Demand and Supply

The aggregate consumption of petroleum products during 1997/98 was 90mt. In the period 1992-98, LPG and HSD registered the largest demand growth rate of 9.2% and 8.6% respectively. The Transport (38%) , residential (26%)and industrial(24%) sectors are the largest consumers of petroleum products. The total production of petroleum products during 1997/98 was 61mt (MoPNG 1998). India's self sufficiency in petroleum products has declined to 34% in 1997/98 from 60% in 1985/86 resulting in a substantial growth in the import bill. 

Natural Gas

Natural Gas currently accounts for 8% of the energy consumption in the country. The current demand is 89 mcmd with domestic availibility lagging behind at 63mcmd. The total gas consumption in 1996/97 was 19bcm with power and fertilizer sectors accounting for more than 80% of the consumption. 

The gap between demand and supply is set to widen unless major gas discoveries are made. India is also looking at pipeline gas and LNG imports from neighbouring countries as well as countries from Iran, Oman, Central and South East Asia. 

The growth of the gas/ LNG imports are very closely intertwined with the power sector, and the competition, and perhaps to an extent the repacement of coal as the preferred fuel. The setting up of  Natural Gas import infrastructure would depend to a large extent on the ability  of the power sector to pay for gas as against the cheaper coal, or an alternative fuel.

Transportation

The Railways handle the bulk of petroleum product movement in the country, followed by the pipeline. The use of pipelines, provide for more reliablity, safety, greater capacity and efficiency in delivery of the product. There are 5000km of pipiline in the country. At present there are two crude pipelines, one belonging to OIL bringing northeastern crude to Barauni refinery and the other owned by IOC taking crude from the gulf of Kutchh to Koyali and Mathura refineries. The IOC pipeline is being extended to bring crude to their Panipat refinery. Another new pipline is being layed from the Gulf of Kutchh to Bina to meet the crude requirements of the new joint venture refinery at the place. 

The Sub-group on refining has proposed 11 new pipelines for the increased capacity utilisation of the existing refineries. The cost of constructing these new pipelines is to the tune of Rs 5000 crore. Inorder to generate funds of this magnitude joint ventures would be essential. To meet these huge costs as well as to ensure equitable utilisation of these pipelines, the government has approved of a holding company and subsidiary jointventure companies for the implementation of these pipeline projects. IOC, BPCL, HPCLand IBP have recently formed a holding company 'Petronet' which will work on the laying down of new product pipelines. 

Pricing for Oil and Natural Gas

The Administered Price Mechanism, which has been a feature of the oil industry in the last fifty years, was sought to be phased out. The dismantling  of this mechanism began on 1 April 1998 and ended in 2002.  The Government however continues to control the prices of petro products.

The APM was made up of a cost-plus pricing system for the producing companies, and cross-subsidisation for the consumers. The Oil -Pool Account was to see to the interests of both producers and consumers. Subsidies have contributed to the severe liquidity crunch faced by the oil companies. The new package accompanying the dismantling of prices is directed towards bringing greater transparency in subsidies, moving prices towards their real costs , sending right market signals, at the same time not throwing the small consumer to the wolves. Studies have shown, the dismantling of the APM will result in an overall wholsale price-index inflation of 1.57% in five years on a cumulative basis.  

The de-regulation of Natural Gas prices also began in a phased manner. The consumer price of gas at landfall points would be linked to the price of a basket of LSHS/FO prices. Domestic gas prices are to move closer towards the inter-fuel market determining pricing regime. The de-regulation of prices is to accompany those of crude oil and petroleum products, to provide a rational market- related pricing framework for end users. 

Key developments in the recent past

1) In November, 1997 the government approved a phased dismantling of the APM. The cost-plus formula for Indian crude oil producers, has been abolished, and so has the retention of pricing for all refineries. However, refinery gate prices of controlled products are still fixed. Custom duties on crude oil are reduced from 27 to 22%, furnace oil and naptha exports have been decanalised and the refining sector was delicenced onJune 8th 1998. 
2) The Oilfields Ammendment bill ,1998 was passed by the LokSabha in December of the same year.. The purpose of the bill was, to increase FDI in the oil sector. 
3) To cancel the oil pool deficit, the government issued special onetime governnment bonds. The oil companies were required to invest in these bonds issued by the RBI. 
4) In January, 1999 the government under NELP, invited bidding for 48 blocks- 10 onshore, 26 shalow water and 12 deepwater. The terms offered were better than the earlier rounds. A new petroleum tax guide was also put into place. 
5)  Promotional presentations and roadshows, in India and abroad, were organised to publicize the new terms and incentives. 
6) A committee was set up under Nitish Sengupta to recommend further deregulation of the sector. The recommendations, which included suggestions on a series of mergers, strategic alliances, cross holding of equity for four stand alone refineries, was not well received by the Indian oil companies.  
7) In december, 1998 the government decided to allow 100% private investment in oil product pipelines, and allow private equity participation in Petronet India. Some private companies like Reliance Petroleum,and Enron Development Corporation  are now planning their own pipeline networks. 
8) The government has also announced a new policy on the exploitation of new energy resources specifically Coal bed Methane, in the states of Bihar, West Bengal and Madhya Pradesh.  
9) The Directorate General of Hydrocarbons is to be transformed into a regulatory body called the Hydrocarbons Regulatory and  Development Authority. The  government has also decided on the setting up of an LNG regulatory authority. 
10) In April 2000, Prime Minister Vajpayee set up a high powered committee to formulate a hydrocarbon plan for the next 20 years. The report suggested  a continued government intervention, limited leeway for foreign investment, integration of the oil majors. Entry of MNC's, under certain  conditions like the following of social objectives and capacity creation and also the setting up of more independent regulatory authorities in upstream, downstream and natural gas sectors.
11) Major discoveries announced by Reliance, Cairn etc

The  Petroleum industry is still riddled with problems. The NELP did not accompany a tax code for more than a year and a half and hence the bids could not come in. The ONGC still having the pick of the best blocks was not very encouraging to the private companies. The APM process has been uneven and whether the government will be able to stick to the time table, is not certain. Foreign participation in the downstream sector has been kept to a minimum, and even the continuing subsidies on LPG by the NOC's, have throttled the private competition under the parallel marketing scheme. Pipelines, despite its immense importance have not yet received infrastructure status, and the role of private investors in pipeline projects is far from clear. Also lack of adequate port, storage and handling infrastructure is another big handicap the sector faces. 

There are mixed signals being sent to industry here and abroad. Despite the setting up of numerous committees and the revamping of old ones, the process of unshackling the petroleum industry is still slow and far from nearing completion.

To understand the scale of the operations, you must travel to the ONGC's pride, Bombay High where oil was struck just 170 km from the coast at a depth of 400 metres. Those were the good days. Says Subir Raha; chairman and managing director, ONGC, which produces 84 percent of the country's annual 32 billion tonnes of oil: "The days of easy oil are gone. There aren't any short cuts."

Raha's target is to raise crude production by 10 per cent by 2006- 07. But that is a tall order. "Considering a natural decline of 8 per cent in the production of the existing oilfields, this means ONGC has to achieve a gross increase of 20 per cent in our production," Raha says

Raha is getting strong backing in this mammoth oil hunt.

Energy- hungry India has had mixed success in its hunt for oil. In the last two years, India has reported 21 oil and gas discoveries amounting to over 800 million metric tones of oil and oil equivalent gas. Apart from Reliance, the other foreign and domestic companies, which together account for around 16 percent of the country's total crude oil production, include Essar, Assam Company, Cairn Energy, Niko Resources, Premier Oil and Hardy Oil

Public sector downstream oil companies like Hindustan Petroleum and Bharat Petroleum have also made a foray into upstream oil exploration as joint venture partners of ONGC in some blocks.

So why are Indian companies suddenly stepping up their hunt for oil? Petroleum Secretary B K Chaturvedi has an answer: " A large part of the remaining sedimentary basin will require deep sea exploration. At the existing speed of exploration, the process of giving out all the sedimentary basins would continue till 2025. There's no way but to accelerate the process as the exercise must be over at least 10 years before that."

That's an understatement, considering India's dependence on imported oil has jumped from just 30 percent of its domestic demand in 1991 to 70 percent now. The fact is the country's oil production has also stagnated for far too long. After Bombay High, the only two significant oil discoveries- more than a billion barrels of in- place reserves- have been the Gandhar discovery by ONGC in the eighties and the recent Mangala oilfields find in Rajasthan by UK based Cairn Energy.

This clearly has to change urgently, say analysts like Shubhomoy Mukherjee, head of oil & gas sector ratings, at ICRA. India, which imports 80 million to 90 million tones of crude oil (Cost over Rs 85,000 crore) against total domestic availability of only 32 million tonnes, desperately needs to find more buried treasures of black gold, India's oil needs will rise to 3.2 million barrels a day by 2010 from around 2.2 million now.

In the process, India, which is now the seventh largest consumer of oil, will emerge as the fourth largest consumer after the US, China and Japan.

Analysts say another reason why India needs to step up its oil hunt is the growing gap between consumption and production growth. For example, crude oil production rose at a compounded annual growth rate (CAGR) of around 2.3 percent from 1994 to 2003. But consumption leapt upwards at a CAGR of some 8.3 per cent.

Raha, for one, is taking this seriously. Consider the Sagar Samriddhi project in which ONGC is seeking to find one- third of the estimated 11 billion tonnes of oil and oil equivalents gas reserves lying unexplored in deep waters. If ONGC could produce one- fourth of the reserves, India would have 1 billion tonnes of oil and gas over 25 to 30 years. That would be fantastic news for the company which has been able to tap only 6 billion tonnes of oil and gas in the past 45 years even though it had 57 per cent of the oil exploration acreage in the country.

But mindboggling investments will be needed to reach these ambitious targets: the company is spending over Rs 400 crore a day to drill 47 exploratory wells. Raha says ONGC, which has domestic exploration licences for a total of around 680,800 square km, will invest Rs 33,000 crore in the 10th Plan period on oil & gas exploration, discovery and asset building. "The proposed investment is part of our expansion plans and ONGC is spending Rs 10,000 crore every year on business development," he adds.

Many consider such a huge investment too risky considering the recovery rate in India has been a mere 28 per cent compared to the world average of 40 per cent. But Raha, understandably, disagrees. Even at a minimum average $ 20 a barrel, he estimates the revenues from 1 billion tonnes of oil production would be at least Rs 644,000 crore over the next 25- 30 years At current prices, each percentage point rise in the recovery factor represents an extra value of Rs 16,000 crore.

Can ONGC pull it off? The initial results have been positive with Sagar Vijay already striking oil in the Krishna Godavari basin. A bullish ONGC estimates its existing crude oil production of 26 million tonnes will rise to 49 million tonnes by 2011- 12, and 62 million tonnes by 2016- 17.

There are, of course, other ways for ONGC to reach its ambitious targets. The corporation is looking at ways of 'renewing' Bombay High, which accounted for 48 per cent of ONGC's crude oil production in financial year 2003, but has been showing signs of ageing. The company has already invested Rs 8,500 crore, which has led to a net production increase of 50,000 barrels per day.

Avinash Chandra, former Director General of Hydrocarbons (DGH), believes progress in India's oil exploration efforts have been tremendous, which is evident from the huge success of the four rounds since 2000. The fifth round is expected to be announced anytime now.

Chandra may have a point. Thanks to DGH, the timespan between the offering of blocks and signing of production- sharing contracts has been cut to an incredible 3- 4 months against 1- 2 years earlier. The deployment of nine seismic vessels in Indian waters compared to one or two vessels earlier has increased the offshore data acquisition sharply.

The icing on the cake has been the spectacular performance of India's oil companies abroad. ONGC Videsh, for example, already has nine overseas assets and wants more. Deals have been struck in countries like Russia, Sudan, Vietnam, Syria, Iran, Iraq, Libya and Myanmar, OVL already gets 3 million tonnes of oil from Sudan and beginning in 2005, expects to get another 5 million tonnes from Sakhalin.

Others have also joined the rush, Reliance Industries has bought a 30 per cent stake in an off-shore field in Yemen. The project, struck oil in mid- June last year.

All this is a far cry from the 1990s when the government stalled all ONGC's new exploration projects because of the severe foreign exchange crisis. The company, no doubt, has paid a heavy price for this, But Raha doesn't like to look to the past. 'We're flush with funds now' ONGC piled up reserves of Rs 34,151 crore even after paying a whopping 300 per cent dividend in the last financial year. 'Our challenge is to convert these resources into assets and wealth for the company, its investors and its customers,' Raha says.

As oil prices skyrocket, India will surely say cheers to that.

The SEC Cloud over oil estimate

This is not a comforting thought for those who worry about India's already scant proven energy supplies. If ONGC adopted the standards set by the Securities and Exchange Commission (SEC), the estimated proved crude oil amount announced by the company might be lower than anyone believes right now.

That gloomy admission comes from ONGC itself in preliminary prospectus for its share sale released in February." If at some point in future we were to adopt SEC Standards. The estimate may come down significantly," the document says, SEC standards are being adopted in creasingly by global oil majors for their widespread acceptability.

At the moment, the company says it uses "internally- developed definitions" to calculate its proved domestic reserves. Those definitions are based mostly on international standards set from March 1995 by the Society of Petroleum Engineers, or SPE.

These standards, referred to as the SPE International Standards, take into account nor only the probability that hydrocarbons are physically present in a given geological formation but also the economic viability of recovering the reserves.

But there are vast differences between the SPE standards and SEC Standards, How different? Well, crucially, the SPE standards are looser.

Under SPE, proved reserves must be based on "current economic conditions, operating methods and government regulations."

The SEC Standards require that proved reserves be based on the "existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made.

Also under SPE, reserves in undeveloped drilling sites that are located near a commercial producing well may be classified as proved reserve if there is a "reasonable certainty" that success will be achieved.

Under SEC, it must be "demon- strated with certainty" that there is continuity of production from the existing reservoir before an unexplored location near a current commercial producing well can be classified as proved reserves.

As far as project commitment, under SPE, proved reserves may be estimated as long as there is a reasonable expectation of project development.

The SEC requires a more firm commitment by the company to develop the project.

As a result, the ONGC document says, "The magnitude of any proved reserve difference between the SPE and the SEC standards could vary greatly, In some cases, the difference could be significant, whereas in other cases there could be very
Little difference.

The SEC standards also are more restrictive in that they require the reserve estimates to use only the prices and costs in effect on the actual "as of" date.

If it adopted the SEC Standards for ONGC shareholders there is an other sting.

A reduction in estimates would have a chain effect: it would impact the amount of depreciation and depletion expense, impairment charges or certain other financial information derived from or relating to such reserves amounts reported by ONGC in its financial statements in future. And that would all affect the crucial bottom line.