A Study on Crude Oil Industry in India


By

Dr. S. Uma
Asst. Professor in Commerce
Kongunadu Arts and Science College
Coimbatore-29
 


INTRODUCTION OF CRUDE OIL INDUSTRY

Crude oil Industry is considered to be the back bone of an economy, because this is the main source of energy till date. Any economy around the world would fail to precede a single step in the absence of crude oil industry including the refining of crude oil. The price of crude oil is determined by the demand, supply mechanism around the globe. Crude oil is not a domestic product and any kind of shortage in the same has serious ramifications on all possible industries along with the economies all over the world. Crude oil industry always needs to perform exploration research all over the world for finding more crude oil sites which also become instrumental in the setting up of crude oil industry.

IN INDIA

India is one of the largest importers of oil and petrol in the world. Like many other Indian industries, the development of the Indian crude industry began very slowly. It started mainly in the northeastern part of Indian especially in the place called Digboi in the state of Assam. Until the 1970's the production of crude oil and the exploration of new location for extraction of crude oil were mainly restricted to the northeastern state in India. However an important advancement in the Indian crude oil industry came with the passing of Industrial Policy Resolution in 1956, which emphasized focus on the growth and promotion of industries in India. The crude oil industry has contributed heavily to the manufacturing industry in the country through foreign trade in petroleum products.

Rapid globalization, fast-changing technology, and the changing methods in the way business is conducted have brought significant changes and enormous opportunities for petroleum companies in India to flourish and expand their operation to global markets.

IN GLOBAL

The global oil industry is a very complex industry. It is one of the oldest in the world as well as one that affects tremendously all aspects of business. Oil is a precious energy source that fulfills 40% of the global energy needs. The products of oil companies revolutionize daily life and the way we do things. Upstream and downstream are two major sectors in the oil industry. In between, there is another sector namely the midstream. The midstream sector processes, stores, markets and transports commodities such as crude oil, petroleum, natural gas liquids as ethane, propane and butane. The upstream sector involves the processes of oil exploration and drilling. Over these years, because of technological advancement, oil producers have been able to access more deposits which resulted in an increase in reserves. The downstream sector involves refining, transporting and marketing of oil and oil products. At the production unit, it is processed and refined into different products that include gasoline, kerosene, residual fuel oil and asphalts.

The Indian Crude oil Industry was dependent from the very beginning on foreign capital, expert personnel, and technology, which led to the industry's globalization. Globalization entails and integration of the nations economies through corporate investments, financial flow, and trade in goods and services between nations. The Indian Crude oil Industry's Globalization took place since foreign involvement in the various important stages such as production, refining, exploration, and transportation increased oil consumption. To encourage Indian Crude oil Industry globalization has offered the contract of discovered fields to foreign and private companies. The various companies that have helped in the globalization of the Indian Crude oil Industry are Enron Oil and Gas Company, Videocon Petroleum Ltd, Reliance industries Ltd, Ravva Oil ltd, and Command petroleum.

The Indian government in an attempt to further boost the globalization of the Indian Crude oil Industry formed the Exploration Licensing Policy by which it tired to attract the foreign and Indian companies in production and exploration. The incentives that were declared by the government to encourage globalization and the Indian Crude oil Industry are that, on imports that were required for Crude oil Operations Customs duty would not have to be paid, state participation is not compulsory, no tax on the production of crude oil, provisions for liberal depreciation, tax holidays for seven years from the day that production starts, and the freedom to sell natural gas and crude oil in the domestic market at prices that are related to the market. The government of India has taken several measures in order to ensure that the Globalization of the Indian Crude oil Industry is successful for the industry.

ROLE OF OIL AND NATURAL GAS INDUSTRY IN INDIA

* India is the 6th largest consumer of crude oil.
* By the year 2012, India is expected to rank 4th in terms of consumption of energy.
* The contribution of Indian Oil and Natural Gas Industry is nearly US$13.58 billion.
* All of the oil refineries in India, apart from two are operated by the states.
* The total refinery output in the period 2009-10 was 130.11 million tones.
* The growth rate of the refinery output was increased by 2.1% in the year 2009- 10.
* The crude oil output at the end of 2009-10 was 33.98 million tones.
* The growth rate of the crude oil output was increased by 5.6%in the year 2009- 10.
* The production of natural gas in the year 2009-10 was 31.55 billion cubic Meters.
* India's crude oil demand depends highly on imports of oil and natural gas.
* Around 70% of the demands are fed by the imports of oil and natural gas.
* The security pertaining to energy has become one of the primary concerns of the Central Government.
* Presently India is trying to grab a share of the oil and natural gas fields from Central Asia to Myanmar and Africa.
* The area of interest for the India Oil and Natural Gas industry is to search for crude oil in both offshore and onshore blocks.

HIGH LIGHTS IN THE CRUDE OIL & NATURAL GAS SECTOR DURING 2009-10

* India has total reserves (proved and indicated) of 1201 million metric tones of crude oil and 1437 billion cubic meters of natural gas as on 1.4.2010.
* The total number of exploratory and development wells and metreage drilled in onshore and offshore areas during 2009-2010 was 428 and 1019 thousand meters respectively.
* Crude oil production during 2009-2010 at 33.69 million metric is 0.55% higher than 33.51 million metric tones produced during 2008- 09.
* Gross production of Natural Gas in the country at 47.51 billion cubic meters during 2009-10 is 44.63% higher than the production of 32.85 billion cubic meters during 2008-09.
* The production of Natural Gas at 44.94% and 0.08% of the total were highest and lowest in JVC/Private and west Bengal respectively during 2009-10.

TOTAL PRODUCTION OF CRUDE OIL IN WORLD

Approximately the world produces 72 million barrels per day. (7.33 barrels make one tonne)


                                                 Production of crude oil in world

The above graph shows the total production of crude oil in the world. The production of crude oil is increased high.

IMPORT OF CRUDE OIL IN INDIA

India extracts approximately 20 million barrels per month. This is inadequate to meet domestic demand. India import around 50 to 60 million barrels of crude oil per month.


                           Volume and Value of Imports of Crude Oil by India 1999-2010

The above chart shows the value and volume of imports of crude oil by India from 1999-2010. The value and volume of crude oil was 9.21 and 57.8 in the year 1999-2000 followed by 25.99 and 95.86 in the year 2004-2005. The volume and value of import of crude oil increased to as 140.4 and 75.6 in the year 2009-2010.

REFINING OF CRUDE OIL IN INDIA

India consumes about 2.5-2.8 million barrels of crude oil per day. India process about 10 million tonnes of crude oil every month. Of this, it produces around 9.5 million tonnes of petroleum products, viz petrol, diesel, kerosene, naphtha etc. The annual production of petroleum products in India amounts to around 117.6 million tonnes, out of which around 13% is exported. Refineries export mainly petrol, diesel and naphtha.

REFINING CAPACITY IN INDIA

India with its refining capacity of 184.4 MT in 2009-10 from 20 refineries is poised to emerge as a major refining hub. In fact, increased oil refining activity in the Asia-Pacific region is lead by India which accounts for nearly 4% of the global refining capacity and has been a leading participant in the rapid growth of global refining capacity

As part of the XI Five Year Plan, the Government intends to promote India as a competitive refining destination and industry experts expect India to be a significant exporter of refined products to Asia in the near future.

EXPLORATION AND PRODUCTION

Most of India's crude oil reserves are located offshore, in the west of the country, and onshore in the northeast. Substantial reserves, however, are located offshore in the Bay of Bengal and in Rajasthan state. India's largest oil field is the offshore Mumbai High field, located north-west of Mumbai and operated by ONGC. One more industry is in Krishna-Godavari basin, located in the Bay of Bengal. Block D6 in the Krishna-Godavari basin, operated by Reliance Industries, began oil production in September 2008. The primary mechanism through which the Indian government has promoted new E&P projects has been the NELP framework. The latest round of auctions, NELP VIII, was launched in April 2009 and attracted nearly $1.1 billion in investment. India currently plans to launch the NELP IX bidding round in the third quarter of 2010.

OVERSEAS EXPLORATION AND PRODUCTION

In recent years, Indian national oil companies have increasingly looked to acquire equity stakes in E&P projects overseas. The most active company abroad is ONGC Videsh Ltd. (OVL), the overseas investment arm of ONGC. OVL conducts oil and natural gas operations in 13 countries, including Vietnam, Myanmar, Russia (Sakhalin Island), Iran, Iraq, Sudan, Brazil, and Columbia. One of OVL's most high profile investments is its share in the Greater Nile Petroleum Operating Company (GNPOC), which has engaged in E&P work in Sudan since 1997. OVL acquired a 25 percent equity stake in the company, with the balance held by the China National Petroleum Company (CNPC, 40 percent), Petronas (30 percent), and the Sudan National Oil Company (Sudapet, 5 percent). The GNPOC acreage in Sudan holds proved crude oil reserves of more than one billion barrels with current production levels at roughly 300,000 bbl/d from 10 fields. In addition to the upstream activities, the GNPOC companies operate a 935-mile crude oil pipeline that pumps oil to Port Sudan for export. OVL also holds a 20 percent stake in the Exxon Mobil-led consortium that operates the Sakhalin-I project in Russia. According to the company estimates, the oil fields associated with Sakhalin-I hold recoverable crude oil reserves of 2.3 billion barrels. In addition to ONGC, other Indian companies are also actively involved in E&P projects abroad.

THE POSITION OF INDIA WITH REGARD TO CRUDE OIL

* India ranks among the top 6th largest oil-consuming country.
* Oil accounts for about 30 per cent of India's total energy consumption. The country's total oil consumption is about 2.2 million barrels per day. India imports about 70 per cent of its total oil consumption and it makes no exports.
* India faces a large supply deficit, as domestic oil production is unlikely to keep pace with demand. India's rough production was only 0.8 million barrels per day.
* The oil reserves of the country (about 5.4 billion barrels) are located primarily in Mumbai High, Upper Assam, Cambay, Krishna - Godavari and Cauvery basins.
* Balance recoverable reserve was about 733 million tons (in 2003) of which offshore was 394 million tones and on shore was 339 million tones.
* The government has permitted foreign participation in oil exploration, an activity restricted earlier to state owned entities.

VARIOUS PRODUCTION SEGMENT

* Refinery production:

Refinery production in context of crude oil escalated from 156.11 MT in FY 2007-08 to 160.67 MT in FY 2008-09. Indian Oil Corporation Ltd is looking forward to elevate the capacity of its Haldia refinery and Panipat refinery plants to 7.5 million tones and 15 million tons respectively in 2010.

* Natural Gas Production:

The natural gas production in 2008-09 increased from the previous year's 32.40 billion cubic meters tonnes (BCM) to 32.84 BCM. In 2009 alone the Natural gas production was registered at 33,846 million cubic meters.

* Crude Oil Production:

The projected production of crude oil during the 11th Five-Year Plan (2007-2012) is 206.76 MMT, while that of natural gas is 255.27 BCM. The cumulative production of crude oil between April-December 2009 was 25,152 MT.

STRATEGIC CRUDE OIL RESERVES

To support India's energy security, India is constructing a Strategic Petroleum Reserve (SPR). The first storage facility at Visakhapatnam will hold approximately 9.8 million bbls of crude (1.33 million tons) and is scheduled for completion by the end of 2011. The second storage division at Mangalore will have a capacity of nearly 11 million bbls (1.5 million tons) and is scheduled for completion by the end of 2012. The third storage at Padur, also scheduled to be completed by the end of 2012, will have a capacity of nearly 18.3 million bbls (2.5 million tons).

The selection of coastal storage facilities was made so that the reserves could be easily transported to refineries during a supply disruption. The SPR project is being managed by the Indian Strategic Petroleum Reserves Limited (ISPRL), which is part of Oil Industry Development Board (OIDB), a state-controlled organization. India does not have any strategic crude oil stocks at this time.

DETERMINATION OF CRUDE OIL PRODUCTS IN INDIA

India has to import about 80% of its total crude oil consumption. Given the high volatility in international oil markets, the government continues to control prices of petrol, diesel, kerosene and LPG despite past attempts to decontrol them. The pricing is based on the presumed users of various products. Petrol, for instance, is an item of final consumption and hence an increase in its price will have little impact on inflation. So there is little pressure to subsidize it. Diesel, on the other, is a product whose price will have an impact on inflation as it is widely used. Trucks account for about 37% of diesel consumption and another 12% is used for agricultural purpose. The railway is also a key user.

Kerosene is subsidized and the objective is to provide light for the poor as it is estimated that 60% of kerosene consumption is for lighting purposes primarily in rural areas. LPG is also subsidized. The subsidy is aimed at promoting a cleaner source of energy rather than using firewood or dung cakes.

PRODUCT DEMAND

The overall growth of Petroleum products during the year 2009-10 was about 3.4%, which is marginally lower than the previous year. The sale of MS and HSD registered a growth rate of 13.9% and 8.9% respectively over the previous years indicating an upswing in the economy. However, the sales of Light Diesel Oil and Fuel Oil registered a growth during the year.

It is confident that with India emerging as a major refining hub and the expected increase in the product demand due to stabilization of world economy, it will perform well in the years to come.

FUEL PRICES ARE HIGH AND RISING

In India, we get petrol, diesel and LPG (liquefied petroleum gas or cooking gas) at a subsidized rate. With the price that we pay, the petroleum companies like Indian Oil, Hindustan Petroleum, Bharat Petroleum, etc will not be able to buy fuel from the international market. They make up this loss with help from the government. This help is not available to private retail outlets.

India is heavily dependent on imports. The cost of fuel here will depend directly on the global prices. It is very difficult to pinpoint exactly why the fuel prices are on the rise globally. There is no unanimity among even the experts. Some of the reasons are:

* Consumption of fuel has increased worldwide, especially among developing countries like India and China. China is expected to overtake the United States and become the largest energy consumer soon after 2010, according to the report's forecasts. In India, where more than 400 million people have no access to electricity, energy demand is expected to more than double by 2030. But the fact is no country consumers as much oil as the United States.

* The global oil cartels, comprising the OPEC (Organization of Petroleum Exporting Countries) are manipulating the prices. There were 13 countries. Now Indonesia has decided to pull out.

THE IMPACT OF A RISE IN CRUDE OIL PRICES

The short-run price elasticity of oil, the amount by which consumption of oil changes in the short-run when its price changes, has usually been observed to be low. Given technology in use, consumer can reduce the consumption of oil by making some behavioral changes. However, the long-run price elasticity of oil has been observed to be high. Over the long-run, a higher price of oil creates incentives for adoption and development of technology which is not intensive in its use of oil. Either the use of alternative source of energy becomes more profitability, or companies invest in fuel-efficient technologies.

INDIAN CRUDE OIL RETAIL MARKET

Expansion of Indian crude oil retail market is triggered by the growth in automobile sales that resulted in major foreign investments. The growth is estimated to sustain and the market is likely to expand further by 20 million every year till 2030, placing India at the world map in terms of being the biggest automobile market.

INVESTMENT IN INDIAN CRUDE OIL INDUSTRY

* In 2010 the state-owned oil firms are expected to splurge US$ 11.34 billion on developing supplies and constructing new shipping networks for petroleum and natural gas.

* Indian Oil Corporation is looking forward to establish a petroleum plant in the state of West Bengal by bringing in investments worth US$ 596.63 million.

* ONGC will bring in US$ 694 million for raising services at its oil fields in Assam and adjoining states to enhance the crude oil output. In addition it will also splurge US$ 5.65 billion on capital expenses in the next two years.

* GAIL (India) Limited and OVL, the international associate of leading oil and gas player ONGC, are expected to bring in investments worth US$ 250 million.

FUTURE OF INDIAN CRUDE OIL INDUSTRY

As per the latest analysis, the energy industry of India will help till the expansion of the crude oil sector by bringing in investments worth US$ 120 billion-US$ 150 billion in the next 3-5 years.

CONCLUSION:

The Future of Indian Crude Oil Industry Depends on

* Demand for crude oil is growing in leaps and bounds.
* Shifting focus to more production of olefin - ethylene, propylene, butadiene.
* Price and availability of crude oil and gas as feedstock would still be critical factors.
* The demand of the end products would affect the demand of the intermediary products.
 


Dr. S. Uma
Asst. Professor in Commerce
Kongunadu Arts and Science College
Coimbatore-29
 

Source: E-mail January 19, 2016

          

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