while its accounts are denominated in Indian Rupees. As a result, fluctuations in foreign exchange rates, in particular the exchange rate of U.S. Dollars for Indian Rupees, may materially affect the revenues and results of operations. From fiscal 1998 through fiscal 2002, the Indian Rupee depreciated against the U.S. Dollar at an annual compounded rate of 5.4 percent. In the nine months ended December 31, 2003 and in fiscal 2003, the Indian Rupee registered an appreciation of 4.2 percent and 2.4 percent, respectively, against the U.S. Dollar. In general, an increase in the value of the U.S. Dollar as compared to the Indian Rupee can be expected to increase reported earnings of ONGC and vice versa.


FINANCIALS OF ONGC: Liquity ratio: Current ratio

Years Current Ratio Mar 05 1.41 Mar 06 1.28 Mar 07 1.15

C u r r e n t R a tio ( x ) 1 .5 1 C u r r e n t R a tio ( x ) 0 .5 0 2005 2006 2007 1 .4 1 1 .2 8

1 .1 5

Current ratio indicates the liquidity position of ONGC. As per the Ideal Current Ratio is 2:1 but ONGCs is below the Ideal Ratio, Moreover it has decreased over the period of 3 years. Which shows that its current assets (receivables) are decreasing and all the current liabilities are increasing which shows it that it may not be able to pay off its current liabilities out of current assets .It does not project a good image for creditors.

Turnover ratios: 1.) Finished goods inventory (days cost of sales)

Years F.G.inventory

Mar 05 2.33

Mar 06 5.36

Mar 07 3.80


F G in ve n t o ry (d a y s c o s t o f s a l e s ) 6 4 2.33 2 5.36 3.8 F G in ve n t o ry (d a y s c o s t ofsales)

0 2005 2006 Year s 2007

The ratio indicates the days in which the inventory can be transformed up to sales .In the year 2006 the ratio as increased which shows ONGCs inefficiency in the year 2006 to convert its finished goods into sales but in the year 2007 it has performed very well. And hence its days of converting its finished goods into sales are decreased .The ratio shows the operating efficiency of ONGC, so it is also indicates that the large amount of funds are not blocked into inventory for a long period of time.

2.) Receivable (days gross sales)-collection period days

Years Collection period

Mar 05 30.08

Mar 06 28.36

Mar 07 17.74

Receivables (days gross sales) 04 03 02 01 0


28.36 17.74 Receivables (days gross sales)


2006 Years


The collection period implies the efficiency of management in realizing money from debtors. Since the collection period has decreased marginally in 2006 and it has decreased very much in 2007, which indicates the credit collection efficiency of ONGC towards its debtors. It also indicates that ONGC is able to generate cash flows from its debtors in relatively less days. Further its investment in debtors in 2007 has also decreased by around Rs 10,000 mn.


Creditors (days cost of sales)

Years Collection period

Mar 05 30.08

Mar 06 28.36

Mar 07 17.74

Creditors (days cost of sales) 06 04 02 0 2005 2006 Years 2007



41.8 Creditors (days cost of sales)

The ratio indicates the creditors willingness in giving credit to the company. The ratio has increased very much in 2006 that indicate creditors confidence in the cash flows of ONGC .It also indicates the liquid position of ONGC due to the fact that it is delaying the payment to the creditors by increasing the creditors deferral period. But in the year 2007 it has decreased due to the fact that the credit purchases of ONGC has increased.

Profitability Ratio: EPS

Years EPS Mar 05 91.05 Mar 06 101.20 Mar 07 73.14

EPS (Rs.) 150 100 Rs 50 0 2005 2006 Years 2007 91.05 101.2 73.14 EPS (Rs.)


The ratio indicates the earning of the shareholder on their investment .The EPS of ONGC has increased in 2006 due to increased in PAT, which shows that ONGC is maximizing the wealth of the shareholders. The decreased in EPS in 2007 should not be misinterpreted because the reduction in EPS is primarily due to the bonus issue made by ONGC in the ratio 1:2 .The EPS of ONGC has decreased due to increased number of shares (bonus issue) but PAT on year on year basis as increased.

Book value
Years Book Value Mar 05 323.87 Mar 06 374.74 Mar 07 286.53

Book Value (Rs.) 400 300 Rs 200 100 0 323.87 374.74 286.53 Book Value (Rs.)


2006 Years


The ratio indicates the net worth per share of an shareholder .In the year 2006 it has increased which shows that the reserves and profits of the company has increased in 2006. Further in the year 2007 it has declined due to the following reason- due to the Bonus Issue the number of shares has increased but the net worth has remained unchanged.

Years DPS Mar 05 40.00 Mar 06 45.00 Mar 07 31.00


DPS (Rs.)

06 Rs 04 20 0


45 31 DPS (Rs.)


2006 Years


The DPS shows the policies of the company regarding dividend payment .The ratio has increased in 2006 which makes it an attractive investment for shareholders as the company has declared highest ever dividend in corporate history .The DPS of ONGC has decreased in 2007 which is also due to the increased in number of shares (Bonus Issue)

Gross profit margin

Years Gross Profit Margin Mar 05 46.44 Mar 06 52.34 Mar 07 44.66

Gross Profit Margin 55 05 54 46.44 44.66 52.34

Gross Profit Margin

04 Mar 05 Mar 06 Mar 07

The gross profit margin shows the margin between sales and cost of goods sold .It has increased in the year 2006 due to the substantial, increase in gross profit .In the year ended 2007,the gross profit has increased marginally and the sales has increased in a large proportion, thereby the Gross Profit Ratio of ONGCs has declined.


Years PAT Mar 05 28.0 Mar 06 29.06 Mar 07 27.62

PAT 29.5 29 28.5 28 27.5 27 26.5 29.06 28 27.62 PAT

Mar 05

Mar 06

Mar 07

The net profit margin shows the operating efficiency of a company .In the year 2006 the ratio has increased due to increased gross profit margin whereas in the year 2007, it has declined marginally in spite of declining Gross Profit Margin which shows he efficiency of ONGC in reducing its indirect expenses.

Years ROI Mar 05 41.44 Mar 06 40.41 Mar 07 26.75


05 04 03 02 01 0


40.41 26.75 ROI

Mar 05

Mar 06

Mar 07

ROI measures the performances of a company. The ratio has decreased marginally in 2006 and substantially in 2007 due to increased investment in 2007 that is the reason for declining ROI in spite of increased PAT.


Debt Equity Ratio

Years Debt Equity Ratio Mar 05 0.21 Mar 06 0.24 Mar 07 0.24

Debt Equity Ratio 0.25 0.24 0.23 0.22 0.21 0.2 0.19 0.24 0.24


Debt Equity Ratio

Mar 05

Mar 06

Mar 07

It indicates the leverage for a firm .The ratio is low due to 74%shareholding of the government in ONGC and its equity shareholding. The ratio has increased in 2006, which shows the increasing debt component in the capital structure of ONGC. But ONGC has kept its debt component unchanged in the year 2007.

Share Price History of ONGC:

NSE Date Open Price High Price Low Price Close Price Volume 52 week high 52 week low 14/08/2007 832.00 859.00 830.00 853.30 524,625 990.00 726.50 BSE 14/08/07 850.10 860.00 841.00 853.95 70,308 989.95 665.81


After Studying and Analysing the Financial of ONGC the Following Interpretation came forward:

Highest-ever Dividend of 450% (up from 400% dividend for FY05). The total payout in absolute terms works out to be Rs. 6,417 Crore (up12.5% from Rs. 5,704 Crore); out of this, the Government will get Rs. 4,757 Crore (74.14%).

ONGC recorded the highest-ever Gross Income (Turnover) of Rs. 49,440 Crore (up 4% from Rs. 47,245 Crore in FY05). 66% of the Turnover came from sale of Crude Oil, 14% from sale of Natural Gas and 13% from sale of Value-Added- products (VAPs) like LPG, NGL, ARN, and Trading - 7%. The Compounded Annual Growth Rate (CAGR) in Gross Income in last 5 years is 20.6%

Highest-ever Net Profit of Rs. 14,431 Crore (up 11% from Rs. 12,983 Crore in FY05) Net Worth Rs. 53,593 Crore (up 15% from Rs. 46,314 Crore in FY05). Highest-ever Earning-Per-Share (EPS) of Rs. 101.20 (up 11% over Rs. 91.05 in FY05) Capital Expenditure rose to Rs. 11,421 Crore (up 7% from Rs. 10,681 Crore in FY05). Out of this, 99.7% was spent on Exploration & Production (E&P).

The shareholding by FIIs increased to 9.24% in September 2006 (from 8.4% in March 2006) Contribution to Exchequer was 23,409 Crore (Rs. 22,812 Crore in FY05)

Results for FY07, which signify as follows:

Highest ever Turnover: Rs 56904 Crore (Up 18 %) Highest ever Profits: Rs 15643 Crore (Up 8 %) Highest-ever Sales Income (Turnover) of Rs. 56904 Crore (up 18 % from Rs. 48201 Crore in FY06). Highest-ever Net Profit of Rs. 15643 Crore (up 8 % from Rs. 14,431 Crore in FY06), notwithstanding highest-ever subsidy payout of Rs. 17,024 Crore (up 42.4 % from Rs. 11,957 Crore in FY06). ONGC issued Bonus Shares in the ratio 1:2, i.e. 1 bonus share for 2 equity shares (held on 30th October 2006), increasing the paid-up capital of ONGC from Rs. 1425.9 Crore to Rs. 2138. 87 Crore. Recommended highest-ever Dividend of 310 % on expanded capital after bonus issue of 1:2 amounting to Rs 6631 Crore + DDT of 1013 Crore (up 3 % from 450 % dividend for FY06 amounting to Rs. 6,417 Crore) recommended. The total payout in absolute terms works out to Rs. 6631 Crore; the Government will get Rs. 4915 Crore (74.14%)





After looking at the above analysis ONGC stands strong Net Profit for last FY & the market capitalization. The financial performance of ONGC for the 3 years reflected a good growth in sales and though all the market segments sustained or bettered their performance over the previous years. Cost overrun in a few long-term projects impacted the profitability. However, the companys track record has always been oriented towards profitable growth and with the strong fundamentals; the company is well placed to grow continuously on major fronts. The financial performance of the company for the 3 years reflected a good growth in sales and though all the market segments sustained or bettered their performance over the previous years.

EPS measures per share profit available for distribution for equity shareholders. The ratio indicates the earning of the shareholder on their investment .The EPS of ONGC has increased in 2006 due to increased in PAT, which shows that ONGC is maximizing the wealth of the shareholders. And further ONGCs has issued bonus share in the ratio 1:2. The overall performance of the company is good and there is a continuous flow of project business. The company is continuing its drive for volume with continued focus on profitability. Looking at the above-mentioned ratios, ONGC looks profitable in the long run because there is no sign of downfall in the near future. The governments drive to get higher dividends from PSUs also makes these companies worth a look on the dividend yield front. Comparing the financial statement & analyzing the ratios of ONGC it seems to be a good buy for the Investors


But investors need to be cautious on the following risk factors

Quantitative and Qualitative Market Risk Factors for Investors
Commodity Price Risk The prices of oil, in particular, crude oil and value-added products are linked to the international prices of such products. Thus the revenues are exposed to the risk of fluctuation in prices in the international markets. Operating Risk The company is exposed to operating risks, including reservoir risk, risk of loss of oil and gas and natural calamities risk in respect of all the installations and facilities. But however the company has insured the installations and facilities, which means that most replacement costs will be borne by the insurance company. However, the company is not covered for lost profits. Exchange Rate Risk ONGC has substantial purchases of services and equipment in foreign currencies and the prices of crude oil and value-added products are linked to the international prices of crude oil and value-added products, which are traditionally denominated in U.S. Dollars. Thus the company is exposed to risks relating to exchange rate fluctuations. There is no hedging or derivative program to cover these risks. However, the risk involved in the required payments in foreign currencies is offset to some degree by the revenues from sales of crude oil and value-added products, which are linked to the U.S. Dollar currency exchange rates and increase if the U.S. Dollar strengthens against the Indian Rupee. Interest Rate Risk The interest rate risk results from changes in interest rates on foreign currency loans, which may affect the financial expenses. Thus ONGC is exposed to interest rate risk on its earnings. As ONGC makes shortterm investments with banks and other financial institutions and a decrease in the interest rates in the domestic market will result in lower interest earnings on short-term deposits.


Financial Management by Prasanna Chandra Financial Management by I M.Pandey www.indiainfoline.com www.geojit.com www.icicidirect.com www.moneycontrol.com www.nseindia.com www.bseindia.com www.ibef.org www.managementparadise.com www.moneypore.com www.buzzingstocks.com www.wikipedia.org www.petroleum.nic.in www.ongcindia.com www.sebi.gov.in