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CONTENT

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Demography of India...2 Energy Mix2 Regulatory Framework2 Energy Demand of Oil and Gas Sector.3 Major Players.3 Indias Upstream Oil and Gas Sector.4 Opportunities.4 (7) Indias Midstream Oil and Gas Sector..6 Transnational Pipelines6 Refining Sector..7 Opportunities.7 (8) Indias Downstream Oil and Gas Sector..7

Overview of the Indian Oil and Gas Sector

DEMOGRAPHY OF INDIA
The country has the second-largest population (1.24 billion, decadal growth rate of 1.5% per annum) in the world next only to China (1.34 billion, decadal growth rate of 0.6% per annum). The country enjoys a demographic advantage vis--vis other countries due to its significantly large young population (below the age of 25). More than 50% of its population is below the age of 25 and more than 65% is below the age of 35. It is estimated that by 2030, the country will have 0.95 billion young people in its workforce. The services sector contributes about 56% to the countrys GDP, followed by industry at 26% and agriculture at 17%. The services sector provides employment to 23% of the workforce and is growing quickly.

ENERGY MIX
India continues to depend, for most of its energy needs, on coal (>50%) and oil (~30%). However, natural gas is emerging as one of the fastest-growing fuels, registering an annual growth rate of 8%. Currently, it accounts for 10% of the total primary energy consumption. On the other hand, other renewable segments (solar, geothermal, wind energy, etc.) and nuclear energy consumption have also registered an impressive annual growth as compared to the last decade25% and 6%, respectively. The respective shares of coal, oil and natural gas are 42%, 24% and 11%, respectively. Nuclear, hydro and renewable sources put together would account for just 7%. Therefore, fossil fuels are expected to continue fuelling countrys economic growth. Given the increased awareness amongst countries to reduce the carbon footprint of the energy industry, oil and gas are expected to play significant role. Natural gas, with its inherent advantages over other alternatives, is expected to emerge as the preferred fuel. Recent gas discoveries have provided encouraging results for the country and with optimum policy stimulus it is expected that India would substantially increase its domestic gas production.

REGULATORY FRAMEWORK
BODY Governing Ministry UPSTREAM The Ministry of Petroleum and Natural Gas (MoPNG) The Oilfields Regulation and Development Act, 1948 The Petroleum and Natural Gas Rules, 1959 The Directorate General of Hydrocarbons (DGH) MIDSTREAM The Ministry of Petroleum and Natural Gas (MoPNG) The Petroleum and Natural Gas Regulatory Board (PNGRB) DOWNSTREAM The Ministry of Petroleum and Natural Gas (MoPNG) The Petroleum and Natural Gas Regulatory Board (PNGRB)

Legal Framework

Regulator

Policies Regulation

The Petroleum and Natural Gas Regulatory Board (PNGRB) and The New Exploration Authorisation Licensing Policy Tariff

The Petroleum and Natural Gas Regulatory Board (PNGRB) Authorisation Tariff determination

3 (NELP) The Coal Bed Methane (CBM) Policy 100% under automatic route Access code Affiliate Code of Conduct 100% under automatic route Exclusivity for CGD networks Technical standards Refining: 49% in case of Public sector units (PSU) via FIPB route and 100% in case of private companies Other than refining: 100% under automatic route

FDI Policy

ENERGY DEMAND SCENARIO IN INDIA

India is one of the largest energy consumers in the world, but its per capita energy consumption 500 kg of oil equivalent (kgoe) is significantly lower than the global average (1,800 kgoe), which indicates the growth potential of energy demand in the country. This provides ample opportunities for companies across the hydrocarbon value chain. India had one of the highest growth rates in oil and gas consumption in the world, growing at a compound annual growth rate (CAGR) of 6.5% over 20052009 to reach 195.2 million tons (MT) of oil equivalent (MTOE). Rise in GDP is likely to result in a rise in energy consumption and an increased need for investments in the energy industry.

VALUE CHAIN OF OIL AND GAS SECTOR The whole value chain of the Oil and Gas Sector is being divided into three streams namely; Upstream, Midstream and Downstream. Below shown is the broadly categorization of the activities under the three streams.

MAJOR PLAYERS
Crude Oil: India relies heavily on crude imports (~75%) and its consumption has outdone production growth rate in the last decade by about 3.5% per annum. Substantial refinery capacity

4 additions over the years have led this growth in crude oil consumption making India a net exporter of petroleum products. Crude oil production has remained stagnant over the past decades. Discovered in 1974, Bombay High still continues to produce around 80% of offshore oil production and 45% of the total oil production in the country. Similarly, Cairns Rajasthan discovery, which currently contributes nearly 20% of the total oil production, is expected to increase and contribute around 30% in the near future. Domestic crude oil production is dominated by ONGC, which accounts for 65% of the countrys total crude oil production. OIL is the oldest E&P company with operations concentrated in the north-east region of India and accounts for 10% of the total oil production. Private and JV companies account for the balance 25%. Natural Gas and LNG: Natural gas has always been a supply-constraint market in India. The most prolific gas producing fields include Bombay High which is operated by ONGC and contributed ~34% of the total gas production in 2011-12, KG-D6 offshore which is operated by Reliance Industries Ltd and contributed ~33% of the total gas production in 2011-12. The total offshore gas production accounts for 88% of the total production in India. The share of the private sector and JVs in the countrys total gas production is expected to increase, owing to recent gas discoveries expected to be monetised by the companies. Other players are Petronet LNG Ltd and Shell.
Upstream Midstream and Downstream

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ONGC OVL OIL Private E&P Companies

Indian Oil BPCL HPCL Reliance Industries NRL BRPL, CPCL MRPL

INDIAS UPSTREAM OIL AND GAS SECTOR

Indias crude oil consumption has increased exponentially over the past few years. On the other hand, the countrys crude oil production continued to be stagnant, resulting in its increased dependence on crude oil imports. The country produced 33.7 MT of crude oil in FY10, as compared to 34 MT in FY07. Fuelled by strong economic growth, the demand for oil has outpaced domestic production, resulting in an increased dependence on imports. In FY09, commissioning of Reliance Industries (RILs) exportoriented Jamnagar refinery resulted in increased oil imports. Indias crude oil imports, as a percentage of its consumption, increased steadily from 79% in FY07 to 85% in FY10 There is a supply-demand imbalance in Indias gas market as domestic production levels are not adequate to meet the current demand. Opportunities (1) Unexplored sedimentary basins offer significant scope for exploration and development India has significant potential to discover new oil and gas reserves, since the bulk of its sedimentary area is largely unexplored or inadequately explored.

5 India has an estimated sedimentary area of 3.14 million km2, comprising 26 sedimentary basins. As per the statistics of the Directorate General of Hydrocarbons (DGH), at the end of FY 2010-11 about 34% of the total sedimentary area was either unexplored or poorly explored. Given the status of exploration undertaken in the country experts feel that India holds immense potential for hydrocarbon discoveries. Additionally, India offers a definite advantage in terms of finding and development costs, which are among the lowest in the world. This is primarily because exploration in the country is typically carried out in relatively softer and shallow rock formations, as compared to that in various other global locations, which are composed of cretaceous, harder and deeper rock. In addition, the Government provides a level playing field for foreign and domestic companies and extends various fiscal incentives under the New Exploration Licensing Policy (NELP) in order to step up domestic production.

Two important discoveries made by Cairn Energy and Reliance Industries in the last decade unlocked a wide range of opportunities in Indias upstream segment. In 2004, Cairn Energy discovered oil reserves in Rajasthan, recording one of the largest onshore oil discoveries in the country; in 2002, Reliance Industries made a significant natural gas discovery in the KG-D6 fields.

(2) Rising demand for oilfield services and equipment

The nine rounds of NELP auctions have resulted in increased investment and also seen the growing participation of private players in the countys upstream sector. However, acute shortage of oilfield equipment has hindered growth in the upstream segment. As a result, out of the US$20.7 billion worth of investments committed in the initial seven NELP rounds, only US$7.2 billion has been spent so far. Investments made during NELP IX are likely to exceed the US$1.1 billion investment committed in NELP VIII. The pending exploratory programs of the previous NELP rounds and fresh commitments made in new NELP rounds will require the outlay of significant exploration and development infrastructure, e.g., constructing process platforms, laying pipelines and building collecting stations and other surface facilities to transport oil and gas from the wells to delivery points. This is a significant opportunity for engineering procurement construction (EPC) companies. The Government offered 34 blocks during the ninth round of NELP in October 2010. As more blocks are explored, the demand for 2D/3D seismic surveys and other geo-scientific surveys is also expected to increase. The demand for other infrastructure including drilling rigs, offshore support vessels, tubular goods, pipelines, storage tanks and production platforms is also expected to grow. Furthermore, the increase in exploratory activities is expected to affect the countrys market for rigs. India is one of the countries that uses the highest number of rotary rigs worldwide, but the shortfall of rigs in the country is a serious problem. The absence of un-contracted rigs in the Indian Ocean and idle rigs in some parts of the world may navigate the movement of rigs closer to Indian shores, which should result in the offshore rig count in India increasing in the near term. (3) Development of shale gas and coal bed methane The opportunity to explore and develop unconventional energy sources, such as shale gas and coal bed methane (CBM), in India are available to both foreign and domestic players. It is estimated that there are significant shale gas reserves in the Cambay, Damodar, Krishna Godavari and Cauvery basins. According to industry estimates, Damodar and Cambay basins have preliminary shale gas reserves of

6 between 35 and 90 trillion cubic feet. However, additional and extensive studies need to be carried out to gauge the true extent of the countrys shale reserves. This will provide opportunities for companies with experience in technical assessment of shale reserves and those with technology to reduce development and production costs. India has the worlds fourth-largest proven coal reserves. The country has significant potential for exploration and production of CBM. Currently, exploration has only begun in 52% of the 26,000 square kilometres of sedimentary area. Many companies, including ONGC, Essar Oil and Great Eastern Energy Corporation Limited (GEECL), have committed substantial investments on CBM exploration and production over the next few years. India has prognosticated CBM reserves of nearly 161 TCF. The bulk of these reserves are located in Jharkhand, Chhattisgarh, Orissa and Madhya Pradesh although most of these regions do not have natural gas pipeline connectivity at present. Commercial production of CBM is expected to provide an impetus for the local economy of these regions. Furthermore, production of CBM will help to reduce greenhouse gases and earn carbon credits, since it prevents methane from operating mines from escaping into the atmosphere. Moreover, extraction of methane helps to increase coal production and ensure safe operating conditions in such mines by keeping methane levels low. (4) Heightened focus on enhanced oil recovery (EOR)/improved oil recovery (IOR) projects Crude production in India increased after Cairn Energy ramped-up production from its Barmer fields last year. However, majority of Indias producing basins have begun to mature with their production either peaking or beginning to decline. Production is also declining in other regions, particularly in the North East. Therefore, the deployment of EOR/IOR techniques has become crucial for arresting a decline in production and extending the economic life of a field. This provides opportunities for companies specializing in deploying secondary and tertiary forms of oil recovery procedures.

INDIAS MIDSTREAM OIL AND GAS SECTOR

Transnational Pipelines:

At the end of FY10, India had a network of 19,300 km of crude, 16,293 km for gas and 15,903 km for products and product pipelines with a capacity of around 163 million tons per annum (MMTPA). Indian Oil Corporation (IOCL) holds the majority share of the transport pipelines and the rest is held by other government-owned petroleum companies such as OIL India, ONGC, BPCL and HPCL. The country currently has a natural gas transmission network of about 11,000 km, with GAIL accounting for nearly 8,000 km of this network. The remaining network belongs to Reliance Gas Transportation Infrastructure Limited (RGTIL), Gujarat State Petronet Limited (GSPL), Assam Gas Company and OIL India. While Indias crude and product pipeline capacity is reasonably adequate, it has inadequate gas pipeline infrastructure. The country has a very low pipeline penetration as compared to the rest of the world with onshore natural gas pipeline density being 3 km per 1,000 km2 of area as compared to 50 km per km in the USA, China and the UK. India currently has three LNG regasification terminals, out of which one each at Dahej and Hazira are operational. The Dahej LNG terminal has a capacity of 10 MMTPA and Hazira a capacity of 3.7 MMTPA. The third terminal at Dabhol, with a capacity of 5 MMTPA, is expected to be operational by the end of 2011. In addition, new LNG terminals are planned in Kochi, Ennore and Mundra. Although LNG imports have increased over the years, its share in total gas supplies has decreased. This is mainly due to the increase in domestic gas production and transmission capacity constraints. However, this trend is

7 likely to reverse over the long term due to increased domestic demand and the inability of domestic production to satisfy the demand. Turkmenistan-Afghanistan-Pakistan- India Pipeline The proposed TAPI Gas Pipeline is expected to be approximately 1,680 km, with a distance of approximately 145 km in Turkmenistan, 735 km in Afghanistan and 800 km in Pakistan. The total contracted volume for 30 years for all three buyer countries together is 0.98 TCM. The source of the gas is the South Yolotan Osman field, recently re-named Galkynysh, which is expected to hold proven recoverable gas reserves of about 16 TCM. The estimated cost of the project is approximately 7.6 billion USD and the commercial operation is expected to commence in the year 2017. The governments of India, Pakistan, Afghanistan and Turkmenistan have signed the Inter-Governmental Agreement (IGA) and Gas Pipeline Framework Agreement (GPFA). In May 2012, India and Turkmenistan entered into a Gas Sale and Purchase Agreement (GSPA). Refining Sector

Over the past few years, private players have gained in importance in the countrys oil-refining sector. Private companies operate three of the refineries and the remaining 17 refineries are run by state-owned oil refiners. The bulk of the output from PSU refineries is sold in the domestic market and that of private companies is largely exported. Currently, India has a surplus refining capacity and is a net exporter of petroleum products. Its net exports of petroleum products, as a percentage of the crude processing capacity of its refineries, increased to around 20% in FY10 from 11.4% in FY07. Petroleum exports are a major source of foreign exchange for the Government and amounted to more than INR1102 billion (US$23.3 billion) in FY10. The Government is promoting India as a global refining hub. The country offers advantages such as low refinery construction and operating costs. Moreover, many refineries in developed countries are likely to shut down over the next few years due to environmental pressures they are old and inefficient, which makes it economically unviable to upgrade them. Refining companies in India are aggressively increasing their refining capacity by upgrading their existing facilities and building new grass-root refineries to exploit these opportunities. The upgraded refineries will be able to produce Euro IV- and Euro V-compliant fuels, which can be exported to developed markets in the US and Europe. These refinery projects provide opportunities for EPC contractors and refinery equipment providers. Opportunities (1) Expansion of LNG capacity Over the next few years, domestic gas supplies are expected to increase significantly due to additional supplies from new gas fields. However, demand is expected to grow in the country at a much higher rate, since major consumers such as fertilizer units and power plants are switching to natural gas from naphtha. As a result, the demand for LNG is expected to remain high, which is likely to lead to capacity augmentation of existing LNG terminals as well as commissioning of new ones. LNG supplies are estimated to account for around 26% of the total demand for natural gas by FY20. The expansion of existing LNG terminals and commissioning of new terminals at Kochi, Ennore, Mundra and Dabhol are expected to result in an increase in supply. Despite the increase in LNG regasification capacity in the country, it may continue to witness a shortage of natural gas. In the current scenario, LNG terminals are more attractive as geopolitical factors, and disagreements on gas pricing may discourage investments in transnational pipelines. Therefore, ramping up

8 additional LNG capacities may be a long-term solution for increasing gas supplies in India. Furthermore, the increase in LNG re-gasification capacity is expected to create opportunities for companies operating LNG terminals and providing EPC services. (2) Need for robust pipeline infrastructure Some of the main drivers of the Indian natural gas market include pricing, pipeline infrastructure, regulatory reforms and customer demand. Gas prices in India are gradually shifting from governmentcontrolled administered prices toward a market determined pricing mechanism. The Petroleum and Natural Gas Regulatory Board (PNGRB) is in the process of strengthening the countrys regulatory framework. There has also been an evident shift of major consumers to the natural gas market. Therefore, there is an urgent need to improve pipeline infrastructure in the country. India has a limited gas transmission network, primarily due to a shortage in the availability of gas supplies and the regional concentration of gas sources (in the western region). However, the supply situation is changing with increasing gas production on the eastern coast as well as an increase in LNG capacity. Major investments in this segment will provide ample opportunities for gas transmission, EPC and pipeline-manufacturing companies. (3) Setting up of strategic crude oil reserves and petroleum product storage infrastructure Oil-refining companies maintain a crude oil inventory of around two weeks. However, this is only for operational purposes and cannot be classified as strategic reserves. India plans to construct strategic crude storage reserves of around 15 MT to protect against possible disruption of supplies. Three underground storage reserves, with a cumulative capacity of 5.33 MT, are being constructed during the first phase. Indian Strategic Petroleum Reserves Limited (ISPRL) is constructing the reserves at Visakhapatnam (1.33 MT), Mangalore (1.5 MT) and Padur (2.5 MT). This will be sufficient to meet the countrys oil requirements for around 14 days. However, this storage capacity is small compared to global standards. For instance, strategic petroleum reserves in the US have a 90-day stockpile. Furthermore, the recent upheavals in the Middle East have again highlighted the importance of having sufficient crude oil storages. The Government is open to the idea of setting up secondary storage infrastructure in addition to that maintained by the refining companies. These can be constructed by using public private partnership (PPP) mode. This will provide opportunities for EPC contractors, oil traders and financing companies.

INDIAS DOWNSTREAM OIL AND GAS SECTOR

The private sector was not authorized to operate in the retailing of fuel up to 2002. Consequently, the Government determined to open the sector to private participation, subject to certain restrictions. In particular, private companies were required to carry out investment of at least USD 400 million in refineries, pipelines or other energy-related assets in the country over a period of time. The Government, with its aim of protecting the Indian consumer from unpredictability of crude oil prices in the international markets, has been subsidizing end-user prices. Very often, this has translated into a large subsidy being given to the internal consumer, with the burden of this subsidy being shared between the oil marketing firms, the Government (which has been issuing oil bonds to the PSU marketers to give back them for their under-recoveries) and the upstream PSU firms of ONGC and OIL. The trend for petroleum products has not changed much in the last five years. The production for middle distillates (kerosene, aviation turbine fuel, high speed diesel, light diesel oil, etc.) accounts for more than 50% of the total production, with light distillates (LPG, motor spirit, naphtha, etc.)

9 accounting for 29% and heavy ends (furnace oil, low sulphur heavy stock, lube oil, bitumen, etc.) making up the remaining 19%. However, these segments are witnessing the following trends: Increase in production of motor spirit, high speed diesel and aviation turbine fuel due to increase in demand from automotive and transport sector and a booming aviation sector Relative slowing of growth in naphtha production on account of substitution by natural gas Absolute reduction in kerosene production due to environmental concern Relative balancing out of demand factors (pull) and usage factors (push) to stabilised production trend for lube oil City gas distribution (CGD) was first introduced in Delhi and Mumbai, primarily to reduce air pollution. The success of these projects prompted the Government to promote CGD in other parts of the country. Increasing availability of gas, transmission capacity and environmental concerns are driving CGD projects and the use of compressed natural gas (CNG) as a transportation fuel. The Government is also promoting the supply of piped natural gas (PNG), which will help to reduce the subsidy burden imposed on domestic LPG. Therefore, this industry offers attractive growth opportunities to contractors, distribution pipeline manufacturers, CNG kit suppliers and cylinder manufacturers. The industry is also expected to become a high employment generator and create opportunities to train manpower and upgrade skills suitable for this sector.