UNIVERSITY OF PETROLEUM & ENERGY STUDIES

CENTRE FOR CONTINUING EDUCATION

EXECUTIVE MBA

(OIL & GAS MANAGEMENT)

SEMESTER III

YEAR: 2014 SESSION: JULY

ASSIGNMENT – 1

FOR

Petro Economics

(MDSO 821D)

(TO BE FILLED BY THE STUDENT)

NAME: _______________________

SAP NO/REGN. NO: _______________________

Section A (20 Marks)

Write short notes on any four of the following

1. Oil Industry StructureAns: The Oil sector has two major activities:-

a. Exploration b. ProductionOf crude oil and gas (E and P)- and is an upstream activity while refining , distribution and marketing are classified as downstream activities. In India, the operation of oil companies are upstream or downstream or both. The oil companies can be grouped into

Exploration and production Refining and marketing

In India, the E and P companies are oil and natural Gas Corporation Ltd (ONGC) and Oil India Ltd, (OIL).-both government controlled and companies in JV with NOCs. The primary producers of all and gas, ONGC and OIL, conduct exploration activities across the country and in their territorial waters.On the other hand, the downstream oil companies include

India Oil Corporation (IOC), Bharat Petroleum Corporation Ltd., (BPCL) Indo-Burma Petroleum (IBP) And Hindustan Petroleum Corporation (HPCL). Of these IBP is a pure marketing

organisation-now a subsidiary of IOC- while the other three have their own refineries and also market petroleum products. Standalone refining companies like Kochi Refineries Ltd., (KRL)-a Subsidiary of BPCL- Chennai petroleum corporation Ltd (CPCL) and Bongaigaon Refinery and petroleum Corporation Ltd. (BRPL) subsidiaries’ of IOC do not have any marketing rights and their products are marketed by marketing companies. Mangalore Refinery and petrochemicals Ltd. MRPL the first joint sector refinery of Aditya Birla Group and HPCL – now a subsidiary of ONGC.

Exploration and Production:The domain of ONGC and OIL upstream E and P is a high risk and high return capital intensive e business. ONGC explores oil across the country and accounts for about 80 per cent of the crude produced while OIL operates mostly in the Northern-eastern parts of India. In E and P, there is high uncertainty with regards to striking of oil in commercial quantities. The companies need to invest significant risk capital and have to accept high ratio of failures before discovery.It was because of the exploratory efforts of ONGC and OIL that a number of oil and gas bearing structures were discovered in Gujarat and Assam. Of these the important ones were in Assam. The government made the search of foreign firms to join hands with ONGC. The contract was signed with the USSR for offshore seismic survey in the gulf of Cambay, Arabian Sea and on the East Coast. Oil on the other hand further developed their existing fields and opened two new areas for exploration. India’s crude oil production during this period rose from about 0.5 millions tonnes to 5.66 million tonnes per annum. With recovery of the national economy exploration for oil was intensified. ONGC increased the speed of exploration in not only the inland basins but also extended it to the offshore areas. Discovery of oil in large quantities at Bombay High in February, 1974 opened up a new prospect of oil exploration in offshore areas. In order to develop the Bombay High field quickly, ONGC adopted the concept of “phased development”. Production from Bombay high was started initially from two platforms at the rate of 40000

barrels of oil per day. Later, the oil production from other platforms was also added to reach a production rate exceeding 60,000 barrels of Oil Per day by October 1977.OIL, meanwhile continued exploratory efforts in their license in upper Assam and increased their reserves by additional discoveries. They had started exploration in Arunachal Pradesh in 1961 and struck oil in the Kharsang areas in 1976. During the decades (1967-77), the production of crude oil increased from 5.66 MTPA to 8.9 MTPA. Next decade( 1977-87) began on a note of deep concern due o the escalating import bill. The demand for petroleum products was rising and international prices were also high. The exploratory efforts yields results in the form of discoveries of oil and gas in a number of structures in the Mumbai offshore areas. Exploration was extended to other offshore area like the East Coast by ONGC and in the offshore of the Andaman by the OIL with varying degrees of success.Both the ONGC and the OIL continued their efforts to make the discoveries through of small size. OIL discovered a few other small pools in the nearby areas which were taken up for development. I its newly acquired areas in Rajasthan, OIL has completed its first phase of seismic survey. It is to start exploratory drilling in this basin.In the year 2009-10, the production of Petroleum Product in the country was 149.65 MTs as against 150.52s during 2008-09, a decline of about 0.6%. out of the total domestic production of 149.56MTs of all types of petroleum products , high speed diesel oil accounted for the maximum share (41%) followed by fuel oil (12%) Motor gasoline (11%) Napatha (10%) Kerosene (6%) and Aviation Turbine fuel (5%). During the current financial year (2010-2011) production of crude oil is estimated at 37.96 million metric ton (MMT) which is about 12.67 per cent higher than the crude oil production of 33.69 MMT during 2009-10. The projected production for Natural gas including coal bed methane (CBM), for 2010-2011 is 53.59 billion cubic meters (BCM) which is 12.80 per cent higher than the production of 47.51 BCM from the KG deep-water block. The upstream oil and gas sector is characterised by high commercial risks, upfront financing exposure and commitment necessitating high premium on stable relationship with Government and patterns. In the context of domestic upstream sector, some other typical constraints are:

Stagnate production level Rapidly rising oil import bill Increasing maturity of production acreage A large unexplored/less explored terrain Requirements of large investments

One way of meeting the deficient is what the government has decided at present to provide more opening for the private sector in exploration. If it is accepted by the private sector then at least technology and finance two critical inputs – would be made available. The chances of new discoveries are enhanced. Oil production from old and depleting fields may be sustained over longer periods by applying suitable enhanced oil recovery techniques. Large investments needs to be made to commence production on large scale. Production levels from existing wells cannot be increased beyond a certain point.

2. Crude oil reserves

Ans: The definitions of reserves are given in several reports of the international oil companies. The definition given by Mobil corporation are technically and practically more useful than and other ones. It provides a good framework within which industry can further evolve a set of “industry accepted practices” for the understanding of hydrocarbon assets.Mobiles recoverable hydrocarbon volume system has three main classification the discovered classification are reserves and contingent resources while the undiscovered classification is designed speculative potential. This schematic is shown

Reserves are quantities of hydrocarbons is known reservoirs that are estimated to be recoverable in future years under existing economic and operating conditions. Contingent resources are significant quantities of resources estimated to be recoverable but are not currently produciable because of existing economic, political environment or technical conditions. Included in this category are resources that are not produciable because there are no development plans and major capital commitments are required for facilities such as offshore platforms , pipelines or production licence. Both reserves and contingent reserves are technically categorised as proved, probable or possible , based on the relative, degree of certainity as to the presence , recovery, ability and economic viability considering all physical technical, political economic and regulatory factors. The Mobil categories of proved, probable and possible are very similar to the recently approved joint SPE/WPC definition, with a few minor exceptions. Of these, the chief difference is that currently uneconomic probable and possible volumes are categorised as contingent resources (P2 to P3) under the SPE/WPC criteria.Speculative potential is the quantity of hydrocarbons located in unproved traps, in undrilled provinces or deeper reservoirs underlying productive fields where geological condition are

Discovered

Geological RiskPg

Speculative Potential

Undiscovered

ProvedP1

Contingent Reserves (uneconomic, not currently producible)

Reserves (Economic, currently producible)

ProvedP2

ProvedP3

ProvedP1

ProvedP3

ProvedP2

Associated Conflict Factors

believed to be favourable for the accumulation of hydrocarbons. Speculative potential provides estimates of the quantities which may eventually be recovered. This potential forms the basis for exploration ventures. Probability of geological success (Pg) is the probability of finding measurable hydrocarbons. It is based on the technical assessment of geological variables i.e., trap reservoir, source and timing of migration. A further business overlay is defined for mobile volumes that involve further movement in addition to the current classification. These define the inventory in terms of the timing for the P2-P6 volumes to become proved, developed, producing hydrocarbons i.e. to the monetised. The categories are transferable and static. The transferable volumes are sub-divided into planned and unplanned. The static volumes while they are discovered, recoverable hydrocarbons are not expected to be mentioned in the next ten years.Mobil utilises a unique methodology for reserve and resource evaluation. The approach integrates both deterministic and probabilistic method to evaluate and establish the full hydrocarbon potential ofp field/prospects. Both methods have valid justification for utilisation. When used jointly they can provide even greater insight into the recoverable hydrocarbon volumes and the probability of recovering those volumes (Nanga et al 1999).In India out of total area of 3.2 million KM, sedimentary basins account for 1.78 million km within the 200 m isobaths line of which 1.46 million km is on onshore and the remaining is on offshore. These basin are classified into four categories.

Category I: Petroliferous basins with proven production of hydrocarbons namely,cambay basin, Upper Assam shelf , Mumbai offshore basin and the Cauvery , Krishna and Godavari Basins.

Category II : Basins with known occurrence of hydrocarbons but here no commercial production on a significant scale has been started e.g. Rajasthan, Kutch, Andaman, West Bengal, Himalayan foothills, Ganga valley, Tripura and Nagaland –fold belt.

Category III: Basins where significant amount of hydrocarbons have not been found. However on general geological grounds these basins are considered prospective e.g., Kerala, Konkan and Mahanadi.

Category IV: Basins which are prospective on the basis of analogy with similar hydrocarbon-producing basins in the world. These include the Vindhya Basin, Deccan Syneclise, Narmada, Bastar and Chhattisgarh.

4. LPG Marketing by PSUs

Ans: LPG was introduced in Mid-fifties as a cooking fuel by multinational oil companies. IOC began marketing the product in 1965. In 1986-87, there were 123.7 lakh LPG consumers as against 33.3 lakh in 1980-81. They were served by 3071 distributors and consumed 15 lakhs tonnes of LPG.The government had approved the release of 40 lakh new connections/DBCs during 1997-98. Against this target the oil companies have actually releases 41 lakh new LPG connections and 38 lakh DBCs during the period april’97-March 98. During the year 1997-98,4.2 lakh new connections under” Tatkal Scheme” was released. To make LPG accessible in the rural areas, the prototype of “Mobile LPG filling truck” mounted with a bullet and calsin, housing cylinder filling/correction facilities was developed and introduced in May 1997 in some district in Tamilnadu on an experimental basis. Oil companies have released 5042 LPG connections (provisional )in the district of Tanjore, Nellai and Thiruvarur in Tamilnadu in 1997-98.The government has also decided to allow the use of LP as automotive fuel. For thus purpose, the Ministry of petroleum has requested the other concerned ministries and organisations to implement an identified action plan for allowing use of LPG as automobile fuel at the earliest. During 1997-98, the total production and import of LPG was about 3.45 MMT and 1.1 MMT respectively. During the period of 1997-98 the total sale of LPG by the Government oil companies was about 4.61 MMT. This has gone upto 8.2 MMT in 2002-03.In February 1993, the government introduced a parallel marketing of LPG and Kerosene by private parties in order to increase the availability of these two products with the common man, cumulatively upto 31.3. 1998, 117 parties for g=kerosene and 18 parties for LPG has signed MS;s for importing these products by using Oil companies facilities at port locations. So far , 88 private parties have importd about 3011.4 kerosene and 18 parties have imported 343.6 TMT of LPG under the Parrallel marketing scheme. Governments drive to expand us of domestic LPG t provide smoke free kitchens for the women and protect the environment from cutting of trees have resulted an addition of over 6 million consumers in the year 2003. This takes the total LPG customers to over 73 million in the country out of which over 38 million were added in the last 4 years alone which means that more custimers to have enrolled in the last 4 years than in the previous 40 years. The LPG customer population in India is now second largest in the world, only after China. The coverage of population at 37.5% is about the same in both countries.

There has been substantial expansion of LPG in the country. As of 01.09.2010 there are 4692 LPG markets and 9858 distributors. The total LPG bottling capacity is 11637 TMT and 1207.4 lakh customers (domestic & Non-domestic) with 592.3 lakh of double barrel connection (DBC). OMCs are in the process of setting up 1340 new LPG distributorship mainly in rural locations under Industry Marketing Plan 2004-07 (including against termination and previous pending) out of which 509 have already been commissioned. Also under Industry Marketing plan 2008-10 advertisement for setting up of 299 LPG distribution ship was released; out of which 1 have already been commissioned.The setting up of LPG distributorship is a continuous process and involves identifying of suitable location, arranging land for up of godwon and other statutory clearances.As per the “Vision-2015” adopted for the LPG sector, target has been given to the OMCs to raise the overall LPG population coverage to 75% in the country by releasing 5.5 crore new LPG connections by 2015, especially in rural areas and under-covered areas. As the urban centres are

more or less, covered by LPG network future growth envisaged under” Vision-2015” will be concentrated in rural/under-covered areas. As step a towards this

5. ONGC and DeregulationAns: The biggest primary producer of oil and natural gas is all set to transform itself into an efficient value-creater. The environment in which ONGC operates is changing rapidly.

A widening gap in demand and supply of oil in India is exerting pressure on ONGC to enhance recovery. The changing India regulatory environment is beginning to allow greater operating freedom for ONGC but is also introducing more competition. Restricting in the global E&P industry has led to dramatic cost reduction and emergence of credible competitors. Technology in the global scene has improved dramatically (e.g. 3D/D Seismic, FPSU slim hole drilling). To stay at the forefront, ONGC too will have to adopt them appropriately. ONGC must face challenges and embrace opportunities. ONGC has to focus on the following:

(a) Reserve Accretion: ONGC must recreate its frontier of the 70s when reserve accretion was the mantra and the best organisational resources were developed on the most important areas.

(b) Commercial objective: To retain its premier position in the increasingly competitive E&P environment, ONGC must enforce commercial accountability. Each of ONGC’s assets (e.g. exploratory areas, producing fields, support services, research institute) must become commercially accountable and appropriately empowered business units.To make such a system work, ONGC will need to reinforce a commercial performance ethic. This will require an evaluation system that motivate, recognises and rewards good performance.

Demand –Supply Gap widening Indian Crude Demand Outpacing supply ONGC’s assets mature but

significant potential remains

Worldwide E&P restructuring Independence emerging Service Company and

operator roles converging. Major and NOC;s

reorganizing around assets

Technology has improved dramatically Advance techniques enhancing

recovery and productivity Data API and management

becoming even more critical

Regulation changing Competition being

introduced e.g NELP Operating freedom and

accountability increasing

In addition, several system and procedures related to MM, finance and personnel will need to be modified.

(c) Multidisciplinary working approaches: The contribution of multidisciplinary working approached to improve the performance of oil companies worldwide is widely recognised. ONGC must move away from its current functional approach (which, often, leads to fragmentation of efforts) and depend more on multidisciplinary cross-functional teams.

(d) Additional opportunities: Several potentially attractive growth opportunities are available to ONGC in addition to its existing India E&P business. These include overseas E&P (Via ONGC Videsh) Oilfields services and downstream integration into gas-related areas.

Section B (30 marks)

(Attempt any three)1. Discuss the global trends in demand and supply of oil.

Ans: The economic growth in the major OECD (organisation for Economic cooperation and development) industrial countries economics in Asia (excluding Japan) will be the key factor in deciding global demand for oil for the next decades. The economics of the industrialised countries are expanding and the economics of many developing countries are growing rapidly.Preserving the environment now appears to be key objective in a large number of countries. Concern for the adverse changes in the environment is now global and pacific regional concerns about the impact of environment changes now influence economic decisions. This has a direct influence on the demand for crude oil.Worldwide petroleum demand has been one of the major determinates of trend in all activity in all activity in the oil and gas industry. Economics forces generally determine the level of petroleum demand but from time to time political considerations also have a great deal of influence in the oil market. An extreme example of this was the conflict in the Persian Gulf. Political events greatly influence the oil markets before and after those hostilities.The level of worldwide economic activity is still a major factor in determining demand for oil and oil products. Energy is an essential input for all types of economic activity. Therefore, there is a close relationship between economic activity and energy consumption. Although the relationship has changed over time as long as there is economic activity, large quantise of energy will be consumed. In today’s modern economic system with high level of economic activity, vast quantise of energy are consumed in a wide variety of forms and form many sources. Out of several basic energy sources two of the most important sources are oil and natural gas. Oil products and natural gas are consumed throughout the world in all geographic area, with differing levels and types of economies the developing economies and in the rapidly changing economies of the former communist countries. latrends provide the background information needed to grasp the relationship between the many factors that influence worldwide oil demand. Throughout the world, there are regional differences in oil industry activity. But to a great extent the oil industry is a global rather than regional industry. Recent trend and events in the industry will be related and then extrapolated into a global outlook.

Because of technological advances, the world oil demand –supply picture has undergone o transformation. Global oil reserves rose by 6.6 billion bbls to 1383 billions bbl in 2010 that represents an increase of 25% over the 2000 figure of 1105 billion bbls, despite an estimated cumulative production of 318 billion bbls during the intervening ten years. Thus global reserves additions amounted to around 596 billion bbls between 2000 and 2010.The technology advances made by the oil industry in the last three decades have been effective investment in terms of an appreciable reduction in production cost and improved exploration, development and production efficiencies. Yet despite these great achievements, technology cannot breathe new life into commercially depleted reserves. Projections based on rising global demand and declining discovery rates indicates that the present age of conventional crude oil will soon be approaching stagnancy and probably by the mid of century there may be not be enough oil to supply motor fuel to the ever widening private transportation sector around the world . The future trends points towards declining production with a confining increase in demand a situation that cannot be sustained for long. According to BP statistical review in 2010 world oil production grew by 1.8 Mb/d and surpassed the level reached in 2008. Growth was the largest since 2004 and was divided evenly between OPEC and Non-OPEC. The largest incresase in OPEC were in Nigeria (+340000 b/d) and Qatar(+ 220,000 b/d ). Non-OPEC output increased by 0.9 Mb/d, the higest since 2002, was led by china (+271 Kb/d)- which recorded its largest increase ever the US(+242 Kb/d and Russia (+236 Kb/d). the oil consumption in Non-OECD rose by 2.2 Mb/d- the higest annual growth on record in volumetric terms- just slightly outpacing the growth seen in 2004. Consumption of petroleum and other liquids fuels increase from 85.7 million barrels per day in 2008 to 11.2 millions barrels per day in 2035 in the IEO2011 refrence case. Although workd liquids consumption actually declined in 2009 tp 83.9 million barrels per day, it receoverde in 2010 to an estimated 86 million barrels per day and is expected to continue increasing in 2011 and beyond as economic growth strengthens, especially among the developing non-OECD nations. In the long term world liquids consumption increase despite world oil prices that rise to $125 per barrel by 2035. More tha 75 per cent of the increase in total liquids consumption is projected for the nations of non-OECD Asia and middle East, acess to ample and relatively inexpensive domestic resources drive the increase in demand.

Global oil Supply:

If we look back over the past few years we notice several factors affecting the world wide crude oil supply. There was the Persian gulf war, which removed oil production capacity from the market by eliminating output from Iraq and temporarily eliminating output from Kuwait. The worldwide crude oil supply situation changed markedly following the conflict in the Persian Gulf. After a brief period of uncertainty that drove up the price of crude oil in late 1990 and early 1991, the market experienced an extended period of price stability. The war and substantial number of years there was excess production capacity in the world, which put downward presence on prices. Most of that excess capacity of Kuwait and Iraq a substantial portion of excess capacity was eliminated. There was even some danger of temporary supply shortages when demand moved up late in 1990, during the winter heating seasons. To satisfy the increase in the world liquids demand in the reference case, liquids production increases by 26.6 millions barrels per day from 2008 to 2035, including the production of both

conventional liquids supplies (crude oil and lease condensate, natural gas plant liquids and refinery gain) and unconventional supplies (biofuels, oil sands, extra-heavy oil, coal to liquids (CTL), gas to liquids (GTL) and shale oil. in the reference case , sustained high world oil prices allow for the economic development of unconventional resources and the use of Enhanced Oil recovery (EOR) technologies to increase production of conventional resources. High world oil prices also incentivise the development of additional conventional resources through technically difficult, high risk and very expensive projects including wells in ultra-deep water and the Arctic.

The most significant non-OPEC contribution to production growth are Russian, the United States, Brazil an Canada. Total Non-OPEC liquids production in 2035 is 15.3 million barrels per day higher than 2008, representing 57 percent of the total world increase. OPEC producers are assumed to restrict investment in incremental production capacity in the reference case, below the levels justified by high prices. As a result, OPEC provide roughly 42 percent of the world’s total liquids supply over the 2008-2035 period and consistent with its share over the past 15 years.

2. The oil industry in India has been thoroughly regulated until very recent past. Comment.Ans : The Oil industry in India has been thoroughly regulated until very recent past. All business decisions needed government sanction and improving efficiency of refineries and marketing functions were the only avenues that companies had to improve for returns. But like many industries the control on oil industry have been easing and have been completely deregulated by 1.4.2002. India’s oil industry was greatly insulated from international movement in oil prices beginning September, 1997 several of these regulations began to be rolled back. Prices were decontrolled and administrated price mechanism was dismantled. The coming period will witness the India’s oil industry moving from regulated to completive one. Tariffs will decline, government intervention will be withdrawn and he entry of private players will be encouraged (IRIS study 1990).Exploration and production exploration and production economics discovery and production of oil and gas by undertaking geological surveys like remote sensing airborne magnetic and field gravity to identify the principle areas of adequate sediment cover. The area this identified are assessed for the most likely hydrocarbon potential through various methods of resources appraisal. Depending on the resource estimated, available technology and the current economics factors, each basin is ranked in terms of risk and reward and exploration priorities assigned. Basins/areas of low to medium risk and high to moderate rewards are taken up first for systematic exploration which begins with detailed geological and regional seismic surveys. The results of such surveys highlights areas of cost intensive exploratort inputs like seismic surveys on adequate grid and structural.

3. Describe the Potentials of Indian Hydrocarbon Sector.Ans : India is endowed with large sedimentary basins that can be trapped for oil and natural gas. Out of 28 billion tonnes of hydrocarbon resources, only about 6.8 billion tonnes have been converted to reserves. Based on recent analysis carried out by Directional General of Hydrocarbons (DGH) and analogy with other producing sedimentary areas of the world it is felt that, so far in India, we have upgraded less than half of possible production reserves (Chandra, 1999). India is in position to produce/establish at least as much more oil and gas reserves as has been done so far without any major success.

Studies reveal that major parts of the sedimentary areas of the country are still unexplored. As per the data of the total 3.14 million square kilometre of sedimentary areas about 1.02 milion square kilometre i.e. 34 percent remains totally unexplored and another 1.58 million square kilometre i.e. 50.32 percent remains inadequate or poorly explored. Deep water areas also remain almost completely unexplored. Deep water potential of Indian waters is estimated to be in the range of 5 to 9 billion tonnes of hydrocarbon resources. DGH has recently carried out satellite gravity , 2D seismic and gravity , magnetic surveys of the Eastern offshore and Andaman seas and these deep water areas have now been opened up for exploration. It appears that resources of deep waters are likely to be several times higher than what was anticipated earlier. Along the East Coast alone, about 30 new geological plays/structures have been mapped with limited data collected by DGH. Structures mapped fall under large to medium size category and average size is close to 500 sq. km. several structures exhibits direct seismic indicator for the presence o gas deposits. Latest interpretation carried out by DGH suggest that some of these prolific oil and gas producing field are the west cost of Africa, deep water areas of Gabon, Nigeria and compos basin in Brazil. Several large international companies have shown interest in deep water areas surveyed by DGH (Chandra, 2002)

Salient Features of NELPIn order to increase the quantum of investments into this sector and to achive a greater level of self-sufficiency in oil Production the government recently announced the NELP. This is now expected to offer a level playing field to all the companies entering this sector and thus would address he major grouse of many of the private sector companies. This policy is expected to be set into motion and in the first phase nine blocks in the Western, Eastern and the Andaman offshore areas are being offered for open bidding. The national oil companies too will have to compete in this process if they want to carry out operations in these areas.The salient features of NELP are elaborated below.

There will be no mandatory state participation through ONGC/OIL nor there did any carry interest of the state.

ONGC and OIL to compete for obtaining the petroleum exploration licences on competitive basis instead of the existing system of granting them PELs on nomination basis. At the same time, ONGC and OIL will also get some fiscal and contract terms available to private companies.

Open availability of exploration acreage to provide a continuous window of opportunities to oil companies. The acreage will be demarcated on grid system and pending preparation will be demarcated on a grid system and pending preparation of the grid , blocks will be carved out of offer.

Companies will be able to choose and propose acreages.

Section C (50 marks)

(Attempt all questions. Every question carries 10 marks)

Read the case “Oil & Gas Industry in India.” and answer the following questions:

Case Study: Oil & Gas Industry

The Indian oil and gas (O&G) sector is projected to touch US$ 139,814.7 million by 2015 from US$ 117,562.9 million in 2012. The sector provides vast opportunities for investors. The New Exploration Licensing Policy (NELP) of 1997–98 was envisioned to deal with the ever-growing gap between demand and supply of gas in India. It has successfully attracted both foreign and domestic investment, as attested by the presence of Cairn India and Reliance Industries Limited in the country.

India’s economic growth, as with all other countries, is closely linked to energy demand. The need for oil and gas, which are among the primary sources for meeting energy requirements, is thus projected to grow further.

To meet this demand, the government has adopted several policies, such as allowing 100 per cent foreign direct investment (FDI) in several segments of the sector, including petroleum products, natural gas, pipelines, and refineries.

Key Statistics

In 2011, India’s O&G sector witnessed one of the biggest FDI deals in the country, with British Petroleum (BP) formalising a US$ 7.2 billion partnership with Reliance Industries, for exploring offshore gas reserves.

At the end of FY 2011–12, India had total reserves of 1330 billion cubic metres (bcm) of natural gas and 760 million metric tonnes (mt) of crude oil.

Diesel & Petrol

Diesel is the country’s most consumed fuel, accounting for almost 45 per cent of the total demand for petroleum products. Since 2003–04, the demand for the transportation fuel has been increasing at a rate of 6–8 per cent.

About 62 per cent of petrol in the Indian market is consumed by two-wheelers, 27 per cent by cars, and 6 per cent by three-wheelers. The rest are consumed for other purposes such as operating generators, and by people in rural areas who need the fuel to run their livelihood, according to a survey conducted by global information and measurement company, Nielsen.

Gas

India's natural gas output was 3.01 bcm in July 2013.

India's natural gas output will increase by 67 per cent in the next three years owing to higher production from several blocks, especially Reliance Industries-operated KG-D6, according to the country’s Oil Minister, Mr M Veerappa Moily.

Oil & Gas – Key Developments and Investments

Bharat Petroleum Corp Ltd (BPCL) plans to invest around US$ 4 billion to increase its refining capacity, according to a top executive of the corporation. The company has already stated its desire to hike its refining capacity from the current annual output of 30.5 mt to 47.5 mt by 2016–17. Capacity expansion and innovation are vital for a company to sustain in today’s business

environment, said Mr S Varadarajan, Chairman and Managing Director, BPCL, at a Refinery Technology Meet in Kochi.

Pune-based My Eco Energy has announced its foray into the bio-fuel industry. The company is involved in the production of bio-diesel, a non-petroleum based fuel. Bio-diesel is manufactured from waste materials such as vegetable oils and animal fat, and is available for commercial and consumer use. Bio-diesel manufactured by My Eco Energy caters to the demand for non-petroleum based fuel, according to Mr Santosh Verma, Director of the company.

The lubricants-making arm of Malaysia's national oil company, Petronas, has formalised a land-lease agreement with Maharashtra Industrial Development Corporation (MIDC) for building a lubricant plant near Mumbai. Petronas Lubricants International aims to consolidate its position in the growing Indian lubes market that is projected to reach US $8 billion by 2017. The plant will cost around US$ 50 million and will possess an initial capacity of 60 kilo tonne per annum (kta).

ONGC Videsh Ltd (OVL), the overseas arm of Oil and Natural Gas Corporation (ONGC), has agreed to buy an additional 12 per cent stake in a Brazilian oil block from Brazil’s Petrobras for US$ 529 million. This purchase will raise the company’s stake in the field to 27 per cent, the company stated.

Indian major Larsen & Toubro (L&T) has bagged two engineering, procurement and construction (EPC) projects believed to be around Rs 1,100 crore (us$ 177.57 million) in the hydrocarbon segment in the United Arab Emirates (UAE) and Qatar. The company has secured the contract for the fuel depot expansion of the Abu Dhabi International Airport. This project aims to improve the facility to meet demand for jet fuel over the next 20 years. Also, L&T has secured an EPC contract from Dolphin Energy for third party gas interconnecting facilities in the coastal city of Ras Laffan, Qatar. The construction periods for the Abu Dhabi and Qatar projects are 30 months and 20 months, respectively.

Oil & Gas - Government Initiatives

The Government of Assam has agreed to allow the clearing of forest areas that were hindering a major investment by ONGC. The investment was endorsed by Indian Prime Minister, Mr Manmohan Singh as a means to revive the hydrocarbons industry in the state. ONGC had previously embarked on a Rs 7,800 crore (US$ 1.25 billion) investment plan to revitalize its operations in the state with fresh technology and infrastructure, in 2008.

With the objective of harnessing the country’s hydrocarbon prospects and to give them greater flexibility in future, the Government of India plans to establish a National Data Repository (NDR) centre. The centre is expected to be complete by 2015 or 2016. The companies would use the data and pick acreage for prospecting, which is an attempt at reforming the existing production sharing contract system. Also, there will be hydrocarbon production linked payments (PLP) as against the present production sharing basis. Most of the reforms are aimed at encouraging indigenous energy exploitation, by offering flexible terms to companies.

Oil & Gas - Road Ahead

ONGC will explore 30 additional shale gas wells in the country over the next two years, according to its chairman and managing director Mr Sudhir Vasudeva. The company plans to invest about Rs 600 crore (US$ 96.81 million) for the project. Shale gas is natural gas that can be found in fine-grained sedimentary rock. The gas is often locked in small spaces and is called ‘tight gas’ due to this characteristic. It requires high-end technique to produce the hydrocarbon at economic rates.

The use of shale gas can be the first step towards ‘economic freedom’, according to Oil Minister M Veerappa Moily. The minister feels that India could follow a similar path to the US, which turned from a net importer of energy to a net exporter of energy with the use of shale gas and oil. The news could not have come at a better time. By 2015–16, India’s demand for gas is set to rise to 124 million tonnes per

annum (mtpa) against a domestic supply of 33 mtpa and higher imports of 47.2 mtpa, which still leaves a shortage of 44 mtpa, according to projections of the Petroleum and Natural Gas Ministry.

1. Throw light on the Indian Oil & Gas Sector. Ans: India has one of the fastest growing economies in the world, and the demand for oil and gas is rising at a matching rate. Not only is India’s market potential huge, but in recent years India has emerged as one of the most prospective regions in the world with major oil and gas discoveries, both onshore and offshore.

India has total reserves (proved & indicated) of 1,201 million metric tonnes (MMT) of crude oil and 1,437 billion cubic metres (BCM) of natural gas as on April 1, 2010, according to the basic statistics released by the Ministry of Petroleum and Natural Gas. Against a crude oil production of about 37 million tonnes per annum (MTPA), India’s consumption currently exceeds 138 million tonnes. In 2010, 194 MMT of crude oil was refined and actual natural gas production was 31.0 BCM. By the end of 2012, the refinery capacity is expected to reach 240.96 million metric tonnes per annum (MMTPA).

The refining capacity of the oil refineries in India has undergone nearly a three-fold increase in 2010. The country exported 50.974 MMT of petroleum products during 2009-10. To provide energy security, the Government of India is seeking private and foreign investments in excess of $250 billion in both the upstream and the downstream sectors during the next 10 years. India’s petroleum product consumption has grown by 4-5% over the past 10 years and the oil demand in India is expected to rise to 368 MMTPA by 2025. With widening gap between demand and supply, both for oil and gas, the outlook for the upstream sector is extremely positive. While oil and gas will continue to play a substantial role in the total energy mix, the need for harnessing alternate energy sources like Coal Bed Methane (CBM), Underground Coal Gasification (UCG) and Shale Gas (gas locked in sedimentary rocks) will become crucial to balance the demand and supply.

Key Statistics

In 2011, India’s O&G sector witnessed one of the biggest FDI deals in the country, with British Petroleum (BP) formalising a US$ 7.2 billion partnership with Reliance Industries, for exploring offshore gas reserves.At the end of FY 2011–12, India had total reserves of 1330 billion cubic metres (bcm) of natural gas and 760 million metric tonnes (mt) of crude oil.

Diesel & Petrol

Diesel is the country’s most consumed fuel, accounting for almost 45 per cent of the total demand for petroleum products. Since 2003–04, the demand for the transportation fuel has been increasing at a rate of 6–8 per cent. About 62 per cent of petrol in the Indian market is consumed by two-wheelers, 27 per cent by cars, and 6 per cent by three-wheelers. The rest are consumed for other purposes such as operating generators, and by people in rural areas who need the fuel to run their livelihood, according to a survey conducted by global information and measurement company, Nielsen.

Gas

India's natural gas output was 3.01 bcm in July 2013. India's natural gas output will increase by 67 per cent in the next three years owing to higher production from several blocks, especially Reliance Industries-operated KG-D6, according to the country’s Oil Minister, Mr M Veerappa Moily

2. What were the key developments and investments that were made in the Indian Oil sector?

Ans:

Key developments in Indian Oil Sector:

1) The Government of India has been taking many radical actions to formulate strategic policy and controlling foundations for enticing investments.

2) Foreign Direct Investment (FDI) up to 100 per cent under the regular means is allowed in exploration activities of oil and natural gas fields, infrastructure associated with marketing of petroleum products, actual trading and marketing of petroleum products, petroleum product pipelines, natural gas and LNG pipelines, market study and formulation and petroleum refining in the private sector. FDI up to 49 per cent is permitted under the government route in petroleum refining by the public sector undertakings (PSU) according to the Consolidated Foreign Direct Investment (FDI) Policy document by the Department of Industrial Policy and Promotion.

3) The Indian Government announced a seven-year tax holiday for the commercial production of gas in respect of contract to be signed under NELP VIII & Coal Bed Methane (CBM) IV with a view to enhance the exploration and production according to a press release by the Ministry of Petroleum and Natural Gas.

4) To be successful at a feasible and sustainable system of cost of petroleum products, the Government has set up an Expert Group, and on its recommendation, the Government has determined that the pricing of petrol and diesel both at the refinery gate and the retail level will be market-determined as per a press release by the Ministry of Petroleum and Natural Gas.

Investment in Indian Oil sector:1) The Ministry of Chemicals and Fertilisers, Government of India has approved a scheme of investments worth US$ 25.25 billion in three areas under its flagship petroleum, chemicals and petrochemicals investment regions (PCPIR) policy. The investment consist of US$ 7.32 billion for physical infrastructure development, and the rest is project-specific investments committed by various public and private companies in three PCPIRs — Visakhapatnam and East Godavari districts in Andhra Pradesh, Bharuch in Gujarat and East Midnapore in West Bengal. US-based industrial gases company Praxair has decided to invest about US$ 370.74 million into its India operations, said Gajanan Nabar, Managing Director, Praxair India. Chennai Petroleum Corporation Limited (CPCL) plans to invest around US$ 3.39 billion for the next five years for capacity expansion including a brownfield refinery project at Manali near Chennai with an expenditure of US$ 1.69 billion.

2) Essar Oil proposes to enlarge its refinery capability by 2 million tonnes a year at Vadinar in Gujarat with an investment of US$ 278.46 million. The company will increase its volume to 20 million tonnes by 2012. According to Mr S. Sundareshan, Secretary, Petroleum and Natural Gas, public sector oil companies are going to be the major investors in Kerala over the next two years as they have allocated over US$ 1.61 billion money in the State. State-owned refinery and marketing firm, Hindustan Petroleum plans to spend US$ 4.87 billion into a new refinery with a capacity of 18 million tonnes per year in Maharashtra.

3) Bharat Petroleum Corp Ltd (BPCL) plans to invest around US$ 4 billion to increase its refining capacity, according to a top executive of the corporation. The company has already stated its desire to

hike its refining capacity from the current annual output of 30.5 mt to 47.5 mt by 2016–17. Capacity expansion and innovation are vital for a company to sustain in today’s business environment, said Mr S Varadarajan, Chairman and Managing Director, BPCL, at a Refinery Technology Meet in Kochi.

3. Write a brief note on the government initiatives undertaken in the last decade.

Ans:

Initiatives undertaken by an Indian Government:

1) The Government of India has been taking many radical actions to formulate strategic policy and controlling foundations for enticing investments.

2) Foreign Direct Investment (FDI) up to 100 per cent under the regular means is allowed in exploration activities of oil and natural gas fields, infrastructure associated with marketing of petroleum products, actual trading and marketing of petroleum products, petroleum product pipelines, natural gas and LNG pipelines, market study and formulation and petroleum refining in the private sector. FDI up to 49 per cent is permitted under the government route in petroleum refining by the public sector undertakings (PSU) according to the Consolidated Foreign Direct Investment (FDI) Policy document by the Department of Industrial Policy and Promotion.

3) The Indian Government announced a seven-year tax holiday for the commercial production of gas in respect of contract to be signed under NELP VIII & Coal Bed Methane (CBM) IV with a view to enhance the exploration and production according to a press release by the Ministry of Petroleum and Natural Gas.

4) To be successful at a feasible and sustainable system of cost of petroleum products, the Government has set up an Expert Group, and on its recommendation, the Government has determined that the pricing of petrol and diesel both at the refinery gate and the retail level will be market-determined as per a press release by the Ministry of Petroleum and Natural Gas.

5) The Government of Assam has agreed to allow the clearing of forest areas that were hindering a major investment by ONGC. The investment was endorsed by Indian Prime Minister, Mr Manmohan Singh as a means to revive the hydrocarbons industry in the state. ONGC had previously embarked on a Rs 7,800 crore (US$ 1.25 billion) investment plan to revitalize its operations in the state with fresh technology and infrastructure, in 2008.

6) With the objective of harnessing the country’s hydrocarbon prospects and to give them greater flexibility in future, the Government of India plans to establish a National Data Repository (NDR) centre. The centre is expected to be complete by 2015 or 2016. The companies would use the data and pick acreage for prospecting, which is an attempt at reforming the existing production sharing contract system. Also, there will be hydrocarbon production linked payments (PLP) as against the present production sharing basis. Most of the reforms are aimed at encouraging indigenous energy exploitation, by offering flexible terms to companies.

4. Highlight the future scenario of the Indian Oil Sector.

Ans:

1) World’s fourth-largest energy consumer. India’s energy demand is expected to double to 1,464 Mtoe by 2035 from 559 Mtoe in 2011. Moreover, the country’s share in global primary energy consumption would increase twofold by 2035 Fourth-largest consumer of oil and petroleum products. Oil consumption is estimated to reach 4.0 mbpd by FY16, expanding at a CAGR of 3.2 per cent during FY08–FY16F Sixth-largest LNG importer in 2011. LNG imports accounted for about one-fourth of total gas demand. India's gas demand is estimated to more than double over the next five years.

2) ONGC will explore 30 additional shale gas wells in the country over the next two years, according to its chairman and managing director Mr Sudhir Vasudeva. The company plans to invest about Rs 600 crore (US$ 96.81 million) for the project. Shale gas is natural gas that can be found in fine-grained sedimentary rock. The gas is often locked in small spaces and is called ‘tight gas’ due to this characteristic. It requires high end technique to produce the hydrocarbon at economic rates.

The use of shale gas can be the first step towards ‘economic freedom’, according to Oil Minister M Veerappa Moily. The minister feels that India could follow a similar path to the US, which turned from a net importer of energy to a net exporter of energy with the use of shale gas and oil. The news could not have come at a better time. By 2015–16, India’s demand for gas is set to rise to 124 million tonnes per annum (mtpa) against a domestic supply of 33 mtpa and higher imports of 47.2 mtpa, which still leaves a shortage of 44 mtpa, according to projections of the Petroleum and Natural Gas Ministry.

5. Suggest some effective measures that can be undertaken to preserve and save the extinguishable oil reserves in India.

Ans: Renewable resources that are non-extinguishable such as wind and sunlight Renewable resources that are extinguishable i.e. all biological resources and vulnerable

reservoirs such as soil and fresh water Non-renewable resources that are non-extinguishable such as metals and minerals. These

resources cannot be destroyed, but they can be dispersed due to natural causes or human activity. Recovery is generally possible, but will require input of energy depending on the level of dispersal;

Non-renewable resources that are extinguishablei.e. fossil fuels. Either their use will be stopped through policy as a response to environmental impacts or by the market, as increased scarcity leading eventually to non-competitive prices.

For the sustainable use of natural resources, three generic management principles were established during the 1990s by political institutions following Rio. These are:

1. The use of renewable resources should not exceed their renewable and/or regeneration rates; 2. The use of non-renewable resources should not exceed the rate at which substitutes are

developed; 3. Outputs of substances to the environment from the use of resources (see below) should not

exceed the assimilative capacity of environmental media (carrying capacity).

Today, the use of renewable resources as referred to by principle 3 (see above) is perceived to include the full life cycle of the resource use or material flow, respectively. The life cycle includes extraction from the environment, processing, transformation, utilisation and disposal. The material output of the life cycle includes the release of all resulting residuals (e.g. waste, emissions, heat) back to the environment during all the life cycle stages.

The principles above integrate two separate but interrelated perspectives with respect to the use of resources:

1. The ‘source-perspective’ - natural resources are input to economic activities; 2. The ‘sink-perspective’- the capacity of natural systems to absorb and assimilate residuals

released by human activities.

On this ETC/SCP website, three generic objectives are described that can be derived from the three sustainability principles above:

security of supply maintenance of sufficient supply of natural resources as basis for economic development and well-being of society – today and in the future. This is a ‘source’ issue.

equity safeguarding the natural resource base of the EU, and the development opportunities of other regions, without shifting environmental burdens to other regions and/or future generations. The issue of equity is affected by both ‘source’ and ‘sink’ aspects of natural resources

protection of the environment ensuring that the use of resources and the associated output of pollutants during the life cycle do not exceed the carrying capacities of the natural environment. This is a ‘sink’ issue

The Thematic Strategy on the Sustainable use of Natural ResourcesThe Thematic Strategy on the Sustainable use of Natural Resources aims to "reduce the negative environmental impacts generated by the use of natural resources in a growing economy – a concept referred to as decoupling. In practical terms, this means reducing the environmental impact of resource use while at the same time improving resource productivity overall across the EU economy. For renewable resources this means also staying below the threshold of exploitation"

The Thematic Strategy outlines a number of broad action areas for achieving this objective. These are:

to improve our understanding and knowledge of European resource use, its negative environmental impact and significance in the EU and globally,

to develop tools to monitor and report progress in the EU, Member States and economic sectors to foster the application of strategic approaches and processes both in economic sectors and in

the Member States and encourage them to develop related plans and programmes, and to raise awareness among stakeholders and citizens of the significant negative environmental

impact of resource use