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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.
| | The gas consuming sectors can be broadly classified into – Priority (power, fertilizers) and unregulated sectors (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. The domestic gas price has been recently revised from US$ 4.2 per mmbtu (million British thermal units) to US$ 5.6 per mmbtu.
| | 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.
| | As per the Government mandate, the priority sector has the first claim over domestic gas which is less costly than the imported.
| | While petroleum had been officially deregulated in June 2010, the Government has recently announced deregulation for diesel. However, kerosene and LPG are still regulated.
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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.
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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 |
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. While OPEC is the cartel that had a major influence on oil prices, with shale revolution and increasing oil production in US, OPEC's supremacy has been challenged.
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| Bargaining power of customers |
Now that the petrol and diesel are deregulated, there is likely to be competition in the fuel retailing space giving more bargaining power to consumers.
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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. 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 37.8 MMT in FY14 while consumption and production of Petroleum Products was at 158.2 MMT and 220.2 MMT. The crude oil imports for the year amounted to US$ 142.9 bn while Petroleum Products imports amounted to US$ 12.3 bn. Total domestic oil and gas production in FY14 stood at 73.2 MMTOE while overseas production of OVL (ONGC Videsh Ltd)stood at 8.4 MMT.
| | Domestic gas production in FY14 stood at 35.5 billion standard cubic metre (bscm) while LNG imports amounted to 14.3bscm. The length of the pipeline network for natural gas was around 15,340 Km, with GAIL alone accounting for 71% of the network, followed by Reliance and GSPCL with 10% and 12% share respectively. The natural gas pipeline capacity in FY14 was 395 mscmd.
| | Installed refinery capacity as on April 2014 stood at 215.1 MMTPA. The crude oil processed in FY14 stood at 222.4 MMT.
| | The crude price (Indian basket) in FY14 stood at US$ 105.52 per barrel, down from US$ 107.97 per barrel in FY13. The rupee dollar exchange rate in FY14 stood at Rs 60.5 per dollar, versus Rs 54.45 per dollar in FY13.
| | For FY14, under recoveries on diesel and kerosene (PDS) stood at Rs 8.4 and Rs 33.98 per litre while subsidized LPG incurred under recovery loss to the extent of Rs 499.5 per cylinder. The total under recovery burden in FY14 stood at Rs 1,399 bn. It was shared by Government, Upstream and oil marketing companies in the ratio of 51%, 48% and 1% respectively.
| | Under recoveries are highly sensitive to crude prices and exchange rate. The overall borrowings for OMCs at the end of FY14 stood at Rs 139 bn, almost similar to level in FY13. The Petroleum subsidy as a % of GDP stood at 1.75%, as compared to 1.7% in FY13.
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The oil and gas sector since long has been a victim of regressive policies such as regulated price regime for Petroleum products. High dependence on imports for crude oil and gas have further made India's energy sector quite vulnerable. However, over the last two years, some positive changes have unfolded. Diesel has been deregulated and gas prices have been hiked. Such developments will promote investment in the upstream and downstream segment. There is likely to be competition from private players thus challenging market share of state run companies.
| | As per the estimates for PPAC (Petroleum Planning & Analysis Cell), the demand for petroleum products and natural gas over the next three years is likely to grow by 5.1% and 8.4% respectively.
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Because of the increased APM gas allocation and priority of domestic gas to CGD entities , the CGD consumption is growing because of higher off take.
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Going forward, the major focus will be on Exploration and Production. The Government is also planning to take significant steps in shale gas exploration and optimizing recovery from ageing fields.
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With regards to refining, the country is exposed to issues like surplus capacities, competitive refining margins, stringent product specifications and greater emphasis on cleaner fuels.
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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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