Energy Sources Sector Analysis Report 

• 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.
• ONGC and Oil India dominate the upstream segment contributing 85% 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 178 MMTPA. IOC dominates the refining capacity with a total share of nearly 32% of the current refining capacity.
• 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.
• ONGC is the major producer of natural gas accounting for 60% of domestic production. GAIL is the monopoly player in the transmission and distribution of natural gas, accounting for about 79% of the supplies. However, the country still witnesses shortage in supply of natural gas. In spite of huge discoveries made by RIL in KG basin, the demand growth will outperform the supply growth for some time to come.

• 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.
• 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.
• 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.
• 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.
• 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.
• 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 Indian basket of crude oil, which averaged US$ 79 per barrel during FY08, went up to US$ 142 per barrel on July 3, 2008 and then slumped steeply to US$ 36 per barrel on December 24, 2008, before recovering to US$ 46 per barrel in March 2009. The average for the year 2008-09 stood at US$ 84 per barrel. It was clear that the respite would be temporary and that this provided a golden opportunity to reform the pricing system.
• The production of crude oil and petroleum products witnessed poor growth in FY09, compared to FY08. While the production of crude oil declined 2% from 34.1 m tonnes (MT) in FY08 to 33.5 MT in FY09, its consumption increased 3% from 156 MT in FY08 to 161 MT in FY09. Balance of recoverable crude oil reserves grew by 6% to stand at 770 MT as on 1st April, 2008. Balance of recoverable natural gas reserves grew by 3% to stand at 1,090 bn cubic meters.
• The production of petroleum products increased 4% from 147 MT in FY08 to 153 MT in FY09. However, consumption declined 4% from 129 MT in FY08 to 124 MT in FY09. The growth in diesel consumption which stood at 7 % in FY07, rose to 11 % in FY08 and then declined to 8 % in FY09, on a YoY basis. Major reasons for the slowdown in growth included industrial slowdown, business slowdown in sectors like automobiles, transporters strike in January 2009, etc.

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• In order to secure the energy security of the country, government has laid increased thrust on exploration and buying oil equity outside the country. In the 7 rounds of New Exploration Licensing Policy (NELP) since 1999, 203 production sharing contracts have been signed, thereby increasing the area under exploration more than 4 times. In NELP VII, 181 bids were received from 95 companies. Under NELP, 68 oil and gas discoveries have been made in 19 blocks, which have added more than 600 m metric tonnes (MMT) of oil equivalent reserves. As on April 1, 2009, investment commitment under NELP is about US$ 10 bn on exploration, against which actual expenditure so far under NELP is about US$ 4.7 bn. In addition, US$ 5.2 bn investment has been made on development of discoveries. Thus, we can see enhanced production of oil and gas in the country in the years to come.
• In view of the demand-supply gap in hydrocarbons, national oil companies are encouraged to pursue equity oil and gas opportunities overseas. Oil & Natural Gas Corporation Videsh Limited (OVL) produced about 8.78 MMT of oil and equivalent gas during the year FY09 from its assets abroad in Sudan, Vietnam, Russia, Syria and Colombia. The largest ever acquisition of a foreign company, Imperial Energy by an Indian public sector company, OVL took place in 2008.
• In petrochemicals, substantial investments have been made in new capacities in emerging economies like China, India and the Middle East, which is expected to emerge as a production hub due to availability of cheap feedstock.

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