Petroleum Industry Analysis

CIA SUBMISSION ON PETROLEUM INDUSTRY ANALYSIS

SUBJECT ECONOMICS

SUBMITTED TO PROF. KAVITA MATHAD

GROUP 7

1MBAN

SUBMITTED BY:

ASHISH GANDOTRA (1628104)

SIMRAN KHAN (1628150)

KAUSHIK DAS (1628115)

CHARCHIT KHATRI (1628109)

SHAYAK BOSE (1628125)

SHRUTI YADAV (1628160)

INDEX

1
Petroleum Industry Analysis

Introduction ---------------------------------------------------------------- 1

World Wide Scenario ---------------------------------------------------------------- 1

History of Petroleum Industry in India ---------------------------------------------

Indian Market Size ----------------------------------------------------------------

Challenges faced by Petroleum Industry ------------------------------------------

Road Map Ahead ----------------------------------------------------------------

References ----------------------------------------------------------------

2
Petroleum Industry Analysis

Introduction:

The petroleum industry includes the global processes

of exploration, extraction, refining, transporting (often by oil
tankers and pipelines), and marketing petroleum products. The largest
volume products of the industry are fuel oil and gasoline (petrol).
Petroleum (oil) is also the raw material for many chemical products,
including pharmaceuticals, solvents, fertilizers, pesticides, and plastics.
The industry is usually divided into three major components:
Upstream, Midstream and Downstream.

The oil and gas sector is among the six core industries in India and plays a
major role in influencing decision making for all the other important
sections of the economy.

In 199798, the New Exploration Licensing Policy (NELP) was envisaged to

fill the ever-increasing gap between Indias gas demand and supply. A
recent report points out that the Indian oil and gas industry is anticipated
to be worth US$ 139.8 billion by 2015. Indias economic growth is closely
related to energy demand; therefore the need for oil and gas is projected
to grow more, thereby making the sector quite conducive for investment.

The Government of India has adopted several policies to fulfil the

increasing demand. The government has allowed 100 per cent Foreign
Direct Investment (FDI) in many segments of the sector, including natural
gas, petroleum products, and refineries, among others. Today, it attracts
both domestic and foreign investment, as attested by the presence of
Reliance Industries Ltd (RIL) and Cairn India.

World Wide Scenario of Petroleum Industry:

World oil use is expected to grow from 98 mbpd in 2015 and 118
mbpd in 2030 as per Energy Information Administration,
International Energy Outlook 2006.

In the IEO 2006 reference case, world oil prices rise from $31 per
barrel (in real 2004 dollars) in 2003 to $57 per barrel in 2030, and
oils share of total world energy use falls from 39 % to 33 %. To
meet the projected increase in world oil demand, total petroleum
supply in 2030 will need to be 38 mbpd higher than the 2003 level
of 80 mbpd. Of this, China is projected to consume additional 9.4
mbpd, US 7.5 mbpd and Asia (other than China & India) 6 mbpd.

3
Petroleum Industry Analysis

The balance growth is expected in South America, Africa and Middle

East.

As per the same report India is expected to consume additional 2.2

mbpd. OPEC producers are expected to provide 14.6 mbpd of the
increase. Higher oil prices cause a substantial increase in non-OPEC
oil production 23.7 mbpd, which represents 62 % of the increase in
total world oil supplies over the projection period. In addition,
unconventional resources (including biofuels, coal-to liquids, and
gas-to-liquids) are expected to become more competitive. In 2003,
world production of unconventional resources totalled only 1.8
mbpd.

Unconventional resource supplies are expected to rise to 11.5 mbpd

and would account for nearly 10 % of total world energy supply in
2030.

History of the oil industry in India :

The history of the Indian oil industry extends back to the period of
the British Raj, at a time when petroleum first became a primary
global energy source. Currently petroleum products and chemicals
are a major contributor to India's industrial GDP, and together they
contribute over 34% of its export earnings. India hosts many oil
refinery and petrochemical operations, including the world's largest
refinery complex in Jamnagar that processes 1.24 million barrels of
crude per day. By volume, the Indian chemical industry was the
third largest producer in Asia, and it alone contributed 5% of its
GDP. India is one of the top 5 world producers of agrochemicals,
polymers and plastics, dyes and various organic and inorganic
chemicals.

Despite being a large producer and exporter of chemicals, Indian

petro- chemical firm faces various challenges with respect to Indian
context some of which are :

The manufacturing units mostly use obsolete format of technology and are
not able produce optimally
There is a necessity for the modernization of equipments.
Excise duty on synthetic fiber should be rationalized.
Prevention of reservation on Small Scale Units.
Plastic waste to be recycled and the littering habits to be discouraged.
India requires advantage on feedstock, so the import cost has to be
brought down.
The industry should have access to the primary amenities of
infrastructure.

4
Petroleum Industry Analysis

Indian Market Size

Backed by new oil fields, domestic oil output is anticipated to grow to 1

MBPD by FY16. With India developing gas-fired power stations,
consumption is up more than 160 per cent since 1995. Gas consumption is
likely to expand at a Compound Annual Growth Rate(CAGR) of 21 per cent
during FY0817. Presently, domestic production accounts for more than
three-quarters of the countrys total gas consumption.

India is the fifth-largest Liquefied Natural Gas (LNG) importer after Japan,
South Korea, the United Kingdom and Spain and accounts for 5.5 percent
of the total global trade.The LNG imports had increased by 43.38 per cent
year-on-year in May 2016 to 2.08 Billion Cubic Metres (BCM).Domestic LNG
demand is expected to grow at a CAGR of 16.89 per cent to 306.54 Million
Metric Standard Cubic Meter per Day (MMSCMD) by 2021 from 64
MMSCMD in 2015.

The country's gas production is expected to touch 90 Billion Cubic Metres

(BCM) in 2040 from 35 BCM in 2013. Gas pipeline infrastructure in the
country stood at 15,808 km in December 2015.

State-owned Oil and Natural Gas Corporation (ONGC) dominates the

upstream segment (exploration and production), accounting for
approximately 68 per cent of the countrys total oil output (FY14).

Indian Oil Corporation Limited (IOCL) operates 11,214 km network of

crude, gas and product pipelines, with a capacity of 1.6 MBPD of oil and 10
MMSCMD of gas. This is around 30 per cent of the nations total pipeline
network. IOCL is the largest company, operating 10 out of 22 Indian
refineries, with a combined capacity of 1.3 MBPD.

CHALLENGES :

1. Tumbling Oil Prices and limited fossil fuels.

Analysis:
Petroleum sector is going through one of the most transformative periods
in its history, which will ultimately redefine the energy business as we
know it. Navigating change of this scale will require smart, strategic
judgment on the part of O&G company leaders. They must tackle cost and
investment concerns in the short term while readying themselves to
respond to the future impact of inevitable external environmental
pressures.

5
Petroleum Industry Analysis

The sensational drop in oil prices below US$40 per barrel at the end of
2015, down more than 60 percent from their high in the summer of 2014
reflects rampant supply and weak global demand amid concerns over
slowing economic growth around the world, especially in China. This
imbalance is only going to worsen this year. Saudi Arabia continues to
pump at full tilt, less concerned about propping up oil prices and more
intent on securing market share, hoping to drive out marginal producers,
particularly in the United States. As early as the second quarter of 2016,
the flow of Iranian oil is likely to increase, adding to the glut. Even Middle
East instability, such as the tension that erupted between Russia and
Turkey in Syria toward the end of 2015, has not budged crude prices.
Consequently, we expect oil prices to remain low for the near future,
although it would not surprise us if volatility returns.

Suggestion:

Review the business strategy to refocus your organization on what you do

best and where you can best outpace competitors. As the emphasis on
fossil fuels wanes, it is critical to avoid becoming overextended in legacy
areas. Look for growth areas where you already have massive strength
that you can draw on, but where you are agile enough to adapt to
changing market conditions.

6
Petroleum Industry Analysis

For example, exploration and production demand two very different

business models. Production has significant funding requirements,
whereas exploration involves substantially higher risks. All too many
exploration firms have delved into production, only to discover that the
complexities of these operations, and the capital and skills needed to
support them, drain the business of resources and make it hard to do
either activity well. Downstream-focused companies have had similarly
unsatisfactory experiences when dabbling in upstream activities during
the past decade. Those types of missteps and overreaching are potentially
disastrous in todays handicapped O&G market.

Instead of broadening your business to pursue every opportunity you see,

develop a more targeted approach to strategy. For example, Occidental
Petroleum spun off its Californian asset into a separately listed company.
Now Occidental is focusing on enhanced oil recovery, a sophisticated
drilling method that can extend the life of producing fields. Similarly,
Apache is emphasizing developing an expertise in managing late-life
assets abandoned by the majors; for example, it has acquired the 50-year-
old Forties drilling site in the North Sea and intends to extend its
productive life by 20 years.

2. Handling government pressure

Analysis:
The O&G landscape is being significantly reshaped by a potent emerging
trend: the fear of climate change and a powerful, concerted effort to
reduce CO2 emissions and minimize fossil fuels. If you are a business
leader in this industry, your most important task this year is to address or
at least face up to a vital existential issue: how to successfully do business
as an O&G company in an increasingly carbon-constrained world.

Governments all over the planet are introducing ambitious carbon

reduction targets and this is putting businesses under growing pressure to
slash their emissions.

The oil and gas industry is being scrutinised closely and firms are
expected to devise new ways to extract natural resources while
minimising pollution. This is a particularly big problem in Canada, where a
report by Environment Canada showed the oil and gas sector has now
overtaken transportation as the leading producer of greenhouse gases.

7
Petroleum Industry Analysis

Suggestion:

O&G companies must link their investment programs to options that are
suitable for a more carbon-constrained operating environment.

This doesnt suggest to radically change portfolio and begin deploying

wind farms on decommissioned oil platforms. Nor it can forecast that pure
exploration and production oil companies will be out of business in 20
years. But in the much shorter term, we think every O&G company should
figure out how to produce oil competitively while reducing its carbon
footprint as much as possible.

As an example: Statoil has taken steps in that direction by launching an

ambitious internal project to review every turbine and compressor it
operates on the Norwegian continental shelf. It intends to upgrade or
replace equipment as needed to reduce its carbon footprint.

Even integrated O&G companies should seriously consider incremental

diversification, moving gradually into low-carbon technologies to manage
the evolution of products as fossil fuels are phased out. For example,
figure out whether you have the capabilities to invest in natural gas as a
transition fuel. In November 2015, Royal Dutch Shells purchase of BG
Group made it the worlds largest liquefied natural gas trader.

3. Attracting investment

Analysis:
A recent report by Oil & Gas UK suggested that offshore exploration in
Britain is facing its biggest crisis for 50 years.

Productivity slumped in 2011 and has yet to fully recover, which will
inevitably cause investors to have second thoughts about pouring money
into UK-based oil enterprises, especially while oil prices are fluctuating so

8
Petroleum Industry Analysis

erratically. This issue is certainly not exclusive to the UK, as investors all
over the world are generally far more cautious since the economic
downturn in 2008-09. One of the biggest challenges facing companies is
maintaining a high level of performance in order to attract investment.

Suggestion:

O&G companies must exploit new technology to innovate, minimize costs,

and help contribute to achieving a lower-emissions environment. For
example, as oil prices plunge, demand for digital oil-field applications will
grow. Opportunities to link multiple platforms operated remotely from a
single onshore centre or to deploy remote monitoring for onshore and
offshore operations can obviate the need for physical on-site inspections.
One supermajor, BP, is already adopting drone technology to inspect
pipelines at its remote Prudhoe Bay field in Alaska.

Look into technology that can retrofit existing equipment for refining and
producing renewable energy. Some large O&G companies, including
ConocoPhillips, Eni, and Neste, are investing in refining processes to
replace diesel with fuel from soybean, palm, and canola oils as well as fats
and animal tallow in airplanes and commercial transportation.

4. Demand & Supply :

Analysis:

The ground in the oil patch has shifted dramatically. The forecast for the
industry is extremely different today compared with how it looked just a
couple of years ago, when the fundamentals of the oil industry were
controlled by cartels. That traditional structural discipline has been
replaced by a systemic imbalance marked by vastly increased supply and
receding demand growth. Global economic weakness (in particular, slower
growth in China and continuing financial woes in Europe); tougher fuel
economy regulations; more viable forms of alternative energy; and the
development of extraordinarily efficient engines on equipment as varied
as cars, earthmovers, and power plants have all combined to dramatically
curtail the need for oil. Meanwhile, robust new reserves, especially of
shale oil, in numerous regions around the world are glutting the market.

Suggestion:

The biggest mistake that oil and gas companies make in this difficult
business landscape is to focus solely on reducing costs (either operating or
general and administrative) and spending; this strategy is effective only in

9
Petroleum Industry Analysis

a very narrow range of market conditions and rarely effective enough to

make businesses successful over the long term.

Companies should carefully consider the supply of assets, analyze the

logistics of accessing available markets, and ensure a long-term presence
in these markets without getting into a bidding war. Oversupply and lower
prices represent a real challenge to the industry, but that doesnt mean
the future is all gloom. It just means that producers and refiners need to
be prepared and adopt strategies that take advantage of the new reality.

5. Improving safety standards :

Analysis:

Oil rigs are notoriously dangerous places to work and firms have always
fought an uphill battle to offer the maximum protection to their
employees. The new regulatory framework has been established to protect
marine life and coastal environments against pollution and European
businesses are expected to have clear contingency plans in place should
an accident occur.

Workers in Oil and Gas industry are generally susceptible to following

agents which lead to various health and Illnesses hazards: chemical
hazards (toxic, corrosive, carcinogens, asphyxiates, irritant and sensitizing
substances); physical hazards (noise, vibration, radiations, extreme
temperature); biological hazards (virus, parasites, bacteria); ergonomic
hazards (manual handling activities, repetitive motions, awkward
postures); and psychosocial hazards (overwork, odd working hours,
isolated sites, violence).

Suggestion:

Given the perilous nature of the Oil and Gas industry, the need for
implementation of an efficient occupational Safety and Health
Management System is important for improving safety and health
performance. Many countries have extensively participated in it by making
strict and obligatory OSH standards and legislations.

The EU introduced a new Directive in June 2013 that is aimed at ensuring

oil and gas companies are maintaining the highest safety standards
possible.

6. Dealing with the 3D effect :

Analysis:

The fact that existing wells are rapidly drying up is arguably the biggest
problem facing oil corporations. Businesses are finding new sources, but
these are proving to be extremely hard to access. In many cases they are

10
Petroleum Industry Analysis

deep underground, difficult to drill and distant from companies existing

sites. You could call this the 3D effect, and it is essentially three challenges
rolled into one.

To extract oil from these new wells, firms need cutting-edge technology
and highly-skilled engineers both of which come at a price. The demand
for oil and gas is continuing to rise at a time when resources are at their
most stretched and this is putting a huge amount of pressure on
businesses.

Suggestion:

This problem can be dealt by launching joint ventures with rival firms.
Some corporations are attempting to resolve this issue by launching joint
ventures with rival firms. This means they can share expertise and
technology, while also reducing the financial burden of launching new
projects.

Road Ahead:

Government of India is taking initiatives to promote oil and gas sector. In a major drive to
enhance the petroleum and hydrocarbon sector, Government of India has introduced
initiatives like the Hydrocarbon Exploration Licensing Policy (HELP), Marketing and Pricing
freedom for new gas production, grant of extension to the Production Sharing Contracts and
assigning the Ratna offshore field award to Oil and Natural Gas Corporation (ONGC) for
development.

The Government of India plans to incentivise gas production from deep-water, ultra deep-water and high
pressure-high temperature areas which are presently not exploited on account of higher cost and risk,
and also to augment the investment in nuclear power generation in the next 15 to 20 years.

Heraeus, one of the worlds largest recyclers of reforming catalyst, has opened a new facility at Udaipur
which will allow companies to benefit from less transport costs, easier file processing, faster recycling
times, better transparency and overall improved costing for catalyst recycling in the country.

11
Petroleum Industry Analysis

IOCL targets to increase the capacity of its Panipat refinery by 34 per cent, to 20.2 million tonnes by
2020 through an investment of US$ 2.38 billion. IOC also plans to increase capacity of Koyali and
Mathura refineries.

Conclusion:

India's consumption of petroleum products which include domestic and industrial fuels like petrol, diesel,
cooking gas, kerosene, naphtha, etc., rose 17.7 per cent to 15.2 million tonne (MT) in October 2015
from 12.9 MT in October 2014, as per Petroleum Planning and Analysis Cell (PPAC) data. The increase
in consumption can be mainly attributed to India's high economic growth, low fuel prices, festival season
demand.

By 2015-16, Indias demand for gas may touch 124 MTPA against a domestic supply of 33 MTPA and
higher imports of 47.2 MTPA, leaving a shortage of 44 MTPA, as per projections by the Petroleum and
Natural Gas Ministry of India. Business Monitor International (BMI) predicts that India would account for
12.4 per cent of Asia-Pacific regional oil demand by 2015.

References :

http://www.ibef.org/industry/oil-gas-india.aspx

http://www.strategyand.pwc.com/perspectives/2016-oil-and-gas-trends

12