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INDIAN OIL SECTOR

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INDIAN OIL SECTOR

OBJECTIVES OF STUDY

Indian Oil & Gas Industry

• The Indian Oil & Gas Sector traces the trends that are most likely to emerge in

this industry in the beginning of this new decade.

• With the Government gradually giving up control on the oil & gas sector in favor

of market forces, Indian oil companies both upstream and downstream players are

getting exposed to international price fluctuations.

• This is changing the ground realities for this vital sector of the Indian economy.

• Hence in order to realize the importance of Indian oil sector this project can be

very useful as it highlights the most successive challenges faced by the Indian oil

sector.

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INTRODUCTION TO INDIAN OIL SECTOR

The Global Scenario:-

Globally, the oil & gas sector is dominated by certain large private companies who have a
presence in almost all segments of the oil & gas value chain. Historically, oil price has
been the single most important challenge facing the global oil industry. The problem is all
the more acute as the large private companies account for only a small share of world oil
production even as oil prices remain unpredictable and prone to wide fluctuations. Given
this backdrop, global oil majors are now increasingly benchmarking their production
costs against the oil production costs of the OPEC (Organization of Petroleum Exporting
Countries), and increasingly relying on technological innovations and other cost cutting
measures to lower their own production costs. The other factors influencing their
decisions are the likely fall in oil prices after March 2000, rising demand for gas and
lighter petroleum products, and the volatile and unpredictable nature of refining margins.

The Indian Scenario: -

Unlike their global counterparts, Indian oil & gas companies have so far been operating
in specific segments of the value chain. Oil & gas exploration, crude oil refining,
distribution and marketing of petroleum products, and natural gas distribution are the key
sub-sectors of the Indian oil & gas sector. The total sales turnover of this sector as a
whole was around Rs. 1,500 billion as on March 31, 1999. The Indian oil & gas sector
has historically been a regulated sector, dominated by Government undertakings. The
regulation took the form of the Administered Pricing Mechanism (APM) under which the
returns on investment were guaranteed. But now, with the APM being dismantled in
phases and private players gaining a presence in the Indian oil & gas sector, the existing
public sector oil companies are getting exposed to market forces and competition.

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The Indian Upstream Sector: -

For the upstream players (the crude oil producers), the linkage to international crude oil
prices implies volatility in earnings. While a rise in international crude oil prices would
translate into a positive contribution to the bottom-line, a decline in the international
prices, on the other hand, would exert pressure on the margins of all upstream companies.
The national oil companies would, however, is protected from the downside risk by the
floor price fixed by the government. But if the floor price is removed and the
international oil prices drop to levels lower than the cost of production, even the national
oil companies would require government intervention to protect their bottom-line. What
aggravates the risk further is the fact that declining oil production and stagnating reserves
dictate that the upstream companies venture into exploration areas that have a high-risk-
high-return profile (like deep water blocks). And this has implications for future
exploration & production (E&P) costs. Given the emerging scenario, expects the
strategies of the upstream players to focus on: use of better recovery techniques;
employment of cost cutting measures; entry into high-risk-high-return areas (with the
assumption that oil prices will not fall below the cost of production); integration into
downstream areas; partnering; venturing into other geographical regions; and,
undertaking organizational restructuring.

The Indian Downstream Sector: -

The phased dismantling of the APM has exposed the Indian downstream players (refiners
and marketers of petroleum products) to market forces. The refining margins of the
Indian refineries are now linked to the international refining margins. A fluctuation in the
international prices of crude oil/ product translates into a variation in the domestic
margins (although they are, to a large extent, protected by the positive net duty
protection). In the first 18 months of decontrol (fiscal year 1999 and first half of fiscal
year 2000), the profitability of Indian refineries has increased (and is expected to increase
further) as their margins have increased following higher duty protection and linkage of
crude and product prices with international prices. However, on the flip side, the expected
surplus in the domestic market may limit this margin expansion. The other factors

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influencing the profitability of Indian refineries in the deregulated scenario would be


refinery configuration, operating costs, and refinery location. The ownership of marketing
and distribution infrastructure would be of strategic importance and would enhance
profitability as the marketing sector is decontrolled. While the profitability of the
integrated players would be higher and more resilient to economic troughs, the pure
refining companies would find it difficult to sustain profitability in a decontrolled
scenario. Accordingly, the pure refining and marketing companies are expected to be
merged with the oil majors. A full decontrol of the marketing sector is likely to lead to
severe competition among the various players in the industry, and a greater focus on
branding and product differentiation. Given the changes taking place, expects the
strategies of downstream players to focus on: strengthening import infrastructure;
enhancing scale of operations; upgrading processing facilities; implementing
environmental projects; strengthening marketing and distribution infrastructure and
promoting brands; entering into strategic alliances; venturing into other areas of the
energy value chain for optimizing the risk-return profile; and restructuring the
organization.

The Indian Gas Sub-Sector: -

The share of natural gas in India's energy mix has increased more than three times since
the early 1980s. Energy efficiency, multiplicity of applications, and environment
neutrality are the key factors that are likely to propel further rise in demand for gas in
India. The increase in demand could come both from the existing uses of natural gas and
from newer applications. A rising demand for gas has implications on the supply level.
An increased thrust on liquefied natural gas imports would signal positive developments
on the supply front. Also expects the decontrol of the oil sector to enable the existing oil
companies to pursue gas E&P activities more actively. The Gas Authority of India
Limited, with a monopoly in natural gas distribution, is likely to benefit from the
expected rise in natural gas supplies. Besides, its exposure to price risks would be
minimal because of the fixed nature of natural gas transportation tariffs.

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Likely Strategic Initiatives: - Response to the phased deregulation, the strategic


initiatives of the various players in the energy value chain would focus on the following
factors. Product mix. This will have to be in line with market demand. Technology would
play a major role in influencing the product mix. Strategic initiatives would also impact
product mix. Cost competitiveness. Technological advancements and scale of operations
would have an impact on operating costs. Infrastructure/Logistics. The ownership of
infrastructure for sourcing crude oil and the logistics for distributing finished products
would have a considerable impact on operating costs. Integration into different elements
of the value chain would be imperative for bringing synergetic benefits, reducing
volatility in earnings, and enhancing value addition. Brand building, pricing, and
packaging. These would be used as tools to deliver greater value to customers.

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WHAT DOES PETROLEUM MEAN?

Petroleum is a liquid that is found underground. Sometimes we call it oil. Oil can be as
thick and black as tar or as thin as water. Petroleum has a lot of energy. We can turn it
into different fuels-like gasoline, kerosene, and heating oil. Most plastics and inks are
made from petroleum, too.
People have burn oil for a long time. Long ago, they didn’t dig for it. They gathered that
seeped from under the ground into ponds. It floated on the water.

Petroleum is a fossil fuel:

Long before the dinosaurs, oceans covered most of the earth. They were filled with tiny
sea animals and plants. As the plants and animals died they sank to the ocean floor. Sand
and sediment covered them and turn into sedimentary rock. Millions of years passed. The
weight of the rock and heat from the earth turned them into petroleum.
Petroleum is called a fossil fuel because it was made from the remains of plants and
animals. The energy in petroleum came from the energy in the plants and animals. That
energy came from the sun.

Petroleum is non-renewable:

The petroleum we use today was made millions of years ago. It took millions of years to
form. We can’t make more in a short time. That’s why we call petroleum non-renewable.
We import more than half the oil we use from other countries.

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We drill oil wells.

Petroleum is buried underground in tiny pockets in rocks. We drill oil wells in to the
rocks to pump out the oil. A few wells are more than two miles deep. A lot of oil is under
the oceans along our shores. Oil rigs that can float are used to reach this oil. After the oil
is pumped to the surface, it is send to refineries. At the refineries, it is separated into
different types of oil and made into fuels. Most of the oil is made into gasoline. The oil is
moved from one place to another through pipelines and by ships and trucks.

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We use petroleum everyday.

What would we do without petroleum? Our country would come to a stop! Most of our
cars, trucks, planes are powered by fuel made from oil.
Our factories use oil to make plastics and paints, medicines and soaps. We even burn oil
to make electricity. We use more petroleum than any other energy source.

Petroleum can pollute.

Petroleum keeps us going, but it can damage our environment. Burning fuels made from
oil can pollute the air. Pollution from cars is a big problem in many parts of the country.
oil companies are making cleaner gasoline and other fuels every year.
Oil can pollute soil and water injuring the animals that live in the area. Oil companies
work hard to drill and ship oil as safely as possible. They try to clean up any oil that
spills.

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ORIGIN OF PETROLEUM

During the past 600 million years incompletely decayed plant and animal remains have
become buried under thick layers of rock. It is believed that petroleum consists of the
remains of these organisms but it is the small microscopic plankton organism remains
that are largely responsible for the relatively high organic carbon content of fine-grained
sediments like the Chattanooga shale which are the principle source rocks for petroleum.
Among the leading producers of petroleum are Saudi Arabia, Russia, the United States
(chiefly Texas, California, Louisiana, Alaska, Oklahoma, and Kansas), Iran, India, China,
Norway, Mexico, Venezuela, Iraq, Great Britain, the United Arab Emirates, Nigeria, and
Kuwait. The largest known reserves are in the Middle East

PHYSICAL PROPERTIES OF PETROLEUM BASED OIL

Petroleum-based oil describes a broad range of natural hydrocarbon-based substances and


refined petroleum products, each having a different chemical composition. As a result,
each type of crude oil and refined product has distinct physical properties that affect the
way oil spreads and breaks down, the hazard it may pose to marine and human life, and
the likelihood that it will pose a threat to natural and man-made resources. For example,
light refined products, such as gasoline and kerosene, spread on water surfaces and
penetrate porous soils quickly. Fire and toxic hazards are high, but the products evaporate
quickly and leave little residue. Alternatively, heavier refined oil products may pose a
lesser fire and toxic hazard and do not spread on water as readily. Heavier oils are more
persistent, however, and may present a greater remediation challenge.

The rate at which an oil spill spreads will determine its effect on the environment. Most
oils tend to spread horizontally into a smooth and slippery surface, called a slick, on top
of the water. Factors which affect the ability of an oil spill to spread include surface
tension, specific gravity, and viscosity.

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• Surface tension is the measure of attraction between the surface molecules of a


liquid. The higher the oil's surface tension, the more likely a spill will remain in
place. If the surface tension of the oil is low, the oil will spread even without help
from wind and water currents. Because increased temperatures can reduce a
liquid's surface tension, oil is more likely to spread in warmer waters than in very
cold waters.
• Specific gravity is the density of a substance compared to the density of water.
Since most oils are lighter than water, they lie flat on top of it. However, the
specific gravity of an oil spill can increase if the lighter substances within the oil
evaporate.
• Viscosity is the measure of a liquid's resistance to flow. The higher the viscosity of
the oil, the greater the tendency for it to stay in one place.

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The Importance of Oil and Natural Gas

When they hear of the decline of oil and natural gas, the first inclination of many people
is to say, “Oh well. So I won’t be able to drive as much. I’ll just have to buy a hybrid car
and a wood stove.” It is difficult to appreciate the true importance of hydrocarbons to
modern civilization. It is doubtful that there is any facet of our technological civilization
which will not be affected by the diminishing production of oil and natural gas.

If you are reading this article in the morning paper, then the paper it is printed on was
manufactured using the energy of oil or natural gas, while the ink itself is an oil product.
The printing press which printed this newspaper was built using the power of oil and
natural gas, and runs on energy provided by oil and gas. Unless the paper was delivered
by a paperboy riding a bicycle (built using the energy of oil and gas, and riding on tires
made of oil), then it was delivered by a motor vehicle which consumed oil, was built with
the energy of oil and gas, incorporating plastic parts made from oil, and driven on roads
made from oil.

The light you are reading by was probably produced from electricity generated by natural
gas. If not, then it was generated by coal or nuclear fuels both of which are mined and
transported using oil. The chair you are sitting on was built using the energy of oil and
natural gas, and if it is built with any materials other than wood (cut and transported
using oil and gas) or metal (mined, smelted and transported using oil and gas), then they
are probably artificial materials made from oil. The same goes for the clothes you are
wearing.

The coffee you are sipping as you read this column was transported and processed using
the energy of oil. Likewise the bacon and eggs you had for breakfast. And the grain
which went into the toast you are eating (harvested, ground, baked and transported using
the energy of oil and gas), was grown using fertilizers produced from natural gas and
pesticides produced from oil. The plate you are eating on was either made from oil, or

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baked in a kiln using natural gas. And your breakfast was cooked on a stove which used
either natural gas, or electricity generated from natural gas.

Beyond that, the materials used to build the house you are sitting in were transported
using oil, as was every item in your house. Oil powered vehicles transport all raw
materials to the factory, all finished products from the factory to the marketplace, and all
purchases from the marketplace to your home. It is mainly due to the availability of cheap
and plentiful oil that the average consumer in INDIA today can live like a king or queen.

The average Indian citizen today is benefiting from the energy equivalent of 60 slaves
working around the clock. We take our energy slaves totally for granted. A large portion
of them are used on frivolous consumption. And, if we are denied our energy slaves for
even a few hours, then most of us will kick up a big fuss until they are restored to us.

Our civilization is built on oil, and an ever expanding supply of energy is vital to
continued economic growth. To quote the Energy Information Administration,
Department of Commerce and Bureau of Economic Analysis, “The availability of oil,
natural gas, and coal is what made the United States’ rise to a global economic
superpower possible. As energy consumption escalated, so did the nation’s economic
output as measured by annual gross domestic product.”

The converse of this last sentence is also true. As energy consumption declines, so will
the annual gross domestic product. It is suspected that this decline will be precipitous
rather than gradual. Once investors understand that diminishing energy production cannot
be reversed, the market will collapse. The result could be a depression worse than the
Great Depression of the 1930s; a depression with no end in sight.

To see where we may be heading, it is only necessary to look back at the 1970s. In the
year 1970, U.S. domestic oil production peaked and began to decline. This country has
never again produced so much oil as we did in 1970. The result was spiraling inflation
and gasoline rationing. Due to inflation, mortgage rates jumped 21%. There were trucker

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strikes, the Arab oil embargo, and a host of other difficulties. But we were able to
overcome the peak of domestic oil production because the world as a whole had not
peaked. We had someplace else where we could turn. By the early 1980s, Alaska’s North
Slope oil was brought on line, as was Gulf of Mexico oil production and, more
importantly, the North Sea deposits. Although the North Slope and Gulf of Mexico
deposits were not big enough to change the peak of U.S. oil production, along with the
North Sea oil they gave us enough leverage to break the back of OPEC for the time
being.

But today the North Slope and North Sea fields are all past peak, as are most of the major
oil fields in the world. The vast majority of the remaining oil deposits are found in the
Middle East, in the countries of Saudi Arabia, Iraq and Iran. Outside of this area, there are
important deposits in Russia, West Africa and Venezuela, but these deposits are an order
of magnitude smaller than the Middle East. And there are indications that Saudi Arabia’s
Ghawar oil field—the largest single field in the world—has been overproduced and
abused to the point of collapse.

This is why many experts speculate that the end of cheap oil could bring about the end of
civilization as we know it. After this will come an era of diminishing energy supplies,
diminishing economies, and the faltering ability to even feed the number of people who
live in the U.S. today, much less the entire planet.

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INDUSTRY STRUCTURE

The structure of the oil industry had been established in the early 1920’s and had been
remarkably stable up until the 1990’s. In the last decade a range of competitive forces
influenced two key structural changes – the consolidation of some of the historic majors,
hand in hand with widening liberalization of gas and power markets.

Today for the first time there was truly an energy market spread across firms competing
against one another in oil, gas and power, compared with the segmentation of relatively
static market structures maintained by barriers to entry or government control.

Energy businesses which drove their operations to achieve cost reductions, to achieve
growth in their markets and which were abreast of the electronic communications
revolution in how they conducted their business were likely to succeed today, not simply
those who had physical and resource assets.

Oil markets had over the last 2 years broken out of the band of crude oil prices which had
been the main trading range in the decade to 1998. Prices had halved and then tripled in
two years, and the forward outlook for the next 2 years as reflected in oil futures would
be relatively tight market conditions. The outlook was for price expectations of above
Rs.840 per barrel for some time yet.

The volatility of price was a sign that markets were working and often politicians were in
favour of markets when prices were falling but wanted to intervene if prices rose. The
main driver was essentially that the world was increasing its demand for oil (by about a
million b/d each of the next 3 years) and asking OPEC to supply about 2/3rds of that
growth.

Despite the present revitalized cohesion of OPEC, calls for government intervention on
the grounds of energy security were misplaced. The basic fact was that oil producers were
mostly tied into a single commodity for their entire economic future, and they had no
persistent incentive to stop or reduce supply. They were much more dependent and
vulnerable to physical oil supply shocks than consumer economies were.

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NATURAL GAS AND TECHNOLOGY

Over the past thirty years, the oil and natural gas industry has transformed into one of the
most technologically advanced industries in the United States. New innovations have
reshaped the industry into a technology leader, in all segments of the industry. This
section will discuss the role of technology in the evolution of the natural gas industry,
focusing on technologies in the exploration and production sector, as well as a few select
innovations that have had a profound effect on the potential for natural gas.

In recent years, demand for natural gas has grown substantially. However, as the natural
gas industry in INDIA becomes more mature, domestically available resources become
harder to find and produce. As large, conventional natural gas deposits are extracted, the
natural gas left in the ground is commonly found in less conventional deposits, which are
harder to discover and produce than has historically been the case. However, the natural
gas industry has been able to keep pace with demand, and produce greater amounts of
natural gas despite the increasingly unconventional and elusive nature. The ability of the
industry to increase production in this manner has been a direct result of technological
innovations. Below is a brief list of some of the major technological advancements that
have been made recently:

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ADVANCES IN THE EXPLORATION AND PRODUCTION SECTOR

Technological innovation in the exploration and production (E&P) sector has equipped
the industry with the equipment and practices necessary to continually increase the
production of natural gas to meet rising demand. These technologies serve to make the
exploration and production of natural gas more efficient, safe, and environmentally
friendly. Despite the fact that natural gas deposits are continually being found deeper in
the ground, in remote, inhospitable areas that provide a challenging environment in which
to produce natural gas, the exploration and production industry has not only kept up its
production pace, but in fact has improved the general nature of its operations. Some
highlights of technological development in the exploration and production sector include:

• 22,000 fewer wells are needed on an annual basis to develop the same amount of
oil and gas reserves as were developed in 1985.
• Had technology remained constant since 1985, it would take two wells to produce
the same amount of oil and natural gas as one 1985 well. However, advances in
technology mean that one well today can produce two times as much as a single
1985 well.
• Drilling wastes have decreased by as much as 148 million barrels due to increased
well productivity and fewer wells.
• The drilling footprint of well pads has decreased by as much as 70 percent due to
advanced drilling technology, which is extremely useful for drilling in sensitive
areas.
• By using modular drilling rigs and slim hole drilling, the size and weight of
drilling rigs can be reduced by up to 75 percent over traditional drilling rigs,
reducing their surface impact.
• Had technology, and thus drilling footprints, remained at 1985 levels, today's
drilling footprints would take up an additional 17,000 acres of land.
• New exploration techniques and vibration sources mean less reliance on
explosives, reducing the impact of exploration on the environment.

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Some of the major recent technological innovations in the exploration and


production sector include:

• 3-D and 4-D Seismic Imaging - The


development of seismic imaging in
three dimensions greatly changed the
nature of natural gas exploration. This
technology uses traditional seismic
imaging techniques, combined with
powerful computers and processors,
to create a three-dimensional model Advanced 3-D Seismic Imaging
of the subsurface layers. 4-D
seismology expands on this, by adding time as a dimension, allowing exploration
teams to observe how subsurface characteristics change over time. Exploration
teams can now identify natural gas prospects more easily; place wells more
effectively, reduce the number of dry holes drilled, reduce drilling costs, and cut
exploration time. This leads to both economic and environmental benefits.

• CO2-Sand Fracturing - Fracturing techniques have been used since the 1970s to
help increase the flow rate of natural gas and oil from underground formations.
CO2-Sand fracturing involves using a mixture of sand propants and liquid CO 2 to
fracture formations, creating and enlarging cracks through which oil and natural
gas may flow more freely. The CO2 then vaporizes, leaving only sand in the
formation, holding the newly enlarged cracks open. Because there are no other
substances used in this type of fracturing, there are no 'leftovers' from the
fracturing process that must be removed. This means that, while this type of
fracturing effectively opens the formation and allows for increased recovery of oil
and natural gas, it does not damage the deposit, generates no below ground
wastes, and protects groundwater resources.

• Coiled Tubing - Coiled tubing technologies replace the traditional rigid, jointed
drill pipe with a long, flexible coiled pipe string. This greatly reduces the cost of

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drilling, as well as providing a smaller drilling footprint, requiring less drilling


mud, faster rig set up, and reducing the time normally needed to make drill pipe
connections. Coiled tubing can also be used in combination with slim hole drilling
to provide very economic drilling conditions, and less impact on the environment.

• Measurement While Drilling - Measurement-While-Drilling (MWD) systems


allow for the collection of data from the bottom of a well as it is being drilled.
This allows engineers and drilling team’s access to up to the second information
on the exact nature of the rock formations being encountered by the drill bit. This
improves drilling efficiency and accuracy in the drilling process, allows better
formation evaluation as the drill bit encounters the underground formation, and
reduces the chance of formation damage and blowouts.

• Slim hole Drilling - Slim hole drilling is exactly as it sounds; drilling a slimmer
hole in the ground to get to natural gas and oil deposits. In order to be considered
slim hole drilling, at least 90 percent of a well must be drilled with a drill bit less
than six inches in diameter (whereas conventional wells typically use drill bits as
large as 12.25 inches in diameter). Slim hole drilling can significantly improve the
efficiency of drilling operations, as well as decrease its environmental impact. In
fact, shorter drilling times and smaller drilling crews can translate into a 50
percent reduction in drilling costs, while reducing the drilling footprint by as
much as 75 percent. Because of its low cost profile and reduced environmental
impact, slim hole drilling provides a method of economically drilling exploratory
wells in new areas, drilling deeper
wells in existing fields, and
providing an efficient means for
extracting more natural gas and oil
from undeleted fields.

• Offshore Drilling Technology -


The offshore oil and gas production
sector is sometimes referred to as

Offshore
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'NASA of the Sea', due to the monumental achievements in deepwater drilling that
have been facilitated by state of the art technology. Natural gas and oil deposits
are being found at locations that are deeper and deeper underwater. Whereas
offshore drilling operations used to be some of the most risky and dangerous
undertakings, new technology, including improved offshore drilling rigs, dynamic
positioning devices and sophisticated navigation systems are allowing safe,
efficient offshore drilling in waters more than 10,000 feet deep.

The above technological advancements provide only a snapshot of the increasingly


sophisticated technology being developed and put into practice in the exploration and
production of natural gas and oil. New technologies and applications are being developed
constantly, and serve to improve the economics of producing natural gas, allow for the
production of deposits formerly considered too unconventional or uneconomic to
develop, and ensure that the supply of natural gas keeps up with steadily increasing
demand. Sufficient domestic natural gas resources exist to help fuel the U.S. for a
significant period of time, and technology is playing a huge role in providing low-cost,
environmentally sound methods of extracting these resources.

Two other technologies that are revolutionizing the natural gas industry include the
increased use of liquefied natural gas, and natural gas fuel cells. These technologies are
discussed below.

LIQUIFIED NATURAL GAS

Cooling natural gas to about -260°F at normal pressure results in the condensation of the
gas into liquid form, known as Liquefied Natural Gas (LNG). LNG can be very useful,
particularly for the transportation of natural gas, since LNG takes up about one six
hundredth the volume of gaseous natural gas. While LNG is reasonably costly to produce,
advances in technology are reducing the costs associated with the liquification and
regasification of LNG. Because it is easy to transport, LNG can serve to make
economical those stranded natural gas deposits for which the construction of pipelines is
uneconomical.

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LNG, when vaporized to gaseous form, will only


burn in concentrations of between 5 and 15 percent
mixed with air. In addition, LNG, or any vapor
associated with LNG, will not explode in an
unconfined environment. Thus, in the unlikely
event of an LNG spill, the natural gas has little
chance of igniting an explosion. Liquification also
has the advantage of removing oxygen, carbon
dioxide, sulfur, and water from the natural gas,
resulting in LNG that is almost pure methane.
LNG Delivery Facility with
Tanker LNG is typically transported by specialized tanker
with insulated walls, and is kept in liquid form by
auto refrigeration, a process in which the LNG is kept at its boiling point, so that any heat
additions are countered by the energy lost from LNG vapor that is vented out of storage
and used to power the vessel.

The increased use of LNG is allowing for the production and marketing of natural gas
deposits that were previously economically unrecoverable. Although it currently accounts
for only about 1 percent of natural gas used in the United States, it is expected that LNG
imports will provide a steady, dependable source of natural gas for U.S. consumption.

NATURAL GAS FUEL CELLS

Fuel cells powered by natural gas are an extremely exciting and promising new
technology for the clean and efficient generation of electricity. Fuel cells have the ability
to generate electricity using electrochemical reactions as opposed to combustion of fossil
fuels to generate electricity. Essentially, a fuel cell works by passing streams of fuel
(usually hydrogen) and oxidants over electrodes that are separated by an electrolyte. This
produces a chemical reaction that generates electricity without requiring the combustion
of fuel, or the addition of heat as is common in the traditional generation of electricity.
When pure hydrogen is used as fuel, and pure oxygen is used as the oxidant, the reaction

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that takes place within a fuel cell produces only water, heat, and electricity. In practice,
fuel cells result in very low emission of harmful pollutants, and the generation of high-
quality, reliable electricity. The use of natural gas powered fuel cells has a number of
benefits, including:

 Clean Electricity - Fuel cells provide the cleanest method of producing


electricity from fossil fuels. While a pure hydrogen, pure oxygen fuel cell
produces only water, electricity, and heat, fuel cells in practice emit only trace
amounts of sulfur compounds, and very low levels of carbon dioxide. However,
the carbon dioxide produced by fuel cell use is concentrated and can be readily
recaptured, as opposed to being emitted into the atmosphere.

 Distributed Generation - Fuel cells can come in extremely compact sizes,


allowing for their placement wherever electricity is needed. This includes
residential, commercial, industrial, and even transportation settings.

 Dependability - Fuel cells are completely enclosed units, with no moving parts or
complicated machinery. This translates into a dependable source of electricity,
capable of operating for thousands of hours. In addition, they are very quiet and
safe sources of electricity. Fuel cells also do not have electricity surges, meaning
they can be used where a constant, dependably source of electricity is needed.

 Efficiency - Fuel cells convert the energy stored within fossil fuels into electricity
much more efficiently than traditional generation of electricity using combustion.

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This means that less fuel is required to produce the same amount of electricity.
The National Energy Technology Laboratory estimates that, used in combination
with natural gas turbines, fuel cell generation facilities can be produced that will
operate in the 1 to 20 Megawatt range at 70 percent efficiency, which is much
higher than the efficiencies that can be reached by traditional generation methods
within that output range.

The generation of electricity has traditionally been a very polluting, inefficient process.
However, with new fuel cell technology, the future of electricity generation is expected to
change dramatically in the next ten to twenty years. Research and development into fuel
cell technology is ongoing, to ensure that the technology is refined to a level where it is
cost effective for all varieties of electric generation requirements.

Types of extracted natural gas

Based on its composition, extracted (biological) natural gas belongs to one of four basic
groups:

1. Dry (weak) natural gas contains a high percentage of methane (95-98%) and a
very small amount higher hydrocarbons,
2. Wet (rich) natural gas contains more higher hydrocarbons in addition to methane,
3. Acidic natural gas has a high content of sulfane (H2S), which must be removed in
processing plants before natural gas is supplied to the distribution system,
4. Natural gas with a high content of inert gases, i.e. mainly carbon dioxide and
nitrogen.

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As to higher hydrocarbons, natural gas contains mainly saturated hydrocarbons, which


under normal conditions exist in gaseous form – ethane, propane, and butane. Natural gas
from some deposits also contains hydrocarbons that are in a liquid state under normal
conditions (pentane and higher) and are separated as a gaseous condensate during
processing. Their mixture is called gasoline or biological petrol.

At present, the most widely used natural gas is the so-called oil-based natural gas, which
formed together with crude oil. In most cases, oil-based natural gas extracted together
with crude oil is wet natural gas. Some deposits contain no crude oil, but only dry natural
gas.

Besides oil-based gas, carbon-based natural gas is used, which is removed from coal
during the mining process for safety reasons. This natural gas is always dry. Carbon-
based natural gas is used in areas with anthracite mining.

Although the deposits of oil-based natural gas are sufficient, research is underway into
ways of producing energy when all gas deposits will have been exhausted. One
possibility is producing substitute natural gas through coal gasification.

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NATURAL GAS

Natural gas is a highly calorific, colorless, and odorless gas with excellent utility
parameters. It is a mixture of gaseous hydrocarbons and non-flammable substances
(mainly nitrogen and carbon dioxide). Its characteristic feature is high methane content.

Without exaggeration, natural gas is a truly environment-friendly fuel because gases


produced by burning this substance contain practically no solid particles (fly ashes) or
sulfur oxides, and the content of other harmful substances, such as CO and NOx, is much
lower compared to other fuel types. Natural gas contains pure energy that brings the
heating comfort to households 24 hours a day, seven days a week, 365 days a year. The
energy in natural gas can be very easily and efficiently regulated and used to the
maximum.

The specific characteristics of natural gas and its extensive applications have had an
important effect on current trends in heating technology, where energy costs and heat
savings are some of the key topics. Thanks to all these aspects, natural gas can be
regarded as the economical, ecological, and prospective fuel for the 21st century.

Recently, natural gas has found its way into the transport industry where it is successfully
replacing traditional fuels. Unlike gasoline and diesel fuel, engines driven by natural gas
produce minimal amounts of pollutants.

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Main advantages of natural gas:

• natural gas is the only biological fuel that can be transported to customers without
energy transformation and costly processing,
• transmission and distribution systems are unaffected by climatic changes,
• natural gas is available to customers with no restrictions 24 hours a day, 365 days
a week,
• customers need no fuel storage space,
• gas appliances are easy to operate and control,
• natural gas is the most ecological non-renewable source of energy.

Natural gas is a biological mixture of gaseous hydrocarbons with a dominant content of


methane (CH4) and variable amount of non-hydrocarbon gases (especially inert gases).

Origin of natural gas

There are several theories about the origin of natural gas. Since natural gas often comes
from localities near crude oil (oil-based natural gas) or coal deposits (carbon-based
natural gas), most theories assume that natural gas was gradually released during the
formation of coal or crude oil as a result of the gradual decomposition of organic
materials. Theories preferring organic origin therefore advocate that natural gas originates
from vegetative and animal remains.

In contrast, inorganic theories assume that natural gas was created from inorganic
substances by a succession of chemical reactions. Recently, American scientists have
proposed another, so-called abiogenetic hypothesis according to which natural gas was
created by the fission of hydrocarbons that came to our planet at the time it was formed
from cosmic matter. These higher hydrocarbons gradually disintegrated into methane,
which subsequently advanced as far as the Earth's surface.

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Qualities of natural gas

Although the gas industry has relied on various gases during the close to 200 years of its
history, only substances produced by the gasification or degassing of coal, natural gas,
and propane- and butane-based liquid gases have been used to an important extent.

Fuel gases produced by the gasification or degassing of coal have an average calorific
value. In the Czech Republic, they are known as coke gas and city gas. While the most
important constituents of these gases are methane, hydrogen, and carbon monoxide, they
also contain nitrogen, carbon dioxide, and higher hydrocarbons. Due to high carbon
monoxide content, these gases are toxic. Their calorific value ranges between 17 - 20
MJ/m3.

Fuel gases with high methane content have excellent heating characteristics. In the Czech
Republic, they include natural gas (carbon- and oil-based) and biogases. While their
prevalent constituent is methane, they can contain higher hydrocarbons and inert gases.
Their calorific value depends on methane content and ranges from some 20 MJ/m3
(biogases, carbon-based natural gas with high content of inert gases) up to 40 MJ/m3 (the
calorific value may be even higher if the hydrocarbon content is higher).

Fuel gases based on propane and butane have a very high calorific value. In the Czech
Republic, these gases are used in a pure form or in a mixture known as propane-butane.
Unlike the previously mentioned gases, propane- and butane-based fuel gases are
distributed in liquid state. Their calorific value depends on the ratio of propane and
butane in the mixture, and ranges between 101.7 (pure propane) and 133.9 MJ/m3 (pure
butane) or 50 MJ/kg of mixture of these gases (they are sold per weight).

Natural gas deposits

Estimated to total 511 thousand trillion cubic meters, the total reserves of natural gas are
expected to last up to 200 years.

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Natural gas reserves are divided into proved, probable, and potential .

Proved reserves of natural gas, which are economically extractable with currently
available technologies, amount to 164 thousand billion cubic meters and are expected to
last until 2060 at the present extraction rate.

The worldwide reserves or natural gas have key importance for the long-term prospects
of gas use. At the end of 1960s, there was a prevalent opinion that natural gas is only a
temporary energy source whose reserves would be rapidly exhausted. Today, it is certain
that natural gas is and will be the fuel for the 21st century. This ambitious statement is
supported by the current state of natural gas reserves and the history of their
development. Deposits of fossil fuels and minerals are usually classified into several
groups based on certain criteria. The classification methodology often differs based on
the processing company or the purpose for which materials are used. For example,
geologists use classification that is far more detailed than mining companies or
institutions that compile statistics.

At the beginning of 1970s, when the first concepts were drafted for transporting natural
gas from the former Soviet Union to Czechoslovakia and Western Europe, proved
reserves of natural gas worldwide amounted to no more than 39,443 billion cubic meters;
12,806 billion cubic meters of which was located in USSR. Rapid advances in geological
surveying on land and continental shelves resulted in the discovery and acquisition of
vast deposits of natural gas, which reached some 164,600 billion cubic meters in 2000.

It is interesting to note that 71.7% of these deposits are located on land and 28.3% in
oceans on continental shelves. In addition to size, the lifetime of natural gas reserves is an
important factor for the long-term prospects of natural gas. The so-called static lifetime is
the ratio of presently known reserves and current extraction expressed in years.

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Probable reserves are reserves discovered in deposits that show high probability of
being extractable under economic and technical conditions similar to those that exist with
regard to proved reserves. No technical facilities have been built at deposits of this type.
In addition to proved deposits, the likeliness that probable reserves will be used is very
high. The shift of a certain volume of probable reserves to the first category as a result of
the continuing exploitation of deposits is the reason why the size and lifetime of proved
reserves of natural gas continue to grow.

Probable reserves amount to 347,000 billion cubic meters. Very interesting and favorable
for Europe and the Czech Republic is the geographic distribution of both categories of
reserves, as shown in the following diagram. According to international gas unions, the
worldwide reserves of natural gas will last 136 to 156 years (up to 200 years according to
some estimates), taking into account proved and probable reserves of natural gas in the
world as of year 2000.

Potential reserves include so-called unconventional sources, especially methane


hydrates, a solid substance similar to snow that consists of methane (20%) and water
(80%). Methane hydrates are located in the Earth's crust under the ocean bottom. These
very important deposits have been known for a long time; however, extraction remains
problematic. One possibility of extracting methane hydrates, which is currently being
researched, is thermal breakup and depressurization. Modern geological surveying
methods allow estimating the reserves of methane hydrates in a more and more precise
manner.

At present, the reserves of natural gas in hydrates amount to some 21,000,000 billion
cubic meters. Another source of this kind, the so-called coal bed methane (CBM), is
methane assumed to originate from anthracite seams. The gas is absorbed in coal seams,
bound to the microporous structure of coal. The efficiency of extracting gas from this
source depends on the degree of carbonization and permeability of coal.

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In most coalfields around the world, extraction of CBM is at the stage of research and
pilot projects. Surveying is also underway in North Moravia where coal has been
discovered to hold some 12.5 cubic meters of CBM per ton of coal, and reserves whose
extraction would be economically viable amount to 70-370 billion cubic meters. One of
the most important factors that has played a major role in the discovery and acquisition of
new reserves is the introduction of new technologies. Three-dimensional seismic studies
have identified new localities for directional boreholes with a great accuracy and
reliability.

The ability to reach new deposits through low-diameter, directional, and horizontal
boreholes has changed the economics of gas extraction considerably. In addition, new
types of sea-based oilrigs have had a major impact on the acquisition of deposits on
continental shelves.

In the future, gas hydrates may become an important source of natural gas. They consist
of a mixture of methane, some higher hydrocarbons (ethane, propane), and water, which
exists under high pressure and low temperature. The deposits of gas hydrates discovered
so far are vast – their size on the northern hemisphere only is many times bigger than the
currently extractable reserves of oil-based natural gas throughout the world.

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Long-distance transport

Due to the long distances over which natural gas must be transported, transportation is
the most demanding part of its journey from a deposit to the customer. Processed natural
gas can be transmitted via pipelines or, in liquid state, by tankers.

• Pipelines – Europe is crisscrossed by a dense network of long-distance


pipelines. The operating pressures in modern pipeline systems reach up to 10
MPa, and pipes often have more than one meter in diameter (for example, the
Czech Republic has close to 400 kilometers of pipelines with a diameter of 1,400
millimeters). Pipelines are located on both land and sea bottom. The latter are
used for transporting natural gas from deposits in North Sea or Africa to Europe.
• Tankers – This method is used for long-distance transport by sea. For example,
it used for transporting compressed natural gas (CNG, PNG) and liquefied natural
gas (LNG) from Algeria, Nigeria, or Australia to Europe. Natural gas is
compressed or liquefied on land (reducing its volume 600 times) and transferred
to a tanker. At the destination, it is pumped into reservoirs where it gradually
evaporates into pipeline systems.

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NATURAL GAS AND ENVIRONMENT

Natural gas is an extremely important source of energy for reducing pollution and
maintaining a clean and healthy environment. In addition to being a domestically
abundant and secure source of energy, the use of natural gas also offers a number of
environmental benefits over other sources of energy, particularly other fossil fuels. This
section will discuss the environmental effects of natural gas, in terms of emissions as well
as the environmental impact of the natural gas industry itself.

Emissions from the Combustion of Natural Gas

Natural gas is the cleanest of all the fossil fuels. Composed primarily of methane, the
main products of the combustion of natural gas are carbon dioxide and water vapor, the
same compounds we exhale when we breathe. Coal and oil are composed of much more
complex molecules, with a higher carbon ratio and higher nitrogen and sulfur contents.
This means that when combusted, coal and oil release higher levels of harmful emissions,
including a higher ratio of carbon emissions, nitrogen oxides (NOx), and sulfur dioxide
(SO2). Coal and fuel oil also release ash particles into the environment, substances that do
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not burn but instead are carried into the atmosphere and contribute to pollution. The
combustion of natural gas, on the other hand, releases very small amounts of sulfur
dioxide and nitrogen oxides, virtually no ash or particulate matter, and lower levels of
carbon dioxide, carbon monoxide, and other reactive hydrocarbons.

Fossil Fuel Emission Levels


- Pounds per Billion Btu of Energy Input
Pollutant Natural Gas Oil Coal
Carbon Dioxide 117,000 164,000 208,000
Carbon Monoxide 40 33 208
Nitrogen Oxides 92 448 457
Sulfur Dioxide 1 1,122 2,591
Particulates 7 84 2,744
Mercury 0.000 0.007 0.016

The use of fossil fuels for energy contributes to a number of environmental problems.
Natural gas, as the cleanest of the fossil fuels, can be used in many ways to help reduce
the emissions of pollutants into the atmosphere. Burning natural gas in the place of other
fossil fuels emits fewer harmful pollutants into the atmosphere, and an increased reliance
on natural gas can potentially reduce the emission of many of these most harmful
pollutants.

Pollutants emitted in the United States, particularly from the combustion of fossil fuels,
have led to the development of many pressing environmental problems. Natural gas,
emitting fewer harmful chemicals into the atmosphere than other fossil fuels, can help to
mitigate some of these environmental issues. These issues include:

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Greenhouse Gas Emissions

Global warming, or the 'greenhouse effect' is an environmental issue that deals with the
potential for global climate change due to increased levels of atmospheric 'greenhouse
gases'. There are certain gases in our atmosphere that serve to regulate the amount of heat
that is kept close to the Earth's surface. Scientists theorize that an increase in these
greenhouse gases will translate into increased temperatures around the globe, which
would result in many disastrous environmental effects. In fact, the Intergovernmental
Panel on Climate Change (IPCC) predicts in its 'Third Assessment Report' released in
February 2001 that over the next 100 years, global average temperatures will rise by
between 2.4 and 10.4 degrees Fahrenheit.

The principle greenhouse gases include water


vapor, carbon dioxide, methane, nitrogen oxides,
and some engineered chemicals such as
chlorofluorocarbons. While most of these gases
occur in the atmosphere naturally, levels have
been increasing due to the widespread burning of
fossil fuels by growing human populations. The Power Plants Contribute to the
reduction of greenhouse gas emissions has Emission of Greenhouse Gases
become a primary focus of environmental
programs in countries around the world.

One of the principle greenhouse gases is carbon dioxide. Although carbon dioxide does
not trap heat as effectively as other greenhouse gases (making it a less potent greenhouse
gas), the sheer volume of carbon dioxide emissions into the atmosphere is very high,
particularly from the burning of fossil fuels. In fact, according to the EIA in its report
'Emissions of Greenhouse Gases in the United States 2000', 81.2 percent of greenhouse
gas emissions in the United States in 2000 came from carbon dioxide directly attributable
to the combustion of fossil fuels. Because carbon dioxide makes up such a high

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proportion of U.S. greenhouse gas emissions, reducing carbon dioxide emissions can play
a huge role in combating the greenhouse effect and global warming. The combustion of
natural gas emits almost 30 percent less carbon dioxide than oil, and just under 45 percent
less carbon dioxide than coal.

One issue that has arisen with respect to natural gas and the greenhouse effect is the fact
that methane, the principle component of natural gas, is itself a very potent greenhouse
gas. In fact, methane has an ability to trap heat almost 21 times more effectively than
carbon dioxide. According to the Energy Information Administration, although methane
emissions account for only 1.1 percent of total U.S. greenhouse gas emissions, they
account for 8.5 percent of the greenhouse gas emissions based on global warming
potential. Sources of methane emissions in the U.S. include the waste management and
operations industry, the agricultural industry, as well as leaks and emissions from the oil
and gas industry itself. A major study performed by the Environmental Protection Agency
(EPA) and the Gas Research Institute (GRI) in 1997 sought to discover whether the
reduction in carbon dioxide emissions from increased natural gas use would be offset by
a possible increased level of methane emissions. The study concluded that the reduction
in emissions from increased natural gas use strongly outweighs the detrimental effects of
increased methane emissions. Thus the increased
use of natural gas in the place of other, dirtier
fossil fuels can serve to lessen the emission of
greenhouse gases in the United States.

Smog, Air Quality and Acid Rain

Smog and poor air quality is a pressing Smog - Natural Gas Can Help
environmental problem, particularly for large
metropolitan cities. Smog, the primary constituent of which is ground level ozone, is
formed by a chemical reaction of carbon monoxide, nitrogen oxides, volatile organic
compounds, and heat from sunlight. As well as creating that familiar smoggy haze
commonly found surrounding large cities, particularly in the summer time, smog and
ground level ozone can contribute to respiratory problems ranging from temporary

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discomfort to long-lasting, permanent lung damage. Pollutants contributing to smog come


from a variety of sources, including vehicle emissions, smokestack emissions, paints, and
solvents. Because the reaction to create smog requires heat, smog problems are the worst
in the summertime.

The use of natural gas does not contribute significantly to smog formation, as it emits low
levels of nitrogen oxides, and virtually no particulate matter. For this reason, it can be
used to help combat smog formation in those areas where ground level air quality is poor.
The main sources of nitrogen oxides are electric utilities, motor vehicles, and industrial
plants. Increased natural gas use in the electric generation sector, a shift to cleaner natural
gas vehicles, or increased industrial natural gas use, could all serve to combat smog
production, especially in urban centers where it is needed the most. Particularly in the
summertime, when natural gas demand is lowest and smog problems are the greatest,
industrial plants and electric generators could use natural gas to fuel their operations
instead of other, more polluting fossil fuels. This would effectively reduce the emissions
of smog causing chemicals, and result in clearer, healthier air around urban centers. For
instance, a 1995 study by the Coalition for Gas-Based Environmental Solutions found
that in the Northeast, smog and ozone-causing emissions could be reduced by 50 to 70
percent through the seasonal switching to natural gas by electric generators and industrial
installations.

Particulate emissions also cause the degradation of air quality in the United States. These
particulates can include soot, ash, metals, and other airborne particles. A study by the
Union of Concerned Scientists in 1998, entitled 'Cars and Trucks and Air Pollution',
showed that the risk of premature death for residents in areas with high airborne
particulate matter was 26 percent greater than for those in areas with low particulate
levels. Natural gas emits virtually no particulates into the atmosphere: in fact, emissions
of particulates from natural gas combustion are 90 percent lower than from the
combustion of oil, and 99 percent lower than burning coal. Thus increased natural gas use
in place of other dirtier hydrocarbons can help to reduce particulate emissions in the U.S.

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Acid rain is another environmental problem that affects much of the Eastern United
States, damaging crops, forests, wildlife populations, and causing respiratory and other
illnesses in humans. Acid rain is formed when sulfur dioxide and nitrogen oxides react
with water vapor and other chemicals in the presence of sunlight to form various acidic
compounds in the air. The principle source of acid rain causing pollutants, sulfur dioxide
and nitrogen oxides, are coal fired power plants. Since natural gas emits virtually no
sulfur dioxide, and up to 80 percent less nitrogen oxides than the combustion of coal,
increased use of natural gas could provide for fewer acid rain causing emissions.

Industrial and Electric Generation Emissions

Pollutant emissions from the industrial sector and electric utilities contribute greatly to
environmental problems in the United States. The use of natural gas to power both
industrial boilers and processes and the generation of electricity can significantly improve
the emissions profiles for these two sectors.

Natural gas is becoming an increasingly important fuel in the generation of electricity. As


well as providing an efficient, competitively priced fuel for the generation of electricity,
the increased use of natural gas allows for the improvement in the emissions profile of
the electric generation industry. According to the National Environmental Trust (NET) in
their 2002 publication entitled 'Cleaning up Air Pollution from America's Power Plants',
power plants in the U.S. account for 67 percent of sulfur dioxide emissions, 40 percent of
carbon dioxide emissions, 25 percent of nitrogen oxide emissions, and 34 percent of
mercury emissions. Coal fired power plants are the greatest contributors to these types of
emissions. In fact, only 3 percent of sulfur dioxide emissions, 5 percent of carbon dioxide
emissions, 2 percent of nitrogen oxide emissions, and 1 percent of mercury emissions
come from non-coal fired power plants.

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Natural gas fired electric generation, and natural gas


powered industrial applications, offer a variety of
environmental benefits and environmentally friendly
uses, including:

• Fewer Emissions - combustion of natural gas,


used in the generation of electricity, industrial
Emissions from Industrial
boilers, and other applications, emits lower
Smokestacks
levels of NOx, CO2, and particulate emissions,
and virtually no SO2 and mercury emissions. Natural gas can be used in place of,
or in addition to, other fossil fuels, including coal, oil, or petroleum coke, which
emit significantly higher levels of these pollutants.

• Reduced Sludge - coal fired power plants and industrial boilers that use scrubbers
to reduce SO2 emissions levels generate thousands of tons of harmful sludge.
Combustion of natural gas emits extremely low levels of SO2, eliminating the
need for scrubbers, and reducing the amounts of sludge associated with power
plants and industrial processes.

• Reburning - This process involves injecting natural gas into coal or oil fired
boilers. The addition of natural gas to the fuel mix can result in NOx emission
reductions of 50 to 70 percent, and SO2 emission reductions of 20 to 25 percent.

• Cogeneration - the production and use of both heat and electricity can increase
the energy efficiency of electric generation systems and industrial boilers, which
translates to requiring the combustion of less fuel and the emission of fewer
pollutants. Natural gas is the preferred choice for new cogeneration applications.
• Combined Cycle Generation - Combined cycle generation units generate
electricity and capture normally wasted heat energy, using it to generate more
electricity. Like cogeneration applications, this increases energy efficiency, uses
less fuel, and thus produces fewer emissions. Natural gas fired combined cycle

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generation units can be up to 60 percent energy efficient, whereas coal and oil
generation units are typically only 30 to 35 percent efficient

• Fuel Cells - Natural gas fuel cell technologies are in development for the
generation of electricity. Fuel cells are sophisticated devices that use hydrogen to
generate electricity, much like a battery. No emissions are involved in the
generation of electricity from fuel cells, and natural gas, being a hydrogen rich
source of fuel, can be used. Although still under development, widespread use of
fuel cells could in the future significantly reduce the emissions associated with the
generation of electricity.

Essentially, electric generation and industrial applications that require energy, particularly
for heating, use the combustion of fossil fuels for that energy. Because of its clean
burning nature, the use of natural gas wherever possible, either in conjunction with other
fossil fuels, or instead of them, can help to reduce the emission of harmful pollutants.

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POLLUTION FROM THE TRANSPORTATION SECTOR -


NATURAL GAS VEHICLES

The transportation sector (particularly cars, trucks, and buses) is one of the greatest
contributors to air pollution in the United States. Emissions from vehicles contribute to
smog, low visibility, and various greenhouse gas emissions. According to the Department
of Energy (DOE), about half of all air pollution and more than 80 percent of air pollution
in cities are produced by cars and trucks in the United States.

Natural gas can be used in the transportation sector to cut


down on these high levels of pollution from gasoline and
diesel powered cars, trucks, and buses. In fact, according to
the EPA, compared to traditional vehicles, vehicles
operating on compressed natural gas have reductions in
carbon monoxide emissions of 90 to 97 percent, and
reductions in carbon dioxide emissions of 25 percent.
Nitrogen oxide emissions can be reduced by 35 to 60

Source: EPA percent, and other non-methane hydrocarbon emissions


could be reduced by as much as 50 to 75 percent. In addition, because of the relatively
simple makeup of natural gas in comparison to traditional vehicle fuels, there are fewer
toxic and carcinogenic emissions from natural gas vehicles, and virtually no particulate
emissions. Thus the environmentally friendly attributes of natural gas may be used in the
transportation sector to reduce air pollution. Natural gas is the cleanest of the fossil fuels,
and thus its many applications can serve to decrease harmful pollution levels from all
sectors, particularly when used together with or replacing other fossil fuels. The natural
gas industry itself is also committed to ensuring that the process of producing natural gas
is as environmentally sound as possible.

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CONTRIBUTION OF OIL AND NATURAL GAS CORPORATION


LTD. (ONGC)

BACKGROUND

1947-1960

During the pre-independence period, the Assam Oil Company in the northeastern and
Attock Oil company in northwestern part of the undivided India were the only oil
companies producing oil in the country, with minimal exploration input. The major part
of Indian sedimentary basins was deemed to be unfit for development of oil and gas
resources.

After independence, the national Government realized the importance oil and gas for
rapid industrial development and its strategic role in defense. Consequently, while
framing the Industrial Policy Statement of 1948, the development of petroleum industry
in the country was considered to be of utmost necessity.

Until 1955, private oil companies mainly carried out exploration of hydrocarbon
resources of India. In Assam, the Assam Oil Company was producing oil at Digboi
(discovered in 1889) and the Oil India Ltd. (a 50% joint venture between Government of
India and Burmah Oil Company) was engaged in developing two newly discovered large
fields Naharkatiya and Moran in Assam. In West Bengal, the Indo-Stanvac Petroleum
project (a joint venture between Government of India and Standard Vacuum Oil
Company of USA) was engaged in exploration work. The vast sedimentary tract in other
parts of India and adjoining offshore remained largely unexplored.

In 1955, Government of India decided to develop the oil and natural gas resources in the
various regions of the country as part of the Public Sector development. With this
objective, an Oil and Natural Gas Directorate was set up towards the end of 1955, as a

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INDIAN OIL SECTOR

subordinate office under the then Ministry of Natural Resources and Scientific Research.
The department was constituted with a nucleus of geoscientists from the Geological
survey of India

A delegation under the leadership of Mr. K D Malviya, the then Minister of Natural
Resources, visited several European countries to study the status of oil industry in those
countries and to facilitate the training of Indian professionals for exploring potential oil
and gas reserves. Foreign experts from USA, West Germany, Romania and erstwhile
U.S.S.R visited India and helped the government with their expertise. Finally, the visiting
Soviet experts drew up a detailed plan for geological and geophysical surveys and
drilling operations to be carried out in the 2nd Five Year Plan (1956-57 to 1960-61).

In April 1956, the Government of India adopted the Industrial Policy Resolution, which
placed mineral oil industry among the schedule 'A' industries, the future development of
which was to be the sole and exclusive responsibility of the state.

Soon, after the formation of the Oil and Natural Gas Directorate, it became apparent that
it would not be possible for the Directorate with its limited financial and administrative
powers as subordinate office of the Government, to function efficiently. So in August,
1956, the Directorate was raised to the status of a commission with enhanced powers,
although it continued to be under the government. In October 1959, the Commission was
converted into a statutory body by an act of the Indian Parliament, which enhanced
powers of the commission further. The main functions of the Oil and Natural Gas
Commission subject to the provisions of the Act, were "to plan, promote, organize and
implement programmes for development of Petroleum Resources and the production and
sale of petroleum and petroleum products produced by it, and to perform such other
functions as the Central Government may, from time to time, assign to it ". The act
further outlined the activities and steps to be taken by ONGC in fulfilling its mandate.

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INDIAN OIL SECTOR

1961-1990

Since its inception, ONGC has been instrumental in transforming the country's limited
upstream sector into a large viable playing field, with its activities spread throughout
India and significantly in overseas territories. In the inland areas, ONGC not only found
new resources in Assam but also established new oil province in Cambay basin (Gujarat),
while adding new petroliferous areas in the Assam-Arakan Fold Belt and East coast
basins (both inland and offshore).

ONGC went offshore in early 70's and discovered a giant oil field in the form of Bombay
High, now known as Mumbai High. This discovery, along with subsequent discoveries of
huge oil and gas fields in Western offshore changed the oil scenario of the country.
Subsequently, over 5 billion tonnes of hydrocarbons, which were present in the country,
were discovered. The most important contribution of ONGC, however, is its self-reliance
and development of core competence in E&P activities at a globally competitive level.

AFTER 1990

The liberalized economic policy, adopted by the Government of India in July 1991,
sought to deregulate and de-license the core sectors (including petroleum sector) with
partial disinvestments of government equity in Public Sector Undertakings and other
measures. As a consequence thereof, ONGC was re-organized as a limited Company
under the Company's Act, 1956 in February 1994.

After the conversion of business of the erstwhile Oil & Natural Gas Commission to that
of Oil & Natural Gas Corporation Limited in 1993, the Government disinvested 2 per
cent of its shares through competitive bidding. Subsequently, ONGC expanded its equity
by another 2 per cent by offering shares to its employees.

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During March 1999, ONGC, Indian Oil Corporation (IOC) - a downstream giant and Gas
Authority of India Limited (GAIL) - the only gas marketing company, agreed to have
cross holding in each other's stock. This paved the way for long-term strategic alliances
both for the domestic and overseas business opportunities in the energy value chain,
amongst themselves. Consequent to this the Government sold off 10 per cent of its share
holding in ONGC to IOC and 2.5 per cent to GAIL. With this, the Government holding in
ONGC came down to 84.11 per cent.

In the year 2002-03, after taking over MRPL from the A V Birla Group, ONGC
diversified into the downstream sector. ONGC will soon be entering into the retailing
business. ONGC has also entered the global field through its subsidiary, ONGC Videsh
Ltd. (OVL). ONGC has made major investments in Vietnam, Sakhalin and Sudan and
earned its first hydrocarbon revenue from its investment in Vietnam.

ONGC PROFILE
Global Ranking:-

• Is Asia’s best Oil & Gas company, as per a recent


survey conducted by US-based magazine ‘Global
Finance’.

• Ranks as the 2nd biggest E&P company (and 1st in


terms of profits), as per the Platt’s Energy Business
Technology (EBT) Survey 2004

• Ranks 24th among Global Energy Companies by Market Capitalization in PFC


Energy 50 (December 2004). [ONGC was ranked 17th till March 2004, before the
shares prices dropped marginally for external reasons.

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• Is placed at the top of all Indian Corporate listed in Forbes 400 Global Corporate
(rank 133rd) and Financial Times Global 500 (rank 326th), by Market
Capitalization.

• Is recognized as the Most Valuable Indian Corporate, by Market Capitalization,


Net Worth and Net Profits, in current listings of Economic Times 500 (4th time in
a row), Business Today 500, Business Baron 500 and Business Week.

• Has created the highest-ever Market Value-Added (MVA) of Rs. 24,258 Crore and
the fourth-highest Economic Value-Added (EVA) of Rs. 596 Crore, as assessed in
the 5th Business Today-Stern Stewart study (April 2003), ahead of private sector
leaders like Reliance and Infosys. ONGC is the only Public Sector Enterprise to
achieve a positive MV A as well as EVA.

• Is targeting to have all its installations (offshore and onshore) accredited


(certified) by March 2005. This will make ONGC the only company in the world
in this regard.

• Owns and operates more than 11000 kilometers of pipelines in India, including
nearly 3200 kilometers of sub-sea pipelines. No other company in India operates
even 50 per cent of this route length.

• Crossed the landmark of earning Net Profit exceeding Rs.10,000 Crore, the first
to do so among all Indian Corporates, and a remarkable Net Profit to Revenue
ratio of 29.8 per cent. The growth in ONGC's profits is not solely due to
deregulation in crude prices in India, as deregulation has affected all the oil
companies, upstream as well as downstream, but it is only ONGC which has
exhibited such a performance (of doubling turnover and profits).

• Has paid the highest-ever dividend in the Indian corporate history.

• Its 10 per cent equity sale (India's highest-ever equity offer) received
unprecedented Global Investor recognition. This was a landmark in Indian equity
market, establishing beyond doubt, the respect ONGC's professional management

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INDIAN OIL SECTOR

commands among the global investor community. According to a report published


in 'The Asian Wall Street Journal (Hongkong)', ONGC's Public Issue brought in
20 Foreign Institutional Investors (FIls) to India, as (it was reported), 'they could
not ignore the company representing India's energy security'.

• The Market Capitalization of the ONGC Group (ONGC & MRPL) constitutes 10
per cent of the total market capitalization on the Bombay Stock Exchange (BSE).
ONGC has an equity weightage of 5 per cent in Sensex; 15 per cent in the Nifty
(the only Indian corporate with a two-digit presence there); ONGC commands a 7
per cent weightage in the Morgan Stanley Capital International (MSCI) Index.

• The growth in ONGC's Market Capitalization (from Rs. 18,500 Crore before May
2001 to Rs. 1,25,000 Crore in January 2004) is unprecedented and except Wipro
(who had a higher market capitalization temporarily), no other Indian company
(either in public or private sector) has seen such a phenomenal growth.

• ONGC has come a long way from the day (a few years back) when India and
ONGC did not figure on the global oil and gas map. Today, ONGC Group has 14
properties in 10 foreign countries. Going by the investments (Committed: USD
2.708 billion, and Actual: USD 1.919 billion), ONGC is the biggest Indian
Multinational Corporation (MNC).

• ONGC ended the sectoral regime in the Indian hydrocarbon industry and
benchmarked the globally- established integrated business model; it took up 71.6
per cent equity in the Mangalore Refinery & Petrochemicals Limited (MRPL),
and also took up a 23 per cent stake in the 364-km-long Mangalore-Hasan-
Bangalore product Pipeline, connecting the refinery to the Karnataka hinterland.
By turning around MRPL in 368 days, ONGC has set standards of public sector
companies reviving joint (or private) sector companies, proving that in business,
professionalism matters, not ownership.

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INDIAN OIL SECTOR

ONGC Represents India’s Energy Security


ONGC has single-handedly scripted India’s hydrocarbon saga by :

• Establishing 6 billion tonnes of In-place hydrocarbon reserves with more than 300
discoveries of oil and gas; in fact, 5 out of the 6 producing basins have been
discovered by ONGC: out of these In-place hydrocarbons in domestic acreage,
Ultimate Reserves are 2.1 Billion Metric Tonnes (BMT) of Oil Plus Oil
Equivalent Gas (O+OEG).
• Cumulatively producing 685 Million Metric Tonnes (MMT) of crude and 375
Billion Cubic Meters (BCM) of Natural Gas, from 115 fields.

India’s Most Valuable Company:

• With a market capitalization having exceeded Rs 1 trillion, ONGC retains it’s


position as the most valuable company in India in various listings.

• As per 5th Business Today Stern-Stewart study, ONGC was the biggest Wealth
Creator during 1998-2003 (Rs 226.30 billion). It was again the highest wealth
creator during 1999-2004, as per Motilal Oswal Securities.

• ONGC’s mega Public Offer (India’s biggest-ever equity offer worth more than Rs
100 billion was over subscribed 5.88 times.

• ONGC is the only Indian company to have earned a Net Profit of over Rs 10,000
crores (2002-03).

• The market capitalization of the ONGC group constitutes 8% of the market


capitalization of BSE.

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INDIAN OIL SECTOR

• ONGC added 49.06 MMT of ultimate reserves of O+OEG during 2003-04


(including overseas acquisitions), maintaining the trend of positive accretion for
the third consecutive year.

ONGC’s Pioneering Efforts:


ONGC is the only fully–integrated petroleum company in India, operating along the
entire hydrocarbon value chain:

• Holds largest share (57.2 per cent) of hydrocarbon acreages in India.

• Contributes over 84 per cent of Indian’s oil and gas production.

• Every sixth LPG cylinder comes from ONGC.

• About one-tenth of Indian refining capacity.

• Created a record of sorts by turning Mangalore Refinery and Petrochemicals


Limited around from being a stretcher case for referral to BIFR to among the BSE
Top 30, within a year.

• Owns 23% of Mangalore-Hasan-Bangalore Product Pipeline (MHBPL),


connecting MRPL to the Karnataka hinterland.

Competitive Strength

• All crudes are sweet and most (76%) are light, with sulphur
percentage ranging from 0.02-0.10, API gravity ranging from
26°-46° and hence attracts a premium in the market.

• Strong intellectual property base, information, knowledge, skills


and experience.

• Maximum number of Exploration Licenses, including competitive NELP rounds.

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INDIAN OIL SECTOR

• ONGC owns and operates more than 11000 kilometers of pipelines in India,
including nearly 3200 kilometers of sub-sea pipelines. No other company in India,
operates even 50 per cent of this route length.

Strategic Vision: 2001-2020


Focusing on core business of E&P, ONGC has set strategic objectives of:

• Doubling reserves by 2020; out of this 4 billion tones are targeted from the Deep-
waters.

• Improving average recovery from 28 per cent to 40 per


cent.

• Tie-up 20 MMTPA of equity Hydrocarbon from abroad.

• The focus of management will be to monetize the assets as well as to assetise the
money.

The focus of management will be to monetize the assets as well as to assetise the money.

Sagar Sammriddhi : Biggest Global Deepwater Campaign


ONGC launched ‘Sagar Sammriddhi’, the biggest deep-water exploration campaign ever
undertaken by a single operator, anywhere in the world.

• Strategic plan to accrete 4 billion tones of reserves by 2020.

• US$0.75 million per day investment.

• Integrated Well Completion approach.

• Plans to drill 47 deepwater wells up to water depths of 3 kms

Leveraging Technology

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INDIAN OIL SECTOR

To attain the strategic objective of improving the Recovery Factor from 28 per cent to 40
per cent, ONGC has focused on prudent reservoir management as well as effective
implementation of technologies for incremental recovery to maximize production over
the entire life cycle of existing fields
Improved Oil Recovery (IOR) and Enhanced Oil Recovery (EOR) schemes are
being implemented:

• In 15 fields including Mumbai offshore

• At a total investment exceeding US $2.5 billion.

• Yielding incremental 120 MMT of O+OEG over 20 years

Sourcing Equity Oil Abroad


ONGC's overseas arm ONGC Videsh Limited (OVL), has laid strong
foothold in a number of lucrative acreages, some of them against stiff
competition from international oil majors.
OVL has so far, acquired 15 properties in 14 foreign countries, and
striving to reach out further.
OVL’s projects are spread out in Vietnam, Russia, Sudan, Iraq, Iran,
Lybia, Syria, Myanmar, Australia, and Ivory Coast. It is further pursuing Oil and gas
exploration blocks in Algeria, Australia, Indonesia, Nepal, Iran, Russia, UAE and
Venezuela.

• Production Sharing Contract in Vietnam for gas field having reserves of 2.04 TCF,
with 45 per cent stake in partnership with BP and Petro Vietnam. Gas production
has commenced from January 2003.

• 20 per cent holding in the Sakhalin–1 Production Sharing Agreement. The US $


1.77 billion investment in Sakhalin offshore field is the single largest foreign
investment by India in any overseas venture and the single largest foreign
investment in Russia. It is scheduled to go on production during 2005-06

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INDIAN OIL SECTOR

• Acquired 25 per cent of equity in the Greater Nile Oil Project in Sudan, the first
producing oil property. ONGC Nile Ganga BV, a wholly-owned subsidiary, has
been set up in the Netherlands to manage this property. Around 3 Million Tonnes
of crude oil is coming to India annually from this project. This is the first time
that equity crude of a group of companies in India is being imported into India for
refining by the group

• Discovered a world-class giant gas field ‘Shwe” in Block A-1(where OVL has 20
per cent share) in Myanmar, with estimated recoverable reserve of 4 to 6 trillion
cubic feet of gas.

• Besides taking equity in oil & gas blocks and looking for stakes in E&P
companies, OVL is also bagging prospective contracts (like the refinery
upgradation and pipeline contracts in Sudan, awarded to OVL on nomination
basis due to its performance in that country), which will increase ONGC’s equity
oil basket. ONGC’s strategic objective of sourcing 20 million tones of equity oil
abroad per year is likely to be fulfilled much before 2020. In fact, OVL is now
eyeing a long-term target of 60 MMT of Oil equivalent per year by 2025.

• Going by the investments (Committed: US $ 4.3 billion, and Actual: US $ 2.75


billion), ONGC is the biggest Indian Multinational Corporation (MNC).

Frontiers of Technology

• Uses one of the Top Ten virtual Reality Interpretation facilities in the world

• Rolled out ICE, one of the biggest ERP implementation facilities in the world

Best in Class Infrastructure and Facilities

• ONGC’s success rate is at par with the global norm and is elevating its operations
to the best-in-class level, with the modernization of its fleet of drilling rigs and
related equipment, at an investment of around US $ 400 million.

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INDIAN OIL SECTOR

• ONGC has adopted Best-in-class business practices for modernization, expansion


and integration of all Info-com systems with investment of around US $ 125
million.

ONSHORE
Production Installation 225
Pipeline Network (km) 7900
Major Offshore Terminals (including CFU, 2
LPG, Gas, Sweetening plants, Storage
Tanks)

Drilling Rigs 75
Work Over rigs 66
Seismic Units 33
Logging Units 35

OFFSHORE
Well platforms 131
Well-cum-process platforms 5
Process platforms 28
Drilling/jack-up-rigs 18
Pipeline networks (km) 3200
Offshore supply vessel 32
Special application vessels 4

Financial (2003-04)

• Highest-ever dividend paid to shareholders (US$ 930 million)

• Practically zero debt Corporate

• Contributed over US $ 20 billion to the exchequer

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INDIAN OIL SECTOR

The Road Ahead

ONGC is entering LNG (regasification), Petrochemicals, Power Generation, as well as


Crude & Gas shipping, to have presence along the entire hydrocarbon value-chain.
While remaining focused on its core business of oil & gas E&P, it is also looking at the
future and promoting an applied R&D in alternate fuels (which can be commercially
brought to market). These efforts in integration are basically to exploit the core
competency of the organization – knowledge of hydrocarbons, gained over the five
decades.

New Business

ONGC has also ventured into Coal Bed Methane (CBM) and Underground Coal
Gasification (UCG); CBM production would commence in 2006-07 and UCG in 2008-
09. ONGC is also looking at Gas Hydrates, as it is one possible source that could make
India self-sufficient in energy, on a sustained basis.

Continuing On the Growth Trajectory

The ONGC Group has doubled its turnover from 5 billion US dollars to 10 billion US
dollars (from Rs 23,238 Crore to Rs 48,368 Crore) in the last 3 years (2001- 2004); and it
aims to go to 50 billion US dollars in the next 5 years. As this implies a commendable
annual growth rate (compounded) of 40-50 per cent, this objective of ONGC, when
realized, would be an outstanding achievement, by any standards.

ONGC Is Now Geared To Meet Its Vision

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INDIAN OIL SECTOR

To be an Indian Integrated Energy Multinational (PSU); Target: A Turnover of 50 Billion


US dollars in 5 years.

CONCLUSION

This project gave me a great opportunity to explore a totally new and giant world of such
a wonderful subject without which the whole country might come to a halt. “INDIAN
OIL SECTOR”

Today Crude Oil is used for enormous purposes. Because of it’s flexibility in
transforming into various types of fuels it has created an impact in each and every sector.
Almost 90% of the resources which we use daily are able to work due to availability of
Crude Oil which can take any form of fuel. It has tapped each and every sector like
Transportation, Production, electricity etc.

Hence it is very important to understand that such a precious resource should be used
very carefully as it cannot be produced and is limited.

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INDIAN OIL SECTOR

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INDIAN OIL SECTOR

BIBLIOGRAPHY

1. PETROLEUM REVIEW

2. OIL AND GAS 2000

3. OIL AND GAS 1990

4. INDIAN OIL AND GAS REPORT 2005

WEBLIOGRAPHY
1. www.bharatbook.com

2. www.researchandmarkets.com

3. www.ongcindia.com

4. www.ongcvidesh.com

5. www.naturalgas.org

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