Oil and gas overview Overview The Indian Petroleum industry is one of the oldest in the world, with

h oil being struck at Makum near Margherita in Assam in 1867 nine years after Col. Drake's discovery in Titusville. The industry has come a long way since then. 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. 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. 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, with seven of them conducted since 1991. 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). Demand and Supply The aggregate consumption of petroleum products during 1997/98 was 90mt. In the period 199298, 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, has been phased out. The dismantling of this mechanism began on 1 April 1998 and eneded in 2002. The APM was made up of a cost-plus pricing system for the producing companies, and crosssubsidisation 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 starting 1st October 199. 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 MNCs, 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 NOCs, 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. Reference: www.IndiaCore.com