Energy Sources Sector Analysis Report 

• The gas consuming sectors can be broadly classified into – Priority (CGD, power, fertilizers) and non-priority sectors (steel, 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
• There are presently three major pipeline entities in gas transportation in the country – GAIL (operating HVJ and DVPL), RGTIL and GSPL. 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. 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.
• Among the key petroleum products, diesel and petrol are deregulated. However, kerosene and LPG still operate under regulated pricing regime. Further, the Government has announced direct benefit transfer to avoid the misuse of the policy.

• Supply
• In the upstream segment, supply from the domestic market caters to 20% 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. Crude oil price prices have recovered from the levels as low as US $ 29per barrel in 2016.
• 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 we expect the long term demand to be in line with economic growth.
  
  OPEC has a significant influence on demand supply dynamics in crude oil.
• 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.
• 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.
• Bargaining power of customers
• Despite oil prices being on the cheaper side throughout the year, 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.
• Competition
• An important development in the sector has been replacement of the earlier New Exploration Licensing Policy (NELP) by HELP (Hydrocarbon Exploration & Licensing Policy).
  
  This change is touted to bring a fresh change in the licensing framework and bring about a greater degree of transparency, thus spurring competition and investments.
  
  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 private players are likely to enter oil and gas sector thus increasing the competition.

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• Crude oil production in India stood at 36 MMT in 2015-16 (versus 36.9 MMT last year), while consumption of Petroleum Products stood at 194.6 MMT, up from 184.7 MMT last year. Production of Petroleum products in CY17 stood at 243.5 MMT, up from 231.9 MMT.
• Crude oil imports for the year stood at 213.9 MMT, up from 202.9 MMT last year. Petroleum products imports for the year stood at 36.3 MMT, up from 29.5 MMT last year. In 2017, crude imports accounted for 81.7% on consumption basis.
• ONGC remains the largest domestic producer of crude oil (58% of domestic share, followed by Oil India Ltd (10% of share).
• Petroleum products exports for the year stood at 65.5 MMT, up from 60.5 MMT last year.
• LNG imports were valued at US$ 6.1 billion, as compared to US$ 6.7 billion last year.
• In April 2017 – Dec 2017, natural gas production in India stood at 24687.55 mmscm (million standard cubic metre)
• Domestic gas price for the period Oct 2017- March 2018 has been set at US$ 2.89 per MMBTU on gross calorific value basis.

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• In 2018, as per PPAC (Petroleum Planning & Analysis Cell), the crude oil imports are estimated at 219.15 MMT.
• India is still to a huge extent dependent on imports for its energy needs.
• While deregulation of diesel and petrol is a much-needed move, market infrastructure is yet to develop for energy price discovery for oil and natural gas.
• With the goal of reducing import dependency on oil and gas by 10% by 2022 and to promote ease of doing business in the oil and gas sector in India, the Government of India announced the new Hydrocarbon Exploration and Licensing Policy (HELP). HELP will replace the earlier New Exploration Licensing Policy /NELP that was created to end the state dominance and encourage competition (was made applicable in 1997-98).
• This is expected to solve issues such as bureaucratic hurdles like multiple approvals and sanctions, cost overruns, and disputes led to some oil majors leaving their awarded blocks and exit from the space.
• This new policy aims to augment domestic production of petroleum and speed up the appraisal of Indian sedimentary basins by providing investors a ready access to huge amount of geoscientific data available in National Data Repository (NDR), flexibility to choose exploration acreages through an open acreage licensing process and increased operational autonomy through a new revenue sharing model.
• Four main facets of HELP policy.
  1. Single license for exploration and production of all forms of hydrocarbons.
  2. An Open Acreage Licensing Programme (allows bidder to have access to geoscientific data through National Data repository /NDR to make assessment of the prospectivity of any area and propose their own area/block for bidding.)
  3. Easy to administer revenue sharing model. The earlier model was profit sharing, wherein companies first recover their capital and operating expenditure before sharing the profits with the government. This can make companies go for gold plating (CAG audit of expenses as it in happening in case of Reliance KG-D6 saga)
     
     The move to RSC (Revenue Sharing Contracts) brings in more transparency as the revenue will be shared between the government and the producer right from the first batch of production of oil and gas.
  4. Marketing and pricing freedom for crude oil and natural gas produced.
• In the downstream segment, competition has increased 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.
• To fulfil disinvestment target, ONGC, a key upstream player is acquiring government’s 51.1% stake in HPCL (downstream player). Apparently the new entity, being integrated will have the capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders. However, this will depend upon how autonomous the new entity is allowed to be post the deal.
• In case of gas, India has stated it plans to raise the share of natural gas in its energy mix to 15 percent by 2022 from about 6.5 percent.
• Overall, the energy 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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