Introduction

The word oil was first mentioned in the Vedas and was called Shilla Jatu. The first oil strike in India took place un Makum, Assam in 1857 and oil refining was started commercially in Digboi from 1890. Thus the Indian hydrocarbon industry was born. Today India registers one of the highest rates of growth of energy in world. Presently the size of hydrocarbon market is 120 MMTOE by 2005. Some of the Indian companies that are trying to cater to hydrocarbon needs of India are Hindustan Petroleum Ltd., Bharat Petroleum Ltd., Oil India Ltd., Oil and Natural Gas Corporation., Reliance Industries and Indian Oil Corporation Ltd. The government of India had both physical controls as well as fiscal control over the hydrocarbon market. Though the OIL COORDINATION COMMITTEE (OCC), which was under the Ministry of Petroleum & Natural Gasses, it used to set the standards of quality of products and used to determine the prices of products. For example Kerosene and LPG were sold at subsidized prices where as Petrol and Diesel were sold at premium prices set by OCC. From 1.4.1998 the companies were given permission to set there own prices in all there products except Diesel, Petrol, Kerosene, LPG and Aero Turbine fuel (these five products together constitute about 75% of all hydrocarbon products). Now the OCC

has been dismantled and the government has no direct controls even on these five products. However the only regulation that Government of India has refine product is through excise & custom duties. Therefore we can say that the cross subsidy through Pool Mechanism under OCC has now been shifted to general Budget of the country.

Oil Scenario in India

India is one of the top 10 oil-consuming countries in the world. Oil and gas represent over 40 per cent of the total energy consumption in India. The consumption of petroleum products in the country is on the rise and demand already far exceeds domestic supply. Therefore, the country has to depend largely on imports. The countrys existing annual crude oil production is peaked at about 32 million tonnes as against the demand of about 110 million tonnes. With inadequate crude production, the country is heavily dependent on imports. Crude is the single largest item on Indias import list. Estimates show that the demand is likely to grow at a faster pace over the next decade if India is to maintain the GDP growth target of 8 per cent. This implies larger imports unless new
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domestic oil reserves are found. With this in view, the government announced the New Exploration Licensing Policy (NELP) in 2000. With a view to ensure long term energy security, the government is also building oil and gas equity abroad. Table: Imports of Crude Oil Crude oil Import Year 1996-97 1997-98 1998-99 2000-01 2001-02 Quantity (MMT) Value (INR bn) 33.90 34.49 39.81 74.10 84.90 183.37 158.72 199.07 400.28 659.32 781.16

1999-2000 57.80

Source: Ministry of Petroleum & Natural Gas Source: 1 US$ = INR 48 approx. The countrys refining capacity is currently at around 115 million metric tonnes per annum (MMTPA). The refinery sector has witnessed a capacity enhancement with the commissioning of the 27 million tonne Reliance Petroleum refinery going on-stream, as well as expansion of existing refineries belonging to the stateowned oil company, Indian Oil Corporation (IOC). The Reliance Petroleum Refinery at Jamnagar is the worlds largest single

stream refinery. A number of refineries both in the public and private sectors are currently under construction. Natural gas production in 2000-01 was 29.48 billion cubic metres and this has increased marginally in 2001-02. Currently, public sector companies like Oil and Natural Gas Commission (ONGC), Oil India Limited (OIL), Gas Authority of India Limited (GAIL), IOC and others dominate gas production and marketing. The country does not currently import gas but is set to become a major LNG importer in 2004 with commissioning of LNG terminals in Gujarat. India has a very strong retail infrastructure comprising over 17,000 petrol stations, around 6,500 kerosene depots and over 5,500 domestic LPG dealers. The Reliance group which was awarded off-shore blocks under the NELP has struck (October, 2002) significant gas reserves of approximately 5 trillion cubic metres in the Krishna-Godavari basin which can produce about 40 MMSCMD. This is the largest gas find the world over in 2002 and the biggest in India over the past decade. Policy Initiatives The deregulation of the petroleum sector has been completed on schedule (March 2002) with the government completely dismantling the administered pricing mechanism for all petroleum

products except kerosene and LPG. As a result, the petroleum product prices will be market determined and the marketing companies will be free to set prices. The government offers both off-shore and on-shore exploration blocks under the NELP for Indian and foreign private participants. Several exploration blocks have already been given out in the first two rounds of NELP. Currently the third round NELP III of bidding out blocks is on. A total of twenty-seven blocks, covering eleven on land, seven shallow-water offshore and nine deep-water offshore have been offered by the government for exploration. So far, contracts with private investors have been signed for 47 blocks in the two rounds of licensing. The recent Reliance discovery of major natural gas reserve has given a major impetus for new explorations. The government has also decided to bid out coal bed methane (CBM) blocks. The government has invited bids from both foreign and domestic companies for 7 CBM sites. Custom duty concessions have been extended by the government on import of equipment used for exploration of CBM. The government allows 100 per cent foreign equity in private refining ventures. However, FDI in refineries promoted by public sector companies is restricted to 26 per cent. Foreign equity participation in petroleum product marketing has been capped at

74 per cent. Foreign equity investment in oil and gas pipeline projects is currently restricted to 51 per cent. The government has allowed private companies to market petroleum products in the country provided that the private company either produces 3 million tonnes or more per annum of crude or has invested over US$ 400 million in the countrys oil and gas related infrastructure sector. In order to improve the viability of stand-alone refineries, the government has linked them to the major public sector oil companies.

Opportunities
The entire gamut of exploration & production, refining, transportation & distribution and retail marketing activities present opportunities for FDI: Production sharing contracts for oil and gas exploration under NELP Supply of crude oil Supply of gas LNG import and transportation Setting up refineries Marketing petroleum products including LPG Setting up of petroleum infrastructure like storage facilities, pipelines, etc

 Retail marketing of transportation fuels

INDIAN OIL CORPORATION LIMITED

Indian Oil Corporation Limited (Indian Oil) is the country's largest commercial enterprise, with a sales turnover of Rs.1,50,677 crore and profits of Rs. 4,891 crore for fiscal 2004. Indian Oil is Indias No.1 Company in Fortune's prestigious listing of the world's 500 largest corporations, ranked 189 for the year 2004 based on fiscal 2003 performance. It is also the 19th largest petroleum company in the world. The company has also been adjudged No.1 in petroleum trading among the national oil companies in the Asia-Pacific region. Indian Refineries Ltd. was formed in 1958 with Mr Feroze Gandhi as Chairman. Indian Oil Company Ltd. was established on 30th June 1959 with Mr S. Nijalingappa as the first Chairman. Beginning in 1959 as Indian Oil Company Ltd., Indian Oil Corporation Ltd. was formed in 1964 with the merger of Indian Refineries Ltd. (Estd. 1958).

Indian refinery ltd. Refining company Incorporated 1958

Merger

Indian Oil Company Marketing company Incorporated 1959

Indian Oil Corporation 1964 As India's flagship national oil company, Indian Oil accounts for 56% petroleum products market share among PSU companies, 42% national refining capacity and 69% downstream pipeline throughput capacity.
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Indian Oil controls 10 of India's 18 refineries - at Digboi, Guwahati, Barauni, Koyali, Haldia, Mathura, Panipat, Chennai, Narimanam and Bongaigaon with a current combined rated capacity of 54.20 million metric tonnes per annum (MMTPA) or one million barrels per day (bpd).

< IndianOil accounts for 42% of India's total refining capacity

Vision of the corporation

A major diversified, transnational, integrated energy Company, with national leadership and a strong environment conscience, playing a national role in oil security& public distribution.

Mission of the corporation

To achieve international standards of excellence in all aspects of energy and diversified business with focus on customer delight through value of products and services, and cost reduction. To maximise creation of wealth, value and satisfaction for the stakeholders. To attain leadership in developing, adopting and assimilating state-of- the-art technology for competitive advantage. To provide technology and services through sustained Research and Development. To foster a culture of participation and innovation for employee growth and contribution. To cultivate high standards of business ethics and Total Quality Management for a strong corporate identity and brand equity. To help enrich the quality of life of the community and preserve ecological balance and heritage through a strong environment conscience.

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Indias Downstream Major The Indian Oil Group of companies owns and operates 10 of Indias 18 refineries with a combined refining capacity of 60.20 million tonnes per annum (1.2 million barrels per day). These include two refineries of subsidiary Chennai Petroleum Corporation Ltd. (CPCL) and one of Bongaigaon Refinery and Petrochemicals Limited (BRPL). Indian Oil owns and operates the countrys largest network of cross-country crude oil and product pipelines spanning nearly 9,000 kilometers, with a combined capacity of 60.42 MMTPA. Indian Oil and its subsidiaries account for 44.50% petroleum products market share among public sector oil companies, 42% national refining capacity and 69% downstream pipeline throughput capacity. For the year 2005-06, Indian Oil sold 49.61 million tonnes of petroleum products, including 2.09 million tonnes through exports. To maintain its competitive edge and leadership status, Indian Oil is investing Rs. 24,000 crore (US $ 5.6 billion) during the X Plan Period (2002-07) in integration and diversification projects,

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besides refining and pipeline capacity augmentation, product quality up gradation and retail expansion. Network Beyond Compare As the flag-ship national oil company, Indian Oils countrywide network of 24,000 sales points is backed for supplies by 158 bulk storage depots and terminals, 95 aviation fuel stations and 88 Indane LPG bottling plants. Its subsidiary, IBP Co. Ltd., is a standalone marketing company with a nationwide network of nearly 4000 retail sales points. Indian Oil reaches Indane cooking gas to the doorsteps of 41.05 million households in 2,353 markets through a network of nearly 4,700 Indane distributors. Indian Oil also operates the largest and the widest network of retail outlets (petrol/diesel stations) in the country. A significant milestone was achieved with the commissioning of the companys 10,000th petrol station during the year 2004-05. Indian Oils SERVO brand lubricants, being the first and only one in its category in India to be accorded Superbrand status, is the country's leading, with over 42% market share and 450 grades. SERVO lubricants are sold through over 10,000 Company retail outlets, besides a countrywide network of bazaar traders.

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Indian Oils ISO-9002 certified Aviation Service commands a 65% market share in aviation fuel business, meeting the fuel needs of domestic and international flag carriers, private airlines and the Indian Defense Services. R&D for Growth Indian Oils world class R&D Centre is perhaps Asias finest. Besides pioneering work in lubricants formulation, refinery processes, pipeline transportation and alternative fuels such as biodiesel, the Centre is also the nodal agency of the Indian hydrocarbon sector for ushering in Hydrogen fuel in the country.

Expanding Horizons Indian Oil has set its sight to reach US$ 60 billion revenues by the year 2010-11 from current earnings of US$ 34.44 billion. The road map to attain this milestone has been laid through vertical integration forward into petrochemicals and backwards into exploration and production of crude oil, besides diversification into natural gas business and globalization of our operations.

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In petrochemicals, a master plan envisaging Rs. 25,000 crore (US$ 5.7 billion) investment is already underway. The commissioning of the worlds largest single train Linear Alkyl Benzene plant at Koyali refinery in August 2004 and the on-going integrated Paraxylene /Purified Terephthalic Acid (PX/PTA) plant and a world-scale Naphtha Cracker with downstream polymer projects are part of this plan. Indian Oil also proposes to convert the ongoing Paradip refinery into a refinery-cum-petrochemicals complex to strengthen its presence in the sector. In exploration & production (E&P), Indian Oil has participated in the first three rounds of NELP (New Exploration Licensing Policy) in India, in consortium with other companies, and was awarded 11 exploration blocks. It has acquired participating interest in onshore blocks in Assam and Arunachal Pradesh region. Overseas ventures include 2 blocks in Sirte Basin in Libya and Farsi Exploration Block in Iran. The Corporation is also exploring opportunities to acquire a suitable medium-sized E&P company to quickly consolidate its upstream operations. In natural gas business, Indian Oil is already marketing 5.26 MMSCMD (million metric standard cubic meters per day) of gas. To augment its business in the sector, it has now finalized an import deal for 1.75 million tonnes of LNG per annum with Iran
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for supplies from the year 2009 onwards. The Corporation has also proposed partnering Petropars, a subsidiary of National Iranian Oil Company, in jointly developing gas blocks in the North Pars fields of Iran. Indian Oil grossed its first US$ 1 billion in revenues through initiatives in new business in 2004-05.

Transnational Presence To emerge as a transnational energy major, Indian Oil has set up offices in Sri Lanka, Mauritius and UAE and is simultaneously scouting new opportunities in new energy markets in Asia and Africa. The Sri Lankan subsidiary, Lanka IOC, operates 170 retail outlets commanding a 27% market share. Its oil terminal at Trincomalee is also Sri Lankas largest petroleum storage facility. Indian Oil Mauritius Ltd. has garnered a 7% market share in the very first year of its operation. It also operates a modern petroleum bulk storage terminal at Mer Rouge port, besides five retail outlets.

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A modern product testing laboratory and expansion of retail network have also been proposed in Mauritius. Indian Oils Regional Office in Dubai, which is coordinating business expansion in the Middle East, has commenced blending of SERVO lubricants through contract blending arrangements for the first time recently. Synergy through Subsidiaries A wholly owned subsidiary IndianOil Technologies Ltd., has been established for commercialising the innovations and technologies developed by the R&D Centre across the globe.The merger of Indian Oil Blending Ltd with the parent company, now approved by the Government, is in the final stages of implementation. The merger of IBP Co. Ltd., a retail focussed subsidiary with a network of 4,000 retail outlets, with the parent company is awaiting the Governments nod after its approval by the Boards of IndianOil and IBP. On Governments approval, other statutory approvals, including shareholders approval, would be sought to complete the merger at the earliest. The merger of Bongaigaon Refinery and Petrochemicals Ltd. with the parent company has also been mooted with the respective

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Boards approving the same already. Other formalities, including Governments nod, would be sought in due course. Indian Oil. Bringing Energy to Life.

THE REFINERIES Indian Oil controls 10 of India's 18 refineries with a current combined rated capacity of 54.20 million metric tonnes per annum (MMTPA)* (one million barrels per day). Indian Oil refineries registered a record throughput of 36.63 million tonnes during the year 2004-05 with a capacity utility of 88.6%.. Overall Energy consumption of Indian Oil refineries was lowest at 109 MBTU/ BBL/ NRGF against earlier best of 111, achieved in 2003-04. Gross Refining Margin (GRM) rose by almost one dollar per barrel during the year 2004-05. It is expected to be the highest at US$ 6.25/bbl for the year 2004-05 as against $5.30/bbl in 2003-04 All refinery units are accredited with ISO 9002 and ISO 14001 certifications. * (MMTPA- Million metric tonnes per annum, equal to 20,000 barrels per day) Indian Oil Refineries: Installed Capacities
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As on Refinery IOC IOCGuwahati IOCBarauni IOC- Koyali IOC- Haldia IOCMathura IOC- Digboi IOCPanipat Sub-Total IOC IOC Subsidiaries CPCLChennai CPCLNarimanam BRPLBongaigaon Sub-Total 0 1.0 3.3 13.0 4.6 7.5 0.65 6.0 36.05

As on 1 1.0 4.2 13.7 4.6 8.0 0.65 6.0 38.15

As on 2 1.0 4.2 13.7 4.6 8.0 0.65 6.0 38.15

As on 3 1.0 6.0 13.7 4.6 8.0 0.65 6.0 39.95

(In MMTPA) As on As on 4 1.0 6.0 13.7 6.0 8.0 0.65 6.0 41.35 2005 1.0 6.0 13.7 6.0 8.00 0.65 6.0 41.35

1.4.200 1.4.200 1.4.200 1.4.200 1.4.200 1.4.

6.5 0.50 2.35 9.35

6.5 0.50 2.35 9.35

6.5 0.50 2.35 9.35

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6.5 1.0 2.35 9.85

9.5 1.0 2.35 12.85

9.5 1.0 2.35 12.85

IOC Subisdiaries IOCTotal(With-

45.40

47.50

47.50

49.80

54.20

54.20

Barauni Refinery (near Patna, Bihar) The Barauni Refinery in Eastern India was commissioned in 1964 with a capacity of 2.0 MMTPA. The refining capacity was increased to 3.0 MMTPA by 1969 and further to its current capacity of 6.0 MMTPA through low cost revamping and debottle necking. Matching secondary processing facility such as RFCC (Residue Fluidized Catalytic Cracker) and hydrotreater facilities for diesel quality improvement have been added. Earlier, refinerys crude input was primarily from the Assam oil fields through pipeline. With the commissioning of the 6.0 MMTPA HaldiaBarauni crude oil pipelines, the refinery now receives imported crude for processing. A CRU (Catalytic Reformer Unit) was also added to the refinery in 1997 for production of unleaded motor spirit. Projects are also planned for meeting future fuel quality requirements. Barauni Refinery supplies distillate products besides eastern India to northern India through a product pipeline to
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Kanpur in Uttar Pradesh.

PARADIP - HALDIA CRUDE OIL PIPELINE Project Cost: Rs. 1178 crore Brief Description: The project consists of installation of crude oil handling facilities at Paradip Port including laying 48 inch diameter, 20 km transfer pipeline, development of a tank farm at Paradip consisting of 15 crude oil storage tanks of 60,000 kl each (Total: 9,00,000 kl), and laying 30 inch diameter, 330 km long crude oil pipeline to Haldia-Barauni Crude Oil Pipeline (HBCPL) Haldia.

Benefit: The pipeline will facilitate transportation of crude oil to Haldia and Barauni refineries in an efficient and cost effective manner compared to the present system of receipt of crude oil

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through the Haldia Dock Complex. There can be a cost saving on certain areas, namely Demurrage of VLCC Daughter vessels costs Additional Wharfage

NEED FOR COST CONTROL

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It is the sound financial strength, growth opportunities and competent human resource, which would determine Indian Oils future financial performance and the global position. However, increased competition in view of present scenario of shrinking market share, mounting operating cost, reducing net profit is the real challenges. In order to maintain continuous growth under the prevailing circumstances, meticulous planning, effective cost reduction & control and high morale of its people are going to determine the future of Indian Oil.

VARIOUS COSTS ASSOCAITED WITH REFINERY

Input costs:-

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Input to a Petroleum Refinery consists of crude, chemicals & catalysts, consumables etc. Cost of crude oil is approx 95% of all the operating costs. Thus the main constituent is the crude oil. The cost of crude depends upon various cost elements starting from Free on Board (FOB) price to customs duty and pipeline freight. Refineries have capabilities to process different crude within the corresponding limits to meet the product specification and environment limits to meet the product specification and environmental limits. Crude mix optimization in any refinery is typically driven by crude and product prices, quality,yield and price tags. Crude input cost build up : The crude input cost build up consists of various elements as given below : Free on Board (FOB) Price Ocean freight Insurance Load port charges Daughter vessel freight Unloading port charges and wharfage Ocean loss/ Unloading & Handling Loss Demurrage
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 Custom duty State entry tax Pipeline freight The crude for Barauni refinery is unloaded at Haldia port and stored in Haldia Barani Crude Pipeline (HBCPL) Haldia teminal tanks. Thereafter the same is pumped through HBPCL to Barauni refinery. Haldia, being a river port, cant accommodate bigger size tanker (VLCC) due to draft limitation and tankers need to be unloaded before berthing at Haldia. The tanker carrying imported crude oil is lightered to daughter vessels at either Vizag or Sand heads (for 4 months in a year) and lightered mother tanker and daughter vessels come to Haldia port for unloading. Due to lighterage operation Barauni refinery has to bear the daughter vessel cost as well as demurrage of the mother tanker for the time requirement for lighterage operation. For reducing the Crude input cost, two areas where Barauni refinery can work on are selection of crude mix from crude oil basket for getting maximum margin and reducing transportation/ lighterage at Kankinara where higher size tankers ( VLCC ) can take birth.

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CRUDE FLOW OF BARAUNI REFINERY

Historically IOC was the sole canalizing agency of crude oil for this nation having increasing demand of petroleum products posed by rapid forecasted growth in industrial as well as consumer sector. Lately from April-0198 with opening of the industry from the closely held government sector to the globally competitive private sector. The scenario of crude of crude oil exploration within the country and import there of also underwent change considering the dynamics of the changes in price per barrel of crude oil in the international market. The government allowed import of crude to all refining companies independently. In Indian Oil, crude oil was centrally procured based on the planned production at all refineries through its specific cell at the marketing division office Mumbai, which was also responsible to procure petroleum products from international market to fill the gap between the national demand and indigenous production. From 2003 onwards the procurement of crude oil segregated by making a specific cell namely Shipping Department located at Refineries Headquarter Delhi and since then this department is exclusively handling the procurement of crude oil both from India

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as well as international market to meet the production requirement various refineries and its subsidiaries. The crude oil for Barauni refinery was initially sourced exclusively from oil fields of Assam through Oil India Pipeline. But due to utilization of available crude in North-East itself after commissioning of Numaligarh Refineries, Barauni Refinery has been fully sourced by imported crude from 2001-2002. To make this feasible, a new Pipeline namely Haldia Barauni Crude Pipeline ( HBCPL ) was constructed and for economic viability of fresh investment the old refinery management has roughly invested Rs. 2000 cr. in expanding the refinery to 6 MMTPA in 2002-2003. The crude movement take place in very large crude carriers ( VLCC ) upto the Bay Of Bengal but due to the poor sea condition cant reach Haldia port directly. This necessitates transshipment of crude in high sea to smaller vessels which in turn bring the crude upto the port where it is unloaded in custom bonded tanks before being pumped through HBCPL. This particular movement of transshipment involves additional costs in the nature of 1. Freight of daughter vessels 2. Demurrage of VLCC 3. Additional wharfage

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To this additional cost is putting Barauni Refinery into a sort of disadvantage in comparison to other west coast Refineries. Considering the scene management is implementing a new pipeline project to connect HBCPL with Paradeep port to which place VLCCs will be directly wharfed and above additional expenditures can be avoided. There is another additional expenditure which is specific to Barauni Refinery and doesnt apply to many Refineries of India is Entry Tax. This has been contested by the management in the Court of Law on Constitutional grounds and stay off 50% has been obtained from High Court, decision of which is pending in Supreme Court.

Normally the cost constituents of Imported Crude is as under 1. Basic Costs 2. Marine Freight 3. Marine Insurance 4. Custom Duty 5. Port Expenses 6. Cost of Inland Transportation

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Of these costs the basic costs and cost of inland transportation can be reduced to have optimum i.e. maximum profit from the Refinery.

PARTICULARS

Actuals 20012002 2879.663 288434 28543 316977 3529 320506 304226 13 857

Actuals 20022003 2993.422 400555 4752 405307 767 406074 353549 895

Actuals 20032004 4303.501 565773 1500 567273 7266 574539 497344 1325

Actuals 20042005 5082.545 887370 -84 887286 15702 902988 799102 4807

THROUGHPUT(TMTs) 1. TRANSFER OF PRODUCTS 2. POOL A/C ADJUSTMENTS TRANSFER OF PRODUCTS (NET):1+2 4. STOCK VARIATION 5. VALUE OF PRODUCTION 6. (a) COST OF RAW MATERIALS (b) OTHER RAW MATERIALS ( c) DEMERRAGE ON CRUDE ( d) NATURAL GAS TOTAL COST OF RAW MATERIALS 7. M A R G I N ( 5 - 6 )

305096 15410

354444 51630

498669 75870

803909 99079

Throughput (TMTs) YEAR 1994-1995 1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2220 2324 1895 2181 2204 3411 3122 2880 2993

THROUGHPUT PER EMPLOYEE Operational emloyees (nos.) 1697 1597 1496 1385 1432 1452 1339 1331 1258

Throughput per em 1308 1455 1267 1575 1539 2349 2332 2164 2379

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2003-2004 2004-2005

CAPACITY UTILISATION INSTALLED CAPACITIES YEAR 2001-2002 2002-2003 2003-2004 2004-2005 THROUGHPUT (MMT) 2.88 2.994 4.304 5.083 %

4.2 MMT 6 MMT

71.3 84.7

DISTILLED YIELD % YEAR 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

PRODUCT RECOVERY % 92.52 91.16 88.09 88.68 89.86

84.9 84.6 85.6 85.5

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