Indian Oil & Gas Industry

INDUSTRY INSIGHT
INDIAN OIL & GAS INDUSTRY
23rd February, 2004
Cygnus Business Consulting & Research

4th & 5th Floors, Astral Heights, Road No. 1, Banjara Hills, Hyderabad-500034, India Tel: +91-40-23430203-07, Fax: +91-40-23430208, E-mail: info@cygnusindia.com Website: www.cygnusindia.com
Disclaimer: All information contained in this report has been obtained from sources believed to be accurate by Cygnus Business Consulting & Research (Cygnus). While reasonable care has been taken in its preparation, Cygnus makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. The information contained herein may be changed without notice. All information should be considered solely as statements of opinion and Cygnus will not be liable for any loss incurred by users from any use of the publication or contents
Industry Report Indian Oil & Gas Industry
Contents
Executive Summary ...............................................................................................................3 Oil & Gas Industry: Introduction.............................................................................................5 Industry Structure..................................................................................................................8 Demand & Supply Scenario ..................................................................................................23 Cost Structure & Profitability ................................................................................................30 Sector Deregulation .............................................................................................................34 Government Policies & Regulations .......................................................................................41 Budget Impact ....................................................................................................................44 Mergers & Acquisitions ........................................................................................................47 Value Chain Analysis ...........................................................................................................48 Michael Porter Analysis ........................................................................................................48 New Developments .............................................................................................................49 Critical Success Factors ........................................................................................................52 Growth Drivers ..................................................................................................................54 Major Players ......................................................................................................................55 Industry Outlook.................................................................................................................61 Conclusion .........................................................................................................................63
Cygnus Business Consulting & Research 2003
Page 2 of 67
Executive Summary
Oil and gas represent 38% of India's primary energy consumption. Per capita consumption is 117 kg. Oil accounts for 30% of imports and contributes over 20% to the exchequer through customs and excise taxes. The annual turnover of the industry is over $65 billion as on FY 2003. Major industry sub sectors are: Upstream (Oil and Gas Exploration and Production) and Downstream Sector (Refining and Marketing). Indias Hydrocarbon resource base is 29 billion metric tonnes, while the oil reserves established through exploration is only 6.8 billion metric tonnes. Oil has been commercially produced in only 7 of the 26 sedimentary basins in India. The E&P sector is characterized by a high degree of uncertainty. Demand for oil is rising with GDP, but domestic production is stagnant. Oil and Gas exploration in India is majorly dominated by ONGC, having >78% market share followed by Oil India limited, having approx. 9% share while, the balance being contributed by the Private players/JVs like that of Reliance Industries and Cairn Energy. Role of Private sector in the Oil and Gas exploration has increased gradually from almost 0% during 1990-91 to 12-15% in FY 2003. Oil-refining sector has an annual installed capacity of 117 mmt. Marketing of refined products is done mainly by 4 public sector undertakings. This is changing with an increasing role of private sector. Pricing in petroleum sector has been deregulated since April 2002. This improved the refining and marketing margins. The demand for natural gas in India is 1.5 times the current level of domestic production. GAIL, with around 4400 km of pipelines, accounts for distribution of more than 85% of natural gas produced. Demand for gas is expected to rise at a CAGR of more than 5% during 2000 to 2025.
Page 3 of 67
Industry Report Indian Oil & Gas Industry E&P companies plan to increase production by tapping into new oil fields. Other developments include - acquisition of foreign oil assets and vertical integration. Refining and Marketing is becoming more competitive with the growth of retail assets and also innovations like loyalty program. Oil product exports fell 11.4 per cent to 1.01 million tonnes in July 2004 from the same month last year. Estimate show that the country's oil exports in the year 2004 to March 2005 were likely to rise to 16 million tonnes from 14.6 million tonnes last year.
Page 4 of 67
Oil & Gas Industry: Introduction

Oil, gas, hydroelectricity, nuclear power and coal are the five constituents of conventionally used primary energy. Wind and solar are two examples of non-conventional sources. The Indian oil and gas sector constitutes 38% of total conventional primary energy consumption, which is lower than the world average of 62%. The per capita consumption of oil and gas is 117 kg against the world average of 925 kg. There is a huge potential for demand growth in India because of higher growth rate of consumption (compared to world average) and increasing share of oil and gas in primary energy consumption. The oil and gas sector gained importance on account of its multiple and costeffective application (compared to coal, hydroelectricity). Oil prices have a significant impact on the economy. Oil accounts for over 30% of India's total import bill and contributes over 20% to the exchequer through customs and excise taxes. India's oil and gas sector has an insignificant share (<1%) in world's oil and gas production and (<3%) in petro product consumption. Historically this has been a government controlled sector. Pricing was deregulated in April 2002. This has led to the setting up of refineries to process the oil and gas for use in various sectors. The history of India's oil industry dates back to 1889, when a commercially significant amount of oil was discovered in Digboi, Assam, a state in the northeastern part of the country. Until 1948, the Indian Government adopted a laissez faire approach with respect to overseeing the domestic oil industry. At that point, however, the Government became involved in the industry in multiple ways, be it establishing Government-owned companies or regulating the price of oil. In 1954, under the auspices of the Geological Survey of India, the Government founded the Oil and Natural Gas Commission (ONGC). In 1959, ONGC became an oil exploration company and the Government founded Oil India Limited (OIL) as well. While ONGC and OIL addressed India's ability to extract crude oil, it had to be able to process or refine the resource after extraction. Therefore, in 1962 the Government established the Guwahati Refinery, and the India Oil Corporation Limited (IOC) was born. Of India's 17 refineries, IOC owns seven of the facilities, maintaining a 41 % market share in the refining space. IOC is a public sector company, meaning that the Government owns at least 51% of the equity
Per Capita Consumption of Energy vis--vis Hydrocarbon (in Kg of Oil Equivalent) World India China Pakistan Japan UK Germany
Source: ABN Amro Bank
Primary Energy 1454 285 688 264 3962 3856 4102
Hydrocarbons 925 117 169 231 2520 2719 2539
Page 5 of 67
Industry Report Indian Oil & Gas Industry capital. With respect to IOC, the Indian Government directly owns 82 % of the company, and an additional 9% is held by ONGC (which is also a public sector company), but the Government is seeking to trim its ownership to a 51 % stake through its disinvestment policy. During the 1970s, India's domestic oil production skyrocketed, relative to its yields in the 1950s and 1960s, as over eight million tons were produced. In 1974, the ONGC made the landmark discovery, Bombay High, off India's west coast, an offshore oil field that dramatically increased the country's domestic oil production. For example, in 1989, when India's oil production peaked at 34 million tons, Bombay High's contribution was 22 million tons, or 65 % of the total. This increase in oil production helped contribute to a growing sense of optimism that new oil fields with abundant supplies were just waiting to be discovered. Various offshore explorations have yielded promise in Andhra Pradesh, Tamil Nadu, Gujarat, and again, in Assam. India also had to quench the country's thirst for natural gas, and through the Gas Authority of India (GAIL), significant quantities were found offshore in numerous locations, among them Bombay High in the Arabian Sea. Natural gas is commonly used in India as fuel and to supply feedstock to fertilizer and petrochemical plants. Furthermore, in the 1990s, a pipeline spanning 1,700 kilometers across India was built to transport natural gas.
Importance of Oil & Gas in the Economy

The oil and gas sector shares an equal importance worldwide. It contributes to foreign exchange reserves through exports, for countries like Russia where nearly half the currency earnings come from crude oil exports. Oil has varied applications in different segments of the economy. Natural Gas (NG) is used for lighting and cooking purposes in urban areas and also for transportation. The sector also has its use in manufacturing plastics, clothes, fertilizers, ropes etc. Gas became important since the oil price shocks, which led to supply disruptions, inflation, output loss and recession. In the 1973 oil shock, GDP for US and Europe declined by 4.7% and 2.5% respectively. In the Indian context, the oil and gas sector has attained importance in several ways: The public sector undertakings (PSUs) in the oil and gas sector account for over 38% of total profit after tax earned and 45% of dividend declared by PSUs as a whole. The share of petroleum sector in national excise and custom duty collections is at 20%. As there is progressive disinvestment and privatisation the dividend income to the government will decline. Cygnus Business Consulting & Research 2003 Page 6 of 67
Industry Report Indian Oil & Gas Industry Crude oil and refined petroleum products account for about 30% of India's total imports. In quantitative terms, from FY91 to FY03, imports have risen from 29.3 million metric tonnes (mmt) to over 88 mmt. Although, since FYOO, the mix is skewed more towards crude as domestic refining capacity increased. The crude oil imports increased to 71% of the total domestic consumption. The energy sector has an influence on the inflationary trend in India as
100% 80% 60% 40% 61% 20% 0% 1990- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 200291 96 97 98 99 00 01 02 03 56% 49% 50% 45% 36% 30% 29% 29% 39% 44% 51% 50% 55% 64%
Share of Crude Oil Processed
energy prices constitute 14.2% weightage in the wholesale price index. Over 38% of the total traffic at the ports and 7% of the total traffic of the railways are comprised of petroleum sector cargo.
70%
71%
71%
Do mestic P roductio n
Impo rts
Source: MoP&NG
Realising the importance of petroleum sector, the government increased
the capital expenditure of the sector from 5% of total public sector capital outlay in Sixth Plan (1980-1985) to 6.5% in Tenth Plan (2002-2007). Accordingly, the share of this sector in total state investments witnessed a rising trend. The role of private sector has also increased.
Page 7 of 67
Industry Structure
The Indian Oil & Gas Industry is mainly dominated by public sector companies. Indian oil companies can be broadly classified into upstream and downstream segments. India's upstream oil sector comprises Oil and Natural Gas Corporation (ONGC), Oil India limited (OIL), Reliance Industries and Cairn Energy, who explores crude oil & gas and produce it, for supply to downstream oil companies in India. Both imported and domestic crude oil is allocated to the different refineries at a pooled price fixed by the Oil Co-ordination Committee (OCC). The downstream oil sector encompasses activities of refining crude oil (both domestically produced and imported); and marketing of petroleum products. In India, the 3 public sector companies Indian Oil Corporation (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) held most of the refining capacities. A few other standalone refineries namely Kochi Refineries, Chennai Petroleum, Numaligarh Refinery, Bongaigon Refinery, Mangalore Refineries etc accounted for the rest. These standalone refineries have been taken over by the PSU majors. The latest entrant into the market is Reliance Petroleum with its 27 million tonnes per annum capacity plant in Jamnagar, Gujarat. Till now, oil marketing rights have been given only to Indo-Burmah Petroleum (IBP) apart from the PSU majors IOC, HPCL and BPCL, but recently the government has allowed private sector to join the marketing bandwagon, which includes Reliance Industries, Essar Oil, MRPL and Numaligarh Refinery. However, Gas Authority of India Ltd. (GAIL) is the only wholesale natural gas transmission and marketing company in the country.
Indian Petroleum Sector
Upstream Sector
Downstream Sector
Oil & Gas Exploration Refining & Marketing ONGC, OIL, RIL IOC, BPCL, HPCL, ONGC, RIL, CPCI, BRPI, KRI, NII, MRPL Natural Gas Distribution
GAIL
CPL: Chennai Petroleum Corporation Limited, KRL: Kochi Refineries Limited, BRPL: Bongaigaon Refinery & Petrochemicals Limited, NRL: Numaligarh Refinery Limited, MRPL: Mangalore Refinery and Petrochemicals Limited, RIL: Reliance Industries Limited.
Page 8 of 67
Industry Report Indian Oil & Gas Industry The Indian oil sector is under the purview of the Ministry of Petroleum and Natural Gas (MoP&NG). The oil and gas industry has 2 sub-sectors: Oil and Gas Exploration and Production (E&P), Oil & Gas Refining and marketing of refined products (R&M). The annual turnover of the industry is over $65 bn.
Upstream Sector: There are 26 sedimentary basins in India, covering a total area of approximately 3.14 million sq. km. The sedimentary basins in India have been classified into four categories, based on: the geological knowledge of the basin; presence and/or indication of hydrocarbons; and the current status of exploration. Basin Category Nature No. of Basins Onland and Offshore Basins Area (sq.km.) Cambay, Assam Shelf, Bombay offshore, Krishna518500 Godavari, Cauvery, Assam-Arakan Fold Belt, Rajasthan 95000 Kutch, Andaman-Nicobar Himalayan Foreland, Ganga, Vindhyan, Saurashtra, KeralaKonkan-Lakshadweep, Mahanadi, Bengal Karewa, Spiti-Zansakar, Satpura-South RewaDamodar, Narmada, Deccan Syneclise, BhimaKaladgi, Bastar, Chhatisgarh
Category I
Proven commercial production Identified prospectivity Known accumulation Hydrocarbons, but no Commercial production
Category II
Category III
Geologically prospective basin
710000
Category IV
Potentially prospective basins
10
461200
Subtotal Deep-waters Total
26
1784700 1350000 3134700
Source: Directorate General of Hydrocarbons Petroleum Exploration & Production Activities, India 2002-03
India's prognosticated hydrocarbon resource base, according to the Ministry of Petroleum & Natural Gas, is 29 billion metric tonnes. So far, oil has been commercially produced in only seven of the 26 sedimentary basins, while the oil reserve established through exploration is only 6.8 billion metric
Page 9 of 67
Industry Report Indian Oil & Gas Industry tonnes, which approximately translates to 23% of the total oil and oil equivalent suspected to exist. Exploratory drilling, so far, has been confined mainly to onland areas and up to water depths of 200 metres. Exploratory drilling has recently been initiated in some segments of the deep-water areas, which have an estimated basin area of 1.35 million sq. km and are believed to hold a significant resource base. Of the total sedimentary basinal area of 3.14 million sq. km (including deep waters), only 16% falls under the moderate to well explored category. Of the balance, while exploratory activity has been initiated in approximately 27% of the area, over 57% of the area continues to fall under unexplored (41 %) or poorly explored (16%) category. Major players Oil and gas exploration is also dominated by ONGC, which holds approximately 57.2 percent of the total area licensed by the Indian government for hydrocarbon exploration. Reliance Industries and OIL have also been significant recipients of petroleum exploration licenses, or PELs, with licenses covering approximately 26.6 percent and 5.5 percent, respectively, of the total domestic territory licensed for exploration. The following table below sets forth acreage licenses to oil companies under PELs as of March 31, 2003. Licensed Domestic Production Area Licensed for Oil & Gas Exploration Licensee (as of March 31, 2003) (Sq. Km.) (%) ONGC 588748 57.17 Reliance Industries Ltd. 273869 26.59 Oil India Ltd. 56319 5.47 Hindustan Oil Exploration Company Ltd. 31268 3.04 Cairn Energy India Pty Ltd. 22705 2.2 Okland International LDC 10795 1.05 OAO Gazprom 10425 1.01 Essar Oil Ltd. 7083 0.69 Phoenix Overseas Ltd. 6928 0.67 Petrom SA (India) 6821 0.66 Mosbacher India Llc. 4940 0.48 Gujarat State Petroleum Corp. Ltd. 3274 0.32 Hardy Exploration & Production (India) Inc. 2498 0.24 Assam Company Ltd. 1934 0.19 B G Exploration & Production India Ltd. 1000 0.10 Premier Oil (North-East India) B V 870 0.08 Niko Resources Ltd. 419 0.04 Total 1029896 100
Page 10 of 67
Industry Report Indian Oil & Gas Industry ONGC has undertaken onshore exploratory activities in the Himalayan foothills, the North-Eastern States, Gujarat, Andhra Pradesh, Tamil Nadu and Rajasthan. Its on-shore oilfields are located at Cambay and Ankaleshwar (both in Gujarat) and at Rudrasagar and Galeki (both in Assam). ONGC has undertaken offshore exploratory activities in both the Eastern and the Western coasts. Its offshore field is located on the Western Coast at Bombay High. OIL has been carrying out exploration in the sedimentary basins of Assam, Arunachal Pradesh, Rajasthan, Orissa (onshore and offshore), the Andamans (offshore), Saurashtra (offshore) and the Ganga Valley (Uttar Pradesh). Its production is confined to the oilfields of Assam and Arunachal Pradesh and the Tanot gasfield in Rajasthan. ONGC and OIL also hold the largest portion of leased acreage for oil and natural gas production, accounting collectively for approximately 76.7% of the total territory licensed by the Government of India for commercial production of crude oil and natural gas as of March 31, 2003. The following table sets forth the amount of domestic production area granted to lessees under petroleum mining leases, or MLs, in effect as of March 31, 2003.
Leased Domestic Production Area Leased for Oil & Gas Exploration Lessee (as of March 31, 2003) (Sq. Km.) (%) ONGC 8739 53.12 Oil India Ltd. 3880 23.59 B G Exploration & Production India Ltd. 2678 16.28 Cairn Energy India Pty Ltd. 454 2.76 Niko Resources Ltd. 229 1.39 Selan Oil Exploration Ltd. 171 1.04 Mosbacher India Llc. 75 0.46 L&T Ltd./Joshi Technologies Int. Ltd. 57 0.35 Assam Company Ltd. 53 0.32 Hindustan Oil Exploration Company Ltd. 48 0.29 Heramec Ltd. 34 0.21 Interlink Petroleum Ltd. 17 0.10 Geoenpro Petroleum Ltd. 11 0.07 Hydrocarbon Resources Development Co. Pvt. Ltd. 4 0.03 Total 16450 100
Page 11 of 67
Industry Report Indian Oil & Gas Industry The Oilfields Crude oil is currently produced from both onshore and offshore fields. The major onshore fields are located in Gujarat, Assam, Nagaland, Tamil Nadu, Andhra Pradesh and Arunachal Pradesh. In addition to production from the regions mentioned, natural gas is produced in Tripura.
Trend of Crude Oil Production
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
35.83% 0.00% 1.85% 9.30% 12.58% 12.59% 12.93% 12.37%
Trend of Natural Gas Production

100% 0.00% 1.46% 90% 80% 70% 60% 78.24% 73.23% 50% 40% 30% 20% 10% 21.76% 25.31% 0% 1990-91 1995-96 10.48% 12.18% 12.20% 13.64% 17.22%
64.17%
64.45%
55.88%
52.36%
51.28%
50.18%
53.14%
63.85% 62.48% 62.64% 62.01% 58.52%
33.70%
34.82%
35.07%
36.13%
36.89%
34.49%
25.67% 25.34% 25.16% 24.35% 24.26% 1998-99 1999-00 2000-01 2001-02 200203*
1990-91 1995-96
1998-99 1999-00 2000-01 2001-02
200203*
Crude Oil Production: Onshore Crude Oil Production: PV/JVCs
Crude Oil Production: Offshore
Natural Gas Production: Onshore Natural Gas Production: Pvt/JVCs
Natural Gas Production: Offshore
Natural Gas The natural gas in India is primarily produced by ONGC & OIL, with a market share of 77.22% and 5.5% respectively in FY2003. The balance is undertaken by private/joint sector in the eastern offshore region. Reliance has recently reported discovery of significant gas reserves at Krishna-Godavari basin (7 trillion cubic feet). The Indian natural gas industry started off in the 1960s with production from the finds in Gujarat and Assam. However, it picked up momentum only in the 1970s with the discovery of associated gas at Bombay High. Subsequently, in the 1980s, production of free gas started from the South Bassien fields with the Gas Authority of India
35000 28000 21000 14000 7000 0 1990-91 1995-96 1998-99 1999-00 2000-01 2001-02 2002-03
Gross & Net Production of Natural Gas (in million cubic metre)
Limited (GAIL) constructing Indias only onshore cross-country Hazira-BijaipurJagdishpur (HBJ) pipeline in 1987. A large proportion of the gas produced at Bombay Offshore is now transmitted through the HBJ pipeline. In the 1990s, other fields at Tapti, Panna-Mukta and Ravva have been explored by the private sector in JVs with
Gross Production
Net Production
Page 12 of 67
Industry Report Indian Oil & Gas Industry ONGC and OIL. The production from these fields accounts for around 12% of the total gas production in the country. The transport, distribution and sale of natural gas in India fall almost exclusively under the purview of GAIL (having more than 85% of the market share). Most of the transmission infrastructure is installed in the northwest of India, for transportation of gas from the Bombay High fields, onto shore, and then to end users. The HBJ line is by far the most significant of these pipelines. The original track of the HBJ began operating in 1988, extending 1,700 km from Hazira on the west coast of India to Delhi in the north. The pipeline ranged from 18-36 inches in diameter, and included four compression stationsyielding an initial capacity of 6.5 bcm per year. In addition to the HBJ pipeline, GAIL also owns and operates regional gas grids of varying sizes in the states of Gujarat, Andhra Pradesh, Assam, Maharashtra, Rajasthan, Tamil Nadu, and Tripura. These small regional pipelines add up to about 1600 kilometers in total length. 725 km of these pipelines were transferred to GAIL from ONGC, and the remainder was constructed by GAIL or by the gas customers themselves. These segments vary in size--from 0.5 to 75 kilometers in length; and 4 inches to 18 inches in diameter--and were generally installed to connect regional gas fields to a single customer or group of customers (GAIL 2001). There are only a few gas distributors completely independent of GAIL. In the northeast, state-owned Assam Gas Company distributes approximately 1 bcm of gas produced by OIL in that region. In Gujarat there is one small private gas company, Gujarat Gas Company, which currently supplies 0.25 bcm of gas annually. BG holds 65% of the equity in Gujarat Gas. Also in Gujarat, the state government has set up its own company, Gujarat State Petronet, to secure LNG imports and build, own and operate gas pipelines. Pricing of Natural Gas Till 1986, the price of natural gas was determined by the producers themselves, on the basis of the thermal equivalence of substitute fuels, and the opportunity cost to the consumer. In 1986, the GoI decided to fix uniform prices for natural gas on a year-to-year basis. During 1995, the consumer price for non-North East locations was Rs. 1,850 per thousand cubic metres, or tcm (exclusive of royalty @10% and sales tax). The corresponding figure for North-East India was Rs. 1,000/tcm with a provision for further discounts.
Page 13 of 67
Industry Report Indian Oil & Gas Industry The subsidy in the North-East was essentially given since the law and order situation was not conducive to industrial activity and significant amount of gas was being flared up.
Regulatory Changes
In January 1995, the GoI appointed a Committee under the chairmanship of Mr. T.L. Shankar to review the pricing of natural gas. Based on the recommendations of this Committee, the GoI has introduced far-reaching changes on the pricing front. From a fixed price regime, prices to consumers and producers of natural gas have been linked to a basket of fuel oils/LSHS (low sulphur heavy stock) prices to be fixed quarterly. Similar linkages to fuel oil for long-term gas contract prices exist in most parts of Europe and Asia. Also, the prices are being fixed in terms of thermal content (which is the international practice) rather volume (as was the case earlier). The detail of the new pricing structure is presented below. The October 1997 Pricing Order of the GoI also provides that the consumer price for natural gas (Consumer Price) is a floating price linked to an international basket of fuel oils (International Reference Price) that is determined and fixed quarterly by us as per the methodology laid down by the Ministry of Petroleum and Natural Gas. This Consumer Price was 75% of the International Reference Price in Fiscal years 2001, 2002 and 2003, subject to both a ceiling of Rs.2,850 per mscm and a floor of Rs.2,150 per mscm and is linked to a calorific content of 10,000 Kcal/scm. proportionately. For gas having a lower or higher calorific content, the Consumer Price will decrease or increase The amount the consumer actually pays (the End Consumer Price) equals the The producer price for the national oil companies for their domestic Consumer Price plus our transmission charge of Rs.1150 per mscm, royalties and sales tax, and any other applicable taxes. production (the Net-back Producer Price) is calculated by taking the Consumer Price and adjusting it to account for the difference between the price of gas from the Ravva Joint Venture, the Tapti Joint Venture and the Panna-Mukti Joint Venture, which are market prices, and the Consumer Price, and also to take into account the Rs.2.5 billion per annum payment to the Gas Pool Account. The Consumer Price, the End Consumer Price and the Net-back Producer Price for gas transmitted through the pipelines in North Eastern States is a lower percentage of the International Reference Price. This Consumer Price was 45% of the International Reference Price in Fiscal 2001, 2002 and 2003, subject to both a ceiling and a floor of Rs.1,700 per mscm and Rs.1,200 per mscm, respectively, and applicable to gas with a calorific content of 10,000 Kcal/scm. For gas
Page 14 of 67
Industry Report Indian Oil & Gas Industry having a lower or higher calorific content, the Consumer Price will decrease or increase proportionately. The GoI may also make further concessions of Rs.300 per mscm on a case by case basis in the northeastern states.
Transmission charges to GAIL

The gas transmission charge, and the method by which the price charged by the producer and the price charged to the consumer are set, differs according to whether the gas is transmitted through GAILs HVJ Pipeline or the Regional Pipelines. Consumer prices for natural gas and the gas transmission charge are set with respect to these systems as follows. HVJ Pipeline: Pursuant to the 1997 Pricing Order, the Ministry of Petroleum and Natural Gas set a fixed transmission charge of Rs.1150 per mscm for gas transmitted through the HVJ Pipeline from October 1, 1997 until March 2000. Subsequent to March 2000, the transmission charges set out in the 1997 Pricing Order have remained in effect. This charge is linked to gas that has a calorific content of 8,500 Kcal/scm. For gas having a lower or higher calorific content, the transmission charge will decrease or increase proportionately. The transmission charge will also increase by 1% for every 10% increase in the consumer price index, although this increase will not be charged directly to the customer, but will be reimbursed to GAIL from the funds on deposit in the Gas Pool Account. Non-HVJ Pipelines: The transmission charge for the non-HBJ system (regional pipelines) is based on individual contracts with customers and varies from Rs. 30/mscm to Rs. 500/mscm, with the average being Rs. 195/mscm. These charges have an escalation provision of 3% per annum. The transmission charges were fixed to provide a 12% post-tax return on equity (ROE) to GAIL. The average transmission charges for the regional pipelines is much lower than the Rs. 1,150/mscm in the case of HBJ because the investment in these pipelines is relatively less and some pipelines have been constructed by the consumers and are only operated by GAIL. The pricing mechanism explained above came into effect following the issue of the October 1997 Price Order by the GoI, and was applicable till March 3, 2000. It is expected that the GoI will review the Price Order (now pending) sometime in 2002-2003 so as to achieve 100% fuel oil parity prices. Till then, the price linkage stipulated for FY2000 remains applicable. The linkage of natural gas prices to international prices has resulted in quarter-to-quarter fluctuations, in line with the movements in fuel prices in the international markets.
Page 15 of 67
Industry Report Indian Oil & Gas Industry The consumer prices for natural gas have no changed since Q1FY2001 and have remained at Rs 2850 per tcm. A committee of the Group of Ministers that was constituted by the GoI to review a possible upward revision of natural gas prices has proposed an increase in the Consumer Price to Rs.3,200 per mscm. The GoI proposal also includes a proposed increase in the transmission charge along the HVJ Pipeline, from Rs. 1,150 per mscm to Rs.1160 per mscm. Key Issues High Risk Associated with Upstream Sector The Exploration & Production (E&P) exercise is characterised by a high degree of uncertainty and, hence, a substantial amount of risk. At every stage of the E&P exercise, there is a very high degree of likelihood that the E&P efforts may have to be abandoned. The chances of abandoning licence at any stage of the E&P exercise ranges from 35% (at the development plan preparation stage) to 80% (at the exploratory drilling stage). Compounded with the risk of abandoning E&P efforts is the fact that the money invested (ranging from US$0.4 million at the seismic survey stage to a cumulative US$48.4 million at the plan development stage) till the abandoning stage would have to be treated as sunk cost. The typical costs and success probabilities in offshore exploration are presented in the following chart.
Acquire Licence
Conduct Seismic Study (US$ 400000)
40% Abandon Licence
Drill First Exploratory Well (US$ 7000000)
80% Abandon Licence
Appraisal Programme for Two Wells & Reservoir Study (US$ 16000000)
60% Abandon Licence 35% Abandon Licence
Preparation of Development Plans (US$ 25000000)
Final Development (US$ 800000000)
Production & Cash Flow
Page 16 of 67
Industry Report Indian Oil & Gas Industry Stagnating Production - Oil & Gas production, in recent years, has been much higher than that in the early 1980s. In 1980-81, the total crude oil and natural gas produced were 10.5 million metric tonnes (mmt) and 2.4 billion cubic metres, respectively. The discovery of the offshore Bombay High oilfields of ONGC in the mid-1970s and the
36000 35000 34000 33000 32000 31000 30000 1990-911995- 1998- 1999- 2000- 2001- 200296 99 00 01 02 03* Crude Oil Natural Gas
Source: MoP&NG
Oil & Gas Production Trends

35000 30000 25000 20000 15000 10000 5000 0
subsequent development in the mid-1980s resulted in the total oil & gas production rising by around three times over the 1980-81 level, in 1985-96. Subsequently, however, in the absence of any new discovery, oil production has stagnated at the mid-1980s levels. Gas production, on the other hand, showed a spectacular growth of 10 times during 1981-96, mainly because of the development of the South Basin fields and reduction in flaring in the Bombay offshore region. Further, the gas transportation infrastructure has improved significantly with the laying of the Hazira-BijaipurJagdishpur (HBJ) natural gas pipeline by the Gas Authority of Indian Limited (GAIL) in 1987. However, beyond 1996, the growth rate in gas production has also been lower. Pressure on Reserves - The total resource base of oil and gas is the entire volume formed and trapped inplace within the Earth before any production. The largest portion of this base is non-recoverable by current or foreseeable technology. This inability is either because of unfavourable economics or intractable physical forces, or a combination of both. At the next level, the recoverable resources are divided into discovered segments. Although the crude oil reserves in India have grown by over six times during the past three decades, the past few years have seen a significant depletion because of the absence of any new findings. The life of oil reserves (as years in 2002 from a high of 45 years in 1980-81. The total proven reserves of natural gas in India as at the end of 2003 was 650 billion cubic metres (bcm). The daily gas production in India is currently around 31 bcm (billion cubic metres). At this and undiscovered
Oil & Gas Reserves
775 750 725 700 675 650 625 600
1990 1997 1999 2001 2003
900 750 600 450 300 1 50 0 Crude Oil Natural Gas

Source: MoP&NG
measured by the Reserve to Production or the R/P ratio) has also declined to 18
Page 17 of 67
Industry Report Indian Oil & Gas Industry production level, India's reserves are likely to last for around 21 years, that is, relatively longer than the 18 years estimated for oil reserves. Role of Private Sector
P vt. P layers Share in P roduction of Oil & Gas (%)
40000 32000 24000 16000 8000 0 1990-91 1998-99 2000-01 2002-03* Crude Oil ('000 tonnes) Natural Gas (mcm) % o f Oil Produced by Pvt Players % o f Gas Produced by P vt Players 20.00% 15.00% 10.00% 5.00% 0.00%
So far, the private sector has played a minor role in the upstream sector. Following the second oil price shock and the realisation of rising oil imports, the Government of India opened the E&P to private sector in 1979. Since 1991, though there have been six rounds of exploration licensing (excluding NELP), limited success has been achieved in the award of the blocks. The reasons being that - firstly,
exploration activities have been initiated only in few (15%) potential oil-bearing areas. Second, there has been delay on the part of the government to award contracts for oil exploration. Third, in the absence of any major oil discovery for the past 15 years, the confidence of the oil majors has gone down. Since early 1990s, government turned its attention towards small and medium-sized oil fields. Under this, two kinds of contracts were offered to the private sector - one, for small-sized fields, involved a production-sharing contract (PSC) with the government, second, for medium-sized fields which involved an equity participation of up to 40% by ONGC/OIL. This privatisation programme has been highly successful as these carried little risks. The development of these fields led to increase in production and the share of private sector in the total oil and gas production. To continue with the privatisation process, in Dec'98, the government introduced the New Exploration Licensing Policy (NELP). Under NELP, the government offered fiscal incentives like: level playing field for National oil companies (NOCs), international oil price to contractors, zero cess liability and 50% rebate on royalty payments for seven years for deep offshore areas. Oil E&P has been given "infrastructure" status, which provides a seven-year tax holiday. NELP I failed to obtain a good response mainly due to low oil prices at the time of launch and high-risk nature of deep-water blocks. Since then, there have been two more rounds of NELP in Dec'00 and Mar'02. And in all these the award process happened in a very short span of time. So far, the government has signed PSCs for 47 blocks in the first two rounds of NELP and has awarded 23 blocks under NELP III. At present 67% of the area under E&P belongs to the NELP Blocks. Recently, in May'03, NELP-IV was Cygnus Business Consulting & Research 2003 Page 18 of 67
Industry Report Indian Oil & Gas Industry announced with 24 blocks on offer. However, despite attractive fiscal terms, transparent approach in bidding process and lesser time in awarding contracts, India has not been able to attract international oil majors probably because of a low success rate of oil strikes and better opportunities elsewhere.
Downstream Sector: Major Players and Structure As of April 1, 2002, the Indian oil-refining sector had 10 companies with 18 refineries and a combined annual installed capacity of 117 mmt. Indian Oil Corporation Limited (IOC) and its two subsidiaries, Chennai Petroleum Corporation Limited (CPCL, formerly Madras Refineries Limited.) and Bongaigaon Refinery and Petrochemicals Limited (BRPL); Bharat Petroleum Corporation Limited (BPCL) and its two subsidiaries, Kochi Refineries Limited (KRL, formerly Cochin Refineries Limited.) and Numaligarh Refineries Limited (NRL); Hindustan Petroleum Corporation Limited (HPCL); Oil and Natural Gas Corporation Ltd. (ONGC); Mangalore Refinery and Petrochemicals Limited (MRPL); and Reliance Petroleum Limited (RPL). Of these 10 companies, RIL is a private sector refinery, MRPL a joint sector entity and the rest public sector enterprises. ONGC is a recent entrant in the refining business and has taken a stake in MRPL. The entry of ONGC into the refining segment appears to be its strategy in the direction of becoming integrated along the oil & gas value chain. The Indian petroleum sector has been under the government control. Keeping the consumers and producers interest, the government decided to
HPCL 11%
Share of Major Refining Capacity, FY 2003

ONGC 8% IOC 43% RPL 23% BPCL 15%
decontrol the sector in a phased manner. To maintain viability of public sector refineries in the decontrolled regime, the government, in Sept'00, decided to integrate the pure refining companies with the integrated majors. Cygnus Business Consulting & Research 2003
Page 19 of 67
Industry Report Indian Oil & Gas Industry Post-restructuring, in FYO3, the shares of IOC (Indian Oil Corporation) and BPCL (Bharat Petroleum Corporation Limited) in India's total refining capacity increased up to 43% and 15.2%, respectively. Indias Installed Refining Capacity (FY 2002-03*) Capacity Refinery Year of ('000 Throughput Company Location Commission tonne) (000 tonne) Barauni 1964 6000 2994 Digboi 1901 650 581 Guwahati 1962 1000 458 IOC Koyali 1965 13700 12434 Haldia 1974 4600 4513 Mathura 1982 8000 8207 Panipat 1998 6000 6101 BRPL Bongaigaon 1979 2350 1463 Chennai 1969 6500 6176 CPCL Narimanam 1993 1000 643 BPCL Mumbai 1955 6900 8770 KRL Kochi 1966 7500 6797 NRL Numaligarh 1999 3000 2307 Mumbai 1954 5500 6078 HPCL Vizag 1957 7500 6851 RPL Jamnagar 1999 27000 30544 ONGC Tatipaka 2001 78 93 MRPL Mangalore 1996 9690 7253 116968 112559
Parent Company
IOC
BPCL HPCL RPL ONGC Total

Source: MoP&NG
Capacity Utilisation 49.9% 89.38% 45.8% 90.76% 98.11% 102.58% 101.68% 62.25% 95.01% 64.3% 127.10% 90.63% 76.90% 110.51% 91.35% 113.16% 119.23% 74.85% 103.92%
* Provisional
Marketing of refined products in India is done mainly by 4 PSUs - IOC, HPCL (Hindustan Petroleum Corporation Limited), BPCL and IBP (taken over by IOC in Feb'02). The government has also decontrolled the marketing sector from April 1, 2002, with pricing of products linked to import parity prices. While the APM for Liquefied Petroleum Gas (LPG), Kerosene (SKO), Motor
HPCL 20%
Marketing Marketshare - FY 2003

Others 6%
IOC 52%
BPCL 22%
Spirit (MS) and Diesel (HSD) have been dismantled, prices of LPG (domestic) and Kerosene (Public Distribution System) are partially subsidised. While the four PSUs account for 91% of total sale of petroleum products in India, the balance sale of 9% is accounted for by imports/sales by private parties. Amongst the PSUs, IOC is the market leader with over 52% market share, followed by BPCL Cygnus Business Consulting & Research 2003 Page 20 of 67
Industry Report Indian Oil & Gas Industry and HPCL having 22% & 20% respectively. Others including IBP has the lowest market share of around 6%. The following table sets forth domestic consumption data for the major categories of refined petroleum products, as a percentage of total domestic consumption of refined petroleum products. Refined Petroleum Products by Major Category Year Ended March 31 (% of total refined product consumption) Product Category 2001 2002 2003 High-Speed Diesel 7711 2079 4863 Kerosene 43% 3% 67% Motor Spirit (Gasoline/Petrol) 3100 378 1644 LPG 3880 64 1898 Naptha/Natural Gas Liquids 33766 263 17717 Furnace Oil/Low-Sulphur Heavy Stock 19.55 10.99
Source: PPAC
Automotive fuels such as diesel (in particular high-speed diesel, or HSD) and motor spirit, or MS (also referred to as gasoline or petrol), account for a significant portion of refined petroleum products sold domestically, making up approximately 42.5 percent of total sales of refined petroleum in India for the year ended March 31, 2003. The four major government-owned downstream oil companies have historically dominated domestic sales of automotive fuels, and prior to March 2002 the Government of India only permitted state-owned oil companies to market automotive fuels to the public. The following chart shows the market shares of the four major government-owned oil companies for domestic sales of automotive fuels (motor spirit and high-speed diesel).
Market Share in Motor Spirit - FY 2003
IBP 7% HPCL 25% BPCL 32% IOC 36%
Market Share in HSD - FY 2003

HPCL 21% IBP 7% IOC 48%
BPCL 24%
The four PSUs control an extensive distribution network consisting of retail outlets, SKO and LPG dealerships, tankage facilities and product pipelines. The company-wise break-up of some of the key elements of the infrastructure is presented here.
Page 21 of 67
Industry Report Indian Oil & Gas Industry Marketing Infrastructure IOC IBP HPCL BPCL 7711 2079 4863 4854 43% 3% 67% 68% 3100 378 1644 996 3880 64 1898 1828 33766 263 17717 16887 19.55 10.99 4.33 53% 5% 20% 22%
SKO Superior Kerosene Oil LDO Light Diesel Oil
Retail Fuel Pumps Company owned & operated SKO/LDO Dealers LPG Distributors LPG Domestic Consumers ('000) Product Pipelines (mmtpa) Market Share
Source: MoP&NG
Earlier, the oil companies used to set up the crude oil/product pipeline network in India. However, to facilitate development of major product pipelines in future, the government created a new company, Petronet India Ltd (PIL). PIL has IOC, HPCL, BPCL and IBP as its major promoters with equity stakes of 16%, 16%, 16% & 2%, respectively. The balance 50% is held by banks & financial institutions. The refineries are expected to construct pipelines on their own. In recent past, oil companies have undertaken several measures to combat air pollution. Auto fuel quality has been improved to enable the automobile industry to comply with the prescribed emission norms. Investment of over Rs.100 bn has been made by the PSU refineries during the last 5 years. In this regard Low sulphur diesel (0.25% maximum) and unleaded petrol are being supplied throughout the country with effect from January 1, 2000 and February 1, 2000 respectively.
Page 22 of 67
Demand & Supply Scenario

Domestic Energy Demand
The significant growth of Indias economy over the past decade has led to strong increases in domestic energy consumption. The increase in demand for petroleum products in India has shown a strong correlation to growth in gross domestic product, or GDP. During the ten-year period ended March 31, 2003, the compounded annual growth rate, or CAGR, of consumption of petroleum products was approximately 6.0 percent (Source: Petroleum Planning and Analysis Cell (PACC) December 2003), compared to a CAGR for GDP of 6.0 percent (Source: RBI) for the same period. However, the consumption of petroleum products grew at a CAGR of 2.4 percent for the period fiscal 2000 to fiscal 2003 (Source: PPAC December 2003). Growth in energy consumption has tended to lag behind GDP growth over the latter half of this period due to several factors, including increased oil prices and price volatility and, perhaps most significantly, due to the fact that the expansion in the Indian economy has been disproportionately concentrated in the services sector rather than in more energy-intensive sectors such as heavy industry and agriculture. Similarly, over the past decade domestic natural gas consumption has grown significantly in absolute terms, from approximately 16,407 mmcm for the year ended March 31, 1994 (Source: Oil Coordination Committee, November 2001) to approximately 29,972 mmcm for the year ended March 31, 2003 (Source: MOPNG Basic Statistics on Indian Petroleum and natural Gas, 2002-03) representing a CAGR of over 6.9 percent. Despite this high rate of growth, natural gas consumption as a percentage of total domestic energy consumption has remained relatively flat over this period, increasing from 6.4 percent for the year ended December 31, 1993 to 7.8 percent for the year ended December 31, 2002, and remains well below the world average of 24.3 percent for the year ended December 31, 2002 (Source: BP Statistical Review of World Energy, June 2003). Domestic natural gas consumption has been limited by supply constraints caused by low growth in domestic production. The production is expected to start declining absent significant improvement in the recovery of reserves in existing fields or significant discoveries of new, commercially viable reserves. Supply constraints have also been caused in part by a relative lack of infrastructure for importing and distributing foreign natural gas. However, the construction of two liquefied natural gas, or LNG, import terminals on the west coast of India by Petronet LNG and Shell by January 2004 and July 2004, with projected annual handling capacity of 5
Page 23 of 67
Industry Report Indian Oil & Gas Industry million tons each, is anticipated to result in average daily natural gas imports of up to 40 mmcmd by 2006. The following table sets forth total domestic energy consumption, and the relative contributions of major primary energy sources to total domestic consumption, for the ten years ended December 31, 2002. Total Domestic Energy Consumption (millions of oil equivalent) 222.4 235.5 252.3 270.0 282.4 290.3 298.1 312.0 314.2 325.1 Primary Energy Sources (% of Total Domestic Consumption) Coal (%) 57.6 56.9 56.6 57.2 56.7 55.0 53.0 54.3 54.9 55.6 Crude Oil (%) 28.2 28.6 28.9 29.4 29.5 29.9 31.9 31.3 30.8 30.1 Natural Gas (%) 6.4 6.3 7.0 6.9 7.3 7.6 7.8 7.8 7.8 7.8 Hydroelectric (%) 7.2 7.7 6.8 5.8 5.6 6.5 6.2 5.6 5.2 5.2 Nuclear (%) 0.6 0.5 0.7 0.7 0.8 0.9 1.0 1.20 1.40 1.40
Year Ended 31-Dec 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: BP Statistical Review of World Energy, June 2003
In addition to demand for energy, the oil and gas industry is significantly affected by demand for a variety of refined and processed products derived from crude oil and natural gas, which are used in a variety of industrial, consumer and agricultural applications. Examples of non-fuel end products include lubricants, fertilizer, plastics and other petrochemicals. Domestic Oil & Gas Production Year Ended March 31 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Total Refinery Throughput of Crude Oil (mmbbls) 405.5 423.4 440.7 471.5 488.9 514.1 643.3 773.3 799.1 829.4 Total Domestic Production of Crude Oil (mmbbls) 202.7 241.7 263.6 246.5 253.7 252.8 240.0 243.4 240.2 248.0 (%) 50.0 57.1 59.8 52.3 51.9 49.2 37.3 31.5 30.1 29.9 Crude Deficit (mmbbls) 202.8 181.7 177.2 225.0 235.1 261.3 403.3 530.0 558.9 581.3 (%) 50.0 42.9 40.2 47.7 48.1 50.8 62.7 68.5 69.9 70.1
Source: PACC, Conversion Factor Used: 1 MMT = 7.5 mmbbls
Page 24 of 67
Industry Report Indian Oil & Gas Industry As the gap between demand and production of crude oil continues to widen, India has increasingly become a significant net importer of crude oil. The following Chart shows, the stagnation in domestic crude oil production during the past few years, along with large additions in domestic refining capacity for meeting the increased demand for refined oil products, has translated into an increased reliance on crude oil imports. This has resulted in a substantial outgo of foreign exchange. In value terms, the foreign exchange (forex) outgo declined during 1997-98 and 1998-99 because of the fall in international crude oil prices. Thereafter, in 1999-2000 and 2000-2001, the rise in crude oil prices, internationally coupled with the increased requirement of crude oil in the Indian market, resulted in a sharp increase in the forex outgo on this account. With increasing and economic dwindling
90 75 60 45 30 15 0 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 Crude Oil Productio n Crude Oil Import Crude Oil Import
Crude Production & Import

900 750 600 450 300 150 0
development
crude oil production, Indias dependence on imported crude oil is expected to increase exponentially coming years. during the
Worldwide, the percentage of global primary energy consumption of natural gas rose from 19% in 1980 to 24% in 2002. The Indian natural gas market is relatively underdeveloped compared to other areas of the world, with only natural 8% of gas total energy The table forth sets currently primary consumed. beside comprising Region India North America South & Central America Europe & Eurasia Africa Middle East Asia Pacific* World Oil 2.8 30.2 6.1 26.3 3.4 5.9 25.3 100 Natural Gas 1.1 31.2 3.9 41.2 2.7 8.1 11.9 100 Coal 7.5 24.7 0.7 21.1 3.8 0.3 41.9 100 Nuclear Hydro 2.8 33.6 24.1 0.8 45.8 0.5 9.3 100 20.7 30.2 3.1 0.3 18.8 100
* excluding India
energy consumption
Source: BP Statistical Review of World Energy, 2003
All figures in percentage (%)
patterns in different regions around the world. Cygnus Business Consulting & Research 2003 Page 25 of 67
Industry Report Indian Oil & Gas Industry In the last 10 years, Indias natural gas consumption has increased at a growth rate of 6.3%, according to the BP Statistical Review of World Energy, 2003. According to the India Hydrocarbon Vision 2025 Report, the demand for natural gas is projected to increase sharply. This projected increase reflects general increases in energy requirements as a result of strong industrial growth in India during this period and the fact that natural gas is cheaper and more environmentally friendly than cost of alternate fuels. We expect further growth in demand for natural gas from the power sector. As new power plants are constructed to meet Indias increasing energy requirements, we expect these new power plants to favour natural gas as a fuel because gas-based power plants take a shorter time to build, can operate at a higher plant load factor, have lower capital and operating costs and have substantial environmental advantages when compared to coal-based plants. We also expect further growth of demand for natural gas from the fertiliser sector. There have been several estimates of the future demand of natural gas as shown below: Gas Demand as per Gas Linkage Committee 2002-03 2003-04 2004-05 2005-06 2006-07 Demand (mmscmd) 145 155 176 179 179 Gas Demand as per India Hydrocarbon Vision Report 2025 2001-02 2006-07 2011-12 2024-25 Demand (mmscmd) 151 231 313 391 ADB Study - Gas Master Development Plan, 1999 2002 2004 2007 Demand (mmscmd) 121.4 144 185.2
While the actual demand projection numbers in each of these studies may vary, the important point that each of these studies make is that there is significant demand for natural gas in the future. However, demand growth would be a function of the price of natural gas vis-a-vis other competing fuels. In other markets, it has been observed that demand for natural gas has very strong inverse relationship with its price with respect to competing fuels. On the supply front, the potential supply from the Reliance gas discovery in Andhra Pradesh is expected to increase the domestic supply by 40 mmscmd in the next three-four years' time. This, coupled with an increase in domestic production by approximately 10 mmscmd, implies a supply of
Page 26 of 67
Industry Report Indian Oil & Gas Industry around 120 mmscmd by 2007. This is still short of the expected demand going by any one of the above estimates. The increased deficit of natural gas in India implies that greater emphasis should be placed on the exploration and production of natural gas and/or its imports from countries like those in the Middle East. As a step towards facilitating imports of liquefied natural gas (LNG), the Gol has formed a company called Petronet LNG. This company has been entrusted with the task of setting up LNG import terminals in the country. Petronet LNG has initiated action to set up LNG terminals at DahejGujarat (5 million metric tonnes per annum or mmtpa) and Kochi-Kerala (2.5 mmtpa) to meet the growing demand of natural gas from the power and fertiliser sectors. Apart from Petronet LNG, a number of other companies are proposing to set up LNG projects as discussed in the Chapter on Natural Gas. Currently, there is a concern on the price at which LNG would be supplied to the consumer-for ensuring viability of the capital-intensive LNG projects. Accordingly, it is increasingly being felt that gas supply through the LNG route may not find favour from the potential gas consumers, unless specific concessions are provided to these suppliers.
Refining & Marketing

Historically, the Indian market was characterised by shortages in petroleum products. The domestic demand for refined petroleum products had increased from 55 million metric tonnes in FY1991 to 91 million metric tonnes in FY1999-a compounded annual growth rate (CAGR) of 6.5%. On the other hand, the production of refined products (by refineries plus gas fractionators) had increased at a lower CAGR of 4% during the same period. Accordingly, the deficit in the Indian market had increased, with the self-reliance level down to 75.6% in FY1999 from 91% in FY1991. Product-wise, the deficit was the maximum in HSD followed by SKO and LPG. This deficit was met by imports. The year FY2000 saw sharp changes in the demand-supply position for petroleum products in the Indian downstream petroleum industry. The year saw the growth in refining capacity from 69.14 million tonnes to 112.04 million tonnes, i.e., a growth of over 62%. Petroleum product demand, on the other hand, witnessed a growth of just 7.2% (from 90.56 million tonnes in FY1999 to 97.09 million tonnes in FY2000). The following two years saw a continuation in the oversupply position in the domestic market. While the product demand increased by a modest 2.6% in FY2001 and a negative 1.5% in FY2002, the installed refining capacity increased from 112.04 mtpa in FY2000 to
Page 27 of 67
Industry Report Indian Oil & Gas Industry 114.7 mtpa in FY2002. Thus by FY2002, the installed refining capacity was over 16 million tonnes more than the product demand.
Source: ICRA
The demand-supply projections for the medium term in this report take into account the new capacities in the pipelineboth greenfield and expansionsand consider three alternative scenarios of demand growth: 3% (low growth), 5% (moderate growth), and 7% (high growth). The findings, as presented in the chart above, show that in all the three scenarios of demand growth, a surplus situation in petroleum products is likely to persist till FY2007. Net Export/(Import) in '000 tonnes Crude Oil & Petroleum Products FY 2000 FY 2001 FY 2002 FY 2003 LPG -1587 -853 -659 -1073 MS 131 1202 2406 2336 Naptha -1334 -283 -773 -226 ATF -1 159 192 695 SKO -6312 -1918 391 -698 HSD -5006 1597 2859 3072 FO/LSHS -1378 -1220 -943 -136 Lubes -407 -1602 -1193 -1309 TAME 0 137 123 90 Others 32 2016 1491 801 Total -15862 -765 3894 3552
Source: MoP&NG
Product-wise the demand-supply position shows that, historically, India faced a deficit in almost all the petroleum products except for naphtha. Naphtha was in surplus in India till FY1998. However, FY1999 and FY2000 witnessed a deficit position in this product. The year FY2000 also saw a surplus
Page 28 of 67
Industry Report Indian Oil & Gas Industry in MS (petrol). During FY2001, FY2002 and FY2003 deficit position in all the products have reduced and products like MS, HSD and ATF have reported surplus. Further, as per the Tenth Five -Year Plan estimate, apart from LPG, FO/LSHS and LOBS (Lube Oil Base Stock), all other products are expected to report a surplus till FY2007.
Oil & Petroleum Products LPG Naptha MS ATF SKO HSD LDO FO/LSHS Bitumen LOBS Others Total
Source: MoP&NG
Surplus/(Deficit) in '000 tonnes FY 03(P) FY 04(P) FY 05(P) FY 06(P) -1275 -1587 -1539 -2430 1001 2670 5042 4347 2820 2751 2613 2210 1245 1916 2234 2175 0 0 0 0 7186 10120 13751 11652 0 0 0 0 -487 -1200 -3223 -4920 0 0 0 0 -369 -348 -386 -463 2581 3565 4945 5693 12702 17887 23437 18264
FY 07(P) -3391 4059 1463 2019 0 8349 0 -5611 0 -539 5612 11961
Total -10222 17119 11857 9589 0 51058 0 -15441 0 -2105 22396 84251
Page 29 of 67
Cost Structure & Profitability
Upstream Companies:
Income Statement FY 2003 Rs crore Industry Aggregates % of Net Sales Gross Sales 41094.78 101.21% Excise Duty 490.39 1.21% Net Sales 40604.39 100% Raw Materials 11.97 0.03% Other Manufacturing Expenses 5023.28 12.37% Power & Fuel Cost 448.86 1.11% Employee Cost 1066.54 2.63% Selling and Administration Expenses 11626.32 28.63% Miscellaneous Expenses 3623.7 8.92% Less: Preoperative Expenditure Capitalised 1.09 0.00% Operating Profit 18804.81 46.31% Interest & Financial Charges 164.41 0.40% Profit before Depreciation & Tax 18640.4 45.91% Depreciation 911.23 2.24% Profit Before Tax 17729.17 43.66% Tax 6058.35 14.92% Net Profit 11670.82 28.74% RONW 28.48% ROCE 28.29% The Industry Aggregates figures have been taken to depict the cost structure of the major players operating in it. The table above shows cost component as a percentage of Net Sales and the figure below display the same thing as a percentage of Total Operating Cost of the Industry.
Cost Structure
M iscellaneous Expenses 17% Raw M aterials 0% Ot her M anuf act uring Expenses 23% Power & Fuel Cost 2%
If we take the second case first, the major cost item for the upstream sector company like ONGC is the selling and administrative expenses followed by Other Manufacturing and Miscellaneous Expenses. Raw Material cost is very
Selling and Administ ration Expenses 53%
Employee Cost 5%
minor in proportion to the total cost, aggregating hardly to 5%.
The finding cost of Indian companies (like ONGC) is much higher than that of international majors. This is probably because of the lower reserve accretion in India in the recent past. Also, the early gains have been in fields where the success probability ratios were much higher. In fact, according to oil experts, earlier ONGC used to operate in fields with a success ratio of 1 per 3.5 wells explored, as Cygnus Business Consulting & Research 2003 Page 30 of 67
Industry Report Indian Oil & Gas Industry against the international norm of 1:5. Thus, future reserve discoveries may require higher investments, which would increase the costs of finding them. Lifting costs (defined as the operating costs for extracting oil & gas from reserves) are lower for Indian E&P companies because of lower manpower costs.
Thus, the cost structure of Indian upstream majors compares well with that of the international oil companies. ONGC and OIL's break-even cost of producing oil at US$8/bbl at their existing fields, which although higher than that of the OPEC4 nations (US$2/bbl for the Middle East, US$7/bbl for Nigeria and Venezuela, US$6/bbl for Indonesia), compares well with the figures for many non-OPEC regions (Mexico, US$10/bbl and North Sea, US$11/bbl). However, the Indian E&P costs are expected to rise in future with the existing fields maturing and the costs of exploration in the higherrisk deep-water areas increasing. The stagnation of production from existing fields and non-accretion of new reserves is forcing Indian E&P companies to venture into high-risk areas. The E&P companies face the uphill task of exploring areas which are complex, unstructured, less viable and require proven and state-of-the-art technology. These would need higher investments, which would entail greater risks and demand considerable skill and experience. In a scenario of lower oil prices, the Indian upstream companies would be at a loss, as their cost of production would be much higher than those of the low-cost oil producers. Such situations would require effective State interventions, such as fixing of floor price, restrictions on oil imports, and imposition of import duties for protecting the interests of the Indian upstream companies.
Page 31 of 67
Downstream Companies:
Income Statement FY 2003 Rs crore Industry Aggregates % of Net Sales Gross Sales 298788.94 111.46% Excise Duty 30708.66 11.46% Net Sales 268080.28 100% Raw Materials 226373.63 84.44% Other Manufacturing Expenses 6788.18 2.53% Power & Fuel Cost 858.42 0.32% Employee Cost 3396.51 1.27% Selling and Administration Expenses 5963.99 2.22% Miscellaneous Expenses 1749.86 0.65% Operating Profit 22949.69 8.56% Interest & Financial Charges 3189.06 1.19% Profit before Depreciation & Tax 19760.63 7.37% Depreciation 4158.25 1.55% Profit Before Tax 15602.38 5.82% Tax 4508.67 1.68% Net Profit 11093.71 4.14% RONW 24.27% ROCE 15.59%
The Industry Aggregates figures have been taken to depict the cost structure of the major players operating in it. The table above shows cost component as a percentage of Net Sales and the figure below display the same thing as a percentage of Total Operating Cost of the Industry. If we take the second case first, the major cost item for the downstream sector company like IOC, BPCL, HPCL, etc is the raw material cost (>92%), followed by Other Manufacturing and Selling & Administrative Expenses forming 2.77% and 2.43% to the total operating cost respectively. Other cost heads like employee cost, power and fuel and miscellaneous expenses in aggregate constitutes the balance of the portion. Same pattern could be seen if we consider the first case i.e. cost component as a percentage to Net Sales. Here also raw material form the major chunk (>84%) again followed by Other Manufacturing and Selling & Administrative Expenses.
Power & Fuel Cost 0%
Cost Structure
Selling and Administ ration Expenses 2%
Employee Cost 1%
M iscellaneous Expenses 1%
Ot her M anuf acturing Expenses 3%
Raw M at erials 93%
Page 32 of 67
Gas Distribution Sector:

(Rs crore) Gross Sales Excise Duty Net Sales Raw Materials Power & Fuel Cost Other Manufacturing Exp Employee Cost Selling and Admin Exp Miscellaneous Expenses Less: Preoperative Expenditure Capitalised Operating Profit Interest & Financial Charges PBDT Depreciation Profit Before Tax Tax Net Profit FY 2003 12102.1 424.46 11677.64 7214.13 380.87 208.34 157.84 170.52 217.46 18.77 3347.25 186.37 3160.88 642.59 2518.29 879.18 1639.11 Income Statement % of Net Sales FY 2001 103.63% 10228.96 3.63% 233.15 100.00% 9995.81 61.78% 6822.69 3.26% 335.79 1.78% 188.01 1.35% 145.21 1.46% 139.64 1.86% 82.6 0.16% 28.66% 1.60% 27.07% 5.50% 21.57% 7.53% 14.04% 54.11 2335.98 197.14 2138.84 586.63 1552.21 426.04 1126.17 % of Net Sales 102.33% 2.33% 100.00% 68.26% 3.36% 1.88% 1.45% 1.40% 0.83% 0.54% 23.37% 1.97% 21.40% 5.87% 15.53% 4.26% 11.27% FY 1999 6909.66 69.5 6840.16 4903.76 215.78 64.99 78.23 61.86 34.53 227.16 1708.17 91.56 1616.61 381.22 1235.39 175.47 1059.92 % of Net Sales 101.02% 1.02% 100.00% 71.69% 3.15% 0.95% 1.14% 0.90% 0.50% 3.32% 24.97% 1.34% 23.63% 5.57% 18.06% 2.57% 15.50%
Cost Structure - FY 2003

Employee Cost 2% Selling and Administration Expenses 2%
Cost Structure - FY 1999

Other M anufacturing Expenses 1% Power & Fuel Cost 4% Employee Cost 1% Selling and Administration Expenses 1% M iscellaneous Expenses 1% Raw M aterials 92%
Other M anufacturing Expenses 2%
M iscellaneous Expenses 3%
Power & Fuel Cost 5%
Raw M aterials 86%
To identify the cost structure of a gas distribution company, we have taken GAIL, which is the market leader in this business having more than 85% of the market share. The above table shows cost component as a percentage of Net Sales and the figure below display the same thing as a percentage of Total Operating Cost of the Industry. Here also if we take the second case first, natural gas which is a raw material to such distribution companies forms the major part of the total operating cost (i.e. >60%). Following which is the power and fuel cost constituting 3 - 4% of the cost. Other cost items includes employee cost, selling and administrative cost and other manufacturing and miscellaneous expenses. Now if we consider the first case, the big picture remains the same, the only difference is there in proportion of various individual components to operating cost, which is evident from the above figure. Cygnus Business Consulting & Research 2003 Page 33 of 67
Sector Deregulation
The Story So Far: Till the year 1998, the Indian petroleum sector was controlled by the Administered Pricing Mechanism (APM), which provided the players with assured returns on capital employed. The APM necessitated that the prices of crude oil/products be fixed in a manner so as to assure returns (based on net worth/capital employed) to the exploration and production (E&P) companies, refiners and marketing companies. As mentioned, the Indian upstream sector (like the downstream sector), till very recently, operated under the administered pricing mechanism, or APM, (domestic natural gas prices were linked to international prices in October 1997 while domestic crude oil prices were linked to international prices in April 1998). During the period 1981 to 1991, the price payable on crude oil to upstream players was left unchanged at Rs. 1,021 per tonne. In 1992, the Cabinet Committee on Infrastructure reviewed the crude pricing and observed that because of the unremunerative prices of indigenous crude oil, the upstream companies were unable to generate resources for developing more oilfields and for exploring new areas. The Cabinet Committee recommended that domestic wellhead prices of crude oil be fixed in such a manner so as to cover the operating expenses plus a guaranteed 15% post-tax return on capital employed. Accordingly, the crude oil price was raised to Rs. 1,506/tonne in September 1992, to Rs. 1,741/tonne in April 1993 and to Rs. 1,991/tonne in April 1996. The gas prices payable to the producer were also fixed at Rs. 1,500 per 1000 cubic metre during 1992 to September 1997, as mentioned earlier. Because of the variations in the prices of crude oil and natural gas, the financial indicators (ROCE, RONW, OPM and NPM5) of the upstream companies have also shown fluctuations, as the following Chart demonstrates. With no revisions being made in oil prices during FY1995 and FY1996 there was a decline in the profitability indicators in this period. Thereafter, the increase in oil prices in FY1997 and the absence of price revision in FY1998 resulted in a see-saw movement (rise followed by a decline) in the profitability indicators. From 1998 onwards, the linkage of domestic prices with international prices, coupled with the fixing of a floor price, has resulted in an upward movement in the profitability indicators.
Source: Company Annual Report
Page 34 of 67
Industry Report Indian Oil & Gas Industry The deregulation of the domestic petroleum industry, which was initiated in April 1998, broadly involved the following: Provide adjusted import parity prices to refineries; Decontrol of all products with the exception of MS, HSD, LPG, SKO and ATF. Subsequently, ATF was freed from marketing controls with effect from April 1, 2001; Partially rationalise the duty structure on petroleum products; Provide crude realisations, indexed to international prices, to the exploration companies; and Introduce the New Exploration Licensing Policy (NELP) in the upstream sector with the intention of inducing capital flows into the sector. The complete decontrol of the sector was proposed from April 2002.
Further, the treatment of upstream companies under the APM has been different. The APM ensured controls on the prices of both the input and output for downstream companies and, hence, guaranteed their profit margins. For upstream companies, while the investment costs in E&P were in line with those of international companies, their sales realisations from crude and natural gas (as fixed under APM) were much lower vis-a-vis international prices. For instance, the price realisation on crude oil for ONGC in FY1997 (net of duties) was Rs. 1,991/tonne (or US$7.6/bbl) as against an average Dubai crude price of US$19.3/bbl in FY1997. This difference translates into a staggering amount of Rs. 79.3 billion in pre-tax profits (which is over three times ONGC's reported profit before tax in FY1997). This anomaly has been corrected to a large extent since April 1998, by linking the price of indigenous crude with the weighted average freight on board (FOB) price of imported crude. The linkage was 75% in FY1999 and 77.5% in FY2000. The GOI had also imposed a floor price (of Rs. 1,991/tonne) and a ceiling price (of Rs. 4,092/tonne, overall price Rs. 5,570/tonne) on the basic price of indigenous crude oil. However, with the full decontrol of the petroleum sector since April 2002, pricing of indigenous crude has been decontrolled and the companies are free to set their own price.
A significant amount of the gross sales realisation on crude oil is taxed in the form of royalty, cess and sales tax as the following table shows.
Page 35 of 67
Industry Report Indian Oil & Gas Industry Basic Price of Crude Oil 1506 1741 1991 Royalty+Cess+Sales Tax (as % of Total Price) 49.8 47.2 44.8
Source: MoP&NG
Pricing Date 16.09.92 01.04.93 01.04.96
Royalty 481 528 578*
Cess 900 900 900**
Sales Tax 115.48 126.76 138.76
Total Price 3002.48 3295.76 3607.76
All units in Rs/tonne *With Effect from June 1999, Royalty was computed as 20% of wellhead value subject to an upper ceiling of Rs 750/tonne. The upper ceiling was increased to Rs 850 (with effect from December1, 1999).
** Doubled to Rs 1800/tonne in the Union Budget of 2002-03. As per the new policy announcement in Feb. 2003, crude oil production from onshore fields would attract 20% royalty in wellhead price, offshore fields 10% and deep waters 5%. ONGC is expected to gain from this, since more than half of ONGC's production concern from the offshore Mumbai High field.
Similarly, in the case of natural gas, the charges include Rs. 2.5 billion annual contribution to the gas pool account; difference between international prices (payable to joint-venture gas fields) and the landfall price; royalty at 10% of producer price; and, sales tax. A self-balancing system, the APM consisted of a number of oil pool accounts through which products like diesel, kerosene, and LPG were cross-subsidised through higher realisations from other products such as MS and Aviation Turbine Fuel (ATF). A cost-plus system, the APM was worked out on the basis of the normative cost, plus a return on net worth/capital employed. A burgeoning oil pool deficit due to the inability of the GOI to pass on the increased costs of crude oil through higher product prices and the need for attracting fresh investments, both in the upstream and the downstream sectors resulted in the initiation of a process of deregulation.
Decontrol Story Finally Unfolds In the Union Budget of FY2002 presented on February 28, 2002, the Gol finally announced deregulation of the petroleum sector. The key announcements included: APM in the petroleum sector to be dismantled with effect from April 1, 2002; The pricing of petroleum products to be market determined; Issue of oil bonds to the oil companies concerned to liquidate the oil pool account; Private companies to be permitted in distribution, subject to specified guidelines; A Petroleum Regulatory Board to be set up to oversee the sector; Subsidy on domestic LPG and PDS kerosene to be provided in the Budget. Prices of LPG being raised by around Rs. 40 per cylinder and of kerosene oil for PDS by around Rs. 1.5/litre from March 1, 2002. Cygnus Business Consulting & Research 2003 Page 36 of 67
Industry Report Indian Oil & Gas Industry Subsequently, however, the prices of LPG was rolled back by Rs. 20/cylinder in March 2002 because of political pressure. The retail prices to vary as the price of crude oil changes in the international market; Customs duties on non-PDS kerosene reduced from 35% to 20% and increased from 5% to 10% on kerosene sold under the PDS scheme; Freight subsidies to continue for LPG and kerosene supplied to far-flung areas; Prices of diesel and petrol to come down by around 50 paise and Re. 1/litre, respectively, from March 1,2002; LPG, kerosene, auto CNG to attract 16% central value added tax (CENVAT) against the earlier 8%; Cess on crude oil increased from Rs. 900/tonne to Rs. 1,800/tonne;and 50% exemption on excise for refineries for the States in the North-East. The Government of India vides Gazette Notification dated March 28, 2002, dismantled APM with effect from April 1, 2002. As per this notification, pricing of all petroleum products would become market determined effective April 1, 2002, except SKO (PDS) and LPG (domestic). Subsidy on SKO (PDS) and LPG (domestic) would be phased out in the next three to four years.
Expected Impact of Deregulation The impact of the deregulation process is expected to be positive for the upstream oil companies. This is because the prices of their main products have now been linked to international prices. Thus, any upward movement in international crude oil prices/basket of fuel oil prices (on which natural gas prices are based) translates into a positive impact on the bottomline of the upstream oil companies. By providing a floor price for crude oil (Rs. 3,469/tonne) and natural gas (floor price of Rs. 2,150/'000 cubic metre on the landfall price), the downside risk because of any decline in international oil prices is also protected. It is estimated that every US$1 increase in crude oil prices results in Rs. 8,050 million and Rs. 1,132 million of additional income for ONGC and OIL, respectively. As incremental expenditure is minimal, most of this adds directly to the pre-tax bottomline of the company. A similar impact may be seen on account of a rise in natural gas prices. The ceiling price imposed by the Gol on crude oil (Rs. 5,570/tonne) and natural gas (Rs. 2,850/'000 cubic metre), however, limited the impact of rising prices. Cygnus Business Consulting & Research 2003 Page 37 of 67
Industry Report Indian Oil & Gas Industry In the Union Budget of 2002-2003, the cess on crude oil produced by NOCs has been doubled by Rs. 900/tonne or around $2.5/bbl. The price of crude oil was, till recently, capped at Rs. 5,570/tonne or US$16/bbl. This cap has been removed from April 2002 with 100% linkage with international prices. Thus, as long as oil prices are above $18.5/bbl, the NOCs are expected to report earnings higher than the earnings in the controlled period. However, earnings are going to be hit the moment oil prices become less than US$18.5/bbl. The natural gas prices, however, continue to be controlled by the upper and the lower bounds-thus providing a limit on improvement in earnings in the event of price rise of fuel oil (on which natural gas prices are fixed) internationally and limitation of downside risk in the event of decline in global prices. Impact of Rise in Price Realisation on Upstream Companies ONGC OIL US$1/bbl rise in crude prices 8050 1132 5% rise in natural gas prices 2540 233
Source: ICRA
The marketing margins of the oil companies are expected to rise following the decontrol of the retail segment. Under the APM, marketing margins of the oil companies used to be determined based on a fixed return on capital employed. However, in a free market the margins on the decontrolled products are expected to be determined on a replacement cost basis. This thinking is substantiated by the fact that the margins on the other decontrolled products (like lubricants, Industrial Fuel and ATF) in India had increased significantly post decontrol. International trend also reveals that the marketing margins (at over $4-5/bbl in many Western countries) are much higher and more resilient than the refining margins. With this full decontrol of the sector, prices at the retail end should vary frequently in accordance with international trends. For example, a $1/bbl rise in crude oil prices may translate into rise in retail prices of Motor Spirit by 50-60 paise/litre in India. However, as petroleum products are for mass consumption, socio-political reasons may prevent frequent changes in the prices of the hitherto controlled products viz. Motor spirit, Diesel, Kerosene and LPG. But what is expected is that the oil companies would review the prices at frequent intervals (typically on a monthly basis) and take the decision to revise prices accordingly. Further, customers are also unlikely to be exposed to extreme price shocks. What is likely is that if oil prices go very high, the government may intervene by imposing excise duty cuts. This may also be supplemented with the oil companies raising the prices by a limited extent (even when international prices are very high) and compensating themselves (for the loss incurred in the process) by resorting to a limited roll-back when the oil prices fall significantly. The proposed downstream regulatory authority is also expected to ensure that the oil companies do Cygnus Business Consulting & Research 2003 Page 38 of 67
Industry Report Indian Oil & Gas Industry not venture into undue profiteering by tampering with the retail prices frequently. The regulatory authority is also expected to ensure that product supply is uninterrupted at all locations, particularly the remote and far flung areas. Thus, the hospitality and marketing infrastructure sharing arrangement among the oil companies is expected to continue in the medium term. Also, the freight subsidy provision in the union budget is likely to ensure that product supply to remote and far-flung areas do not take place at unreasonable prices. Actual Impact of Deregulation Dismantling led to a massive hike in net profits of over Rs 23,000 crore of the national oil companies, allowing them to reap a windfall by selling crude at market rates instead of being tethered down by artificially low price ceilings. While there has been a benefit on the inventories held, the increase in retail prices also led to an improvement in marketing
Changing Fortunes Post APM - ONGC
120000 90000 60000 30000 0 Turnover 2001-02 PAT 2003-04 M arket Capital 30-Jan-04
margins. While the major companies -- Oil and Natural Gas Corporation (ONGC), Indian Oil Corporation (IOC), Mangalore Refinery Petrochemicals Ltd (MRPL), HPCL, GAIL and BPCL -Changing Fortunes Post APM - IOC
150000 120000 90000 60000 30000 0 Turnover 2001-02 PAT 2003-04 M arket Capital 30-Jan-04
have made huge profits, smaller subsidiaries also performed well. Companies like Kochi Refineries and CPCL too posted good growth in topline and bottomline. While the sale has been witnessing a steady growth over the past few years, the bottomline is that oil and
Changing Fortunes Post APM - GAIL
20000 15000 10000 5000
gas companies have seen a sharp and consistent rise in profits. Large dividend payouts have been a striking feature of these public sector companies which made their valuations more attractive on the bourses. Assured returns for oil companies in the APM era resulted in gross inefficiencies at the cost of the taxpayers. Besides, these companies were ill-equipped
0 Turnover 2001-02 PAT 2003-04 M arket Capit al 30-Jan-04
to source crude economically as IOC was the sole canalizing agency for the purpose. Also, crosssubsidisation of prices caused uneven pricing across oil products.
Page 39 of 67

Changing Fortunes Post APM - HPCL
60000 50000 40000 30000 20000 10000 0 Turnover 2001-02 PAT 2003-04 M arket Capital 30-Jan-04
Thus, the cost of petrol used to be almost twice that of diesel unlike in developed countries where prices are almost equal. Aviation turbine fuel (ATF) too used to cost more than in most other countries. PostAPM, the market based environment ensures better pricing, efficient working capital management and higher margins for oil PSUs. Deregulation has made
PSUs more competitive and has led to a strong performance at the bourses. The phenomenal results of the oil PSUs over the last few months have generated immense interest in the international market. However, the question that is begging to be answered is why, after more than a year since the deregulation process was announced, has it still to be effected? Theoretically, APM was dismantled with effect from
Changing Fortunes Post APM - BPCL
50000 40000 30000 20000 10000 0 Turnover 2001-02 PAT 2003-04 M arket Capit al 30-Jan-04
April 1, 2002; but the oil companies were not allowed to revise the prices of MS and HSD despite rise in international prices during the first two months of 2002-03. Finally, in June 2002, the oil companies were allowed to revise the prices upwards. The first hike was affected on the midnight of June 3-4. This involved raising prices of MS and HSD by Rs. 2.5/litre and Rs. 1.5/litre, respectively. The GOI also shared the burden of rise in international prices by reducing the excise duty on both HSD and MS from 16% to 14%. Following the first round of price hike, the GOI authorized the oil companies to make a fortnightly revision of prices. As far as the duties are concerned, the GOI has said that it would review the tariff structure on MS and HSD on a quarterly basis, taking into account factors such as global prices, domestic retail prices, financial impact on the domestic market and other economic factors. However, in case of extreme volatility in prices in the international markets, the review date may be preponed.
Page 40 of 67
Government Policies & Regulations

Petroleum and Natural Gas Regulatory Board Bill With the object to oversee the downstream petroleum sector in the country in the deregulated scenario, Government proposed to set up a Petroleum and Natural Gas Regulatory Board .To facilitate the setting up of the Board, the Government introduced the Petroleum Regulatory Board Bill, 2002 in the Lok Sabha on May 6, 2002. This bill has been later amended and renamed as the Petroleum and Natural Gas Regulatory Board Bill, 2002. One of the basic objectives of this Bill is to provide for a regulatory mechanism which 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. To prevent exploitation of consumers in the deregulated scenario, the Regulatory Board would ensure that each marketing entity displays for the information of customers the maximum retail prices for the notified petroleum, natural gas and petroleum products, and take steps in accordance with regulations, to prevent profiteering by the entities. Provisions have been made in this Bill to ensure redressal of grievances and protection of consumer interest as also resolution of disputes among entities or between an entity and any other person. Auto Fuel Policy The Mashelkar Committee on Auto Fuel Policy has suggested introduction of Bharat Stage II in the entire country with effect from April 2005. The Committee has also recommended introduction of Euro III or Bharat Stage III equivalent emission norms for all categories of vehicles (excluding two and three wheelers) to be introduced in seven mega cities with effect from April 2005, and to be extended to other parts of the country by 2010. The Committee expects the Indian refiners to spend Rs. 170 billion to meet emission norms by 2005 and another Rs. 180 billion to meet the 2010 specifications. Draft Natural Gas Pipeline Policy A Natural Gas Pipeline Policy is being formulated. The objective of this policy is to promote investment in gas pipeline and to provide inter-connectivity between regions, consumers and producers and to provide a framework for future growth of the gas sector. As per this policy a regulator will be appointed for regulating, transmission, distribution, supply and storage system for natural gas/liquefied natural gas (LNG) and to promote development of the sector. Cygnus Business Consulting & Research 2003 Page 41 of 67
Industry Report Indian Oil & Gas Industry As per the draft policy transportation of all gas will be done through a network of pipelines laid in accordance with authorization granted by the regulator. Any producer of gas or other person desirous of transporting gas owned by it will negotiate with the pipeline owner on term of transportation as may be mutually agreed. Refined Product Pricing After nationalisation of the refining industry and prior to 1998, prices of all major petroleum products were fixed pursuant to the APM and overseen by the OCC. The APM was based on a cost plus pricing system under which companies engaging in exploration and production, refiners and marketing companies were all guaranteed fixed returns on net worth plus reimbursement of eligible operating costs. Under the system, selling prices of any given petroleum product was uniform for each marketing company within a specific area except for variances resulting from differing tax rates from one state to another. The APM operated through a system of oil pool accounts through which cash flows relating to various charges, subsidies and other adjustments were managed, allowing for certain products, including PDS kerosene and domestic LPG, to be cross-subsidised by income from other products such as MS. Pursuant to a resolution of the MoPNG dated November 21, 1997, the consumer prices of all petroleum products other than MS, HSD, ATF, PDS kerosene and domestic LPG were decontrolled effective April 1, 1998. Subsequently, the price of ATF was decontrolled effective April 1, 2001. Finally, effective as of April 1, 2002, pricing of MS and HSD was also decontrolled. Currently, therefore, pricing of all petroleum products except for PDS kerosene and domestic LPG is influenced by market factors. In practice, however, BPCL, HPCL, IOC and IBP, all of whom are directly or indirectly controlled by the Government, meet periodically (usually once every two weeks) and determine whether or not to revise the uniform prices charged by them. As such retail price competition has yet to emerge. As part of its decision to dismantle the APM, the Government introduced the subsidy on PDS kerosene and domestic LPG on a flat rate basis. It was decided that the oil marketing companies will not increase the selling prices of these products during Fiscal 2004. The subsidy on PDS kerosene and domestic LPG will be phased out in 3-5 years from April 1, 2002. The resultant under-recoveries of oil marketing companies will be absorbed and shared amongst the oil companies. As per the broad mechanism finalised for sharing of these under-recoveries amongst the oil companies for Fiscal 2004, a part of the projected under-recoveries would be made up through
Page 42 of 67
Industry Report Indian Oil & Gas Industry settlement among oil marketing companies by way of cross subsidisation through other retail products and the balance would be shared between the public sector oil marketing companies and the public sector upstream companies like ONGC and GAIL. 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 300km 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% extra capacity beyond that needed by itself and interested companies for other users.
Page 43 of 67
Budget Impact
Union Budget 2003-04
Budget Proposal Railway Budget for FY 2003-04 has proposed to reduce the freight rates on petrol & other petroleum products by 10.27%, in the range of 5% to 9% respectively. Customs Duty on LNG re-gasified plants has been reduced from 25% to 5%. Additional duty of customs and excise on Motor Spirit (MS) & High Speed Diesel (HSD) oil has been increased by 50 Paise from Rs 1 per litre to Rs1.50 per litre. The additional duty of 50 Paise would be used for funding the North-South and East-West corridors. Excise duty on Light Diesel Oil (LDO) has been increased by Rs1.50 per litre, mainly to discourage use as an adulterant. Concession of 30 Paise per litre from surcharge on MS intended for use in the manufacture of ethanol doped with petrol is to be continued till March 2004. No Cenvat credit allowed in respect of duty paid on LDO. Levy of additional income tax of 12.5% on the distributed dividends of corporate bodies. Divestment target for the FY2003-04 has been fixed at Rs 132 billion, expected to comprise mainly of receipts from sale of stakes in oil marketing companies. Budget Impact - Industry The price of MS and HSD would increase due to the increase in both the custom and excise duty. The major portion of the disinvestment target may come from the profitable oil PSUs as the CCD has already given approval to the divestment of HPCL & BPCL. The competition in the sector may increase with possible participation of private players. However, regulatory issues have still not been resolved. The Petroleum Regulatory Board as proposed in the previous year budget has still not been set up.
Page 44 of 67
Budget Impact - Companies

All the Oil companies are expected to perform reasonably well during this year too because of prices are now linked to the international price of crude under the guidance of PPAC. The hike in customs and excise duty is expected to be passed on to the consumer and not affect the companies per se. Decrease in tariff charged by the railways would improve the margin of the companies. Substantial stakes in oil PSUs are owned by GoI, who are also high dividend paying companies. The total interim dividend paid by the Oil PSUs for the FY2002-03 to GoI was over Rs 27 billion. Dividend distribution tax paid by the companies would affect the cash flows of these companies.
Interim Budget 2004

Measures Reduction of customs duty on project imports from 25 per cent to 10 per cent. Reduction of excise duty on ATF from 16 to 8 per cent. Capital goods supplies to refineries get deemed exports status under exim policy. Duty free import of fuel for exporters. Govt cuts subsidy on LPG, kerosene from Rs 6292 crore in 2003-04, to Rs 3500 crore for 2004-05. Impact Duty reduction in project imports is likely to reduce the cost of upcoming refineries and gas projects substantially. Deemed exports status to capital good suppliers is expected to lower project cost of new refineries IOC's Paradeep refinery, BPCL's Bina refinery and HPCL's Bhatinda refinery will see a reduction in project costs, even though the companies may have already negotiated concessional rates for imports with the government already.
Page 45 of 67
Industry Report Indian Oil & Gas Industry The excise duty cut will lead to Rs 1.50-Rs 1.75 per litre decrease in ATF prices. This, along with the abolishment of air travel tax, will induce tariff reduction and increase demand for ATF. The increased demand is expected to mitigate the extent of oversupply in ATF, estimated at about 0.74 million in 2002-03. Exporters may bargain for lower fuel prices is a negative, although the impact is likely to be marginal. The government had provided a flat subsidy of Rs 6,300 crore in fiscal 2003-04 (revised to Rs 62. This translated to a subsidy of Rs 47 per cylinder of cooking gas and Rs 2.40 per litre in the case of kerosene. With the reduction in the subsidy bill, the government will provide for a subsidy of only Rs 23.50 per cylinder of cooking gas and Rs 1.20 per litre of kerosene. In effect, therefore, the government will be cutting its subsidy component on these petroproducts by 50%. With elections round the corner, these companies are not in a position to pass on the subsidy burden to the consumers. However, the actual burden would depend on factors such as international prices of crude, growth in domestic production and tax structure. As a result of such move, one is likely to see a negative impact on operating margins of oil marketing companies in the coming quarters. However, post-elections, the prices of LPG and kerosene are likely to increase and relieve some pressure on the oil companies.
Page 46 of 67
Mergers & Acquisitions

As part of its plan of restructuring the oil sector, the government decided on the integration of standalone refineries in public sector and, accordingly, sold its stakes in KRL, CPCL, and BRPL. Consequent to restructuring, Kochi Refineries and Numaligarh Refinery are made subsidiaries of BPCL, while BRPL and CPCL became subsidiaries of IOCL. This arrangement will strengthen the stand-alone refineries to face the increasing challenges of deregulation and enhance supply of petroleum products to IOC and BPCL in the southern and northeastern regions. In private sector, Reliance Petroleum has decided to merge itself with the parent Reliance Industries to become the first Indian private company to enter the list of Fortune 500. The board has recommended an exchange ratio of 1 share of RIL for every 11 shares of RPL, which has already been approved by the shareholders. In its latest move, ONGC increased its stake in Cairn Energy JV to 40% in the Gulf of Khambat oil and gas block. ONGC has hiked its stake from 10 to 40% and with this Cairn Energy's equity in the field has come down 50 from 80%. The balance 10% is with Tata Petrodyne. ONGC has acquired the 37.39% stake of the Aditya Birla Group in MRPL at a price of Rs. 2 per share. This involved a cash outgo of Rs. 600 million. This involved a cash outgo of Rs. 600 million. At a later date, ONGC plans to infuse an additional Rs. 10 billion equity capital in order to have a management control of the company. While this would result in ONGC's stake increasing to 51%, HPCL is expected to see its stake decrease from 37.39% to around 15-16%. With this deal, ONGC would not only secure product supply for servicing its proposed retail network, it would also be able to set off its tax liability against the Rs. 28 billion accumulated losses of MRPL. ONGC, with profits of over Rs. 51 billion, is one of the largest corporate taxpayers in India. Meanwhile, the FIs have also agreed to convert a portion of the over Rs. 55 billion debt to equity so as to bring down the leverage, which is currently high at 6:1. IOCL acquired the 33.58% government equity in petro product retailer IBP. The hydrocarbon vision has suggested measures like phased disinvestment in oil companies to 26% except ONGC, IOC and Gail. With the industry to be deregulated by 2002, mergers and alliances are unavoidable in order to compete with international players.
Page 47 of 67
Value Chain Analysis

Crude Oil Value Chain
Exploration Using Technology to find new Oil resources Production Bringing oil to the surface using Natural & Artificial Methods Transportation Moving Oil to Refineries & Consumers with tankers, pipelines & trucks Refining Converting Crude Oil into Finished Products Marketing Distributing & Selling Refined Products
Natural Gas Value Chain

Exploration Using Technology to find New Gas Resources Production Bringing Gas to the surface Processing Treating Gas to be sent to the Markets Transportation Moving Gas over Pipelines & Tankers Marketing Distributing & Selling Natural Gas
Michael Porter Analysis

Entry Barriers Large investments Restrictions on entry into auto fuel marketing Tech-intensive upstream sector; Distribution & logistics intensive downstream sector Bargaining Power of customers High with customers who can purchase products from other producers Otherwise Limited bargaining
Inter-Firm Rivalry Keen in deregulated products, e.g. lubricants With full deregulation, competition to hot up in all products
Bargaining power of suppliers High because of few participants. Marked by presence of cartels.
Threat of Substitutes Largely inter petro product substitution. Limited substitution with other forms of primary energy
Page 48 of 67
New Developments
Bonds worth Rs. 90 billion issued For liquidating the receivables from the oil pool account (which has been dismantled with effect from April 1, 2002), the Gol has issued bonds worth Rs. 90 billion to the oil companies. These 6.96%, seven-year Oil Bonds have been issued on a provisional basis in lieu of a part of the estimated outstanding claims of the oil companies from the oil pool account as on March 31, 2002. The balance amount of the outstanding claims is expected to be paid after certification of accounts by the Comptroller and Auditor General (CAG). Marketing Rights on Transportation Fuel On March 8, 2002 the Cabinet approved the proposal to open up marketing of transportation fuels to companies that have invested or plan to invest Rs. 20 billion, in the hydrocarbon sector-specifically, exploration and production (E&P), refining, pipelines or terminalswith effect from April 1, 2002. Organisations intending to invest were required to submit a bank guarantee of Rs. 5 billion, to qualify. These investments are required to be made within a period of maximum 10 years. Nine companiesReliance Petroleum, ONGC, Essar Oil, NRL, Cairn Energy, Oil India, MRPL, Nagarjuna Refinery and Petronet LNG-had qualified as per this pre- investment qualification norms. As of December 31, 2003, the Central Government has granted marketing rights to four companies Reliance, ONGC, NRL and Essar Oil. These four companies propose to set up more than 11,000 new outlets in the country. However, since ONGC and Essar Oil did not have operating refineries, the Gol has asked them to provide information on product sourcing. ONGC has been authorized to market MS and HSD only. The existing PSU marketing companies are in the process of setting up 2,900 outlets. Further, Shell and MRPL have also applied for retail license to open 2000 and 500 stations respectively. Thus, the total number of retail outlets in the country is expected to increase by 73-74% in the next couple of years to around 33700. Company IOC HPCL BPCL ONGC OIL BRPL NRL KRL CPCL GAIL Total Oil Bonds Issues Bond Amount (Rs crore) 5276 1481 1018 961 107 56 46 37 12 6 9000
Source: Press Releases
Page 49 of 67
Industry Report Indian Oil & Gas Industry Proposed Retail Outlets Company IOC, BPCL, HPCL, IBP (Existing) IOC, BPCL, HPCL, IBP (New) RPL Essar Oil Shell India ONGC MRPL NRL Total
Source: Press Releases
No. of retail outlets 19507 2900 6000 1700 2000 600 500 510 33717
As per the Gol guidelines, 11% of the retail outlets (to be set up by the new entrants in the transportation fuel marketing), have necessarily to be set up in the remote and far-flung areas. The Gol has also given the PSU oil companies a free hand in selecting dealers and distributors for the petro products. This is consequent to the dissolution of the Dealer Selection Board-which comprised a chairman and two members of the industry and was constituted by the Ministry of Petroleum & Natural Gas. 100% FDI allowed The government on January 16, 2004, lifted almost all the blocks on Foreign Direct Investment (FDI) in the petroleum sector. Foreign investors will now be able to bring in 100% FDI in explorations, refineries, pipelines and marketing. While removing existing FDI caps in these sectors, the government has also allowed investments through the automatic route instead of the existing Foreign Investment Promotion Board (FIPB) route. This investor-friendly move is expected to encourage investments and do away with procedural delays. However, these foreign investments are subject to sectoral conditions and guidelines, such as: Explorations - The new policy removes the present FDI limit in oil exploration of 60% (in case of unincorporated joint ventures) and 51% (in case of incorporated joint ventures). The government has allowed 100% FDI via the automatic route in both small and medium sized fields, subject to the policy on private participation in exploration of oil and the discovered fields of national oil companies. Refineries - The government has allowed 100% foreign equity investments through automatic route, as against the existing policy of going through the FIPB route. It has been specified that this policy will not include PSU refineries, where the cap of 26% remains, but only be applicable for private sector Cygnus Business Consulting & Research 2003 Page 50 of 67
Industry Report Indian Oil & Gas Industry refineries. However, given the existing refining capacity in the country which is in surplus to the demand in the country, it will be sometime before foreign investments come into this sector. Pipelines - While 100% FDI in the petro-product segment through the automatic route has been allowed (as against 51% earlier), investments in natural gas and LNG pipelines will have to be approved by the FIPB. Marketing - The existing cap of 74% has been done away with and 100% FDI has been allowed subject to the existing sectoral policy and regulatory framework. The policy requires companies to invest Rs 2,000 crore in the petroleum sector either in refining, exploration or infrastructure (relating to the petroleum sector) to qualify for marketing license. Given the market size of the country and the growth potential of the industry, these moves are expected to attract foreign investments in the sector. Divestment Begun Putting an end to the dilemma and suspicion with respect to the disinvestment in Oil PSUs, the government has decided to sell its 10 percent equity stake in both, Oil and Natural Gas Corporation (ONGC) and Gail (India) Ltd with the remaining 26 percent equity stake in IBP Ltd, all through a book-building route. There are underlying benefits which are expected to come with this sale, such as: Benefits to the company: The sale of equity in these companies will increase the liquidity of the three firms and provide a healthy trading platform. Benefits to the government: This will also help the government primarily to meet the unrealised disinvestment target of Rs 13,200 crore for the Fiscal 2004 and at the same time reducing its fiscal deficit caused by the stoppage of divestment of HPCL & BPCL. At present, only 1.14 per cent of ONGC shares, 1.89 per cent of Gail shares and 5.66 percent of IBP shares is with the public. The government holds 84.11 per cent in ONGC, 67.35 per cent in Gail and 26 percent in IBP. ONGCs & Gails 10 percent dilution would fetch the government close to Rs 10842 crore and Rs 1,730 crore, at the market cap of Rs 1,08420.59 crore (as on 1 March 2004) and Rs 17297.77 crore (as on 1 March 2004) respectively. Further, Rs 367 crore will come from the sale of governments remaining equity stake i.e., 26 percent in IBP, at the market cap of Rs 1467.7 crore (as on 1 march 2004). Jointly, it can mop up around Rs 12,900 crore from equity sale in the three companies.
Page 51 of 67
Critical Success Factors

Geological knowledge and experience: The skillset to analyse subsurface geology is critical in reducing the leadtime in developing or abandoning a prospective reserve area. This again has an implication on the cost front. This factor also determines the areas where a company should bid. Reserve Replacement to Production (R/P) Ratio: As oil and gas are non-replenishable resources, it is of utmost importance to keep on adding to the reserve base so as to sustain earnings growth. Cost competitiveness: As the oil prices are not in the control of oil companies, it is important to focus on lowering the finding, development and lifting costs on an ongoing basis so as to be in a position to survive in phases of low prices. Gas supply source: The ability to lock in to alternate gas supply sources (either through an existing gas producer / supplier or by venturing on its own into E&P activities) would be crucial for streamlining the supply chain and minimising disruption. Gas Pricing: Price of gas supplied should be competitive vis a vis alternate fuel such as Naphtha and Fuel Oil so that it remains a commercially preferred fuel. Financial strength: As the exploration and production require large amount of financial resources, it is important for the players to raise the necessary capital at low costs. Risk taking ability: The upstream business is characterised with high risk and high return. Hence, the ability to take risks and absorb losses becomes extremely important. Companies increasingly form a consortium for bidding purposes so as to minimise risk. Ability to win contracts: Normally, blocks are assigned based on competitive bidding. Hence, the ability to win contracts by competing with other major players becomes a key success factor. Technological advancement: The upstream segment is a technology intensive segment. The
undiscovered reserves are likely to be located in a more difficult environment and hence, technological advancements may be crucial to tap these undiscovered reserves. Competitiveness of Indian Refineries: In a deregulated scenario the competitiveness of Indian refineries influences margin expansion. The constituent of net cash margins, which is a measure of competitiveness, includes the Complexity level, Operating costs and Location of Refinery. Thus Indian refineries have to perform so as to meet these success parameters and ultimately become more profitable.
Page 52 of 67
Industry Report Indian Oil & Gas Industry Important Tariff Protection: This is the single most important factor in protecting the local refinery margins. Products sold in the local market enjoy an import parity price which includes landed cost plus import duty. Previously the import duty on the petroleum products were less then the duty on the crude oil which use to create an anomaly now this has been corrected and duty structure on import duty has been rationalized. Product portfolio: The light distillate such as MS, ATF, Naphtha and LPG are considered to be high value products, whereas heavy distillates are considered to be low value products. The margins in the deregulated scenario will be higher on the high value products and moreover demand growth rate for the high value products is higher than low value products. Presently BPCL markets highest percentage of high value products in its sales volume. In absolute terms IOCL has the highest sales volume of high value products. Location of Retail outlets: This becomes important in a decontrolled regime. Retail outlets located in high traffic industrial corridors, prime metropolitan areas and the deficit regions (primarily Northern) of the country, are likely to see a higher throughput and asset utilisation and hence higher profitability. Setting up retail outlets: Ownership of marketing assets and bringing more retail outlets under ownership for mitigating poaching risk assumes paramount importance in deregulated market. Upgrading retail stations: Upgradation of retail outlets and adoption of promotional schemes for increasing volume offtake and building customer loyalty, would play a very critical role in the future market. Investment in strengthening retail infrastructure: NOCs should invest more in strengthening the retail network inorganically by acquiring other player in pure marketing business only. For e. g. IOC acquiring IBP, having over 1500 retail outlets, and thus adding more muscle to its retail business. Gas Distribution Infrastructure: Well laid out pipeline network so as to optimally reach out to the customers. Further expanding the existing customer base and meeting the enhanced demand of the existing customers would be key to earnings growth. Fully Integrated Player: There are very few big oil companies worldwide that are only into E&P. Giants such as Royal Dutch/Shell, ExxonMobil, ChevronTexaco and BPAmoco are all present across the value chain from oil production to downstream products and even into power generation. With the opening of the sector, this is the way to go in India as well. At present there is no fully integrated player in India. Reliance and ONGC, along with IndianOil, stand the best chance of emerging as truly integrated global oil players from the country in the long run. Cygnus Business Consulting & Research 2003 Page 53 of 67
Growth Drivers
Pricing: Till 1 April 2002, the prices of petroleum products have been regulated by the Government of India. But with the dismantling of APM, the entire petroleum product prices, except of LPG (Domestic) and kerosene (PDS) are market determined. This will lead to much better profit margins for the companies in exploration, production and refining business, as prices will be on par with the international prices. But the same does not applies to a standalone pure marketing company like IBP because of an artificial restriction on passing the same price raise on to the final consumers. Once the domestic petroleum prices truly reflects international price, there will be a much better growth in the companies operating in the Oil & Gas Industry. Economic Growth: The growth of the petroleum industry is directly linked to the economic activity. The increase in demand for petroleum products in India has shown strong correlation to growth in gross domestic product, or GDP. With the Governments initiative to boost infrastructure and the ongoing Golden Quadrilateral project, it is expected that there will be dramatic increase in the demand for petroleum products. During the ten year period ended March31, 2003, the compounded annual growth rate, or CAGR, of consumption of petroleum products was approx. 6%, compared to CAGR for GDP of 6% for the same period. Sector undergoing complete metamorphosis: The government has permitted private as well as international players in this hitherto regulated sector. It has allowed 100% FDI in private exploration, refining, petro-pipeline and marketing sector. Many private players are permitted under the NELP for exploration and production of crude oil and expansion in refining sector and are expected to cater the rising demand of petroleum products of the country in future. LNG Import: The share of natural gas in Indias energy mix (at present natural gas contributes 8% to the total energy demand in India) is expected to increase tremendously because of its features like energy efficiency, multiple applications, and fewer environmental problems. According to the Hydrocarbon Vision 2025, the share of natural gas in Indias energy demand would be 20% by year 2025, and the LNG import projects are expected to help in releasing the domestic natural gas supply constraints. Venturing International Markets: Leading oil companies like ONGC, IndianOil and Gail had already entered into collaborations to set up joint ventures in international markets and ONGC Videsh is pursuing a number of projects around the world in countries such as Oman, Venezuela, Algeria, Indonesia, Iran, Iraq, Russia, Nepal, Libya, etc. Cygnus Business Consulting & Research 2003 Page 54 of 67
Major Players
ONGC The company holds the distinction of being the first Indian corporate with its profit crossing the Rs 10000 crore mark. ONGC is also one of the top 30 upstream companies worldwide in terms of oil and gas production and among top 20 in terms of market capitalisation. The ONGC group is a public sector behemoth comprising ONGC, ONGC Videsh Limited (a wholly-owned subsidiary), ONGC Ganga Nile BV (a wholly-owned subsidiary of OVL) and MRPL, a subsidiary with effect from March 30, 2003. Rs crore Revenue Net Profit Reserves EPS 2000-01 2001-02 2002-03 24270 23857 35387 5229 6198 10529 28885 28296 34313 36.7 43.5 73.8
7500 6000 4500 3000 1 500 0 M ar-02 A ug-02 Jan-03 Jun-03 No v-03
BSE Sensex Vs ONGC

1 000 800 600 400 200 0
B SE Sensex
ONGC
Reserves are undistributed profits & reflect investment capacity.
ONGC recorded, for the third year in succession, positive reserve replacement with accretion of approximately 130 million tonnes of oil plus oil-equivalent gas, from domestic and foreign assets. The company has drawn a massive programme to upgrade infotech and communications with a budget of Rs 600 crore over the next three years. For isolated gas fields, ONGC is exploring upward revision of natural gas prices, so that additional investment for gas production can be economically justified. To secure long-term growth in the core business of exploration & production, ONGC is accelerating investments in onshore and offshore survey, re-development of producing fields, revamping and upgrading of equipment and facilities and monetising marginal/isolated reserves. To ensure that it discovers more oil than it produces, the company is investing about Rs 400 crore a day on exploration. Around 27 oil rigs will be drilled under project Sagar Samridhi. Through its subsidiary OVL, it is aggressively going beyond Indian seas to acquire oil and gas fields. OVLs target is procuring 20 million tonnes of oil and gas by 2020. The two key determinants of ONGCs futures are oil prices and new discoveries. Prices, though unpredictable, are unlikely to fall steeply & the companys discovery drive seems real. Yet, to minimise the risk inherent in the exploration business, ONGC is getting into refining and retail. It acquired MRPL in March 2003 and will start setting up its petrol pumps in 2004-05. That will put it in league with global oil majors that own the entire oil chain from exploration to retail.
Page 55 of 67
Industry Report Indian Oil & Gas Industry IOC

BSE Sensex Vs IOC
INDIAN Oil Corporation (IOC) enjoys the distinction of being the country's largest commercial enterprise, with a sales turnover of Rs 120000 crore and profits of Rs 6,115 crore for fiscal 2003. Moreover, IOC happens to be India's sole representative in Fortune's prestigious listing of the world's 500 largest corporations, ranked 191 for the year 2003 based on fiscal 2002 performance. It is also the 17th largest petroleum company in the world and was adjudged second in petroleum trading among the 15 national oil companies in the Asia-Pacific region,
8000 6000 4000 2000 0 M ar-02 A ug-02 Jan-03 Jun-03 No v-03 B SE Sensex IOC
600 500 400 300 200 1 00 0
Rs crore 2000-01 2001-02 2002-03 Revenue 117371 114864 119848 Net Profit 2720 2885 6115 Reserves 115192 14532 18149 EPS 33.97 37.05 75.45
Reserves are undistributed profits & reflect investment capacity
and is ranked 325th in the latest Forbes' "Global 500" listing of the largest public companies. Beginning in 1959 as Indian Oil Company Ltd, IOC was formed in 1964 with the merger of Indian Refineries Ltd (Estd. 1958). As India's flagship national oil company, IOC accounts for 56 per cent petroleum products market share, 42 per cent national refining capacity and 67 per cent downstream pipeline throughput capacity. To maintain strategic edge in the market place, IOC has planned investments to the tune of Rs 24,400 crore during the Tenth Plan period (2002-07), mainly in refining and pipeline capacity expansions, product quality upgradation, retail operations and diversification projects. The corporation is further expanding its horizons and is metamorphosing from a pure sectoral company with dominance in downstream in India into a vertically integrated, transnational energy behemoth. Its countrywide network of about 21,000 sales points is backed for supplies by its extensive, well spread out marketing infrastructure comprising 169 bulk storage terminals, installations and depots, 93 aviation fuel stations and 79 LPG bottling plants. Its subsidiary, IBP Co Ltd, is a stand-alone marketing company with a nationwide retail network of over 2,000 sales points. IOC is strengthening its existing overseas marketing ventures and simultaneously scouting new opportunities for marketing and export of petroleum products in foreign markets. The company has been lending its expertise for nearly two decades to various countries in several areas of refining, marketing, transportation, training and research & development. These include Sri Lanka, Kuwait, Bahrain, Iraq, Abu Dhabi, Tanzania, Ethiopia, Algeria, Nigeria, Nepal, Bhutan, Maldives, Malaysia and Zambia.
Page 56 of 67
Industry Report Indian Oil & Gas Industry RIL Reliance Industries (RIL), a petrochemical major is the flagship company of Reliance Group has business interests in textiles, polyester, petrochemicals, Oil & Gas and oil refining. Reliance is the world's third largest producer of paraxylene (PX), and the world's fourth largest producer of PTA. Within the country, Reliance is the largest manufacturer of PX, PTA and MEG, with a market share of over 80%. RIL is India's largest private sector company on all major financial parameters with gross turnover of Rs 65,061 crore in the fiscal 2002-03. Cash profits for Rs crore Revenue Net Profit Reserves EPS 2000-01 2001-02 2002-03 28008 57120 65061 2646 3243 4140 13712 26416 28931 25.1 23.4 29.3
7500 6000 4500 3000 1 500 0 M ar-02 A ug-02 Jan-03 Jun-03 No v-03 RIL
BSE Sensex Vs RIL

625 500 375 250 1 25 0
B SE Sensex
the fiscal stood at Rs 7,565 crore, net profit is Rs 4,104 crore, net worth is Rs 30,327 crore and total assets at Rs 63,737 crore. RIL's market capitalisation as on March 31, 2003 stood at Rs 45,000 crore while its exports stood at Rs 11,900 crore by far the largest for any Indian private sector company. Reliance is poised to enter a period of sustained growth with future earnings growth coming from the high margin exploration and production (E&P) business from 2006, volume growth in existing refining and petrochemical business and increased sale of petroleum products in the domestic market. Further additions to the company's earnings will be from the uptrend in petrochemicals cycle, higher earnings from consolidation in IPCL and BSES Ltd, and the earnings from Infocomm being consolidated from next year. RILs E&P business will make significant contributions to the future earnings revenue stream. The contribution of oil and gas business to the revenue will grow from the current levels of one per cent to 10-15 per cent in the next three to four years. Reliancewhich holds 30 per cent interest in Panna, Mukta and Tapti oil and gas fields, has acquired 3 2 blocks in India, two coal bed methane blocks and 17 per cent interest in an onshore block in Yemenis the largest private sector E&P operator in India, with total acreage of over 288,000 sq km.
Page 57 of 67
Industry Report Indian Oil & Gas Industry GAIL GAIL India Limited (erstwhile Gas Authority of India Ltd), a 'Navratna' company, is the country's principal gas transmission & marketing company. Primarily a natural gas company, the company is focused on all aspects of the gas value chain including exploration, production, transmission, extraction, processing, distribution and marketing of natural gas and its related process, products and services. It was recently ranked second in the world on return on invested capital among all gas companies. Gail (India) was set up by Government of India in Rs crore 2000-01 2001-02 2002-03 Revenue 9197 9568 10642 Net Profit 1126 1186 1639 Reserves 4634 4490 5493 EPS 12.91 14.02 18.87
7500 6000 4500 3000 1 500 0 M ar-02 A ug-02 Jan-03 Jun-03 No v-03 B SE Sensex GA IL
BSE Sensex Vs GAIL

300 250 200 1 50 1 00 50 0
August 1984 with the objective of creating gas sector infrastructure for sustained development of gas market in the country. It transports and markets 90% of the natural gas sold in the country. It has the largest gas distribution and marketing network (4,600 kms of pipeline). And it not only owns and operates the longest exclusive LPG pipeline (1,269 kms), but also has the largest gas-based LPG generation capacity (1 MMTPA). With changes taking place in market Gail has prepared itself for the deregulated scenario. Today Gail makes a contribution for supplying fuel for generation of around 4500 MW of power generation, supplying feed for production of 10 million tonnes of urea per annum, supplying environment-friendly fuel for industrial, transport and domestic sectors in Delhi, Mumbai and Hyderabad. GAIL is also selling cooking gas (piped natural gas or PNG) to 2.45 lakh customers in Delhi, Mumbai and Vadodara and plans to expand to 22 more cities by 2010. With a firm grip on gas transmission and virtually in control of the Rs 20000 crore National Gas Grid to be completed by 2008, GAIL will be at the centre of the gas business in India. It has also invested in 10 exploration blocks, including a big find in Myanmar to secure gas sourcing. GAIL has also entered telecom. It owns and operates 8000 km of optical fibre cable network along its gas pipelines. Looking beyond, it has picked up a 17% and 22% stake in two gas companies in Egypt and is exploring opportunities in Bangladesh, Turnkey, Iran and the Philippines.
Page 58 of 67
Industry Report Indian Oil & Gas Industry HPCL HPCL a Navratna company, is the second largest domestic integrated refining and marketing company, boasting of refineries, cross -country pipelines, liquefied petroleum gas (LPG) bottling plants, lube blending plants and aviation service facilities. In existence from 1974, the company reported Rs 52,605 crore for the financial year 20002-03. Keeping pace with the nation's energy requirements, the company is foraying into the upstream sector exploration and production (E&P). While marketing opportunities in newer areas to sustain its growth. And the company has already chalked out its plan to maximise its growth securing equity oil through E&P, marketing of eco-friendly gaseous fuels, retail automation and dynamic pricing, leveraging state-of-art information technology, risk management tools, strengthening of downstream infrastructure and foray into international markets. The main products of the company include petrol, high speed diesel, superior kerosene oil, LPG and aviation turbine fuel (ATF), naphtha, furnace oil, bitumen, low sulphur heavy stock, solvents, propylene and over 300 grades of lubes. The company has launched several customer-centric marketing initiatives such as retail branding wherein a total of 760 retail outlets have been converted to Club HP branded fuel Power and Turbojet. It was also the first to launch the HPGas Rasoi Ghar community kitchen which provides a common cooking platform. Users have to pay on the basis of the time utilised for cooking thus eliminating the deposit for acquiring a LPG connection. Added to this, it has extensive network of retail outlets, regional offices, terminals and depots that truly make it a company worth acquiring. It runs 4,860 retail outlets and 1,640 kerosene distribution centres across the country. To ensure that these outlets receive an uninterrupted supply of fuels and other related products, the company has a network of supply points across the country. HPCL accounts for about 25 per cent of the approximately 19,800 retail outlets in India. The company also controls over 20 per cent of the Indian kerosene distribution network. Rs crore Revenue Net Profit Reserves EPS
BSE Sensex Vs HPCL
7500 6000 4500 3000 1 500 0 M ar-02 A ug-02 Jan-03 Jun-03 No v-03 HP CL 600 500 400 300 200 1 00 0
B SE Sensex
2000-01 2001-02 2002-03 25995 47117 52605 901 1088 1558 4812 6148 6340 32.12 23.26 45.37
of petroleum products will remain its core competency, the company is constantly looking for
Page 59 of 67
Industry Report Indian Oil & Gas Industry BPCL BPCL is India's second largest oil company in terms of market share and processes about 9 million metric tons of crude per year. The company produces a diverse range of products, from Petrochemicals and Solvents to aircraft fuel and specialty lubricants. It manufactures petroleum and petroleum products, asphalt, bituminous substances, carbon, carbon black, hydrocarbons, mineral substances and the products/by-products derived there from. The Rs 47,237 crore company, now in its 51st year of operation, is diversifying from marketing and Rs crore Revenue Net Profit Reserves EPS 2000-01 2001-02 2002-03 42294 47238 832.7 849.8 1250 3779.4 3697.4 4447.4 27.76 28.33 41.67
BSE Sensex Vs BPCL
7500 6000 4500 3000 1 500 0 M ar-02 A ug-02 Jan-03 B SE Sensex Jun-03 No v-03 B P CL 600 500 400 300 200 1 00 0
refining business to upstream activity exploration and production (E&P). The company has already set aside a corpus of Rs 1,500 crore for pursuing its E&P business starting this year. It is already in the process, teaming up with Oil and Natural Gas Corporation (ONGC). BPCL has been a trendsetter in taking various initiatives to its customers. The round-the-clock booking for Liquefied Petroleum Gas (LPG), guaranteed refill within 24 hours and making weighing scales available at the customers' doorstep so that the LPG cylinders can be weighed before being accepted are some of the company's initiatives for its LPG customers. The company presently enjoys a 25 per cent market share in the LPG business. Another major avenue for BPCL is the pipeline sector. With the government allowing any oil company to put up pipelines with a covenant that at least 25 per cent of the capacity should be allowed to be used by the industry, BPCL is already in die process of extending its pipeline projects. It is also exploring more pipeline proposals. Deregulation of the petroleum sector has provided BPCL a set of opportunities to harvest for better results. The company has decided to increase the number of its retail network by 700 in the current fiscal. It plans to increase the number of Pure for Sure petrol pumps to 80 per cent of its total network of 4,854 outlets, within the next one year. The refineries contributed nearly one-third of the corporate's gross margin in the last fiscal.
Page 60 of 67
Industry Outlook
Oil and gas is expected to experience a sustained growth in demand, which is primarily a function of economic growth. As per the MoP&NG, around two-thirds of exploration area in India is either not or inadequately explored. There is a potential for locating additional reserves. With deregulation, Qty: Mn. Tonne, Value: Rs billion Gross Imports Crude Oil Petro Products Grand Total Exports (Petro Products) Net Imports Crude Oil Petro Products Grand Total
Source: MoP&NG
FY 2001 Qty Value
FY 2002 Qty Value
FY 2003* Qty Value
74.1 659.32 78.71 603.97 81.99 761.95 9.27 120.93 7.01 72.49 6.74 82.06 83.37 780.25 85.72 676.46 88.73 844.01 8.37 74.1 0.9 75.0 76.72 10.09 82.85 10.29 108.68
the upstream NOCs are likely to see an increase in their
659.32 78.71 603.97 81.99 761.95 44.21 -3.08 -10.36 -3.55 -26.62 703.53 75.63 593.61 78.44 735.33
* Provisional
profitability and hence the additional resources can be employed in E&P activities. The domestic upstream companies are now improving recovery from existing fields, improving reserve accretion by bidding for domestic fields and acquiring equity in oil assets abroad, integrating into downstream areas and partnering. This may lead to revenue growth and may also help them to diversify their risk portfolio. In India, there is a great potential for locating additional reserves. This is more valid today after the gas discovery by Reliance Basin, (Krishna-Godavari Figures in % Coal Oil Gas Hydel Nuclear Sources of Energy FY98 FY02 FY07 FY11 FY25 55 50 50 53 50 35 32 32 30 25 7 15 15 14 20 2 2 2 2 2 1 1 1 1 3
Source: India Hydrocarbon Vision 2025
Shahdol in Madhya Pradesh). The success of Reliance is likely to increase the confidence level of other explorers and additional future discoveries are likely. The oil majors are also evaluating options to enhance the recovery rate (Enhanced Oil Recovery program) and the life of reserves by using better recovery techniques. With full decontrol of petroleum sector, prices at retail end would vary in accordance with international trends. However, since petroleum products are for mass consumption, sociopolitical reasons may prevent frequent changes in the prices of products. This may prevent a high growth in marketing margins. Cygnus Business Consulting & Research 2003 Page 61 of 67
Industry Report Indian Oil & Gas Industry Another impact of dismantling the oil pool account would be that the liquidity position of the oil companies should be better (compared to APM scenario) because of improved certainty in cash inflows. In view of uncertainty, oil companies have initiated a number of measures to gain competitiveness in a deregulated market. Some of these are: strengthening import/ marketing infrastructure, enhancing scale of operations, undertaking environmental measures, entering into domestic/overseas alliances, setting up hedging mechanism to mitigate its exposure to price volatility and undertaking business restructuring to ensure operational efficiency. The share of natural gas in India's energy mix has increased from 2.5% in 1980s to more than 8% now. Energy efficiency, multiple applications and fewer environmental
(in billion cubic meters)
1 60.00 1 40.00 1 20.00 1 00.00 80.00 60.00 40.00 20.00 0.00 1 998-99 2001 -02 2006-07(P) 201 1 -1 2(P) 2024-25
Demand for Natural Gas
problems
would
lead
to further
rise in demand. Although the contribution of private players/JVs has been insignificant so far, their share of the total natural gas production is on rise and expected to increase significantly in future.
Source: India Hydrocarbon Vision 2025
Page 62 of 67
Conclusion
On January 19, 2004, India's Oil Sector Hit A Geyser. On That Day, British energy major Cairn Energy announced the discovery of oil in Barmer, Rajasthan, with an estimated reserve of 450 to 1,150 million barrelsone of the biggest finds in recent past. The news of discovery in the block, where Indian energy giant ONGC has a 30 per cent stake, pushed Cairn's stock value on the London Stock Exchange to 665 million (Rs 5,490 crore)more than 70 per cent of what the company was valued at before the find. A windfall for Cairn? No doubt. But from India's perspective, the discovery is symbolic of the changes that are sweeping through the core sector of oil and gas. Consider: Until 1998, just 22 blocks had been offered for exploration. But after the New Exploration Licensing Policy (NELP) was introduced in 1998 to encourage domestic production of oil and gas, 91 blocks have been given out for exploration and development in just four rounds of bidding. And the initiative, by any measure, has been a roaring success. A string of discoveries has boosted India's energy situation. Last year the Reliance Industries-Niko Resources (of Canada) consortium announced discovery of 14 trillion cubic feet (TCP) of in-place reserve of gas in the Krishna-Godavari basin. The reserve is not just India's biggest, but the worlds. According to preliminary estimates, the block can produce 35 to 40 million cubic metres per day (MMSCMD) of gas for about 20 years. Earlier, in February 2003, once again Cairn had discovered a 20-million tonne reserve of oil in Barmer, putting the desert state on India's oil map. A month later, ONGC struck oil and gas in the Vasai East oil field, off the coast of Maharashtra. The company has said that the in-place reserve could be as high as 30 million tonnes. These discoveries under the NELP are very significant. India is an energy-deficient country and has to depend on imports to meet its requirements. Last year, the country spent a staggering $17.45 billion, or Rs 84,400 crore, in importing 88.7 million tonnes of crude oil and products. The imports account for almost 70 per cent of our oil needs. Such a high dependence is not desirable for several reasons. For one, it's a big drain on the national exchequer. Suppose the country could save $1 billion (Rs 4,600 crore) or 52 billion (Rs 9,200 crore) in its oil bill, that money could easily be utilised to build more schools, hospitals, roads, institutes of higher learning, or spent on critical research and development in medicine or defense. For another, not having one's own oil reserves puts India at the mercy of oil producing nations, and in this age of fragile, volatile geo-political equation, a war or mere changes in trade equations can wreak havoc on India's economy. A desperate India may, then, be forced to pay higher for oil or cut consumption, crippling several industries. By focusing on developing its own potential in the energy sector, India will pre-empt such a scenario. The recent Cygnus Business Consulting & Research 2003 Page 63 of 67
Industry Report Indian Oil & Gas Industry discoveries go a long way in boosting investor confidence and will help to improve the perception of hydrocarbon prospectively in India. That means the investments in the 70 blocks already under exploration and another 24 that have been bid for in September last year in the fourth round will see significantly larger investments. In fact, according to the Director General of Hydrocarbons, the investments could be as high as $8 billion (Rs 36,800 crore). Already Cairn Energy, which has been prospecting for oil in India for the last 10 years, has announced that it would like to acquire more blocks in Asia, especially in India and Nepal. The Big Push Given that India's oil and gas consumption is set to soar in the years to come (we'll need 3.4 million barrels per day by 2010 and 1.6 TCP of gas by then), the government has been in high gear over the last four years to develop hydrocarbon productivity in India. For instance, under the fourth round of NELP auction, 44 bids have been received for 10 onland and 11 deep-water blocks. The 19 bidders include 12 Indian and seven multinational companies, comprising big names, among others, such as ONGC, Reliance Industries, Cairn Energy, Niko Resources, BG Group and Zarubezneftgas of Russia. What's interesting, though, is that there are more multiple bidders for a single block than in the previous three rounds of bidding. Not to mention that nine of the bidders are doing so for the first time in India. ONGC, which accounts for 84 per cent of India's oil and gas production, has been pushing ahead with the challenge of finding reserves in India's deep waters. Its Sagar Samriddhi project has set itself the goal of adding 4 billion tonne oil equivalent (BTOE) from deep water exploration. At a daily spend of about Rs 3.50 crore, the project will plumb depths greater than 1,800 metresa one of its kind project in the world. However, the focus of exploration is as much on gas as oil. In fact, the country is even trying to tap newer sources of gas like coal beds. The first time the government tried to market these to companies was in May last year, when it organised an event in Delhi. But a month later, a high-level delegation headed by Petroleum minister Ram Naik actually went to Houston, America's oil Mecca, to woo investors. The results were encouraging: 32 companies, including giants like CDX Gas and Burlington Resources, attended the road show, which offered nine coal bed methane blocks for exploration. An ONGC-Coal India consortium has already begun work on developing eight blocks offered under the first round. The eight blocks are in the states of Jharkhand, Madhya Pradesh, and West Bengal.
Page 64 of 67
Industry Report Indian Oil & Gas Industry However, the strategy of self-sufficiency does not end within India's own boundaries or territorial waters. It extends well beyond, into other oil and gas-rich nations. Not incidentally, ONGC, which has discovered more than 6 billion tonnes of oil and oil equivalent in India, is at the forefront of this initiative. In March 2003, the company's subsidiary ONGC Videsh signed an agreement to acquire a 25 per cent stake in a 12-million tonnes per annum crude oil producing field in Sudan. The investment: Rs 3,220 crore. The first shipment of this "equity oil" (so called because of India's partowner status) reached the Mangalore port barely two months later. Apart from its investment in Sudan, ONGC Videsh has bought a 20 per cent stake in Sakhalin Oil Fields in Russia at an investment of Rs 8,500 crore. Starting next year, India stands to receive four to eight million tonnes of crude and five to eight million cubic metres of gas per day from 2008. ONGC Bidet's Rs 980-crore investment in Vietnam, where it owns a 45 per cent stake in a 2-TCF gas field, has already been supplying gas for more than a year now. In addition to these investments, ONGC Videsh has many other strategic pieces of the energy cake. Take a look: It has interests in Libya, Myanmar, and the US. In September last year, the subsidiary acquired more than 26 per cent of the shares in Austrian company OMV'S interests in an exploration block in Sudan, besides agreeing to buy another block in the country also owned by OMV. Other oil and gas companies are tapping opportunities elsewhere in the world. Gas Authority of India Ltd. (GAIL), for example, has recently announced a major gas find in Myanmar, with projected reserves of 14 to 42 TCP. Meanwhile, to meet the burgeoning demand for natural gas, the government has launched an initiative to import liquified natural gas (LNG) through Petronet LNG, a four-way joint venture involving BPCL, GAIL, JOG, and ONGC. The first shipment reached the newly-completed terminal at Dahej, Gujarat, on January 30, 2004. Industry experts see LNG as the fuel of the future. "Why? For one, LNGit is nothing but natural gas cooled to a low temperature of 160 degree Celsius below zerois a "clean" fuel with low emission levels. The Rs 2,600-crore project, with equity participation from French state-owned gas company, GDF International, will supply regassificd LNG to customers as diverse as power, fertiliser, transportation, and even homes in the seven states of Delhi, Gujarat, Haryana, Madhya Pradesh, Punjab, Rajasthan, and Uttar Pradesh. Petronet has a tie up with RasGas, a Qatar Petroleum and Exxon Mobil joint venture, for supply of LNG for the next 25 years. The Move to Free Pricing If the changes upstream appear dramatic, then the transformation downstream can be called revolutionary. For 27 long years, prices of oil and oil products were controlled by the government of India. But beginning April 2002, the system of administered price mechanism (APM) was dismantled Cygnus Business Consulting & Research 2003 Page 65 of 67
Industry Report Indian Oil & Gas Industry and the oil companies were allowed to sell their products at international rates (however, LPG and kerosene were excluded in the short term to protect the interests of middle class and lower middle class consumers). Besides, the private sector was allowed to enter marketing of oil and oil products. Those who have jumped on the marketing bandwagon include Reliance Industries, which plans to set up nearly 6,000 petrol stations, Shell (2000), Essar Oil (1,700), ONGC (600), and Numaligarh Refinery (510). Already, the PSU oil companiesprimarily Indian Oil, BPCL, and HPCLhave 20,000 petrol outlets in the country. The private sector will add more than 10,000 stations in the years to come.
PARADIGM SHIFT
Key regulatory changes have turbo-charged the energy sector APM Dismantled Except for LPG and kerosene, all petro products have been freed of price controls. That means energy companies can now sell them at prevailing international prices. Marketing Privatised Allowing private sector companies to get into distribution of oil and lubes will add another 10000 retail outlets to the existing universe of 20,000-odd. Exploration Boosted The New Exploration and Licensing Policy have brought 94 blocks under exploration and success of companies like ONGC, Reliance and Cairn have boosted investor sentiment. Gas Rush With Petronet LNG completing its LNG terminal at Dahej, there will be cleaner energy available for a range of industries from fertiliser to power-besides a new source of energy will be created. Pipelines Eased The introduction of "common user" principle for pipelines will create a viable network of pipelines in the country, reduce pressure on road transportation, and ensure quality of supply.
Source: Business Today Special Issue Feb 2004
The dismantling of APM and privatisation of the entire energy spectrum has done wonders to the fortunes of PSU oil companies. So much so that the most valuable company on Indian bourses is an energy companyONGC, with a market cap of more than Rs 100000 crore. This company has also
Page 66 of 67
Industry Report Indian Oil & Gas Industry turned in stellar performance over the last two years. In 2001-02, its gross turnover was Rs 23857 crore and net profits were at Rs 6198 crore. But last fiscal, the figures had soared to Rs 35386 crore and Rs 10529 crore, respectively. Similarly, Indian Oil Corporation has increased its revenues by Rs 5000 crore to Rs 119848 crore and more than doubled its net profits to Rs 6115 crore. Even a lossmaking company like Bongaigaon Refineries and Petrochemicals Ltd. managed to turn its 2001-02 loss of Rs 199 crore to net profits of Rs 178.50 crore last year. To complement the privatisation of the energy sector, the government also brought in a new policy for oil pipelines, based on the principle of common usage. Therefore, pipelines originating from refineries and exceeding 300 km in length, and pipelines originating from ports will need to be built on a common user principle. Under the new policy, Reliance Industries alone has proposed building of six different pipelines, covering more than 5,500 km in length and entailing an investment in excess of Rs 4500 crore. At the same time, the governmentin keeping with its larger policy of economic reformhas decided to sell its stakes in oil companies. Therefore, BPCL is to be sold to a strategic investor and HPCL will be disinvested via public sale of the government's equity. However, the Parliament must pass an amendment before the sales can happen. Opening up of the sector has meant that oil companies are moving double fast to tap newer opportunities. Consider Indian Oil. Last year, it acquired 100 retail outlets in Sri Lanka from Ceylon Petroleum Corporation, marking its first international foray in distribution. Recently, it has expressed interest in buying British Petroleum's interest in distribution in Singapore and Malaysia. In fact, IOC has even acquired Premier Oil's stake in Cachar exploration blocks in Assam for S595 million (Rs 2,737 crore}. Similarly, ONGC has moved into oil refining by increasing its stake in Mangalore Refinery and Petrochemicals Ltd to 51.25 per cent (Indian Rayon exited last year, selling its 37.39 per cent stake to ONGC). A number of initiatives are slated for launch in areas as diverse as biofuel to LPG. Innovative marketing of LPGsuch as the 5-kg cylinder for use by economically weaker sections of the societyhave made India the second-largest retail consumer of LPG, with a customer base of more than 7.1 crore. Of these, 3.60 crore were added in the last four years alone! The country is on its way to attaining another distinction in the sector: it has the world's longest LPG pipeline. The bottomline: India's gigantic energy sector may only have started getting its act together for a greater role tomorrow.
Page 67 of 67

Indian Oil & Gas Industry

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Indian Oil & Gas Industry

Uploaded by

Copyright:

Available Formats

INDUSTRY INSIGHT

INDIAN OIL & GAS INDUSTRY

23rd February, 2004

Cygnus Business Consulting & Research

Industry Report Indian Oil & Gas Industry

Cygnus Business Consulting & Research 2003

Industry Report Indian Oil & Gas Industry

Cygnus Business Consulting & Research 2003

Cygnus Business Consulting & Research 2003

Industry Report Indian Oil & Gas Industry

Oil & Gas Industry: Introduction

Primary Energy 1454 285 688 264 3962 3856 4102

Hydrocarbons 925 117 169 231 2520 2719 2539

Cygnus Business Consulting & Research 2003

Importance of Oil & Gas in the Economy

Share of Crude Oil Processed

Realising the importance of petroleum sector, the government increased

Cygnus Business Consulting & Research 2003

Industry Report Indian Oil & Gas Industry

Cygnus Business Consulting & Research 2003

Geologically prospective basin

Potentially prospective basins

Subtotal Deep-waters Total

1784700 1350000 3134700

Cygnus Business Consulting & Research 2003

Cygnus Business Consulting & Research 2003

Cygnus Business Consulting & Research 2003

Trend of Natural Gas Production

63.85% 62.48% 62.64% 62.01% 58.52%

1998-99 1999-00 2000-01 2001-02

Crude Oil Production: Onshore Crude Oil Production: PV/JVCs

Crude Oil Production: Offshore

Natural Gas Production: Onshore Natural Gas Production: Pvt/JVCs

Natural Gas Production: Offshore

Cygnus Business Consulting & Research 2003

Cygnus Business Consulting & Research 2003

Cygnus Business Consulting & Research 2003

Transmission charges to GAIL

Cygnus Business Consulting & Research 2003

Conduct Seismic Study (US$ 400000)

40% Abandon Licence

Drill First Exploratory Well (US$ 7000000)

80% Abandon Licence

60% Abandon Licence 35% Abandon Licence

Preparation of Development Plans (US$ 25000000)

Final Development (US$ 800000000)

Production & Cash Flow

Cygnus Business Consulting & Research 2003

Oil & Gas Production Trends

900 750 600 450 300 1 50 0 Crude Oil Natural Gas

Cygnus Business Consulting & Research 2003

Share of Major Refining Capacity, FY 2003

BPCL HPCL RPL ONGC Total

Marketing Marketshare - FY 2003

Market Share in HSD - FY 2003

Cygnus Business Consulting & Research 2003

Cygnus Business Consulting & Research 2003

Industry Report Indian Oil & Gas Industry

Demand & Supply Scenario

Cygnus Business Consulting & Research 2003

Source: BP Statistical Review of World Energy, June 2003

Source: PACC, Conversion Factor Used: 1 MMT = 7.5 mmbbls

Cygnus Business Consulting & Research 2003