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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). There are broadly two pricing regimes for the gas in country - Administered Pricing Mechanism (APM) and non-APM, which applies to imported gas (LNG) and gas produced from JV fields
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There are presently three major pipeline entities in gas transportation in the country - GAIL (operating HVJ and DVPL), RGTIL and GSPCL. The natural gas is sourced from KG-D6, Mumbai offshore, Cambay Basin, Ravva Offshore, KG Basin, Cauvery basin and imported LNG.
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As per the Government mandate, the priority sector has the first claim over domestic gas which is less costly than the imported. One must note that the GoI changed the priority of domestic gas allocation and allocated highest priority to the CNG and PNG (domestic) segments of the CGD sector ahead of core sectors - Power and Fertilizers.
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Among the key petroleum products, diesel and petrol are deregulated. However, kerosene and LPG still operate under regulated pricing regime.
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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. In the gas segment also, with the domestic gas supplies on a decline, the share of imports in gas sector is rising. In the downstream segment, refining has seen significant capacity addition in the recent past. In the current scenario, oil prices have come down due to over supply from OPEC members.
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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. In current scenario,oil is oversupplied while demand remains relatively muted due to slowdown in the global economy.
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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 |
Crude prices are globally determined and are highly susceptible to geopolitical events, economic growth and demand factors, economic policies, and speculative bets. Since domestic availability is only about 20%-25% of the requirement, India is basically a price taker as far as crude is concerned. For the petroleum products, given the surplus capacity in the country the bargaining power is low.
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| Bargaining power of customers |
Despite the fact that oil price has crashed, the price of petroleum products has not declined by the same extent due to Government's interference with regards to hike in excise duties etc. With PSUs controlling most of the market, bargaining power of customers is not very strong. However, this may change as private players gain a higher share in the market.
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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, in the current scenario, companies may hesitate in making fresh investments in exploration.
In the downstream segment, companies are going for upgradation of refineries and adding capacities which is likely to lead to more competition. With new reforms announced in energy sector, more players are likely to enter oil and gas sector thus increasing the competition.
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Crude oil production in India stood at 37.5 MMT in 2014-15 (versus 37.8 MMT last year), while consumption of Petroleum Products stood at 165.5 MMT, up 4.5% YoY.
| | Production of Petroleum products in 2014-15 stood at 220.7 MMT, almost flat on a year on year basis.
| | Domestic refinery capacity as on April 2015 stood at 215.1 MMT
| | Gross production of natural gas stood at 33,656 mmscm in 2014-15 (P), while imports for the same duration stood at 51,320 mmscm.
| | Total under recoveries in 2014-15 stood at Rs 763 bn, down 47% YoY. Of the total under recovery burden, upstream shared 56%, Government shared 41% while oil marketing companies shared 3% of the burden.
| | Volumewise, the consumption of petroleum products grew by 3.4% YoY for sensitive products (SKO & LPG), 9.3% YoY for major decontrolled products and 8.8% YoY for minor decontrolled (petroleum coke) products. For the first 9 months of FY16 (9MFY16), Motor spirit/MS has grown by 14.2% YoY, driven by auto sector.
| | High speed diesel (HSD) consumption for the year grew by 6.2% YoY in 9MFY16.LPG consumption in 9MFY16 grew by 7.5% YoY.
| | The cumulative gas consumption declined by 3.1% YoY in 9MFY16, mainly on account of reduction in domestic gas production and lower off take of gas in core sectors. However, gas pooling policy has compensated to some extent the slowdown in demand for gas. CGD consumption in 9MFY16 declined 4.5% YoY. The cumulative gas production for the year declined 2.76% YoY in 9MFY16, while cumulative imports for the period were higher by 8.3% YoY.
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After being a victim of regressive policies such as regulated price regime for Petroleum products, the oil and gas sector has seen some relief on this front with moves such as deregulation of diesel, direct benefit transfer and so on.
| | Decline in the crude oil price has further helped in reducing the import bill and under recoveries. As such, subsidy burden of upstream companies has come down. More importantly, the working capital situation has improved for oil marketing companies leading to lower debt.
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That said, lower oil prices may make oil production unviable in some areas and hence can impact production plan and balance sheet health of some of the oil exploration and production companies.
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In the downstream segment, there is likely to be a lot of competition from the private players. One must also be cautious about capacity addition in refining space. The same is likely to lead to over supply, thus putting pressure on product cracks and margins.
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The sector is quite vulnerable to global threats like slowdown in the US/ Europe, tensions between Iran and US region etc. 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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S&P BSE OIL & GAS 5-YR ANALYSIS
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