EXPORT OF REFINED PETROLEUM PRODUCTS FROM INDIA

SUKRIT DUTT Roll No: 43 MBA (IB) 200912 Indian Institute Of Foreign Trade, Kolkata Centre

EXPORT OF REFINED PETROLEUM PRODUCTS FROM INDIA

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OBJECTIVE: EXPORT OF REFINED PETROLEUM PRODUCTS FROM INDIA Background: The hydrocarbons sector plays vital role in the economic growth of the country. It is necessary to have a Iong-term policy for the hydrocarbons sector, which would facilitate meeting the future needs of the country.Issues such as energy security, use of alternative fuels, interchangeability of technology are vital to ensure that the mix of energy sources used in the economy is optimal and sustainable and that adequate quantities of economically priced clean and green fuels are made available to the Indian consumers. The estimated energy supply mix in India for a period up to 2025 is given at Annexure-I. Oil and gas continue to play a pre-eminent role in meeting the energy requirements of the country 45% of the total energy needs would be met by the oil and gas sector, though some amount of interchange between oil and gas is foreseen. Table 1: Share of future energy supply in India (%). (Source: Upto 2011 from Technical Note on Energy, Planning Commission, Govt. of India (1998-99). Beyond this period the figures have been extrapolated) Year 1997-98 2001-02 2006-07 2010-11 2024-25 Coal 55 50 50 53 50 Oil 35 32 32 30 25 Gas 7 15 15 14 20 Hydel 2 2 2 2 2 Nuclear 1 1 1 1 3

Share of hydel energy remains constant considering the planned capacity addition upto 2012 and projected at the same level upto 2025. 1.1 The current levels of per capita energy consumption in India are extremely low as compared to the rest of the world. In terms of comparison with the developed countries, the differentials

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are even more marked. The comparative figures of per capita energy consumption for India and rest of the world are in Annexure-II. Growth of the economy would lead automatically to growth in energy consumption, as there is a direct correlation between the GDP and energy consumption. The per capita consumption of primary energy and hydrocarbons (Annexure-III) reveals that India is amongst the lowest in consumption of hydrocarbon in terms of kilograms of oil equivalent. Viewed from all angles, therefore, the hydrocarbon sector is most crucial for determining the energy, security for the country. Table 2: Per capita Energy consumption in million tonnes of oil equivalent (MTOE). (Source: British Petroleum Statisitcs-1998) Country/Region World India China North America Europe Former Soviet Union Rest of the World 1987 1.5 0.2 0.6 5.8 3.1 4.7 0.6 1997 1.5 0.3 0.7 6.3 3.1 3.2 0.7

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Table 3: Per capita consumption of Energy vis--vis Hydrocarbons (in Kg of oil equivalent). (Source: British Petroleum. Statistics1998) Country/Region World India China Pakistan Bangladesh Japan U.K. Germany Primary Energy 1454 285 688 264 81 3962 3856 4102 Hydro-Carbons 927 113 169 231 80 2520 2719 2539

Hydrocarbons Vision of India. To assure energy security by achieving self-reliance through increased indigenous production and investment in equity oil abroad. To enhance quality of life by progressively improving product standards to ensure a cleaner and greener India. . To develop hydrocarbon sector as a globally competitive industry which could be benchmarked against the best in the world through technology upgradation and capacity building in all facets of the industry. To have a free market and promote healthy competition among players and improve the customer service. To. ensure oil security for the country keeping in view strategic and defence considerations.

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Refining & Marketing This is a important sector and its development is crucial for having self-sufficiency in petroleum products and in moving towards a consumer oriented competitive market and exporting of refined petroleum products. Objectives of this sector: To maintain self-sufficiency of middle distillates in the sector with an appropriate mix of national oil companies, foreign players and private Indian players. To develop a globally competitive industry. To have a free market and healthy competition amongst players. . To develop appropriate infrastructure such as ports, pipelines etc. for an efficient hydrocarbons industry. To improve customer services through better retailing practices. To make available un-adulterated quality products at reasonable prices. To achieve free pricing for products while continuing subsidized prices for some products in certain remote areas. To achieve the above objectives, the following action are required to be taken:Medium term Grant operational flexibility to refineries in crude sourcing and in respect of risk management through hedging. Set out a timetable for achieving product quality norms to conform to cleaner environmental standards and to global standards by 2012. Formulate a clear stable long-term fiscal policy to facilitate investment in refining, pipeline and marketing infrastructure. Grant full operational freedom to existing PSUs to establish and maintain marketing networks and allowing entry of new players into the marketing sector through a transparent and clear entry criteria and provide a level playing field for new entrants.

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Make marketing rights for transportation fuels conditional to a company investing or proposing to invest Rs.2000 crores in E&P, refining, pipelines or terminals. Such investment should be towards additionality of assets and in the form of equity, equity like instruments or debt with recourse to the company. Set up mechanisms to enable new entrants to establish own distribution networks for marketing without encroaching on the retail networks of existing marketing companies. Set up a common regulatory mechanism for downstream sector and natural gas. To take up with the States for a uniform State level taxation on petroleum products. Provide for level tax rates for domestic products vis-a-vis imported products. Increase the ceiling of Foreign Direct Investment (FDI) in refining sector from the present level of 49% to 100%. Provide a level playing field among all market participants.

Long term Develop an optimal transportation mix keeping in view the existing rail and port infrastructure. Develop a policy for encouragement of transportation of crude through Indian flag vessels. Develop a policy for transportation of LNG preferably through Indian flag vessels. Provide for massive capacity expansion of the refining and marketing infrastructure to be taken up. The total investment in refining sector upto 2025 is estimated at Rs.2, 50,000 crores while the same for the marketing infrastructure is estimated at Rs.1, 35,000 crores. The Hydrocarbon Vision, the main thrust of the activities would be: Focus on oil security through intensification of, exploration efforts and achievement of 100% coverage of unexplored basins in a time bound manner to enhance domestic availability of oil and gas. Secure acreages in identified countries having high attractiveness for ensuring sustainable long term supplies. 5

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Pursue projects to meet the deficit in demand and supply of natural gas, and facilitate availability of LNG. Maintain adequate levels of self-sufficiency in refining Establish adequate strategic storage of crude and petroleum products in different locations. Create additional infrastructure for distribution and marketing of oil and gas. Open up the hydrocarbon market so that there is free and fair competition, between public sector enterprises, private companies and other international players. Create a policy framework for cleaner and greener fuels. Have a rational tariff and pricing policy, which would ensure the consumer getting the petroleum products at the most reasonable prices and requisite quality, eliminating adulteration. Announce a long-term fiscal policy to attract required investments in the hydrocarbon sector. Restructure the oil sector PSUs with the objective of enhancing shareholder value and disinvest in a phased manner in all the oil sector PSUs. To develop regulatory and legislative framework for providing oil/gas security 'for providing oil/gas security 'for the country. Refining capacity expansion & exporting of refined petroleum products: As of April 2010, India's refining capacity is at 185 milliontones per annum (MMTPA) i.e., 3.7 million barrels per day,accounting for 4.3% of the global refining capacity. Public sector companies account for close to 112 MMPTA & private sector accounts for 72.5 MMTPA, being 60.5% and 39.5% of total installed capacity respectively. Growth of refining capacity of petroleum products in India Refining capacity has increased more than three times in the last 12 years. It was at 62.4 MMTPA in April '98, just before the commissioning of Reliance Industries' first refinery in Jamnagar in 1999. This leap in the short period was significant, considering that the industry is more than a century old in India. This growth is likely to continue with refining capacities 6

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expected to touch 255 MMTPA by 2012 and 302 MMTPA by 2017, with a slew of projects announced by both public and private sector.The consumption of petroleum products has also grown from 111.6 MMTPA in 2004-05 to 138.2 MMPTA in 2009-10, growing at a CAGR of 4 to 5%, slightly lower than the GDP growth rates.The expected economic development at robust growth rates will undoubtedly generate equal, if not more petroleum products demand growth.Since 2001-02, India transformed herself from a net importer of petroleum products to a net exporter. The growth is so much that foreign exchange earned by petroleum products exports is the now the highest amongst all exports. If all the planned projects materialise, India will have an exportable surplus petroleum product of around 100 MMTPA by 2012 and 140 MMTPA by 2017. Defying the negative sentiments during economic downturn in 2009, Indian refinery projects were being put together to meeting tight deadlines and production from almost all operating refineries were crossing the rated capacities. The contrast with the western world was evident. To illustrate, while the crude throughput in western world and developed economies fell by around 4 million barrel per day due to economic downturn, India, China and Middle East added similar capacities in the last few years. This shift now has significant impact on crude and product trade-flows and logistics. The strength of Indian refineries was demonstrated more prominently when in the face of downturn, and western capacities were shutting down or reducing, the Indian refineries operated to capacity and exported too. Not only Indian demand but competitiveness of Indian refineries was proven beyond doubt. India's aim of being a refinery hub of the world seems to be realising. The refining hub case continues to receive impetus by the private sector implementing additional projects with export objective. The Government expects refining capacity to be over 250 MMTPA by the end in 2012. More projects are being announced. India will need to commission 15 MMTPA capacity every second year if not each year. The demand and competitiveness is also making room for innovative refineries. Reliance Industries Limited commissioned its export oriented refinery in Jamnagar SEZ in 2009, with the ability to produce Euro V grades of gasoline and diesel. The ability to commission refinery

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during periods of trough in demand and to succeed in exporting full capacity in the cut-throat market was a achievement by itself. Sharp rise in investments Indian refineries are also consistently clocking higher Gross Refining Margins (GRMs) compared to the regional benchmarks, e.g. Singapore GRMs, a clear sign of competitiveness in refiningoperations. The Government went ahead with issuing two licenses to coal-to-liquid based projects expecting to produce diesel and like products in Orissa. This was a clear indication of confidence the Government had about the demand growth at home. Three grass-root (or greenfield) refineriesBhatinda, Bina and Paradipare as such under construction, and the second mega Jamnagar refinery had justcommissioned. Essar, which deferred its refinery expansion during downturn has re-activated its expansion plans from 14 MMTPA to18 MMTPA by 2012, and with plans to ultimately to take it to 36MMTPA. IndianOil's Paradip refinery is being put on fast-track and HMEL's Bathinda refinery and BORL's Bina refinery are expected to go on stream very soon.. It is also important to mention, while capacities get added, the Indian refiners are also investing substantially on fuel quality upgrade projects demanding a substantial capital commitment. This achievement assumes special dimension, since this has been made possible despite inability of integrated refining and marketing companies to realise full value of product due to controlled transport and domestic prices. The unique feature of India is that none of the global refinery majors have invested in India. Mittals were first timers in refining deciding to create foot print in India, and Oman investment was ostensibly with similar objective of being there where demand is, although the latter investment commitment came in over a decade back. The exception, obviously, is of Chevron who invested in the SEZ refinery with Reliance Industries but chose to opt out of that soon. Majors like Total, Shell and BP seriously looked at Indian refining and/or marketing sector but

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the likes await the transport and domestic fuels pricing decontrol, and apparently continue to do so. Advantages favouring India India's competitive and market advantages in refining industry is a mix of various strengths mentioned below, .Geographically India is positioned closer to crude sources and also product markets than China, .Old refineries in USA and Europe are shutting down due to un-competitiveness, costly carbon abatement actions, and reduced demand. New US vehicle mileage norm may lead to dieselisation, while refineries are geared for gasoline production making room for Indian refineries to export. New refinery additions in Arab Gulf delayed and some shelved due to cost overruns. Cheaper labour, favorable FDI environment, and economics of scale, besides skill sets, capital and operating costs are favourable. for India. Vast coastline7,500 kms provides good location advantage for import of crude oil and product exports. Low capital and cash operating costs compared to developed countries. Access to large, technically skilled manufacturing base and workforce.

Concerns The industry, though, faces challenges. To be competitive, the industry desires to use gas as fuel but supply constraints continue to deprive refineries of gas. Gas, also poses challenge to refineries in another manner. Gas will displace petroleum products being consumed in the Industries, automobile sector, and likes reducing the demand. It however appears that the demand is growing at much higher pace and that gas will be deployed in Greenfield projects more than for liquid fuel displacement. Refinery hubs will need all weather port and infrastructure development for import and exports, necessitating development infrastructure not available now. Refineries are relatively low margin businesses and the need for integration with

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petrochemical & power plants for higher value additions is high. Growing environmental concerns is expected to make operating refineries a challenge. India as a refining hub While there is no readymade solution to fix the above issues, India has certainly arrived in refining space. India's refining industry is also critical for the economic viability of our petrochemical sector and it has also created impetus for allied sectors like engineering, procurement, construction firms, project management! consultancy firms and other such service providers..The demand in India fuelled growth of refining sector; supported by other enablers the private sector took it to a substantial exporting status. For India to be a "hub" however, a lot more needs to be done. If India continues to follow this ambition, it may not suffice couple of private sector companies put up single owner industry or public sector develop projects only to satiate local demand. It's time the policy makers, Government and the investors plan and commit to third generation hub development which leverages on supply chain integrated oil, petrochemical, and derivatives based hubs.They should enjoy the shared utilities, and other infrastructure and individually concentrate on core process and product excellence. The downstream industry offers substantial investment multiplier, growth, capital leverage and employment. May the excellence be converted to national objective of refinery hub with multisector, multi-industry and government-enabled development like in the Jurong Island in Singapore. Petroleum, Chemicals and Petrochemical Investment Regions (PCPIR) was a move in the direction and we look forward to their development. India becoming a global refining hub on the back of major capacity expansions and massive investments: The domestic demand of petroleum products is expected to grow at a Compounded Annual Growth Rate (CAGR) of 4.6% during the next 5 years. The projected expansion of refinery capacity from 310.9 MMTPA in 2016-17 from 232.3 MMTPA in 2012-13 is in line with Indias aspiration of becoming a global refining hub. The sector is expected to see tremendous growth opportunities on back of strong domestic demand as well as significant export opportunities. The Indian refinery sector having established its ability to deliver in international markets is well poised to take advantage of this opportunity.

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Analysis of India to emerge as a major global refined product exporting hub: As set out in its 11th Five-Year Plan, the GoI wants to establish India as a global refined product exporting hub, both by instructing OMCs to take a more outward-oriented operating stance, and by encouraging private-sector refiners to invest in export-oriented refining capacity. An attempt has been made to examine the extent to which India is likely to realise this internationallysignificant policy and commercial goal in the medium-term. The measure of Indias refined product export capacity over time will be the build-up of excess refinery capacity over domestic demand. In fact, Indias actual refined product export volumes are likely to be larger than the aggregate of excess capacity. OMCs look to first supply the Indian market, and then to export the balance of refined product produced. Private-sector refiners, however, have no operational directive to first supply domestic markets. They will look to produce a product slate which optimises total refining margins from period-to-period, and will sell to customers, irrespective of location, to allow this. Export markets are therefore not a balance option for private-sector refiners, but integral to their business model. There is thus the possibility of a situation in India of large exports of refined products in parallel with product imports to satisfy domestic demand. In the context of sectoral expansion to facilitate greater export potential, however, excess refinery capacity is nevertheless a valid measure of Indias growing exporting potential. The emergence of India as a global refined product exporting hub is likely to have significant implications for regional product markets, extending the depth of product markets in the Middle East and South-east Asia in particular. It is also likely to have competitive effects for established Asian refinery centres such as Japan, South Korea and Singapore, and even as far as the United States Gulf Coast, and North-Western Europe.Growing exports of refined product from India have the potential to add to the energy security of countries in the Middle East and AsiaPacific that are increasingly reliant on refined product imports, such as Iran, Saudi Arabia, Vietnam, Indonesia and Australia. But, at the same time, they threaten to undermine competing (and often ageing) refineries in countries such as Japan, South Korea and Australia. Analysis here therefore confines itself to the medium-termfocussing on the period to 2015. There is information available on regional refinery capacity addition post-2012. For example, significant refining capacity (over 2 mb/d) is scheduled to come on-line across the Middle East after 2014,

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particularly in Saudi Arabia, Kuwait and Iran. The commercial and policy impetus to establish India as major refined product exporter above all stems from strong medium- and long-term demand growth forecast in the Asia-Pacific and Middle East regions, and the gradual establishment of Asia as the key emerging pole of international liquid fuel demand. According to the IEAs 2008 World Energy Outlook, close to 85% incremental oil demand to 2030 will come from Asia-Pacific and the Middle East. Upto 2014, petroleum product demand growth in Asia (excluding China, South Korea and Japan) and the Middle East is forecast to rise by about 4% per annum.) Chinas product demand is expected to grow by an average of 4.5% per annum to 2014. As recognised by both Indian policy makers and by private industry, there is thus significant opportunity to leverage Indias commercial and geographic comparative advantages to establish refinery operations that supply a share of this rapid expansion in regional liquid fuels demand.

It is not only Asian markets that Indian refined product exports are intended to penetrate.. In order to supply North Atlantic markets (where no greenfield refinery has been constructed in 25 years), RIL and Essars existing refineries are configured to produce EuroV quality fuels.

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In the same way, all greenfield OMC refining capacity is required by the GoI to meet the most stringent global fuel quality standards so that product can be readily exported if necessary to the United States, Europe, Japan and Australia. Indeed, the large size, complexity and modernity of Indias new refining complexes put them at significant advantage to the smaller and older refineries in the established markets of Europe and North America. According to the IEAs 2009 Medium-Term Oil Market Report, for example, more than 2 mb/d of refining capacity in Europe is under threat of permanent closure due to competition from new, cheap, large-scale and complex refining projects in developing Asia and the Middle East. Medium-term refinery capacity addition in India India will have undergone little less than a revolution in domestic refinery capacity addition, sophistication, orientation and global importance in the years of the 11th Five-Year Plan. Charts below depict the brownfield and greenfield refinery additions occurring in India upto 2012-13, From a refining base of 3.54 mb/d in 2009 India increased refining capacity to close to 5 mb/d by around 2012, a huge increase of over 40% in three years. OMCs will collectively add 600 000 bbl/d in greenfield refinery investment, spread over three different projects. This, for example, is greater than the entire accumulated refining capacity of Malaysia. Private-sector firms will add just over 500,000 bbl/d in greenfield investment, led by the 400,000 bbl/d Phase II of Essars Vadinar refinery (and assuming this project goes ahead). Downstream companies both private and publicly-ownedwill also add close to 350,000 bbl/d in brownfield expansion to Indias existing refineries. Together, this is a huge medium-term increase in capacity. Private-sector refiners, in particular, have invested heavily in India in recent times. From the commissioning of Jamnagar II in late-2008 to the scheduled commissioning of Essars Vadinar II in 2012, private-sector refiners will have added around 1.2 mb/d of new refining capacity (not including Jamnagar I). This is close to the size of the entire current refining capacity of Singapore (that is, 1.27 mb/d), the established refining powerhouse of South-East Asia. The level of OMCs investment in Indian refining has not been significantly affected by the current system of petroleum product pricing that burdens these firms with large retail under-recoveries. In the same way, it seems that private-sector investment has not been significantly affected by the distortionary system of product price regulation. Indeed, by 2012-13, India will operate

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private refining capacity of over 2 mb/d. This continued robust investment despite a sub-optimal national pricing framework may be explained by two key factors. The role of OMCs: OMCs absorb the retail losses within the current system of pricing. When supplying the growing Indian market, private-sector refiners are able to sell to OMCs at market-based refinery-gate prices, without carrying any underrecovery risk. It is also important to note that price restrictions only apply on four products (albeit those that make up a large majority of domestic petroleum product consumption). Private-sector refiners are therefore able to market industrial fuels, lubes, jet fuel, etc., at market rates without restriction. India as an export base: Putting aside the regulatory complexities of domestic product markets, private-sector refiners have considerable incentive to establish operations in India simply as a base for international product exports. India immediately straddles the worlds major crude producing countries in the Middle East, to its west, and the key pole of global petroleum product demand growthEast and South-East Asiato its east. Its proximity to the Middle East also gives Indian refiners access to another rapidly growing market for petroleum products. Perhaps more significantly, Indian production, construction and unit labour costs are far lower than in the developed world, while skilled labour and high-quality capital (in terms of both access to financial markets and hightech capital machinery) are relatively abundant.

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Brownfield refining capacity addition to 2012

Despite the current regulatory conditions, there are therefore compelling, cost, commercial and competitive reasons for private-sector firms to look to establish export-oriented refining operations in India. Greenfield refinery projects to 2012

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The fall outs Indias growing excess capacity With forecasted total domestic refining capacity of 4.96 mb/d by 2012-13, India will become the worlds fourth largest refining centre, after the United States, China and Japan. Although expected to grow strongly, Indian product demand to 2012 has grown far less rapidly than additions to its domestic refinery capacity. India currently consumes petroleum products at a rate of just over 3 mb/d, growing briskly at slightly more than 4% per annum to 3.44 mb/d in 2012. Assuming refinery capacity utilisation of slightly below 100%, by 2012-13 India will be in a position to export approximately 1.4 mb/d of refined product to global markets. This would make India Asias largest refined product exporter, surpassing Singaporewhich is expected to export 1.2 mb/d. With the establishment of the world-leading Jamnagar complex and the imminent start-up of close to 1.2 mb/d of highly complex greenfield refinery capacity, India looks likely, in particular, to dominate Asian exports of highest quality products such as high-octane gasoline, ultra-low sulphur diesel and petcoke. The emergence of this large-scale and complex refinery capacity in India will greatly increase the resilience of regional supply-chains for these high-end industrial and auto fuels. Putting aside regional industry cycles that fluctuate between scarce and excess capacity, the establishment of India, along with Singapore, as a consistent large-scale exporter of refined products in Asia in all cyclical conditions and from period-to-period will substantially deepen and strengthen refined product trade flows in the Indian Ocean rim (stretching from Africa and the Middle East in the west, to South-East Asia, East Asia and Australia in the east). This will be especially the case for diesel, jet fuel, gasoline. Currently, Asia-Pacific trade in refined product is relatively small compared to total product consumption. In 2008 Asia-Pacific countries together imported around 5 mb/d of refined product, out of total consumption of over 24 mb/d. This compared with Europe, for example, where close to 40% of total product demand is sourced from outside the country in which it is consumed. Asia-Pacific countries are therefore highly reliant on domestic refining to meet demand, and trade linkages in refined product are weak and under-established. This situation contributes significantly to limited flexibility in product supply chains, making both short-term product supply disruptions and long-term adjustment to increasing import dependence much more problematic.

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Indian refining capacity vs domestic demand, 2009-12

The recent deepening of Indian Ocean rim refined product markets, significantly led by Indian export-oriented product volumes, is one of the most important developments in global petroleum product markets to occur in recent years, and a pattern that is likely to accelerate over the next decade.It implies a fundamentally changing configuration of global refining, in which, increasingly, refined product is mass-produced in what may be termed South Asiaa region broadly encompassing the Middle East, India and South-East Asiaand then exported along increasingly resilient trade routes and robust supply chains to both mature economies and smaller emerging markets that look to these producer hubs to supply incremental product demand growth over time. This is a case of comparative advantage asserting itself in increasingly open international energy markets. For slow-growing mature markets (such as in Europe, the United States and Australia), it is increasingly unviable to undertake extremely costly, lengthy, labour-intensive, and regulation-intensive refinery investments (and even upgrades) to meet incremental demand. This is well-understood in South Asian countriesthe huge refinery complexes of India, Singapore and the Middle East are designed largely to fill this

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refinery investment gap in the West (where, as mentioned, no greenfield refinery has been built since the mid-1980s). Forecast Asia-Pacific refined product exports, 2012

Increasingly robust refined product supply chains in the Indian Ocean rim will naturally develop from market interactions that match growing product volumes from producers such as India, with refined product deficits in established markets (especially as economies recover from recession). Policy makers, however, should formulate policy tools that encourage domestic downstream industries to embrace and engage with the changing geographic configuration of refinery production in order to ensure national liquid fuels supply chains are best integrated into evolving global patterns of liquid fuels trade and production. Risks and challenges Emerging Indian regional excess capacity There are several risks to the continued perpetuation of Indias status as the largest exporter of petroleum products in Asia that need to be overcome in the next decade. The most pressing of these is the almost unprecedented emergence of structural excess refining capacity across the 18

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Asia-Pacific region. Strong India refinery capacity addition has been mirrored, to a large extent, across the region. After adding close to 600 000 bbl/d in 2008, China has added another 800 000 bbl/d of new refining capacity in 2009.At the same time, both Japan and South Korea face structurally declining refined product demand combined with large domestic refinery industries, and therefore growing domestic excess capacity. In the context of very weak local, regional and global demand, smaller refiners such as Thailand and Taiwan are also likely to face increasing surplus capacity. Refiners across the region will therefore be looking to the same export markets to absorb their surpluses. Alternatively, refineries will be forced to significantly cut runs, or to consider sectoral consolidation. Unfortunately for refiners needing to rapidly increase exports, global refined product demand is still reeling from the worst negative demand shock to affect international oil markets since the early-1980s. The capacity for global markets to absorb regional excess capacity is therefore strictly limited. The Asian refining industry is thus bracing itself for a painful period of significant market oversupply and historically-low refining margins As an indication of the likely extent of refining margin depression, when regional excess refining capacity reached 1.1 mb/d (significantly less than that forecast for the period 2009-12), the Singapore gross cracking margin remained very low, at USD 0.75/bbl. Asian refiners, in general, can therefore expect to continue the current period of low margins, weak crude runs, commercial hardship and industry rationalisation. Indian refiners are likely to fare significantly better than competitor refineries in other Asian countries. Firstly, the large scale and worldleading complexity of Indias new greenfield refineries mean marginal costs of production are significantly less than older, less complex facilities, thereby increasing refining margins. Secondly, Indias new refinery capacity is equipped to process heavier and cheaper crude grades, again putting upward pressure on refining margins by lowering input costs. Finally, as mentioned, Indian refineries are configured to produce complex, high-end products which will retail in international markets for somewhat of a premium. This too will support refining margins. The ability of the Indian refinery sector to avoid the worst consequences of regional excess capacity and to maintain market share as a result of unique, clean and high-end product slates will at the same time directly worsen the difficulties of refiners in Japan, South Korea and SouthEast Asia during the expected period of cyclical over-capacity. Despite the significant factors in their favour, however, Indian private-sector refiners (and to a lesser extent OMCs) will not be able to completely avoid the combined commercial impact of market glut and shocked global

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demand. Like the rest of Asias refiners, although to a lesser extent, in the short-to-medium-term Indias refiners will be forced to endure an undefined period of commercial difficulty. Indian refining capacity vs domestic demand, 2012-15

Evolving from exporter to genuine hub Singapores success within international energy markets has been its ability to establish itself as not merely a large refined product exporter, but as a truly world-significant liquid fuels trading hub and centre of commerce. Singapore has become the worlds preeminent liquid fuels trading centre east of Suez. It has put in place extensive and state-of-the-art shipping, handling and port facilities, world-class institutions of trade and commerce, and one of the worlds largest local fuel storage capacities. In doing so it has attracted a large service industry in liquid fuels (and shipping) trading, financing, consulting, management and regulation that services this dynamic sector. A significant proportion of the economic value-added of the liquid fuels sector comes from the associated service industries, rather than the actual physical trade of liquid fuels. India, in the short-term at least, will become Asias largest exporter of refined product and, with Singapore, one of the two key centres for traded refined product in Asia. However, it still has

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significant progress to make in establishing itself as a genuine, well-functioning liquid fuels trading hub, with associated and lucrative service industries. As India has, to some extent, completed the difficult task of establishing the necessary physical refining capacity for the moment, the transformation to trading hub is primarily an exercise in concerted industry policy and institution building. In particular, the GoI needs to establish the institutions of finance, commerce and trade within the sector. The city of Mumbai is Indias rapidly growing financial centre and the obvious geographic locus of Indias export-oriented refined product sector (with RIL and Essars huge facilities located to the north at Jamnagar, Mangalore refinery to the south, and close to 400,000 bbl/d of refinery capacity within the city itself). There is considerable potential for Mumbai to develop into a key global centre of liquid fuels trade, leveraging on rapidly increasing Indian product trade, and transforming India from a very large refined product producer to genuine trading hub. For this to occur, the GoI must above all establish a state-ofthe-art liquid fuels trading exchange in Mumbai that facilitates rapid, inexpensive and sophisticated trade in physical fuels and fuel contracts. This is the key institutional basis for the development of multilateral trade and exchange in refined product, rather than simply one-way product exports, and a prerequisite for the development of a dynamic secondary sector servicing Indias expanding export-oriented refining sector. Conclusion In keeping with the ambitious goals of the 11th Five-Year Plan, India will emerge by 2012 as Asias largest refined product exporter, and a major global producer of petroleum products. Indias emerging refined product export industryled by RILs Jamnagar facility but also increasingly supported by new OMC refineriesis characterised by extremely large-scale, lowcost and modern plants capable of processing heavy crudes and producing complex, clean products. The addition of around 1 mb/d of traded refined product, especially high quality product, in the Indian Ocean rim will substantially strengthen liquid fuel supply chains in this region and deepen currently-underdeveloped Asian trade in refined product. While Indias refining successes are intimately related to the natural comparative advantages of the country itself, it has also been fostered by prudent policies and intervention by the GoI. From an outcomes perspective, the policy mix chosen by the GoI for the refining sector has been

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highly successful. The government has single-mindedly pursued large-scale investment in refining capacity through OMCs by extending considerable financial support to these firms; by upholding confidence in OMCs within capital markets; and by providing OMCs the freedom to make investment decisions The GoI has created a domestic downstream sector in which well-supported OMCs absorb the significant retail losses inherent in the current system of product market regulationthereby creating a market-space in which private-sector refiners can profitably conduct business based not only on export sales, but on the penetration of Indias fast growing domestic market. The appeal of this business model has driven the recent boom in local private sector investment in Indian refining that has culminated, for example, in the emergence of Jamnagar in Gujarat as the worlds largest refining centrewith close to 2 mb/d of privately owned refining capacity expected to be in place by 2012. Government policy has therefore succeeded in fostering a dynamic combination of private and public investment in refining capacity which has transformed the face of Indias downstream petroleum sector in the years of the 11th Five-Year Plan. Despite its significant successes, in the long-term India faces several challenges to its growing status as global refining powerhouse. Current extensive investment will certainly ensure that India remains a key exporter of refined product, especially in the Asia-Pacific region. However, falling investment in refinery capacity after 2012, owing largely to growing regional excess capacity and a tighter fiscal environment, puts at risk Indias emergence as truly one of the worlds largest refinery centres in the long-term, especially in the context of growing domestic product demand. It is difficult to predict the exact trajectory of Indian refinery investment after 2015, when the current wave of investments will have ended. Certainly, investment will be much lower and more incremental in nature. The GoIs move to abolish the tax holidays on refinery investment and construction occurring after 2012, however, suggests that it is content with Indias projected refinery base to 2012 and that it will take a less expansionary attitude to refinery capacity in the future. While from an outcomes perspective the GoIs refinery sector policies have been highly successful, from a cost perspective, they have been close to disastrous. In order for OMCs to be in a position to make large-scale refinery investments (and, secondly, in order for OMCs to be able to continue to incur under-recoveries, and thereby to create space for private-sector refiners to prosper, the GoI has been forced to

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make payments, in various forms, to OMCs .. The combination of managed petroleum product prices and large-scale refinery investment has thus become extremely expensive for the GoI, contributing significantly to an alarming and rapid fiscal overflow since 2008 .The funding pattern that has largely underpinned Indias refinery boom is therefore clearly and entirely unsustainable. Although a great deal of investment has been completed, India will need to incrementally add refinery capacity after 2012 to maintain its export potential. Given Indias fiscal circumstances, and under rapidly tightening budgetary conditions, this investment should be increasingly sought commercially from the private-sector, including from international oil companies. In order to promote increasing private-sector involvement in Indian refining, including foreign private-sector involvement, the GoI must begin the process of product market liberalisation, which will help to foster timely, effective investment responses to clear market signals, and work to encourage high-quality investment from private-sector refiners. In turn, liberalisation will reduce the dependence of OMCs on the GoI for working capital, allowing these companies, too, to invest in an efficient and timely fashion. Reform to pricing policy in product markets will thus reduce the fiscal burden of the current system unofficial subsidies on the GoI, and promote least-cost refining investment responses. Such reform also has secondary benefits. Clear price signals encourage fuel conservation and substitution. This will simultaneously reduce Indias crude import costs, and, as substitution to cleaner fuels occurs, greenhouse gas emissions will be reduced as well while boosting energy security. For each of these reasons, the GoI should move in the direction of market-based reform in petrol, diesel, LPG and kerosene markets. It should do this, however, while employing effective policy tools, such as price ceilings and highly targeted subsidies that provide energy market access for poor Indians, especially in LPG and kerosene markets. Market for Exports. While India currently exports a part of its excess production of refined petroleum products mainly to the US and Europe, it is seeking new markets in its neighbourhood. A delegation led by commerce secretary Rahul Khullar went to Pakistan and discussed the prospects of exporting petroleum products. Pakistan, which has 13 million tonnes of refining capacity, imports a significant part of its finished petroleum products. With signs of an

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improvement in ties between the two south Asian neighbours, there is every likelihood that Indian refineries operating plants in the northern and western states would export products like diesel to Pakistan. Petroleum products in India are hugely subsidised by the government, so there is a significant price differential between prices in the two countries. If the proposal is finally cleared, Indian refineries in cities such as Bhatnida and Panipat in the north and Jamnagar in the west (where India`s leading private sector major, Reliance Industries, has a 40 million-tonne refining capacity) would be able to supply petroleum products to Pakistan. There could be significant savings in transportation costs as well. In return Pakistan would expect India to open up its cement market, enabling the export of the commodity; different regions in India experience a shortage of cement at certain times of the year and the northern markets could be well-served by suppliers in Pakistan. State-owned refining and petroleum marketing major Indian Oil Corporation, is eager that Pakistan opens up the sector, enabling Indian refiners to sell their products. Indian Oil, could even plan of expanding capacities at its Panipat refinery, if Pakistan starts buying petroleum products from India. Another state-owned refiner, Hindustan Petroleum Corporation Ltd, is also promoting a refinery in the joint venture together with L.N. Mittal, in Bhatinda, bordering Pakistan. The nine milliontonne refinery is expected to be commissioned very soon. Other opportunity for India lies on its east coast that is exporting petroleum products to Bangladesh. Numaligarh Refinery Ltd (NRL), which operates in Assam, plans to build a 100-km-long pipeline to Bangladesh for the export of high-speed diesel. The pipeline is expected to connect Siliguri at the foothills of the Himalayas in West Bengal to Parbatipur in Bangladesh. An existing pipeline links Numaligarh to Siliguri.A team from NRL, which is owned by state-owned Bharat Petroleum Corporation Ltd and the government of Assam, among others, was in Bangladesh recently seeking a nod for the proposal.The pipeline will cost about Rs1500 million and will be in addition 24

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to the export of petroleum products through waterways.NRL had last year exported a small quantity of diesel to Bangladesh through the water route, but is keen to enhance exports. Demand in the north-east is limited and the excess supply is routed to other parts of India. Bangladesh faces a shortage of about 1.5 million tonnes of petroleum products annually.Recently there has been talks with the Mynmaar military government to supply refined from NRL.OIL India is finalizing the deal.The Indian banks have asked for the payment in dollar whereas the Mynamar govt is offering to pay in rupee. Indian refiners continue to invest huge amounts in new refineries or upgrading capacities in existing ones. Indian Oil, plans to invest Rs400 billion in a greenfield refinery along the west coast, which could have a capacity of 20 million tonnes. The refinery, expected to go on stream by 2018, will come up near a port that receives imported crude. Indian Oil at present has a 66 million tonne refining capacity.Private sector major Nagarjuan is also pushing ahead with its Cuddalore refinery in the southern state of Andhra Pradesh. While Indian refiners are on a capacity addition binge, refiners in the US and Europe are finding it increasingly difficult to add capacity in line with projected demand growth due to environment concerns. This is expected to lead to widening gaps between demand and supply of petroleum products in these countries. Besides, many Asian countries like Taiwan, Indonesia, Vietnam, Philippines, Sri Lanka, Pakistan and Bangladesh are projected to have refining capacity shortfalls. Indian refiners are well-placed to meet these gaps. Refining capacity additions have fluctuated considerably through cycles of both excess and tight capacity. In the 1970s and 1980s, the refining industry experienced periods of rapid expansion fuelled initially by rising demand and anticipated sustained growth. Global capacity peaked at 82 mbd in 1981 and declined to 73 mbd by the late 1980s. The 1990s and early part of this century were more balanced with regard to capacity and demand, until the consumption surge of refined products in 2004 and 2005 created a much tighter situation in the refining sector. This led to rising margins and increased profitability for refineries, thus reviving interest in ramping up existing facilities and building new ones.

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Apart from India, major refining capacity addition is coming up in the Middle East and China. While the latter is adding capacity to meet its domestic demand, the upcoming 2.6 mbd of grassroots refining capacity in Middle East counties like Saudi Arabia, Kuwait, Qatar, UAE and Iran is envisaged to meeting export demand.

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SWOT Analysis Strengths Demand for petroleum products increases with economic growth. Expectation of healthy

economic growth could bolster consumption of petroleum products, and hence sales of oil companies. India has the potential of becoming a petroleum products hub, with many countries

looking to source refined products from relatively low-cost countries. Weakness High dependence on imported crude oilaccounting for over 80% of the consumption

could pose an energy threat to the country anytime in the future. In this sense, such high dependence could amount to a strategic disadvantage. The sector is partially government-administeredthat is, in LPG (domestic) and

kerosene (under PDS)denting profitability of upstream and downstream companies. Lack of crude storage makes the countryand by, extension, the oil companies

vulnerable to oil shocks. Opportunities The recent petrol price deregulation augurs well, especially for private players. Backward and forward integration in the petroleum value chain portends a bright future. Natural gas has the potential to be the fuel of the future with demand outpacing supply.

Threats Deregulation of prices will boost competition for existing refining and marketing majors,

with a possibility of shrinkage in their market shares and, consequently, margins. Continuation of government interference can hamper profits.

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Porters generic strategy In order to secure competitive advantage it may be practical for a business to consider cost leadership, differentiation and a focus on either cost leadership or differentiation within a limited scope These generic strategies, when employed successfully, will reflect the ability of the firm to control the Porters 5 forces better than its competition. Cost leadership focuses on being the lowest cost, no-frills leader in the market; differentiation leadership involves being unique in the market place and being able to charge a premium while cost or differentiation focus entails being the cost leader or the unique firm withing a niche or smaller scope market One can suggest that omc s and private refiners has been more inclined to follow the path of cost leadership; as earlier mentioned it is an industry leader in finding and development costs however, there are evidence to suggest that OMCs are pursuing a differentiation strategy also. However, the pursuit of more than one generic stategy could be risky as this usually involves inconsistent actions by an already successful firm; a compromise which may have negative consequences for its generic strategy. A firm may thus become stuck in the middle .Whether OMCs stuck in the middle and at what cost are these companys prepared to sustain competitive advantage. Analysis of Indian Petroleum Companies with a Global Strategy Framework Mapping of Global Ambition of India

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Major issues faced by the Oil & Gas sector in India The Oil & Gas sector in India has come a long way since our independence. There has been significant progress in every sub-sector of the Oil & Gas industry. The sector is teeming with opportunities but at the same time its dealing with some fundamental issues which can hinder its progress and thwart the achievement of its growth objective. While some of these issues are specific to a sub-sector, other such as infrastructure development are applicable to the entire sector. Some of these major issues have been discussed below: a) Limited participation by foreign companies in the Indian upstream sector - Prospectivity

or Policy: The nine rounds of NELP have seen enthusiastic participation by the state owned companies, the participation by private players especially the foreign majors has been limited. These companies bring a lot of investment muscle required for development of capital intensive and high risk upstream projects. More importantly however, these companies bring technological expertise and diverse project experience. Other sections of the industry believe that inconsistency and ambiguity in the policy and fiscal framework is one of the major factors due to which foreign companies either stay away or withdraw participation. Interference in terms of a signed contractual terms is also counted as a factor that discourages foreign participation b) Upstream skills, technology and equipment shortage: Upstream talent shortage and

ageing workforce is an issue being faced the global as well as Indian upstream industry. The industry is especially pressed with shortfall of labor with specialized skills such as reservoir engineering or with experience of developing unconventional gas assets .Also, while we are counting the unconventional sources of energy such as Shale gas as major areas of opportunities we must also not forget the associated challenges such as high water and land requirements and also the limited availability drilling equipment. An enabling policy and fiscal environment that makes investment in this area an attractive proposition even after taking into account the associated risk and challenges is required to take advantage of the opportunity associated with unconventional. c) Enablers for acquisition of oil & gas assets abroad: Indian Oil & Gas companies,

especially the public sector companies have been competing with aggressive Chinese

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counterparts and IOCs for acquisitions of assets abroad. However, in many cases these companies have to lose out to the competition due to the slow speed of clearances and decision making process in place for making large investment decisions. d) Also, the Indian companies are sometimes also constrained by lack of opportunity

tracking resources and networks that can spot opportunities early and pass on to the companies. However, the Indian government has taken many diplomatic relationship building initiatives with countries in regions such as Africa. More initiatives are required for strengthening this network so that Indian companies are not at a disadvantage to the international competition. e) Ambiguity on policies relating to pricing and marketing of domestic gas as well as the

gas end-user segment policies creating hurdles to gas market development: Acknowledgements: I would like to thank Dr S. Tripati, for her guidance and encouragement towards the research involved and completion of this report. I would also like to thank all the Professors at IIFT for their guidance and support for imbibing in me the learnings of management, which has enabled me to complete this Project successfully. My sincere thanks to the S&D officials of IOCL for their support in collection of exportimport data.

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