Registry Document



Indian Oil and Gas Sector

Prepared By Joel K Pandian

Senior Trade and Investment Adviser-Energy

UK Trade and Investment

Email: Joel.Pandian@.uk

Contents

Introduction

Market Overview

Exploration

Refining

Natural Gas

Opportunities and Conclusion

Note : Rs.1cr = Rs.10 million

£1= Rs.84

Introduction

The Indian Petroleum industry is one of the oldest in the world, with oil being struck at Makum near Margherita in Assam in 1867 nine years after Col. Drake's discovery in Titusville. The industry has come a long way since then. For nearly fifty years, the oil sector in India, has seen the growth of giant national oil companies in a sheltered environment. A process of transition of the sector has begun since mid nineties, from a state of complete protection to the phase of open competition.

The sector in recent years has been characterised by rising consumption of oil products, declining crude production and low reserve accretion. India remains one of the least-explored countries in the world, with a well density among the lowest in the world. With demand for 130 million tonne, India is the third largest oil consumer in Asia, even though on a per capita basis the consumption is a mere 0.1 tonne, the lowest in the region- This makes the prospects of the Indian Oil industry even more exciting.

The last fifty years, however, seen the rapid growth of the upstream and downstream oil sectors. There has been optimal use of resources for exploration activities and increasing refining capacity as well as the creation of a vast marketing infrastructure and a pool of highly trained and skilled manpower. Indigenous crude production has risen to 35 million tonnes per year, an addition of fourteen refineries, an installed capacity of 125 million tonnes per year and a network of 17000 km of pipelines.

But with the consumption of hydrocarbons said to increase manifold in the coming decades, (200 mmtpa by the end of the 10th plan and 325 million tonnes by 2025) liberalisation, deregulation and reforms in the petroleum sector is essential for the health and overall growth of the economy.

'With more than a billion people, a structural demographic shift resulting in exploding consumption expenditure, full deregulation of a 125 m tonne market growing at twice world averages, India represents one of the most exciting oil markets in the world today' - CLSA Asia Pacific

As the Indian Economy breaks the shackles of a Hindu rate of growth to grow at a pace of 8% and above, the single biggest beneficiary should be the oil & energy sector. Oil and energy are most happening sectors of the Indian economy today. PSU Oil Companies were in the limelight over the past two years for a variety of reasons- first, the companies, then the huge surge in profits, and recently, the drama over sale of government's stake through public offer.

Consider the following:

Automobile sale has surged to 34% per annum year on growth. Car sales are up by nearly 30%, heavy & medium commercial vehicle sales have climbed an even more steep 40%, consumption of diesel and LPG are on a steep rise.

That should be pretty good news for the industry, which is counting on surging sales and economic boom to absorb the huge refining capacity that has been built up in the country. The interesting story is that oil product consumption has started picking up in line with the economic boom, though with a certain lag.

Going forward, we should see much larger pick- up in sales of oil products in line with the GDP growth rate, feel analysts.

High consumption has meant high profit margins for oil companies, particularly refining majors like Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL), Indian Oil Corporation (IOC) and a host of other smaller refining companies.

Refining margins are now ruling at their highest levels over the past decade. According to analysts tracking the sector, refining margins are now at $8 per barrel, one of the highest levels in many years. And these margins have stayed high despite a rise in prices of crude oil.

For integrated refining & marketing companies, like HPCL, BPCL and IOC, the gains are even more substantial and their numbers may look very impressive.

However, sentiment for the sector would be significantly impacted by the performance of the biggest upstream oil company in the country- ONGC .The company is by far the biggest player in the oil exploration & production sector and has a presence in the refining sector through its arm- MRPL. As crude prices have held firm in the global markets over the past months, the company should show good performance for the year. The company should benefit from a surge in demand in this region.

According to CLSA. "While Asia (excluding, Middle East) accounts for only 10% of oil production, it accounts for as much as 25% of oil consumption and refining capacity. Oil consumption in Asia is returning, driven mainly by a surge in Chinese demand over the shorter term. With most Asian economies on track for a solid recovery, we would expect demand growth to top 3-4% in the next few years leading to a quick recovery. With Asia forming 45% of global incremental demand between 2000 and 2010, we expect Asian refining margins to remain at higher than global averages"

Energy Demand and Supply

Demand

With an expected GDP growth of 8% by the end of the Tenth Five-year Plan, the energy demand is expected to grow at 5%. India's incremental energy demand for the next decade is projected to be among the highest in the world spurred by sustained economic growth, rise in income levels, and increased availability of goods and services.

Despite increases in energy use in India, the current per capita commercial primary energy consumption in India is about 479 kg of oil equivalent (kgoe), low even compared to some of the developing countries. Driven by the rising population, expanding economy, and a quest for an improved quality of life, energy use in India is expected to rise to around 450 kgOE/year in 2010. The commercial energy intensity (TOE [tonnes of oil equivalent] per thousand rupees of GDP) has declined from 0.028 to 0.026 over the period 1993-2003.

Supply

India is relatively well endowed with both exhaustible and renewable energy resources. Coal, oil, and natural gas are the three primary commercial sources of energy. Over the years, there has been a significant change in the pattern of supply and consumption of energy. The share of commercial fuels in the total energy supply in India has risen from 41% in 1970/71 to approximately 70% in 2003/04 despite the dominance of the traditional fuels in the energy sector in India. The total domestic primary commercial energy supply in India has risen from 147.05 MTOE (million tonnes of oil equivalent) in 1970/71 to 248 MTOE in 2003. The projected figures for 2006-07, corresponding to an expected GDP growth rate of 7%, stand at 385 mtoe, spiraling to 505 mtoe by 2011-12. At a similar growth rate the country's total domestic primary commercial energy supply is estimated at a whooping 1060 mtoe by 2026-27. Despite the increasing share of commercial fuels in the energy mix, non-commercial fuels still hold importance in the energy portfolio. More than 60% of the Indian households depend on traditional sources of energy like fuel wood, dung, and crop residue for their energy requirements. Out of the total rural energy consumption, about 65% is met through fuel wood. The energy demand for non-commercial fuels is estimated to rise overtime from 151.3 MTOE in 2006/07 to 170.25 MTOE in 2011/12.

The Future Estimates

The total primary commercial energy supply in India has been projected to grow at an average rate of 3.2% over the period 200225 (Energy Information Administration 2003). These growth rates would mean a doubling of the energy requirement to reach 709 MTOE from the current level of 325 MTOE by 2030 (IEA 2002). Such a growth in demand is expected to entail significant investments in the capacities to produce and deliver these energies. In addition, ensuring stability in supplies is also an issue of concern.

Fossil fuels are likely to dominate the energy mix world-wide. India is also expected to follow the same trend. The share of alternative fuels in India's energy profile in the future is shown in Table II. Though the share of coal is expected to decline from 55% to 50% in 2025, it still remains the largest energy source in India's energy matrix. The share of natural gas and nuclear are also expected to constitute 20% and 3% of the energy mix, respectively, in 2025.

As per the available projections, India's oil demand is expected to grow at a compound rate of 4.2% per annum over the period 200225 to reach about 274 MT (Energy Information Administration 2003). Assuming a refinery loss of 8%, the refinery throughput would be 295 MT in 2025. The current indigenous production falls far short of this demand and India would be importing about 85%-88% of the total consumption by 2006/07.

Crude Oil and Natural Gas

India's balance recoverable reserves of crude oil and natural gas as on 31 March 2003 was 740 MMT and 920 BCM (billion cubic metres), respectively). The production of crude oil in the country has increased marginally from 32.03 MMT in 2001/02 to 33.08 MMT in 2002/03 and to 33.22 MMT in 2003/04. The figures remained more or less constant for 2004-05 and 2005-06 at 34.63 MMT and 34.48 MMT respectively. The projections for 2006-07 stand at 33.97 MMT.

The production of natural gas has increased from 86.56 MMscmd in 2002/03 to 90.54 MMscmd in 2003/04 and to 103.84 BCM in 2004/05. Production of natural gas is expected to remain on the same level with figures for 2006/07 pegged at 103.08 MMscmd.

The quantity of crude oil imported (Including JVC/private companies) in 2002/03 was 81.99 MT. This increased to 90.434 MT in 2003/04. Besides, 7.90 MT of other petroleum products were imported during this period. The exports of petroleum products were 14.62 MT during the same period. The refining capacity as on 1 April 2004 was 125.97 MTPA (million tonnes per annum). The production of petroleum products during 2003/04 was 113.46 MT from domestic refineries, which was adequate to meet the domestic demand of 106.55 MT except for LPG (liquefied petroleum gas). The import dependency was over 70% in 2003/04.

Natural gas has experienced the fastest rate of increase of any fuel in India's primary energy supply. It now supplies about 8.9% of India's energy, with that share expected to double by 2020. Natural gas demand is growing at the rate of about 6.5% per year, and it is forecasted to rise to 47.45 BCM by 2006/07 and 64 BCM by 2011/12.

Power generation, fertilisers, and petrochemical production are industries that have been turning to natural gas as an energy feedstock. India's natural gas consumption has been met entirely through domestic production in the past.

However, demand for natural gas since the past 45 years has been increasing at a rapid pace and has outstripped the country's ability to produce it. To bridge this gap, public and private sector companies are pursuing several gas import options. The import of LNG (liquefied natural gas) is being considered as one of the possible solutions for India's expected gas shortage. Several LNG terminals have been planned in the country, with a combined capacity of 22.5 MTPA. Of these, the LNG terminal of about 5 MT at Dahej, the LNG import terminal at Hazira has already been commissioned. The other possible sources for import of natural gas via pipelines are

➢ The Iran-Pakistan-India pipeline

➢ The Bangladesh-India pipeline

➢ The Myanmar-Bangladesh-India pipeline

➢ The Turkmenistan-Pakistan-Iran pipeline

Upstream-Exploration

Oil accounts for about 33 percent of India's total energy consumption. Majority of India's oil reserves of roughly 4.7 billion barrels are located in the Bombay High, Upper Assam, Cambay, Krishna-Godavari, and Cauvery basins. The offshore Bombay High field is India's largest oil producing field, with production of 250,000 barrels per day (bbl/d) in 2003. India's average crude oil production level for the year 2004 was estimated at 33 million Tons. India imported over 94 million tons in the fiscal year 2004.

India remains one of the least explored regions in the world with a well density of 20 per 10000km2. Of the 26 sedimentary basins, only 6 have been explored so far. The Oil and Natural Gas Corporation (ONGC) and the Oil India Limited (OIL)- the two upstream public sector oil companies- in 1981/82 had taken their search to previously unexplored areas. Number of wells drilled as well as the meterage increased. However current reserve accretion continues to be low.

India is attempting to limit its dependence on oil imports by expanding domestic exploration and production. Private sector participation in the E&P sector started in 1974. Before NELP was introduced in 1997, only four major oil fields were given for commercial exploitation to private sector players. These four fields include the Ravva oil field, which has been bagged by the Videocon/ Marubeni combine and the Panna, Mukta & Tapti oil fields which have been won by the Reliance/ Enron combine (Enron stakes has been bought over by BG Group in 2003). The Indian government announced the New Exploration Licensing Policy (NELP) in 1997, which permits foreign companies to engage in exploration, an activity long restricted to Indian government-owned firms. Reliance Industries, Niko Resources, Oil and Natural Gas Corporation (ONGC), Cairn Energy, Gazprom, Mosbacher Energy, and Geopetrol of France were some of the selected bidders under NELP. India has until now awarded about 110 blocks under five rounds of bidding under the NELP.

Salient features of the NELP

1) There will be no mandatory state participation through ONGC/OIL nor will there be any carried interest of the government.

2) The two public sector upstream companies would compete for petroleum exploration licences, instead of the existing system of granting of licences on nomination basis. The public sector companies will also be able to avail of the fiscal and contract benefits available to private companies.

3) Open availability of exploration acreage to provide a continuous window of opportunity to companies. The acreages will be demarcated on grid system and pending preparation of the grid, blocks will be carved out for offer.

4) Freedom to the contractors for the marketing of crude oil and gas in the domestic market on international basket prices.

5) Royalty payments at the rate of 12.5% for the onland areas and 10% for the offshore. Half the royalty of the offshore area will be credited to a hydrocarbon development fund to fund and promote exploration related study and activity.

6) To encourage exploration in deepwater and frontier areas royalty will be charged at half the prevailing rate for normal offshore area, for deep-water areas beyond 400m for the first seven years after commencement of commercial production.

7) Prompt action by the Ministry of Petroleum and Natural Gas to sign the PSC's for exploration blocks. The government to attract private investment in the upstream sector has conducted regular rounds of bidding.

India's tenth five-year plan states that India will run out of oil reserves by 2012 even if only 30 percent of demand are met by domestic production. Recent experience does not support an optimistic view, as no major new finds have been made in recent years, except for a 200m recoverable reserve in Rajasthan by Cairn Energy and 14tcf gas in KG basin by Reliance, and analysts consider it likely that most of India's easily recoverable oil has been discovered. The main hope is offshore exploration, and in particular deep-water exploration. One onshore area, which has shown promise, is in western Rajasthan.

Two large government-owned companies - Oil and Natural Gas Corporation Limited (ONGC) and Oil India Limited (OIL) account for almost the entire exploration and production (E&P) industry in India. Another government-owned company Gas Authority of India Limited (GAIL) is engaged in gas transmission and distribution. ONGC and OIL produce over eighty percent of India’s crude oil and natural gas while private companies contribute the balance.

Powered by the India Hydrocarbons Vision- 2025 report, which gave priority to a huge push in exploration efforts, the government has moved into overdrive. As many as 110 blocks have been given out for exploration under the New Exploration and licensing Policy since April 2000 against just 22 blocks in the preceding 10 years. While ONGC holds 49. 2 per cent of the total area licensed by the government for oil exploration, Reliance Industries and Oil India Ltd have grabbed licences covering around 26. 6 percent respectively.

The Government Strategy

To reduce the dependence on external crude oil and gas supply, the Ministry of Petroleum and Natural Gas (MoPNG) is following a conscious 4 pronged strategy for enhancing indigenous supply:

Exploration in frontier areas.

Intensive exploration in the proven areas.

Strengthening overseas exploration

Initiation of exploration for non-conventional hydrocarbon resources.

The main frontier areas are the Assam Arakan Fold Belt, the Himalayan Foothills, sub-trappean Mesozoic basins in western India, the Gondwana and Vindhyan basins in central India and deep water basins in the eastern offshore areas. Exploration initiatives already taken in these areas include categorisation of the areas in terms of risk/reward perception, seeking international experts’ opinion about the prospectivity of the basins and identification of area specific technology.

The deepwater areas beyond 200-m isobath form parts of basins off the western and eastern coasts of India. Success has already been met with in the Krishna-Godavari deep offshore basin with Reliance Industries reporting a 14 trillion cubic feet, (recently re-assessed at 8.6Tcf’s) gas discovery in one block in 2002-03. But exploration in these areas is still in data acquisition stage. Cost intensive advanced technology requirements like FPSO (floating production storage and off-loading systems), sub-sea completion and TLP (Tension Leg Platforms) are being sought. The MoPNG is hoping for an early breakthrough with a possible giant discovery, which could change the scenario of hydrocarbon exploration in the country.

Recent Discoveries in the Indian Offshore and Onland Blocks

In the last 4 years, the National Oil Companies (NOC) viz. ONGC and OIL, made 25 significant hydrocarbon discoveries of which 10 are in offshore and 15 onland.

Out of 10 offshore discoveries, 6 discoveries were made in Kutch & Mumbai Basins, Western Offshore and 4 discoveries were made in K-G Basin, Eastern offshore. All these offshore discoveries were made by ONGC. The Western Offshore discoveries were GK-39-1 (Gas) in Kutch offshore; WO-24-1 (Gas), B-14-2 (Gas), Vasai West (Oil & Gas), Vasai East (Oil) and NMT-2 (Gas) in Mumbai offshore. The Vasai East and Vasai West discoveries are considered to be the major discoveries in Western Offshore. The Eastern Offshore discoveries were KD-1-1 (Gas), GS-KW-1 (Oil & Gas), GS-49-2 (Gas) in K-G shallow waters and G-4-2 (Gas) in K-G deep waters. The significance of GS-KW-1 and GS-49-2 discoveries are that these have highlighted the prospectivity of land-sea transition zone.

Out of the 15 Onland discoveries, 5 discoveries were made by OIL in Upper Assam Shelf and 10 discoveries were made by ONGC in Rajasthan, Cambay, Cauvery, K-G and in Assam Arakan Basins. The discoveries made by OIL were Chandmari-1 (Oil & Gas), Matimekhana-2 (Oil), Baghjan-1 (Oil & Gas), Chabua-6 (Oil) and North Chandmari-1 (Oil & Gas). The discoveries made by ONGC were Chinnewala Tibba-1 (Gas) in Rajasthan Basin, Katpur-1 (Gas) in Cambay; PBS-1-1 (Gas) in Cauvery; SU-1 (Oil), GM-1 (Oil), AK-1 (Gas) and Endumuru-9 (Gas) in K-G; Sonamura (Gas) in Assam-Arakan Fold Belt and Banamali (Oil & Gas), Liapling Gaon-1 (Oil), in Upper Assam Shelf.

Private/JV companies have made 27 significant hydrocarbon discoveries, both in the NELP and Pre-NELP blocks. These discoveries were made in five major areas: Mahanadi - NEC offshore, Krishna-Godavari offshore, Gulf of Cambay, onland Rajasthan and Cambay Basins.

The recent gas discoveries, namely Dhirubhai-9, 10 and 11 made by Reliance India Ltd. (RIL) in shallow offshore block NEC-OSN-97/2 located in Mahanadi - NEC basin have upgraded the category of the basin from Cat-III to Cat-II. When these discoveries will be put on production, the category of the basin will further be upgraded to Cat-I and will become the 8th basin having established commercial production.

In deep-water block KG-DWN-98/2, Cairn Energy Pty. Ltd. (CEIL) made three important discoveries: Annapurna, Padmavati and Kanaka Durga. While the first tested gas, the other two tested oil. The consortium of RIL and Niko Resources Ltd. made a spectacular series of gas discoveries in their deep-water block KG-DWN-98/3 through the drilling and testing of Dhirubhai wells 1 to 8. In fact, the Dhirubhai-1 discovery was the world's largest gas discovery in 2002. These eight wells drilled in merely 20% of the block and they have already established gas reserves of about 12-14 TCF.

In the Gulf of Cambay block CB-OS/2, operated by Cairn Energy, four hydrocarbons bearing structures: Lakshmi, Gauri, Ambe and Parvati were discovered. The Lakshmi field has been on regular gas production at the rate of 3.0 MMSCMD since November 2002. The gas production from the second field Gauri has also commenced from April 2004. The rate of gas production from this field is 1.3 MMSCMD.

In block CB-ONN-2000/2 of onland Cambay basin, Niko Resources struck natural gas in Well Bheema-1. This is the first block awarded under NELP-II to establish substantial hydrocarbon potential, and that too in a very short span of 15 months from the signing of the PSC. In addition, significant quantities of shallow gas (NS-A field) have been discovered in the block, which is first of its find in India. The NS-A field is on gas production at a rate of 0.14 MMSCMD from May, 2004.

In the Rajasthan onland block RJ-ON-90/1 in Barmer-Sanchor Sub-basin, Cairn has made string of oil discoveries viz. Saraswati, Raageshwari, GR-F, Kameshwari, Mangala, N-A and N-C. These discoveries have put Rajasthan on Oil Map of India.

Refining

Currently there are about 17 refineries of which seven are owned by Indian Oil Corporation (IOC), two each by Hindustan Petroleum Corporation Ltd. (HPCL) and Madras Refineries Ltd (MRL), and one each by Bharat Petroleum Corporation Ltd (BPCL), Cochin Refineries Ltd (CRL), Bongaigoan Refinery & Petrochemicals Ltd (BRPL), Numaligarh Refineries Ltd (NRL), Mangalore Refinery & Petrochemicals Ltd (MRPL) and Reliance Petroleum Ltd (RPL).

The refining capacity increased from 69.14 Metric Tons Per Annum (MTPA) in FY99 to 125 MTPA in FY 2005 i.e about 3 percent of the world refining capacity. The major refinery constructed during 1999-2000 is the 27 MTPA Reliance Petroleum project at Jamnagar. For FY01, domestic production from refineries was estimated to be 110 MTPA (about 2.35 million barrels per day) while consumption is around 104 MTPA. During the period 2004-05, the 17 refineries together processed about 125 MT of crude of which 92 MT was estimated to be imported crude.

By FY 2007, the refining capacity is expected to increase to about 159 MTPA with the implementation of four refinery projects and de-bottlenecking of capacities in some other refineries. The proposed refineries include:

New Refinery Capacity

BORL (Bharat Oman Refinery Ltd), Central India 6.00 MTPA

IOC, East Coast 9.00 MTPA

HPCL, Punjab 9.00 MTPA

Essar 10.00 MTPA

Reliance 40.00 MTPA

Refinery construction has been encouraged by regulatory changes by the Indian government, including a provision allowing foreign firms which invest more than $400 million in refinery infrastructure to sell refined products in competition with Indian public sector firms.

Another major downstream infrastructure development is the construction of pipelines undertaken by Petronet India, a company created by an agreement in 1998 between India's state-owned refineries. The pipelines will add 500,000 bbl/d to India's current 325,000-bbl/d capacity for pipeline transportation of refined products. Pipelines between refineries and major urban centres will replace rail as the main transportation mode.

While retail gasoline sales are still controlled by state-owned firms, several multinationals have entered the Indian lubricants market, which was deregulated five years ago. Over one-third of the market is currently held by firms such as Shell, Exxon, and Caltex. While there operations are relatively small, they are seen as allowing the majors to study the Indian market, establish brand recognition, and prepare for the eventual deregulation of the Indian retail petroleum products sector.

Natural Gas

India's consumption of natural gas has risen faster than any other fuel in recent years. The consumption increased from 0.6 trillion cubic feet (tcf) in 1995 to 1.7 tcf in 2005 and is projected to reach 2.7 tcf in 2010. Increased use of natural gas in power generation and fertiliser industry will account for most of the increase. The Indian government is encouraging the construction of gas-fired electric power plants in coastal areas, which can be easily supplied with liquefied natural gas (LNG) by the sea route. Considering the fact that domestic gas supply is not likely to keep pace with demand, India will have to import most of its gas requirements, either via pipeline or LNG tanker, making it one of the world's largest gas importers.

Almost 70 percent of India's natural gas consumption comes from reserves in the Bombay High basin and the state of Gujarat. Current projects include enhancing gas production at the Tapti fields and revamping the gas fields at the Bombay High oilfield. India is investing heavily in the infrastructure required to support increased use of natural gas, building LNG import terminals and pipelines. It is also reducing the flaring of gas, produced as a by-product of oil production, which was a substantial 86 billion cubic feet (bcf) in fiscal year 1999.

India's Foreign Investment Promotion Board (FIPB) has approved 12 prospective LNG import terminal projects, but it is unlikely that they will be commissioned on schedule, as their combined capacity would exceed projected demand. The major LNG import terminal projects are promoted by Petronet (government owned), Enron (will be commissioned by GAIL after the take over of Dabhol Power Company, likely to be commissioned in June 2006), Siemens, TotalFinaElf, Shell and Reliance. The Indian government has now frozen approvals of new LNG terminals.

Aside from LNG imports, imports of gas by pipeline may play a significant role in satisfying India's gas needs. One possibility is to import gas from Iran's huge South Pars field via a pipeline, either subsea or through Pakistan. Another possible import route would link the gas reserves of Bangladesh into the Indian gas grid. Current proven reserves of natural gas in Bangladesh are at least 11 tcf, but the foreign firms including Mobil, Unocal and Shell believe that the reserves are higher. Bangladesh have been reluctant to approve exports to India until it is confident that its reserves are higher than domestic demand.

Currently, most of the activities that relate to Natural Gas are under the control of public sector oil companies. ONGC and OIL explore and produce natural gas while GAIL is engaged in storage, transportation and distribution of natural gas. The scenario is changing with the change in the Government policy on promoting foreign investment and private participation in the entire value chain oil and gas sector.

Projections by the International Energy Agency, the GoI and other sources indicate a gas demand potential of 280-300 MMscmd in India by 2020. These forecasts assume a 6% rate of economic growth and a progressive increase in the share of gas in the primary energy mix from the current 8% to around 20%. The registered demand for gas in India, currently concentrated around the available gas transmission network, is around 120 MMscmd, against which a supply of 68 MMscmd is available. Considerable gas discoveries made on the Indian East Coast and in Rajasthan, besides sizeable imports of gas in the form of LNG, are set to significantly improve the supply position in gas in India. ICRA’s estimate on the future supply position is presented in Table 1.

The projected increase in supply from the LNG terminals would be sufficient to meet the existing deficit in the Western and the Northern part of the country (along the HBJ pipeline). But given the demand projections, sizeable additional supplies, over and above those from the Reliance discovery would be required to meet the growing requirements of the Indian gas market. Moreover, demand from the power sector would require long-term security of supplies, given that green-field power projects, which are capital intensive, would require long-term fuel supply linkages for achieving financial closure. The options being explored for the further strengthening of the supply base include:

➢ Development of natural gas and coal bed methane reserves

➢ Import of gas through cross-country pipelines: This option is exposed to political risk, particularly for the proposed pipelines from Iran and Bangladesh, although imports from Myanmar appear possible in the medium term.

➢ Development of additional LNG facilities: The possible revival of the Enron LNG facility is a likely option in this regard.

➢ Acquisition of participating-interest in overseas oil and gas acreage that have reached the development stage: The strategy being adopted by ONGC Videsh is representative of this approach.

The strategic options being considered for investment are highly capital intensive, and given the limited tradability of gas, their implementation would need to be supported by long-term off-take commitments from creditworthy consumers.

The Indian gas market currently has a limited transmission infrastructure consisting of small regional pipelines and the HBJ pipeline, which carries gas from the offshore Bombay High basin to the North Indian hinterland. Growth of the domestic gas market, in the coming years, would hinge on the development of the National Gas Grid (NGG) project, besides of course higher supplies. At present, Gail is expanding its transmission infrastructure through the implementation of the Dahej-Vijaipur and the Dahej-Uran pipeline projects, which would allow it to handle the increased supply of gas from the PLL and Shell LNG facilities.

Further, the draft pipeline policy formulated by the GoI proposes to notify the organised development of the NGG project. Such a project, by connecting the emerging supply sources with the potential markets, would even out the regional demand-supply imbalances that currently exist. The NGG project, which involves an 8000km cross-country pipeline network, is likely to be implemented in phases over the next six-seven years, at an estimated outlay of Rs. 200 billion. Projects of this nature are highly capital intensive and are characterised by long gestation periods. Thus their commercial viability would be a function of the adequacy of tariffs offered by the regulator, and the extent of capacity that would be underwritten on a long-term basis by creditworthy consumers.

The energy markets in India are on the threshold of change, with both the natural gas and electricity markets likely to witness significant structural shifts in the coming years. Given the considerable investments envisaged in power generation, the electricity sector is expected to become the key growth driver for the gas business, although the transportation sector would also progressively emerge as a large consuming segment.

Currently, the natural gas business in India is emerging out of the constraints of regulatory control, with the newer gas finds having been granted the freedom to devise their own pricing strategies. With the number of players in the gas sector set to increase, gas pricing would be increasingly influenced by competitive forces within the industry. However, given the price sensitivity of the power sector, future gas prices would also be determined by the price absorption capacity of this user segment.

A key driver of growth for the gas business in India would be the establishment of a national gas transmission infrastructure, a project that is expected to witness considerable investments over the next five to seven years. The structure and configuration of this project, and its financing would however hinge on greater clarity on regulatory issues particularly with respect to issues related to pricing and non-discriminatory open access. Further, given the long gestation period that the project would have, implementation would also need to be supported by long-term capacity underwriting commitments from creditworthy users.

Status of Pipeline Projects of GAIL

The latest status on the following GAIL projects:

➢ Dahej -Uran Pipeline Project. (Cost- Rs.1,830.77 cr)

➢ Thulendi - Phulpur Pipeline Project (Cost - Rs. 220 cr)

➢ Vijaypur - Kota Pipeline Project (Cost - Rs 299.84 cr)

➢ Dadri - Panipat Pipeline Project (Cost - Rs 346.99 cr)

➢ Jagoti - Dewas Pithampur pipeline Project (Cost - Rs 194.82 cr)

➢ Kelaras - Malanpur Pipeline Project (Cost - Rs. 104.73 cr)

➢ Expansion of Gas Cracker unit (GCU) from 300,000 TPA to 440,000 TPA Ethylene along with necessary utilities and offsite facilities and New HDPE plant of 100,000 TPA Polymer capacity (Cost - Rs 647.38 cr)

Conclusion

India's domestic crude oil production has been stagnant while demand has been growing with an ever-expanding economy. Consequently, the value of oil imports has increased from $4 billion in 1990-91 to over $24 billion in FY 2005. If the situation continues, it could have serious repercussions on India's balance of payments situation as well as smooth and continuous availability of energy. The Government is seeking investments in excess of US $ 100 billion in the upstream and the downstream sector during the next 15 years to provide energy security. The government has also realised that to attract private/foreign investment, the controls in the sector will have to be removed and a level playing field has to be provided.

Accordingly, the process of partial withdrawal of regulation in the sector commenced with the decimalization of several petroleum products, permission to new entrants to market LPG and SKO, decontrol of lubricants, awarding production-sharing contracts of oil wells and rationalisation of tariff structure. The Administered Pricing Mechanism (APM) was also replaced by market driven pricing mechanism in April 2002.

India's petroleum product consumption has grown by 6.3 per cent over the past 10 years and the oil demand in India is expected to rise to 368 MTPA by 2025. India's import dependence, which is 68 per cent now, is likely to go up substantially in the near future. In addition, India has huge gas deficits. The widening demand-supply gap for natural gas cannot be filled up with the country's limited conventional gas resources. Hence, unconventional gas resources like Coalbed Methane (CBM) and gas hydrates need to be aggressively explored and developed. In India, both domestic and international companies can view unsatisfied demand and relatively higher gas price as stimulants for Coalbed Methane exploration and development.

In order to explore and produce Coalbed Methane (CBM), the Government of India announced offer of 7 blocks in May 2001. Out of these, 2 blocks are located in the state of Jharkhand, 3 blocks in Madhya Pradesh, 1 block in Rajasthan and 1 block in West Bengal. Foreign/Indian companies can have up to 100 percent participating interest. Industry experts have rated the terms offered for CBM exploration and production as extremely attractive. Copies of the Indian CBM offer may also be seen at the special CBM website as well as at the website of Ministry of Petroleum and Natural Gas, .

Disclaimer

The information in this report is provided as a starting point to assist the reader to have a simple understanding of the oil and gas sector in India. The report is produced on the individual capacity of the author and the views expressed are his own and not of the organisation the author represents.

Whereas every effort will be made by the author to ensure that the information given through this report is accurate, the author and his organisation, accept no responsibility for any errors, omissions or misleading statements in that information and no warranty is given or responsibility is accepted as to the standing of any firm, company or individual mentioned.

Contact Information

D.Joel K Pandian

Senior Trade and Investment Adviser-Energy

UK Trade and Investment

British High Commission

Shantipath

Chanakyapuri

New Delhi 110 021

India

Ph: +91 11 2419 2235

Fax: +91 11 2687 0062

e-mail: Joel.Pandian@.uk

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