Oil and Gas Scenario in India

Apurva Chandra Joint Secretary Ministry of Petroleum & Natural Gas, Government of India.

Prologue The Oil and gas sector in India is the largest in terms of sales turnover, touching the lives of all citizens, providing uninterrupted supplies of oil products to the remotest parts of the country. The oil sector is also the largest contributor to State exchequer through taxes. During 2008-09, the total import of crude oil and petroleum products was over Rs. 4 lakh crore comprising 31.8% of total imports. The oil sector contributed Rs. 1.62 lakh crore to the Central and State Governments through Central Excise and Sales Tax. The contribution of the oil sector in Central Excise is 56% of the

total, and 31% of the total State Sales Tax. Counter intuitively, the oil sector has also emerged as the largest exporter from the country with the export of petroleum products amounting to Rs. 1.31 lakh crore in 2008-09 which was 16.2% of the total exports from the country. The oil sector is the largest exporter as well as the largest importer in India. A very informative Article and particularly relevant in the developing energy/ environment scenario. - Editor

India and the World India’s per capita energy consumption is amongst the lowest in the world. India accounts for 17% of the world’s population but only about 5% of the world’s primary energy consumption. Table I gives an idea of energy consumption in India for 2007 in comparison to other major economies.

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January 2010

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Table I : Selected Energy Indicators Country

TPES (Mtoe)

USA UK China Japan India World

2340 211 1956 513 595 12029

TPES: Total Primary Energy Supply GDP in 2000 US$

TPES / Population (toe/capita) 7.75 3.48 1.48 4.02 0.53 1.82

TPES/GDP (PPP) (toe/000 2000$) 0.20 0.12 0.20 0.14 0.15 0.20

toe: tonnes of oil equivalent Mtoe: Million tonnes of oil equivalent

Source: Key World Energy Statistics 2009, IEA

India’s per capita energy consumption is just 7% of energy consumption of USA and 30% of the world average. However, the International Energy Agency has forecast that India’s energy consumption would grow at 3.5% per annum over the next 25 years against the expected world average of 1.8%. The total energy consumption of the country in 2007-08 was 570 million tonne of oil equivalent (MTOE) of which 74% was from commercial sources like coal, oil, hydro etc. while 26% was from non-commercial sources like agriculture wastes, biomass, wood and cow dung. The total energy consumption is expected to rise three fold to 1836 MTOE by 2031-32 of which 90% will be accounted for by commercial energy. Table II : Share in Energy Basket Commercial & Non-Commercial

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% Share of Primary Commercial Energy

Source: Integrated Energy Policy 2006 at 8% GDP

As can be seen from Table-II above, fossil fuels will continue to play a major role in the total energy mix of the country with the share of nuclear energy and gas expected to rise in the next 25 years in relation to the other sources of energy. However, coal will continue to be the major source of commercial energy in the country, followed by oil and gas. Coal forms a substantial percentage of the energy mix in India at 51%, against 29% being the world average. Natural gas at 9% in India is much lower than the world average of 24%. The growth of natural gas in the country has been constrained by its availability but with new domestic discoveries and import of gas as LNG, natural gas will play a greater role in the energy mix of the country. Demand for Petroleum Products The demand of petroleum products has grown steadily in the country from 55 million tonne in the year 1990-91 to 133.4 million tonne in 2008-09. Diesel at 51.6 million tonne is the largest component of the domestic demand. The demand for petrol, LPG and naphtha ranges from 11-13.5 million tonne each while kerosene is the other major commodity with 9.3 million tonne consumption. The demand for petroleum and diesel is growing at a fast clip of 8-9% annually reflecting the growth in the auto sector. The use of LPG has grown substantially as LPG is being made available to larger sections of the population. Correspondingly, kerosene consumption is declining over the years as LPG substitutes kerosene use in households. Aviation turbine fuel had grown at over 15% from 2003 onwards but has shown a negative growth for the last two years. The demand for industrial fuels like Naphtha, Furnace Oil and Light Diesel Oil moves in tandem with industrial activity. The total demand for petroleum products is expected to reach 270 million tonne by the year 2030-31 with the expected demand growth at 3.5% per annum being second only to China. The demand has reached a plateau in OECD (Organization for Economic Co-operation and Development) countries and some analysts expect that the demand may not

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touch the peak reached in 2008 for several years. Self-Sufficiency The domestic crude production has remained stagnant at around 33 million tonne per annum for almost 20 years (Table-III). Table III: Crude Production and Imports

MMT: Million tonnes

Table IV: Natural Gas Production and Imports

BCM: Billion Cubic Metre Source : Petroleum & Natural Gas Statistics, Petroleum Planning & Analysis Cell (PPAC).

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With increasing demand dependence on import of crude has risen from 50% in 1985-86 to 80% by 2009-10 and is expected to further rise to 90% by 2030. The production of natural gas is expected to double within a year with supplies having commenced from KG-D6 fields operated by RIL-NIKO consortium. The import of natural gas through LNG has also commenced from 2003-04 and is expected to rise with the expansion of capacities and commissioning of new terminals (Table-IV). Import of gas through transnational pipelines from Iran and Turkmenistan has been under discussion for several years but many issues still remain unresolved. In the product mix, with increase in refining capacity in the country in the last 10 years, the country has become a net product exporter since 2001-02. Thus, as mentioned earlier, even though India depends to the extent of 80% on crude import to meet its demand, at the same time India has become a regional hub of refining capacity with a total refining capacity of 180 million tonne, being in excess of the domestic demand of 133 million tonne. The Refining capacity is expected to rise further to 241 million tonne by March 2012 with new refineries being commissioned at Paradip (Orissa), Bina (Madhya Pradesh) and Bhatinda (Punjab). The refiners in India find it economical to import crude, add value and export products after meeting the domestic demand. While the country is a net exporter of all major petroleum products like Petrol, Diesel, Kerosene and Naphtha, the country remains a net importer of LPG which is a constraint in the faster expansion of the use of LPG in rural areas. One must remember that exploration is a high risk-high reward venture. The tools for exploration have become more advanced over the years with the advent of computers and the tremendous increase in data analysis capabilities but exploration of oil and gas still retains an element of art and judgement in the interpretation of the data generated by the sophisticated 2-D and 3-D seismic surveys on the part of the interpreting geologists. The success rate in exploration is less than 10% for discovery of new oil. The seismic survey essentially consists of creating short waves that pass through various rock layers below the ground and interpreting the waves that are reflected back to the surface. The reflections travel at different speeds depending upon the type or density of rock layers through which they pass. The readings are interpreted by seismologists for signs of oil and gas traps. Once the geologists are reasonably certain about the prospectivity of a site, exploratory drilling is undertaken. While the exploratory drilling on land is cheaper, offshore costs are much higher depending upon the depth of the water in which the drilling is undertaken. To come to a prospectivity the average water depth in Mumbai High is about 150 metres. Drilling wells in water depth beyond 400 metres require very specialized skills. The discoveries of gas by RIL-NIKO Consortium in Krishna Godavari Basin are in water depths of around 800 metres. Several of the Blocks in the KG Basin where exploration has started are in ultra deep water with water depths in excess of 1500 metres. The wells are drilled to a depth of 3000 to 5000 metres below the sea bed. In such great water depths, the cost of a single deep water well can range from Rs.200-250 crore. Thus one can imagine the cost of failure in deep water and even if the success is marginal, it may be difficult to commercially exploit the resources as the cost of development in deep water is much higher than in any other area.

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The time between a discovery and actual production to take place may range from 7 to 10 years and requires huge investment in the actual development of the field. Many times discoveries are made by small and medium Exploration and Production companies who are willing to take risks in uncharted areas but do not possess the financial muscle to develop discoveries. Such discoveries are farmed out to oil majors who can exploit the potential with their deep pockets. Internationally, most of the easily available crude is already discovered and exploited. The largest reserves of oil which may be lifted at low costs are in the Middle-East, but in other areas the frontiers are moving to more difficult geology, deeper oceans and permafrost of the Arctic Circle. Hunt for Oil & Gas India has 17% of the world’s population but only 5% of the proven oil and gas. Oil and gas reserves are discovered in sedimentary basins. The total land area and the offshore economic zone of India comprises of about 5 million sq. km of which 3.1 million sq. km is sedimentary basins (1.75 million sq. km offshore). About 1.17 million sq. km of the sedimentary area is under exploration at present. 55% of this area is with National Oil Companies (NOCs) i.e. Oil & Natural Gas Corporation Ltd. (ONGC) and Oil India Ltd (OIL). The Government introduced the New Exploration Licensing Policy (NELP) in 1999 which opened up the exploration sector to all participants through international competitive bidding by providing a level playing field between NOCs and private domestic as well as International Exploration and Production Companies. Since the year 2000, the Government has offered blocks in 8 annual rounds under the NELP regime in which 203 blocks have been contracted. 1.43 million sq. km. area has been allotted which is 46% of the total sedimentary basin area in the country. It is targeted that the entire sedimentary basin of the country would be allotted for exploration by the year 2015. Bids under the NELP are invited through international competitive bidding where strict eligibility parameters are laid down. The technically qualified bidders are evaluated on the proposed work plan and the financial parameters. More weightage is assigned to the work plan which includes 2-D Seismic, 3-D Seismic surveys and the number of exploration wells to be drilled since the intention of the Government is to get the sedimentary basin explored within the shortest possible time. The financial parameters which include sharing of profits with the Government in case of a commercial discovery being made are also part of the evaluation process along with the work plan. A separate tax code has been evolved for exploration and production activities under NELP which would not be varied to the disadvantage of the contractor during the period of the contract. The financial and operational terms offered under the NELP contract are amongst the best in the world. Considerable interest has been generated in the NELP rounds with participation by several international companies. In each round of NELP, the committed

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expenditure on exploration alone amounts to an average of US$ 2 billion. In 8 years, the area under exploration has increased four times from 0.35 million sq. km in 2000 to 1.43 million sq. km in 2008. Such an increase would not have been possible under the old model where exploration blocks were given on nomination to NOCs. 42 hydrocarbon discoveries have been made under the NELP regime of which the biggest is the discovery of natural gas in the Krishna-Godavari Basin by RIL-NIKO consortium followed by discovery of natural gas in Krishna-Godavari basin by Gujarat State Petroleum Corporation (GSPC). These gas discoveries have been transformational in nature with the domestic gas production in India doubling from 80 million standard cubic metres per day (mmscmd) to 160 mmscmd within one year. There had been no major discovery of oil after Mumbai High in India. However, five years back, M/s Cairn Energy of UK struck black gold in Rajasthan in a block which was earlier with Shell and had been surrendered by Shell as they did not foresee any prospectivity in the block. As epitomised in the quotation at the beginning of this article, Cairn geologists were convinced of the prospectivity of the block and decided to continue exploration and were rewarded for their conviction. The block has gone into production this year and would add almost 30% to the current crude production of the country with a peak production of about 10 million tonnes per annum. Unfortunately, the major oil producing areas in the country like Mumbai High, Gujarat onshore and Assam are in decline and considerable efforts and investments are required even to maintain their present level of production. India is awaiting some major discoveries with the impetus given to exploration. Acquisitions Abroad Apart from domestic exploration and production, oil security can be achieved by acquiring assets abroad. ONGC Videsh Ltd. (OVL), a subsidiary of ONGC, is the vehicle for acquiring Exploration and Production assets abroad. Till the year 2000, OVL had only one property in Vietnam. Now eight Indian companies, including from the private sector, have interest in 87 projects abroad, spanning 28 countries and 4 continents of which 10 are producing properties. The oil and gas production from overseas assets amounts to 8.8 million tonnes of oil equivalent per annum which is 13% of domestic production and overseas reserves at 428 million tonnes oil equivalent amount to 14% of the domestic reserves. The cumulative investment abroad has been over Rs. 50,000 crore. The most successful acquisitions abroad have been in Sakhalin, Russia and Sudan in the year 2002-03 when oil prices were ranging near about $25 per barrel. With the subsequent high oil prices, these producing properties have been able to pay back the initial investment and will provide profits for the next several years. Acquisition of assets abroad is a pains taking and long drawn out process involving diplomatic relations between the countries at the highest level and risk assessment at geopolitical level apart from financial acumen. Discovered properties

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Oil and Gas Scenario in India

in countries having low geopolitical risk are either not available for acquisition as they are reserved for National Oil Company of those countries as in the Middle East or the costs are extremely high. A balance has to be struck between risk and reward while venturing into areas which carry geopolitical risks. China has been very aggressive in acquiring energy assets abroad and has spent considerable amount of money in improving social infrastructure in several African countries to improve its relationship with the host countries while acquiring assets abroad. India has not been able to match the aggressive investments of China. A comparison of overseas Reserves and Production between India and China and two oil majors is given in Table-V. Table V : Acquisitions Abroad

India China Malaysia Exxon BP

Countries of operation

Projects

Production (MMT)

Reserves (MMT)

28 40 31 50 29

87 120 50 120 50

8.8 40 31 140 162

428 Not known 1,000 3,000 2,500

Source: ONGC Videsh Ltd.

Price of Crude Oil Crude oil prices behave like any other commodity with wide price swings in times of shortage or over-supply. But crude, being the most important commodity traded in the world, several political factors have an impact on crude pricing with countries trying to gain control over crude due to its impact on the economies. Crude oil reserves are also not evenly distributed throughout the world thus giving some countries the leverage to control world oil prices by changing their production. In the post World War-II era the average world price of crude adjusted for inflation was about US$ 2.8/barrel. Crude prices have mostly been stable in the post World War-II period except in response to War or conflict in the Middle East. However, in the last three years the crude prices have shown wild volatility in response to the perception that crude oil production has peaked and may not keep pace with the demand of the growing world economy, specially the rising aspirations of developing countries like China and India. Crude oil prices ranged between $2.5/barrel to $3/barrel upto the 1970s. The Organization for Petroleum Exporting Countries (OPEC) was established in 1960 with Iran, Iraq, Kuwait, Saudi Arabia and Venezuela being the founding members. By 1971, six other countries i.e. Qatar, Indonesia, Libya, UAE, Algeria and Nigeria also joined the Club. Today, OPEC controls 76% of the proven oil reserves of the world (Table-VII) and produces 44.8% of the world’s crude oil production. Most of the crude

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produced in the OPEC countries is exported as internal consumption is limited. The Reserves to Production ratio (R/P ratio) which is a measure of the number of years for which proven oil reserves will last at current rate of production is highest for the OPEC countries at about 75 years while for the Former Soviet Union (FSU) the R/P ratio is about 27 years and for rest of the world about 15 years (Table-VI). Thus, the control over the oil markets will increasingly vest with OPEC over the years. Table VI : Reserves-to-Production Ratios

Note : Showing R/P ratios of over 20 years and reserves over 2 billion barrels. Source : BP Statistical Review of World Energy, June 2009.

Table VII : Global Oil Reserves

Source : BP Statistical Review of World Energy, June 2009.

OPEC was first able to control the price of crude when the Arab world put an embargo on supply of crude oil to the Western world in October 1973 after the Western

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countries supported Israel when it was attacked by Syria and Egypt. The price of crude oil quadrupled in a short span of time from US$3/barrel to US$ 12/barrel. The extreme sensitivity of price to supply shortages of even 5-10% became apparent when prices increased 400% in six months in 1974. The war between Iran and Iraq led to another spurt in prices from about US$ 14/barrel in 1978 to US$ 35/barrel in 1981. The price of crude oil again spurted in 1990 preceding Iraq’s invasion of Kuwait and the ensuing Gulf war. However, one must remember that while there were spikes in crude oil prices, on the whole OPEC was not very effective in controlling the prices. As OPEC did not have any mechanism to enforce the production quota on its members, many times member countries increased their production to maintain their revenues after the crude prices declined somewhat due to economic factors as well as efficiency measures adopted by consumers. Such an increase in production led to a further decline in the prices. Also, after the first oil shock in 1974, the Western world invested heavily in improving energy efficiency of the industrial processes and the automobile sector. The world economy also went into recession which led to reduction in demand and falling crude prices. The world economy recovered over time but the efficiency gains in reaction to the hike in oil prices were permanent. One can see a reflection of the same response to high crude oil prices today when much research is directed towards harnessing renewable sources of energy like solar and wind, electric cars and bio fuels so as to reduce dependence on oil over time. While such responses do not have an immediate impact but over the long term the impact can be seen as the energy intensity of the economy goes down meaning thereby that the amount of energy used per unit of output is reduced. Table VIII : Movement of Crude Prices between 1947 and 2006

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Table IX gives the proven reserves, production and consumption of some of the major economies and producers in the world. Table IX : Reserves, Production and Consumption of Major Countries (For year 2008) S.No.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Country

Proven Reserves Production Consumption (Thousand million (Million tonnes (Million tonnes tonnes) annually) annually)

USA Canada Brazil UK Germany France Russia Iran Iraq Saudi Arabia UAE Australia China India Japan South Korea

3.7 4.4 1.7 0.5 10.8 18.9 15.5 36.3 13.0 0.5 2.1 0.8 -

305.1 156.7 93.9 72.2 488.5 209.8 119.3 515.3 139.5 23.8 189.7 36.1 -

884.5 102.0 105.3 78.7 118.3 92.2 130.4 83.3 NA 104.2 22.9 42.5 375.7 135.0 221.8 103.3

(Source: BP Statistical Review of World Energy, June 2009) Pricing of Products in India There are three types of pricing regimes in the world. There is free pricing in developed countries like USA, Europe, Japan and South Korea. Products are priced much below their cost in oil producing countries like Indonesia, Middle East and Venezuela. Product prices are controlled through subsidy/tax reliefs in developing countries like Brazil, Russia, India, China, Mexico and South Africa. In India, after Independence, oil products were marketed through multinational oil companies like Shell, Esso and Caltex. Indian Oil was incorporated in 1959 as the first Indian company in marketing and refining of petroleum products. After Independence, Government of India realized that it must have control over oil supplies in the country and cannot remain dependent on multinational oil companies. Immediately after Independence, the Government of India asked the oil companies to set up two refineries in India. But the companies were prepared to consider building the refineries only if these refineries were allowed to sell products at a price 10%

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Oil and Gas Scenario in India

above the world parity price. Later the companies did build the refineries in Mumbai and Vizag. In the events leading to a war with China in 1962, the multinational companies refused to refine cheaper crude oil sourced by the Government of India from Russia. These events led to reserving the refining and oil marketing sector for Government companies and nationalization of the multinational companies in 197576 leading to the formation of Hindustan Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd. (BPCL) and IBP Ltd. The price of petroleum products were controlled through the Administered Price Mechanism (APM). Under the APM, Oil Marketing Companies (OMCs), refineries and pipelines were compensated for operating cost and assured return of 12% post tax on net worth. A self balancing oil pool account was operated which was used to balance the prices for products and to protect the customers from international volatility in crude prices. The system worked well in the initial years and helped in extending the reach of oil marketing to remote corners of the country. However, at times when international crude prices showed a prolonged uptrend and prices of products were not raised in tandem, oil pool account would run into deficit and put pressure on public finances. The APM also came under criticism as 12% assured post tax return did not foster efficiency or the most efficient investment decisions. The APM was progressively dismantled first with lubricants, then products like naphtha and industrial solvents and subsequently was fully dismantled in 2002. Post dismantling of APM, for some time the prices of petrol and diesel moved in tandem with the international crude prices. Private marketeers like Reliance, Essar and Shell entered the Indian market to set up retail outlets. However, with the continuous rise in the world crude price since 2005 (Table-X), the Government took a conscious decision to protect the customers from the international prices. Today, the Government of India decides the prices at which petrol and diesel are sold in the country and any under-recovery of the OMCs is compensated through Oil Bonds and discounts in crude prices from upstream companies like ONGC and OIL. Table X : Price of Indian Basket of Crude oil ($/ barrel)

Source: PPAC

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Kerosene and LPG are mass products which are used mostly for cooking and to some extent for lighting. As kerosene is supplied through Fair Price Shops under the Public Distribution System to the poorest sections of the society, the price of kerosene has always been controlled by the Government and has not been raised over long periods. The price of kerosene continued to be Rs. 2/litre for several years till 1999, when it was raised to Rs. 9.05/litre over a period and has since continued to remain at the same level. LPG has become a cooking fuel of the middle classes and has shown a massive expansion in the last decade. The number of LPG households has grown from just about 3 crore ten years back to 11 crore today. Even though LPG is used by relatively well-off sections of the society, still the prices are controlled and the customers protected from the fluctuations in the international prices. During the period April-November, 2009, the average under-recovery on kerosene was about Rs. 13.5/litre and on LPG about Rs. 130/cylinder. The prices of products are also a function of taxation. With both the Central Government and the State Governments relying heavily on oil taxes, there are multiple layers of taxations from custom duty on crude oil, excise duty on refined products and VAT by the State Governments. Apart from these, there are special cesses like the one for development of National Highways and rural roads. The Government of India does try to reduce the taxes, in periods of rising crude prices, to protect the customers from the cascading effects of ad-valorem taxation. However, the State Governments have hardly ever agreed to reduce VAT rates and this leads to automatic increase in State revenues when product prices are raised. At present, the average level of taxation is 49% on petrol and 25% on diesel. Table XI gives the prices of four sensitive products in India and neighbouring countries. As can be seen, kerosene and LPG are substantially under priced in India even compared to neighbouring countries whose per capita income is much lower than that in India. Table XI : Prices in Neighbouring Countries (Indian Rupees/Litre) India

Pakistan

Bangladesh

Nepal

Petrol

44.63

35.13

50.91

48.15

Diesel

32.87

36.93

30.27

34.17

9.22

32.99

30.28

34.17

281.2

520.0

547.06

698.94

Kerosene LPG (per 14.2 Kg Cylinder) Source: PPAC

The subsidies on four sensitive products during the last five years and the provisional subsidies for 2009-10 are given in the Table-XII.

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Table XII : Under-recoveries of OMCs Under-Recovery 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(P) PDS Kerosene Domestic LPG Petrol Diesel Total

9,480 8,362 150 2,154 20,146

14,384 10,246 2,723 12,647 40,000

17,883 10,701 2,027 18,776 49,387

19,102 15,523 7,332 35,166 77,123

28225 17600 5181 52286 103292

16773 11886 3763 5164 37586

Source: PPAC, MoP&NG

An outcome of price controls on petrol, diesel, LPG and kerosene has been that the private companies which had started retail operations in India could not sustain their operations when the international oil prices were very high. This was due to the absence of any compensation for under-recoveries from the Government which was available to the Public Sector Oil Marketing Companies and have had to shut down their retail operations. Now the private retailers have begun to restart their operations but are not confident to invest in expansion or scale up their operations as any spike in the crude prices may make their operations unviable as they are not protected from international price fluctuations. Marketing Issues before the Oil Sector in India Pricing As can be seen from the previous section the pricing of petroleum products at present levels is unsustainable over a long period. Issuance of Oil Bonds by the Government of India to the OMCs puts pressure on public finances and the benefits of efficiency which accrue through competition in the market, are lost. A consequence of under-pricing of products like kerosene is wide scale diversion towards adulteration of diesel, because of the huge financial gains, as also diversion of domestic LPG for commercial use, and illegally, as auto fuel. Internationally all major oil companies are integrated across the value chain of the oil sector i.e. exploration and production, refining and marketing. Due to integrated operations, there is a self adjusting mechanism at the company level as profits in production when crude prices are high take care to a certain extent the reduced refinery margins and losses on product sale in some markets. This function used to be achieved by the oil pool account during the APM regime in India but now the three OMCs which do not have access to their own crude, suffer huge losses while upstream companies like ONGC and OIL are making huge profits. Subsidy on Products While there is a conscious policy to subsidize kerosene and LPG but the subsidies are not computed as a percentage of the international price of these products

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and have ballooned to over Rs. 45,000 crore in 2008-09 and estimated to be over Rs.25,000 crore in 2009-10. Even if these subsidies are to be continued, there is the issue of targeting of subsidies to the right beneficiaries. National Council for Applied Economic Research (NCAER) in its national survey on kerosene in 2005 estimated that 38.6% of the kerosene is diverted. Even of the remaining amount, it is doubtful that much of the kerosene would reach the genuine customers at the government determined price of Rs. 9.05/litre. Most of the States follow a policy that kerosene quotas are not made available to LPG customers. However, at the field level this does not actually get reflected in the ration card records as the OMCs issue LPG connections independently and there is no information exchange between the OMCs and the State Governments in this regard. Smart Cards and direct cash transfer of subsidy amount to the account of the beneficiary have been suggested as possible solutions. Government of India has decided to implement pilots for Biometric smart cards in the cities of Pune, Hyderabad and Bengaluru. Unlike kerosene, LPG is directly administered by the OMCs and not through the interface of the State Governments. However, over the last decade, LPG customers have quadrupled and are set to grow even more over the next five years covering 75% of the nation’s population. LPG connections are available across the counter against proof of residence and there is not much of cross checking at the distributor’s end, thus it is likely that ghost connections may have been created in large numbers and LPG diverted towards commercial use where the rates are more than double that for domestic use. Suggestions have been made to limit the use of domestic LPG to customers at subsidized prices to 6-8 refills in a year and to limit subsidised LPG to non-income tax payers. Smart cards for LPG will also take care of ghost connections. Bio-Fuels The World is abuzz with talks of ethanol and biodiesel being used for fuel with many European countries and America having laid down targets for biofuel use over the next ten years. Use of biofuels is supposed to be carbon neutral and thus reduce the effect of global warming even though doubts have been raised on this also as crops like sugarcane are highly water intensive and power required for irrigation and fertilizer needs fuels. A study by Noble Prize winner Paul Crutzen found that ethanol produced from corn and sugarcane had a ‘net climate warming’ effect when compared to oil. In India, ethanol was first mixed in petrol in 2002. From 2006, the programme was extended to cover twenty States and four Union Territories leaving out the North-Eastern regions, J&K and the Island territories. Ethanol in India is mostly sourced from molasses which is a bye-product of the sugar industry. Use of ethanol as fuel has definitely provided an alternate and stable customer to the sugar industry which has the potential of stabilising the volatilities in the sugar sector. However, there have been problems in the availability of ethanol even to the extent of blending 5% with petrol as sugar is produced only in some States like Uttar Pradesh, Maharashtra, Karnataka, Andhra Pradesh and Tamil Nadu. Further, alcohol is a highly controlled commodity by the State Excise Department with first charge being for

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potable alcohol and inter-state movement is not easy, being subject to licensing procedures and taxes. The sugar cycle is itself very volatile in India with years of glut in sugar, alternating with huge shortfalls and import of sugar from abroad. The cycle of crude prices also does not move in tandem with the sugar price cycle. Brazil is the only country in the world which has successfully implemented a fuel ethanol programme in a large measure. Brazil is the largest producer of sugar in the world and uses diversion of sugarcane to ethanol to swing prices of sugar in international markets as also to protect domestic consumers in periods of high volatility in crude prices. Brazil has also developed flexi fuel cars which can operate from 0% ethanol to 85% ethanol mix as fuel giving the option to the customers to switch between ethanol and petrol or a suitable mix depending on the prices of the alternates. Since a litre of ethanol gives less energy than a litre of petrol, vehicles running on 85% ethanol give 20-30% less mileage. Biodiesel is derived from animal fats, vegetable oils or seeds like Jatropha, Karanja and Pongamia. There have been efforts to plant Jatropha on waste lands in a big way as it is expected to provide income to farmers on waste lands since these crops are supposed to be sturdy and tolerant to poor quality of soil and lack of irrigation. Such plantations have still not been taken up in a big way and there are still doubts about the economies of plantation on waste lands as also the yield and oil content of the seeds. The OMCs have declared a policy that any producer can supply biodiesel to the OMCs at Rs. 26/litre at select depots. However, no biodiesel has been offered at any location at this rate over the last three years since the policy was announced. Some producers have set up plants to produce biodiesel based on palm oil wastes and animal fats but they are also not able to supply biodiesel at the declared price of the OMCs. A biodiesel programme in India based on imported feedstock anyway does not benefit the Indian farm sector. Internationally, there is a debate on diversion of agricultural lands towards bio-fuels and cutting of rain forests for plantation of palm oil trees. The price of corn in USA more than doubled in 2008 in response to high crude prices as corn is the major feedstock for ethanol production in USA. An additional issue in increased use of biofuels is the likely impact on Government revenues as most bio-fuels achieve parity with petroleum products only, due to very low levels of taxation while petroleum products are amongst the most highly taxed. There is research going on to extract cellulosic ethanol from wood, grasses or non-edible parts of plants economically. This is a promising area for the future. Adulteration Adulteration of Petrol and Diesel is closely associated in the public mind with the oil trade in India. Till the early 1990s, the difference in prices between Kerosene (which is the common adulterant in Diesel) and Diesel was less than 50 paisa/litre. The differential kept on increasing and today there is a difference of over Rs. 23/litre in retail selling price of Kerosene and Diesel. Naphtha and various solvents

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are the common adulterants in Petrol. As Petrol is perceived as a rich man’s fuel, it is heavily taxed in comparison to Naphtha and Solvents which are industrial intermediaries. The problem of adulteration is unique to developing countries as in a free pricing regime most of the fuels like Kerosene, Petrol, Diesel and Naphtha have very similar prices. The refinery processes by which these fuels are produced from crude are very similar and it is only the level of taxation or subsidies which create the differentials in prices in these products. There are today more than 35,000 retail outlets (ROs) in the country and it is virtually impossible to police these ROs on a continuous basis. The OMCs have been looking for technological solutions to curb adulteration in the absence of price parity in product prices. OMCs have started automation of high selling ROs where tanks stocks, densities and retail operations can be remotely monitored. GPS based tracking systems have been deployed on tank trucks carrying petrol and diesel from oil depots. A marker to dope kerosene was operational in 2007 and 2008 which led to more than 500 cases of adulteration being detected. The price of naphtha for small scale re-processors was increased to slightly above the retail selling price of petrol and this has led to almost nil supply to such re-processors and substantial reduction in adulteration. There are several challenges in checking adulteration as long as the price differentials remain as attractive as they are. It is only the use of technology, constant vigil and staying a step ahead of the adulterators that the menace can be contained. Quality of Fuels Increase in urbanization and large additions of automobiles and two wheelers every year, apart from a lack of dependable public transport, has led to increasing pollution load in the cities and a clamour for better quality auto fuels so that the pollution in the cities can be reduced. Reduction in sulphur contents in fuel, removing lead, and higher octane number in fuel have been achieved over the years. The Government announced the Auto Fuel Policy in 2002 wherein timelines for switching to better quality fuels were laid. Today the fuel quality in India matches the best internationally. From 1.4.2010, twelve major cities in the country will shift to Euro-IV quality fuel and the rest of the country will be supplied with Euro-III quality fuel. Considerable investments amounting to over Rs. 1 lakh crore have been made over the last decade to improve the quality of fuels in the country. At the same time, Compressed Natural Gas (CNG) which today is being provided in Delhi and Mumbai and some other cities will also get extended to other areas as the pipeline network expands and the availability of gas improves. While there have been improvements in the ambient air quality in cities due to improvement in fuel quality but the net addition of vehicles as well as several issues like running of old vehicles whose engine technology does not conform to the use of

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Oil and Gas Scenario in India

higher quality fuels, lack of maintenance of vehicles, specially catalytic converters, lack of inspection and testing regimes, significant number of two wheelers with two stroke engines which do not give the full benefits of the high quality fuels, lead to increasing pollution load in the cities. Conclusion In the short term as well as in the medium term till 2030 fossil fuels like oil, gas and coal will continue to dominate the total energy supplies of the world and India. The dependence on imports in India will continue to rise as even with best efforts domestic exploration and production may not lead to additional production which could sustain the energy needs of an economy of the size of India growing at 8 to 9% every year. Over the last three years, the country has taken giant strides in expanding the reach of oil marketing to the remotest corners of the country. Despite the challenges, the oil sector is doing a commendable job in reaching commodities like Petrol, Diesel, LPG and Kerosene to the customers throughout the year without any disruption. The pricing regime in India protects the customers from fluctuations in international prices but it has put a strain on public finances and may not be sustainable for long. Internationally, there is a lot of research on alternate sources of energy like solar, wind and bio-fuels as also electric cars. Technological breakthroughs in these hold out hope for the world for reducing its dependence on fossil fuels which may not last the present century. References 1.

World Energy Outlook, International Energy Agency, 2009.

2.

Key World Statistics, International Energy Agency, 2009

3.

Integrated Energy Policy, ‘Report of the Expert Committee’, Planning Commission, August 2006.

4.

Petroleum Planning & Analysis Cell (PPAC), Ministry of Petroleum & Natural Gas, Ready Reckoner of Oil Statistics, 2009.

5.

British Petroleum Statistical Review of World Energy, 2009.

6.

Crutzen, P. J., Mosier, A. R., Smith, K. A., Winiwarter, W. : “Nitrous oxide a release from agro-bio-fuel production negates global warming reduction by replacing fossil fuels”, Atmospheric Chemistry and Physics, 11191-11205, 2007. *****