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Overview

The Indian Petroleum industry is one of the oldest in the world, with oil being struck at Makum near Margherita in Assam in 1867 nine years after Col. Drake's discovery in Titusville. References to rock-oil as 'shilajatu' are found in the Vedas. Early evidences of oil seeps were recorded along the banks of the Nampong river in upper Assam, in the 1820s by British army men and geologists. First Indian oil well at Digboi in 1889. Refining, transportation, followed with the discovery at Digboi. It is amazing how the oil was transported in elephant drawn carts across the jungles and then through the waterways to as far as the Malabar coast. Seismic surveys were carried out in the 19th century in jungles of Assam using elephant logistics.

After independence, India didn't loose much time in initiating geological and seismic surveys in search of oil in the Indian basins. After discoveries in the western sector in Gujarat, the prevailing attitude of non-cooperation by multinationals, necessitated the establishment of Koyali refinery in the 60s. One after the other major refinieries were set up and infrastructure for distribution of the products expanded at a great pace.

Unique challenges of reaching essential fuel, be it kerosene or LPG to far-flung, logistically challenging terrains across the vast geography of India was addresssed with amazing resilience. India's forays into offshore in the 1970's at Aliabet were also very early for a fledgling industry of a developing country. The bold initiative taken with faith in indigenous capabilities in an entirely new and technologies challenging area is a tribute to the Indian oil technologists of the day. But the faith was not misplaced as the oilmen did the country proud by bringing the Mumbai high to production in a then world record time of 26 months from the day of discovery.

The industry has come a long way since then. The giant offshore structures, the ultramodern environment friendly refineries, the high-tech pipeline transportation facilities may appear dazzling. For nearly fifty years after independence, the oil sector in India, has seen the growth of giant national oil companies in a sheltered environment. A process of transition of the sector has begun since the mid nineties, from a state of complete protection to the phase of open competition. The move was inevitable if India had to attract funds and technology from abroad into our petroleum sector.

The sector in recent years has been characterized by rising consumption of oil products, declining crude production and low reserve accretion. India remains one of the least-explored countries in the world, with a well density among the lowest in the world.  With demand for 100 million tonne, India is the fourth largest oil consumption zone in Asia, even though on a per capita basis the consumption is a mere 0.1 tonne, the lowest in the region- This makes the prospects of the Indian Oil industry even more exciting.

The years since independence have, however, seen the rapid growth of the upstream and downstream oil sectors. There has been optimal use of resources for exploration activities and increasing refining capacity as well as the creation of a vast marketing infrastructure and a pool of highly trained and skilled manpower. Indigeneous crude production has risen to 35 million tonnes per year, an addition of fourteen refineries, an installed capacity of 69 million tonnes per year and a network of 5000 km of pipelines.  

But with the consumption of hydrocarbons said to increase manifold in the coming decades (155mmtpa by the end of the 10th plan) the liberalisation, deregulation and reforms in the petroleum sector is essential for the health and overall growth of our economy.

'With more than a billion people, a structural demographic shift resulting in exploding consumption expenditure, full deregulation of a 100 m tonne market growing at twice world averages, India represents one of the most exciting oil markets in the world today' - CLSA Asia Pacific

As the Indian Economy breaks the shackles of a hindu rate of growth to grow at a pace of 8% and above, the single biggest beneficiary should be the oil & energy sector. Oil and energy are most happening sectors of the Indian economy today. PSU Oil Companies were in the limelight over the past two years for a variety of reasons- first, the companies, then the huge surge in profits, and recently, the drama over sale of government's stake through public offer.

Consider the following:

Automobile sale have been surging every year. Car sales are up by nearly 30%, heavy & medium commercial vehicle sales have climbed an even more steep 40%, consumption of diesel and LPG are on a steep rise.

That should be pretty good news for the industry, which is counting on surging sales and economic boom to absorb the huge refining capacity that has built up in the country. The interesting story is that oil products consumption has started picking up in line with the economic boom, though with a certain lag.

Going forward, we should see much larger pick- up in sales of oil products in line with the GDP growth rate, feel analysts.

High consumption has meant high profit margins for oil companies, particularly refining majors like Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL), Indian Oil Corporation (IOC) and a host of other smaller refining companies.

Refining margins are now ruling at their highest levels over the past decade. According to analysts tracking the sector, refining margins are now at $8 per barrel, one of the highest levels in many years. And these margins have stayed high despite a rise in prices of crude oil.

For integrated refining & marketing companies, like HPCL, BPCL and IOC, the gains are even more substantial and their numbers may look very impressive.

However, sentiment for the sector would be significantly impacted by the performance of the biggest oil company in the country- ONGC .The company is by far the biggest player in the oil exploration & production sector and has a presence in the refining sector through its arm- MRPL. As crude prices have held firm in the global markets over the past months, the company should show good performance for the year. The company should benefit from a surge in demand in this region.

According to CLSA. "While Asia (excluding, Middle East) accounts for only 10% of oil production, it accounts for as much as 25% of oil consumption and refining capacity. Oil consumption in Asia is returning, driven mainly by a surge in Chinese demand over the shorter term. With most Asian economies on track for a solid recovery, we would expect demand growth to top 3-4% in the next few years leading to a quick recovery. With Asia forming 45% of global incremental demand between 2000 and 2010, we expect Asian refining margins to remain at higher than global averages"

Exploration

India remains one of the least explored regions in the world with a well density of 20 per 10000km2. Of the 26 sedimentary basins, only 6 have been explored so far. The Oil and Natural Gas Corporation (ONGC) and the Oil India Limited (OIL)- the two upstream public sector oil companies- in 1981/82 had taken their search to previously unexplored areas. Number of wells drilled as well as the meterage increased . However current reserve accretion continues to be low. 

NELP

The government in order to increase exploration activity, approved the New Exploration Licensing Policy (NELP) in March 1997 which would level the playing field in the upstrem sector between private and public sector companies in all fiscal, financial and contractual matters.  

Salient features of the NELP 

1) There will be no mandatory state participation through ONGC/OIL nor will there be any carried interest of the government. 
2) The two public sector upstream companies would compete for petroleum exploration licences, instead of the existing system of granting of licences on nomination basis. The public sector companies will also be able to avail of the fiscal and contract benefits available to private companies. 
3)  Open availibility of exploration acerage to provide a continuous window of opportunity to companies. The acerages will be demarcated on grid system and pending preperation of the grid, blocks will be carved out for offer. 
4) Freedom to the contractors for the marketing of crude oil and gas in the domestic market. 
5) Royalty payments at the rate of 12.5% for the onland areas and 10%for the offshore. Half the royalty of the offshore area will be credited to a hydrocarbon development fund to fund and promote exploration related study and activity. 
6) To enourage exploration in deepwater and frontier areas royalty will be charged at half the prevailing rate for normal offshore area, for deep water areas beyond 400m bathymetry for the first seven years after commencement of commercial production. 
7) Prompt action by the Ministry of Petroleum and Natural Gas to sign the PSC's for exploration blocks.  
The government  to attract private investment in the upstream sector has conducted regular rounds of bidding. 

Powered by the India Hydrocarbons Vision- 2025 report, which gave priority to a huge push in exploration efforts, the government has moved into overdrive. As many as 94 blocks have been given out for exploration under the New Exploration and licensing Policy since April 2000 against just 22 blocks in the preceding 10 years. While ONGC holds 57. 2 per cent of the total area licensed by the government for oil exploration, Reliance Industries and Oil India Ltd have grabbed licences covering around 26. 6 percent respectively.

Refining

The total  installed refining capacity of the 15 refineries in the country at the end of march 1998 was 69.140 million tonnes per annum and the total is expected to go up to 131 mtpa by the year 2001/02. The expected increase in refining capacity should be sufficient to meet the growth in petroleum product demand (112 mtpa by the end of the ninth plan) with minimum level of imports.  

The Sub-group on refining has suggested certain financial incentives for the efficient functioning of the refining sector and enhancing private sector participation during the Ninth five year plan period. In order to increase capacity utilisation of the existing refineries, 11 new crude pipelines have been proposed by the Sub-group. 

In addition, there is an urgent need to reduce fuel loss in refineries, which reached a level of 7.1% in 1985/86 and declining marginally to 6.1% in 1996/97. To reduce energy consumption, projects amounting to Rs 7200 million have been identified, which on implementation, will achieve a saving of 186000 tonnes per annum (tpa).


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