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Energy Sources Sector Analysis Report 

[Key Points | Financial Year '19 | Prospects | Sector Do's and dont's]

Important: One stock to add to your portfolio asap

  • India's energy requirements have grown significantly since market reforms were initiated by the Government of India in the 1990s. Energy sector reforms, capacity addition and improvement in existing infrastructure are the government’s primary focus areas as energy is a key necessity for meeting the country’s high economic growth expectations.
  • 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.
  • The Indian renewable energy sector is the fourth most attractive renewable energy market in the world.
  • With a potential capacity of 363 gigawatts (GW) and with policies focused on the renewable energy sector, Northern India is expected to become the hub for renewable energy in India.
  • With many bilateral nuclear agreements in place, India is expected to become a major hub for manufacturing nuclear reactors and associated components. Foreign participation in the development and financing of generation and transmission assets, engineering services, equipment supply and technology collaboration in nuclear and clean coal technologies is also expected to increase.

How to Research the Energy Sources Sector (Key Points)

  • 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 $ 29 per 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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Financial Year '19

  • During 2018-19, crude oil prices witnessed high volatility with the price of Brent crude recording a peak at US$ 86 per barrel in October 2018, dropping to a low of US$ 50 per barrel in December 2018, and recovering to range of US$ 65 per barrel to US$ 70 per barrel in March 2019. Production discipline by OPEC and Non-OPEC countries, decline of Venezuelan production and announcement by USA in May 2018 to reimpose sanctions on Iran were major factors to drive upward movement of crude prices during the first half of 2018- 19.
  • For FY2018-19, India’s oil demand grew at about 3% YoY with consumption-led demand growth in gasoline (+8.1%), gasoil (+3.0%) and jet fuel (+9.1%). The demand was driven by robust growth in commercial vehicle sales and strong air traffic growth during the year.
  • During 2018-19, petroleum product consumption in India increased by over 5 million metric tonnes (MMT) to reach about 212 MMT and registered a growth of 2.7%. All petroleum products excluding Kerosene, Fuel Oil (FO), lubricants & greases and Petroleum Coke registered positive growth during 2018-19.
  • LPG consumption recorded a growth of 6.8% over 2017-18 on account of increased LPG penetration in country due to implementation of PMUY and other LPG programs initiated by Government of India.
  • After witnessing a positive growth for 7 consecutive years, Petroleum Coke consumption saw a decline during 2018-19 with degrowth of 20% over previous year, mainly due to regulatory restriction on usage of Petroleum Coke as a fuel.
  • As of April 2019, total renewable energy installed capacity (excluding large hydro) in the country stood at 78.4 GW. Off-grid renewable power capacity has also increased.
  • According to data released by the Department for Promotion of Industry and Internal Trade (DPIIT), FDI inflows in the Indian non-conventional energy sector between April 2000 and March 2019 stood at US$ 7.8 billion.

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  • To fulfil disinvestment target, ONGC, a key upstream player is acquiring governments 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.
  • India targets US$ 100 billion worth investments in gas infrastructure by 2022, including an addition of another 228 cities to city gas distribution (CGD) network. This would include setting up of RLNG terminals, pipeline projects, completion of the gas grid and setting up of CGD network in more cities.
  • In case of gas, India has stated it plans to raise the share of natural gas in its energy mix to 15% by 2022 from about 6.5%.
  • The Government of India has adopted several policies to fulfil the increasing demand. The government has allowed 100% Foreign Direct Investment (FDI) in many segments of the sector, including natural gas, petroleum products, and refineries, among others. Today, it attracts both domestic and foreign investment, as attested by the presence of Reliance Industries Ltd (RIL) and Cairn India.
  • The country's gas production is expected to touch 90 Billion Cubic Metres (BCM) in 2040. India is the fourth-largest Liquefied Natural Gas (LNG) importer after Japan, South Korea and China, and accounts for 5.8% of the total global trade.
  • 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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Related Links for Energy Sector
Quarterly Result | Sector Quote | Over The Years

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Oct 19, 2020 (Close)