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Energy Sources Glimpses of the future

May 27, 2000

Should the Government adhere to its schedule of deregulation in the Oil & Gas industry, one can expect competition to heat up in the sector post 2002. This is largely because India will emerge as the fastest growing market for oil products. Deregulation will also have ramifications on the petrochemical sector. Breaking the value chain can help one understand the nature of business in the oil & gas and petrochemical industry.

To survive in the deregulated environment, we suspect companies will have to operate on multiple levels of the value chain. The structures that we may see are integration between exploration & production (E&P) and refining and marketing (R&M), R&M and petrochemicals and wholly integrated companies existing at levels of the value chain.

Products higher up the chain are commodity based and expose the business to the cyclical behaviour of commodity products. Existing at multiple levels will help to reduce the impact of business cycles. Lower down the chain products are of greater value (branded textiles is the last stage) implying that manufacturers have a relatively higher control over prices. Hence, presence further down the value chain will offer greatest advantage.

Thus deregulation will see companies existing at multiple levels and one can expect consolidation amongst the Indian players. Players existing at all levels of the value chain will reap the greatest benefits of integration and will have strong competitive advantage.

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