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Energy value chain has 2 stages - upstream (exploration and production) and downstream (refining and marketing). Post extraction from reserves, crude oil is processed to yield various petroleum products, which are then marketed.
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The gas consuming sectors can be broadly classified into - Priority (power, fertilizers) and unregulated sectors (City gas distribution, industrials, refining etc.). The gas demand in India is met through either domestic supplies or imported gas (LNG). As per the Government mandate, the priority sector has the first claim over domestic gas which is less costly than the imported supplies (since it can’t pass higher gas costs to the end consumer). Since demand overpowers supplies, the final off take of gas depends on available domestic supplies, regasification capacity and pipeline infrastructure etc.
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| The share of natural gas in serving India’s energy needs is 10% versus 24% across the world. India has total reserves of 1,201 mmt of crude oil and 1,437 bcm of natural gas at the end of 2010. Around 80% of Oil and 20% of Gas is imported to serve consumption needs.
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| While Petroleum is deregulated, the prices for diesel, kerosene and LPG are still fixed. As a result of this, the state run oil retailers incur under recovery losses. As of now, losses on account of under recoveries are shared amongst upstream oil companies, the Government and downstream for which there is no fixed formula.
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| Supply |
In the upstream segment, supply from the domestic market caters to 20%-25% of the total demand for crude oil and approximately 80% of the gas. In the downstream segment, refining has seen significant capacity addition in the recent past. Lack of logistics support can hamper the large-scale export potential of the products.
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| Demand |
In the past, we have seen a fair degree of correlation between the growth in petroleum products and the growth in the overall economic activities. Thus demand will be in line with economic growth.
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| Barriers to entry |
In the upstream segment, government permission is required to commence operation. Finding, exploration, development and production cost of oil fields are significant, thus barriers are higher.
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| Bargaining power of suppliers |
High for crude, since domestic availability is only about 20%-25% of the requirement. For the petroleum products, given the surplus capacity in the country and the commodity nature of the product, the bargaining power is low.
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| Bargaining power of customers |
In the upstream segment, government allocates the crude oil produced by the players. Thus, in an indirect way act as a bargaining arm for OMCs.On the retail front, government acts as a strong bargaining arm of customers, with OMCs having to sell the sensitive petroleum products at losses. In the industrial and consumer segment, the competition is moderate and is expected to intensify with the increase in the refining capacity of the country.
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| Competition |
The Government of India (GoI) has enacted various policies such as new exploration licensing policy [NELP] and coal bed methane [CBM] policy to encourage investments and competition across the industry’s value chain. However the dominance of ONGC in the segment will continue for some time to come. In the downstream segment, increased action is expected in product pipelines and city gas distribution. |
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The Indian basket of crude oil averaged around US$ 85.09 per barrel, up 22% YoY. Inflation was a major issue on the domestic front. Global oil prices increased due to turmoil in Middle East and North Africa. The domestic crude processing in FY11 stood at 196.5 MMT, up 5.3% YoY. The domestic crude production came at 37.68 MMT, up 12.47% YoY. The natural gas production came at 52.22 BCM, up 9.9% YoY.
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Demand for petroleum products in India at 142 million tonnes was up 2.6% YoY. The crude import volumes at 163.13 MMT were up 2.4% YoY. The total exports of finished products touched 56.35 MMT, up 10% YoY while imports stood at 17 MMT, up 16% YoY. The consumption was up for LPG, Aviation Turbine Fuel (ATF), Naphtha, and High Speed Diesel (HSD) that amounted to 74% of the consumption basket. The consumption for rest of the products like Superior Kerosene Oil (SKO), Bitumen, Lubes, Light Diesel Oil (LDO) and Fuel Oil (FO) etc. declined. The subsidized products (SKO-6%, HSD-42% and LPG-10%), constituted 58% of the total products consumption. The Indian refining capacity increased to 184.1 MMT, up 2.3% YoY.
| | In FY-11, Asian LNG prices remained linked to crude oil and spot prices in recent months touched $10-12/MMBTU.The overall gas supply in the country has increased to 154 mmscmd, up 4.8% YoY. FY11 also saw developments on cross border pipeline (TAPI) project.
| | Natural gas prices were revised to US$ 2.52 per MMBTU for North East consumers and US$ 4.2 per MMBTU for the rest. Also the non APM price of natural gas produced by national oil companies was revised upwards.
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The Government has a planned an investment worth US$ 563 bn across the oil and gas value chain under the Eleventh Plan (2007-201) and is also looking at Open Acreage Licensing Policy (OALP).
The demand supply gap in gas sector is bound to widen further. We expect RIL BP deal to lead to new developments in the upstream sector. We believe it will take some more time before production from KG D6 blocks increases. The declining production from existing oil reserves should offset the increase from new discoveries. In this backdrop and with increasing capex plans, the companies that operate in regasifying LNG should benefit.
The gas prices are expected to increase at the end user level. GAIL is implementing five new gas pipelines, which should increase the transmission capacity to around 300 MMSCMD and would also double the length of existing gas pipeline. However, there is a concern of capacity underutilization of pipelines.
While gas companies are mulling over entering the power sector, we don’t expect any major event there as we doubt gas price pooling will happen soon.
It is expected that the Government of India will look at options to minimize the subsidy burden on sale of petroleum products. The deregulation of diesel is also under consideration. If that happens, it will open the market for private players leading to high competition. On GRMs front, if the differential between Brent and Dubai crude remains high, it will lead to better margins for the companies that can process heavier crude. In petrochemicals, huge investments in new capacities in emerging economies like are expected to raise it to the level of a production hub due to availability of cheap feedstock.
However, such opportunities are fraught with global threats like slowdown in U.S/Europe and political unrest in the MENA region. Going forward, higher domestic production, regulatory reforms across the value chain and pipeline, refining and gas infrastructure will be the driving factors for the sector.
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