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There are two stages in the energy value chain, upstream (exploration and production) and downstream (refining and marketing). After extracting crude oil from the reserves, it is processed to yield various petroleum products, which are then marketed.
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ONGC and Oil India dominate the upstream segment contributing 86% to India's total oil production. In the downstream segment, major players include IOC, HPCL, BPCL and Reliance. Independent refineries have now become subsidiaries of these bigger players. There are a total of 19 refineries in the country comprising 17 in the public sector and 2 in the private sector with a combined refining capacity of 147 MMTPA (as per the monthly statistics in June 07). IOC dominates the refining capacity with a total share of nearly 32% of the current refining capacity.
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Refining sector got deregulated in FY99 whereas marketing sector deregulation began to take shape on 1st April 2003, although it largely remained so on paper. Political intervention persists in the pricing of sensitive petroleum products. Inspite of price being regulated, domestic retail fuel market is becoming increasingly competitive.
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ONGC is the major producer of natural gas accounting for 78% of domestic production. GAIL is the monopoly player in the transmission and distribution of natural gas, accounting for about 78% of the supplies. However, the country still witnesses shortage in supply of natural gas. Inspite of huge discoveries made by RIL in KG basin, the demand growth will outperform the supply growth for some time to come.
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| Supply |
In the upstream segment, supply from the domestic market caters 30% of the total demand for crude oil in the country. The supply of the crude is largely met through import. 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. The new players wanting to enter the retail segment need to pump in a minimum of Rs 20 bn in the sector as eligibility criteria.
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| Bargaining power of suppliers |
High, since crude availability of country is only about 30% of the requirement. OPEC, a group of major oil producing countries, has a great bargaining power. For the petroleum products on the other hand, given the surplus capacity in the country and the commodity nature of the product, the bargaining power is on the 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 acts as a bargaining arm for OMCs. In the downstream segment, the standalone refineries had to share the subsidy burden. 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 |
Upstream segment has been made competitive with introduction of NELP, 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 year witnessed a steep climb in crude prices as they touched record highs. Price of Indian basket of crude had registered a steady climb in the previous year going up to US$ 65 per barrel at the end of FY06.It went further up in FY07 to highs of US $ 71 per barrel, before coming down in the second half of the year to close at US$ 65.
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On the product front, the prices for petrol increased 9% during the year with an average price of $73 per barrel; Diesel reached a high of $87 per barrel during the year but closed at $77. Kerosene reached a high of $90 per barrel during the year but closed at $77, which was the average price during the year. While this was the trend globally, in India, prices of petroleum products, especially diesel, petrol and kerosene, did not rise proportionately, resulting in negative marketing margins for oil marketing companies like IOC, BPCL and HPCL. However, to lessen the damage, the government reduced the customs duty and issued oil bonds.
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Petroleum products consumption increased by 5.9% in FY07, significantly higher than the growth registered in the previous two years. High-speed diesel consumption grew by 6.7%; LPG sales were higher by 4.8%. Naphtha sales grew by 3.8% during the year. Amidst a commendable topline growth, the bottomline performance across oil companies was muted owing to lack of price revisions and under-recoveries in some products.
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In order to secure the energy security of the country, government has laid increased thrust on exploration, buying oil equity outside the country. There have been some significant discoveries in oil and gas space, with discovery of oil in Rajasthan by Cairn and discovery of gas by Reliance in KG basin. OVL (ONGC Videsh Limited), the overseas investment arm of ONGC has also bought stake in oil blocks in as many as 14 countries. Thus, post 2009; we can see enhanced production of oil and gas in the country. Coal Bed methane (CBM) is expected to commercialize within next couple of years, thus paving the way for alternative sources of energy in the country. On the demand side, petroleum products are expected to grow at the rate of 3%-4% over next couple of years. In the downstream segment, competition is expected to intensify with both PSU and private oil companies increasing their outlets leading to reduction in thruput per outlet. The total demand for natural gas in the country is expected to grow at a CAGR of 12% to 282 MMSCMD by FY12. From 8% share in the energy basket currently, natural gas’ share is expected to touch 14% by FY12.
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