ICRA Oil - Gas 2004

Oil & Gas Sector
ICRA
ICRA Sector Analysis

OIL & GAS
The Indian Oil & Gas Sector
October 2004
www.icraindia.com
Report by ICRA Information, Grading and Research Service 1
Oil & Gas Sector
Contacts:
Rajeev Thakur Research Head
Amul Gogna Executive Director
Date October 2004
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Oil & Gas Sector
TABLE OF CONTENTS
EXECUTIVE SUMMARY ...................................................................................................................... 4

SECTOR OVERVIEW ..................................................................................................................................... 4
THE UPSTREAM SECTOR ............................................................................................................................. 5
THE NATURAL GAS SECTOR........................................................................................................................ 5
THE DOWNSTREAM REFINING & MARKETING SECTOR ............................................................................... 6
SECTOR OUTLOOK....................................................................................................................................... 7
OUTLINE OF THE SECTOR .................................................................................................................... 8
MARKET SIZE AND SEGMENTATION ............................................................................................................ 8
INDUSTRY STRUCTURE (INCLUDING PLAYER TYPES) .................................................................................. 8
MARKET CHARACTERISTICS...................................................................................................................... 12
PLAYERS ................................................................................................................................................... 19
PLAYERS TYPE AND OUTLINE ................................................................................................................... 19
RANKING ................................................................................................................................................... 21
KEY SUCCESS FACTORS ............................................................................................................................ 23
INVESTMENT CLIMATE ....................................................................................................................... 27
GROWTH TREND ....................................................................................................................................... 27
INDIA ADVANTAGE/DISADVANTAGE......................................................................................................... 28
REGULATIONS ........................................................................................................................................... 29
CRITICAL ISSUES THAT NEED TO BE ADDRESSED ....................................................................................... 29
HUMAN RESOURCES.................................................................................................................................. 31
INFRASTRUCTURE...................................................................................................................................... 31
POLICY FRAMEWORK.......................................................................................................................... 33
TAXATION ................................................................................................................................................. 33
POLICIES.................................................................................................................................................... 34
PROJECTS ................................................................................................................................................. 42
ONGC....................................................................................................................................................... 42
IOC ........................................................................................................................................................... 42
HPCL........................................................................................................................................................ 46
BPCL........................................................................................................................................................ 46
GAIL ........................................................................................................................................................ 47
RIL............................................................................................................................................................ 49
LNG PROJECTS ......................................................................................................................................... 49
FY2004 PERFORMANCE OF MAJOR PLAYERS............................................................................... 55
MODEST GROWTH IN DEMAND AND PRICE VOLATILITY ........................................................................... 55
EARNINGS OF UPSTREAM COMPANIES....................................................................................................... 56
EARNINGS OF GAS DISTRIBUTORS ............................................................................................................. 57
EARNINGS OF DOWNSTREAM COMPANIES ................................................................................................. 59
OUTLOOK .................................................................................................................................................. 61
OTHERS ..................................................................................................................................................... 61
INITIATIVES IN UNION BUDGET FY2005 ..................................................................................................... 61

Oil & Gas Sector
EXECUTIVE SUMMARY
S e c to r Ov e r vi e w
The Indian Oil & Gas Sector

• Annual turnover of over US$80 Inter-Firm Rivalry
Entry Barriers billion • Intense in
• Large scale • Accounts for over 30% of India's deregulated
investments import bill products like
• Restriction on • Contributes over 20% to the lubricants
entry into national exchequer through • Competition
automotive fuel customs and excise increasing in
marketing • Insignificant share of world oil & automotive fuel also.
• Technology gas production (<1%) and petro- Entry of new
intensive product consumption (<3%) players to intensify
upstream sector, • Historically, a Government- competition.
and Distribution controlled sector. Limited
& Logistic deregulation in March 2002.
intensive Some very important issues need
downstream to be addressed for streamlining Bargaining Power
sector transition to full deregulation. • High with customers
• Unlike global players with as they have the
integrated operations, the Indian option of purchasing
industry is segmented into products from
Threat of
Upstream Exploration & alternative producers
Substitutes
Production, Downstream • Limited bargaining
• No substitution
Refining & Marketing and power of refiners
threat with other
forms of primary Natural Gas Distribution
energy in some segments. Deregulation is
markets like however leading to the breaking
transportation. of barriers across segments.
• In other markets,
price key
determinant of
substitution.
Key Success Factors

• Optimal product mix
• Cost competitiveness
• Infrastructure/logistics
• Integration into attractive segments of energy
value chain
• Enhancement of customer value

Oil & Gas Sector
T h e Ups tr e a m S e c to r
• Major Player(s): Oil and Natural Gas Corporation Limited (ONGC)
• Other Players: Oil India Limited (OIL), Reliance Industries Limited (RIL), Indian Oil
Corporation Limited (IOC), Gas Authority of India Limited (GAIL), British Gas, Essar
Oil, Videocon, Cairn Energy, Hindustan Oil Exploration Company Limited, Niko
Resources, Gazprom, Energy Equity, Geoenpro Petrol Ltd., Geopetrol International,
Enpro India Ltd., Hardy Oil, Tata Petrodyne, Gujarat State Petroleum Corporation,
Selan Exploration Technologies Ltd., L&T, Joshi Tech., Interlink Petroleum, Rawa Oil
Pte Limited, Heramec Limited, Hydrocarbon Res. Dev. Co. (P) Limited, Assam Company
Limited, Samson Inc., Mafatlal Industries, Mosbacher, Tullow Oil, Phoenix, Okland
International, Premier Oil and Geo Global Resources.
• Performance of Major Player(s) during FY2004

! 6.5% decline in net sales
! 3.9% decline in operating profit
! 17.7% decline in net profit
• Key Issues facing the Industry

! High level of business risk
! Rising demand for oil & gas in the country
! Stagnation in domestic oil & gas production. However, the future looks promising
with giant gas discovery made by Reliance in 2002. More discoveries likely.
! Volatility in earnings due to volatility in international prices.
! Increasing role of private sector.
• Strategies Employed for Facing Deregulation

! Strategic alliance for undertaking investments in other elements of the value chain.
! Taking equity in overseas oil and gas fields.
! Undertaking enhanced oil recovery projects in the existing fields.
! Bidding for new blocks (particularly, deep-water blocks) in India.
! Using advanced technology to reduce finding and production costs.
! Exploring unconventional energy sources, such as coal-bed methane.
T h e Na tur a l Ga s S e c to r
• Major Player(s): Gas Authority of India Limited (GAIL)
• Other Players: Gujarat Gas Limited, Indraprastha Gas Limited, Mahanagar Gas
Limited, Assam Gas Company Limited, and Tripura Natural Gas Company Limited are
involved in gas distribution. Gujarat State Petroleum Corporation’s subsidiary Gujarat
State Petronet Ltd. (GSPL) is also investing in gas distribution by setting up a State-
wide gas pipeline network. Some companies (such as Petronet LNG and Shell) are in the
process of setting up liquefied natural gas (LNG) terminals on the Western coast. The
LNG terminal of Petronet LNG was commissioned in January 2004. The LNG terminal
of Shell is expected to be commissioned in the latter half of 2004.

! 5.5% growth in net sales
! 11.4% growth in operating profit

Oil & Gas Sector
! 14.6% growth in net profit

! Gas demand far outstrips current domestic supplies. Environmental friendliness and
favourable economics are the prime dictators of growth in natural gas demand.
! Increasing natural gas production by private sector players, giant gas discovery by
Reliance, potential new discoveries by other players, and the new LNG projects signal
improvement in the gas supply position.
! A virtual monopoly in ownership of the gas distribution infrastructure, the expected rise
in gas supplies, and the minimal price risk involved, signal favourable earning prospects
for GAIL.
• Strategies employed for facing Deregulation

! Bidding for exploration blocks so as to improve gas sourcing
! Exploring alternative energy source such as gas hydrates and coal-bed methane
! Upgrading and strengthening gas distribution infrastructure
! Locking in new customers with long-term supply contracts
! Leveraging existing infrastructure to enter into new lines of business (such as
telecommunications)
! Integrating into production of value-added products such as petrochemicals and polymers
! Participation in LNG projects for improving gas supply availability.
T h e D o w n s t r e a m Re f i n i n g & M a r ke t i n g S e c t o r
• Major Player(s): Indian Oil Corporation Limited (IOC), Bharat Petroleum Corporation
Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL), and Reliance
Petroleum Limited (RPL, now merged with Reliance Industries Limited).
• Other Players: Managalore Refinery and Petrochemicals Limited (MRPL); BPCL’s

subsidiaries—Kochi Refineries Limited (KRL), and Numaligarh Refinery Limited (NRL);
IOC’s subsidiaries—Chennai Petroleum Corporation Limited (CPCL), IBP Company
Limited (IBP), and Bongaigaon Refinery and Petrochemicals Limited (BRPL).

! For the three integrated public sector undertakings (PSUs), Sales growth was in the
range of 6-11%, Operating profit growth was in the range of 13-19% and the net profit
growth was in the range of 15-34%.
! The refining division of RIL witnessed a growth of 20.9%. Profit before interest and tax
was higher by 49.3%.

! Surplus in the domestic market
! Low complexity of refineries.
! Deregulation implies exposure to regional refining margins. The proposed duty
protection is likely to play a key role in determining future profitability
! Ownership of marketing infrastructure to have a critical bearing on profitability in a
fully deregulated market.
! Limited flexibility in changing retail prices of auto fuel is an issue of concern
! The subsidies on LPG and SKO have shown a declining trend and do not cover the actual
outgo of the oil companies. Also oil Companies have not been allowed to vary the retail
prices in line with international trends. This has resulted in significant under-recoveries.

Oil & Gas Sector
Further, while the public sector undertakings get subsidy on LPG sale for domestic usage
and SKO sale through PDS, the parallel marketers do not get any such subsidy.
! Environmental norms to become stiffer in future.
• Strategies employed for facing Deregulation

! Upgrading processing facilities to improve refining complexity
! Enhancing scale of operations
! Strengthening and upgrading crude sourcing and product distribution logistics
! Investments in environmental projects
! Brand building
! Organisational restructuring for faster decision making
! Strategic alliances for strengthening position in existing lines of business and as means
for entering other segments of the energy value chain
! Setting up hedging desk for managing price risks
! Use of information technology to increase operating efficiency
Sector Outlook
The earnings of upstream companies is likely to remain strong in the immediate term due to
sustainability of international oil prices at high levels. However, the issue of sharing under-
recoveries with the downstream companies may impact the performance of Companies like
ONGC (as was the case in FY2004). Gas distributing companies are expected to show growth
in revenue and profits due to expected increase in gas volumes (due to LNG projects along
with domestic gas discovery) and fixed nature of transportation tariffs.
The issue of declining subsidies on LPG/SKO along with rigidity in retail prices suggests
continuing under-recoveries for the downstream oil companies. Marketing margins on
automotive fuel may also suffer due to unclarity on the government’s position in allowing the
oil companies to revise retail prices.
The downstream refining and marketing sector otherwise offers growth opportunities for the
different players. Demand for petroleum products is likely to pick up in the future due to
positive trends in the country’s economic growth. In the refining segment, while the surplus
situation in most products is a matter of concern, the current duty structure protects the
Indian refining margins. With deregulation, the marketing segment is witnessing ongoing
changes in the market dynamics. The marketing segment is expected to continue witnessing
ongoing initiatives by the oil companies. These initiatives are expected to be centred around
the interests of the consumers and may involve steps such as improving product range,
refurbishing the retail outlets, selling non-fuel items and providing value added services.

Oil & Gas Sector
OUTLINE OF THE SECTOR
M a r k e t S i ze a n d S e g m e n t a t i o n
The size of the Indian Oil & Gas sector is approximately US$80 bn. There are broadly 3
segments in the Oil & Gas sector.
• Upstream Oil & Gas Exploration
• Natural Gas Distribution
• Downstream Refining & Marketing
I n d u s t r y S t r u c t u r e ( i nc l u d i n g P la y er T y p e s )
The Indian oil sector has historically been a regulated one dominated by
Government undertakings. However, with the Government loosening its control, new
private sector players are now gaining presence.
Unlike the international oil majors which have integrated operations along the energy value
chain, the Indian oil sector has companies operating in three distinct sub-segments: Oil &
Gas Exploration and Production (E&P), Oil Refining and marketing of refined
products (R&M) and, Distribution of Natural Gas. The major players in each of these
sub-sectors are listed in the figure below.
Fig. 1.1
The Indian Petroleum

Sector
GAIL,
Gujarat Gas,
GSPL
Oil & Gas Refining and Natural Gas
Exploration Marketing Distribution
CPCL,
KRL, Gas
IBP
ONGC, OIL* BRPL, NRL IOC, HPCL, Distributors
MRPL, RIL BPCL
E&P Companies Refined Product Marketing

Integrated Refining and Marketing
Pure Refiners
*ONGC (Oil & Natural Gas Corporation Ltd.) is the major player in the Indian E&P sector.
Other players include OIL (Oil India Ltd.), Reliance Industries Ltd. (RIL), Indian Oil
Corporation Ltd. (IOC), Gas Authority of India Ltd. (GAIL), British Gas, Essar Oil, Videocon,
Cairn Energy, Hindustan Oil Exploration Company, Niko Resources, Gazprom, Energy
Equity, Geoenpro Petrol Ltd., Geopetrol International, Enpro India Ltd., Hardy Oil, Tata
Petrodyne, Gujarat State Petroleum Corporation, Selan Exploration Technologies Ltd., L&T,

Oil & Gas Sector
Joshi Tech., Interlink Petroleum, Mosbacher, Tullow Oil, Phoenix, Okland International,
Premier Oil and Geo Global Resources
Government Controlled Companies: ONGC, OIL, IOC, Hindustan Petroleum

Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd. (BPCL), GAIL and Gujarat
State Petronet Ltd. (GSPL). Chennai Petroleum Corporation Ltd. (CPCL), Bongaigaon
Refineries & Petrochemicals Ltd. (BRPL) and IBP Co. Ltd. (IBP) have now become
subsidiaries of IOC. Kochi Refineries Ltd. (KRL) and Numaligarh Refineries Ltd. (NRL) are
now subsidiaries of BPCL.
Joint Sector Companies: Mangalore Refinery & Petrochemicals Ltd. (MRPL) used to be a
joint sector company with equal stake of HPCL and Aditya Birla Group. However, ONGC has
bought the majority stake of the Aditya Birla Group in MRPL making it a public sector
company.
Private Sector Companies: Reliance Petroleum Ltd. (RPL) - which has now been merged
with parent Reliance Industries Ltd. (RIL), Gujarat Gas
The preceding chart includes the names of players whose activities in their respective areas
were operational as on March 31, 2004. Thus, it is evident that Government companies have
dominated in each of the areas of the oil sector. However, with the Government now
loosening its control, the future is likely to see the entry of private players in almost all areas
of the oil sector.
The segment of oil & gas exploration and production has players such as ONGC and
OIL, both public sector undertakings (PSUs). Until recently, almost the entire exploration
and production work was carried out by these two national oil companies. Of late, the
Government has been awarding oil exploration/development blocks to private companies
also. The New Exploration Licensing Policy (NELP) of the Government is a step in this
direction. Under the NELP the Government offers attractive fiscal terms such as: level
playing field for national oil companies; international oil price to contractors; zero cess
liability; and 50% rebate on royalty payments for seven years for deep offshore areas. Oil
exploration and production has also been given infrastructure status, which, inter alia,
provides for a seven-year tax holiday. So far, the Government has awarded 90 blocks in the
first four rounds of NELP.
In the Upstream Oil Exploration and Production Sector, Oil& Natural Gas Corporation Ltd.
(ONGC), which is an Indian Company, is the major player accounting for the largest share in
Oil & Gas production. Other players in the Upstream sector include both Indian and Foreign
companies.
As far as LNG (Liquefied Natural Gas) projects are concerned, Petronet LNG, an Indian
Company, has set up an LNG terminal at Dahej (Gujarat). Shell, a multinational, is in the
process of setting up an LNG terminal at Hazira (Gujarat).
Distribution and marketing of gas is done mainly by GAIL, a public sector undertaking.
The other players in the natural gas distribution industry are small and regional players,
such as Gujarat Gas (a subsidiary of British Gas) & GSPL (a subsidiary of GSPC, a Gujarat
State Government Company), Mahanagar Gas Ltd. (a 50% JV between GAIL and British
Gas and operational in Mumbai), Indraprastha Gas Ltd. (promoted by GAIL and BPCL and
operational in Delhi), and the two State Government undertakings in the North-Eastern
States (Assam Gas Company Ltd. and Tripura Natural Gas Company Ltd.). OIL, a public
sector undertaking also has a marginal share of the natural gas distribution business.

Oil & Gas Sector
The Indian oil refining sector has 10 companies:

• Indian Oil Corporation Limited (IOC) and its two subsidiaries, Chennai Petroleum
Corporation Limited (CPCL, formerly Madras Refineries Limited.) and Bongaigaon
Refinery and Petrochemicals Limited (BRPL);
• Bharat Petroleum Corporation Limited (BPCL) and its two subsidiaries, Kochi Refineries
Limited (KRL, formerly Cochin Refineries Limited.) and Numaligarh Refineries Limited
(NRL);
• Hindustan Petroleum Corporation Limited (HPCL);
• Oil and Natural Gas Corporation Ltd. (ONGC);
• Mangalore Refinery and Petrochemicals Limited (MRPL); and
• Reliance Petroleum Limited (RPL)--merged with parent Reliance Industries Ltd. (RIL)
with effect from April 1, 2001.
These 10 companies together have 18 refineries and a combined annual installed capacity of
125.97 million metric tonnes (mmt) as on April 1, 2004. Of these 10 companies, RPL is a
private sector refinery, and the rest public sector enterprises. Of these companies, ONGC is a
recent entrant in the refining business and has commissioned a mini-refinery with a capacity
of 0.078million tonnes (mt) at Tatipaka in East Godavari district of Andhra Pradesh in
September 2001. Further, in the year FY2003, it has acquired a majority stake (72%) in
MRPL – which earlier was a Joint Venture between HPCL and Aditya Birla Group. This
acquisition was facilitated by the sale of equity stake in MRPL by the Aditya Birla Group.
The entry of ONGC into the refining segment appears to be its strategy in the direction of
becoming integrated along the oil & gas value chain.
Table 1.1
India’s Installed Refining Capacity as on April 01, 2004
Parent Company Refinery Year of Capacity Throughput Capacity
Company Location Comm. (’000 (mmtpa) Utilisation
mmtpa)
IOC IOC Barauni 1964 6,000 4,304 71.7%

Digboi 1901 650 602 92.6%
Guwahati 1962 1,000 889 88.9%
Koyali 1965 13,700 12,759 93.1%
Haldia 1974 4,600 4,518 98.2%
Mathura 1982 8,000 8,249 103.1%
Panipat 1998 6,000 6,336 105.6%
BRPL Bongaigaon 1979 2,350 2,125 90.4%
CPCL Chennai 1969 9,500 6,312 78.9%
Narimanam 1993 1000 654 65.4%
BPCL BPCL Mumbai 1955 6,900 8,757 126.9%
KRL Kochi 1966 7,500 7,853 104.7%
NRL Numaligarh 1999 3,000 2,200 73.3%
HPCL HPCL Mumbai 1954 5,500 6,110 111.1%
Vizag 1957 7,500 7,593 101.2%
MRPL Mangalore 1996 9,690 10,068 103.9%
RPL RPL Jamnagar 1999 33,000 32,345 107.8%
ONGC ONGC Tatipaka 2001 78 91 116.7%
Total 125,968 121,765 100.2%
Source: Ministry of Petroleum & Natural Gas

Oil & Gas Sector
The Indian petroleum sector has historically been under the Government of India’s (GoI’s)
control. Keeping in mind the consumer’s interest and for ensuring the long-term profitability
of this sector, the GoI had decided to decontrol this sector in phase-wise, with full decontrol
coming into effect from April 1, 2002. To warrant the viability of the public sector refineries
in the decontrolled regime, the GoI, in September 2000, decided to merge the pure refining
companies (namely CPCL, KRL, NRL and BRPL) with the integrated majors following the
recommendations of the Nitish Sengupta Committee. This decision was based on the
observations in the global energy market, where refining margins were found to be low and
volatile as against the relatively higher and more stable marketing margins. Accordingly,
stand-alone refining operations were thought of as being very risky and unviable in a fully
decontrolled market. The specific restructuring measures as announced by the GoI were as
follows:
• Sale of GoI’s 52.5% stake in CPCL to IOC;
• Sale of GoI’s 74.46% stake in BRPL to IOC;
• Sale of GoI’s 55.04% stake in KRL to BPCL; and
• Sale of IBP's 19% stake in NRL to BPCL.
These restructuring measures were completed in FY2001. Post-restructuring, the shares of IOC and
BPCL in the country’s total refining capacity have shot up to 41.9% and 13.8%, respectively. Thus, the
restructuring exercise has improved the self-sufficiency of IOC and BPCL in refined products.
Chart 1.1
Share in Refining Capacity–FY2004
All Companies Parent Companies
ONGC
RPL ONGC
0.1% IOC
26.2% 7.8%
31.7% RPL IOC
26.2% 41.9%
MRPL BRPL
7.7% 1.9%
HPCL BPCL
NRL KRL BPCL
HPCL CPCL 10.3%
10.3%
2.4% 6.0% 5.5% 13.8%
8.3%
Marketing of refined products in India is done mainly by the four public sector
undertakings (PSUs), namely IOC, HPCL, BPCL and IBP Company Limited (IBP). While
IOC, HPCL and BPCL have integrated operations in refining and marketing, IBP is purely a
marketing company and has been taken over by IOC in February 2002 following
disinvestment1 of GoI’s stake in the company. Till recently, the marketing sector was strictly
1 The Cabinet Committee on Disinvestment had decided to reduce the Government stake in IBP to 26% by selling the
balance 33.58% stake to a strategic partner. The Nitish Sengupta Committee had suggested a merger of IBP with
BPCL or HPCL so that the merged entity could effectively compete in the market. The suggestion has been abandoned
in favour of letting any company bid for the stake. During February 2002, the strategic sale was made to IOC,
following competitive bidding, for a price of Rs. 11.54 billion, i.e., Rs 1,551/- per share at a P.E. ratio of 63.

Oil & Gas Sector
under GoI control. However, the GoI has now decontrolled this sector. With effect from April
1, 2002, pricing of all products are linked to import parity prices. While the administered
pricing mechanism for Liquefied Petroleum Gas (LPG for domestic usage), Kerosene (SKO
for sale through PDS), Motor Spirit (MS) and Diesel (HSD) have been dismantled, prices of
LPG (domestic) and SKO (PDS) are partially subsidised.
It has also formulated some caveats for entry into marketing of automotive fuels, which
actually translate into high entry barriers for new entrants. This entry barrier
included investment of Rs 2000 crore in building infrastructure in the hydrocarbon sector. In case the
investment has not yet been made, a performance guarantee of Rs. 500 crore towards fulfilling the
commitment is required. The Government granted marketing rights for automotive fuel, in June
2002 to four companies, which fulfilled the investment criteria.--Reliance, ONGC, NRL and
Essar Oil. However, as ONGC and Essar Oil did not have operating refineries, the
Government has asked them to provide information on product sourcing from these two
companies. These four companies propose to set up 8659 new outlets in the country. The
company wise break-up of retail outlets proposed to be set up is: Reliance (5849), Essar
(1700), ONGC (600), NRL (510). In May 2003, the Government allowed the multinational
Shell to market transportation fuel in India. This was however, subject to the company
providing a performance guarantee of Rs. 500 crore towards fulfilling the commitment of
investing Rs.2000crore in building infrastructure in the Indian hydrocarbon sector.
Historically, it is the oil companies that have set up the crude oil/product pipeline network in
India. To facilitate development of trunk route product pipelines in future, the GoI has
created a new company, Petronet India Ltd., and has entrusted it with the task of developing
all future pipelines in India. Petronet India has IOC, HPCL, BPCL and IBP as its major
promoters with equity stakes of 16%, 16%, 16% and 2%, respectively. The balance 50% is
held by banks and financial institutions. The refineries are expected to construct crude oil
pipelines on their own.
Ma r k e t Cha r ac te r is ti c s
Upstream Exploration and Production
! High level of business risk

The Exploration & Production (E&P) exercise is characterised by a high degree of uncertainty
and, hence, a substantial amount of risk. At every stage of the E&P exercise, there is a very high
degree of likelihood that the E&P efforts may have to be abandoned. The chances of abandoning
licence at any stage of the E&P exercise ranges from 35% (at the development plan preparation
stage) to 80% (at the exploratory drilling stage). Compounded with the risk of abandoning E&P
efforts is the fact that the money invested (ranging from US$0.4 million at the seismic survey
stage to a cumulative US$48.4 million at the plan development stage) till the abandoning stage
would have to be treated as sunk cost. The typical costs and success probabilities in offshore
exploration are presented in the following chart.

Oil & Gas Sector
Chart 1.2
Typical Costs and Probabilities (%) of Abandoning in Offshore Exploration
Acquire Licence
40% Abandon Licence

Conduct Seismic Programme (US$400,000)
Drill First Exploratory Well (US$7,000,000) 80% Abandon Licence
Appraisal Programmes for 60%

Two Wells and Reservoir Study (US$16,000,000) Abandon Licence
Preparation of Development Plans (US$25,000,000) 35%

Abandon Licence
Final Development (US$800,000,000)
Production and Cash Flow
Source: Hydrocarbon Perspective Report
! Rising demand for oil & gas in the country. Stagnation in domestic oil
& gas production. However, the future looks promising with giant gas
discovery made by Reliance in 2002. More discoveries likely.
Oil & gas production, in recent years, has been much higher than that in the early 1980s. In 1980-
81, the total crude oil and natural gas produced were 10.5 million metric tonnes (mmt) and 2.4
billion cubic metres, respectively. The discovery of the offshore Bombay High oilfields of ONGC
in the mid-1970s and the subsequent development in the mid-1980s resulted in the total oil & gas
production rising by around three times over the 1980-81 level, in 1985-96. Subsequently,
however, in the absence of any new discovery, oil production has stagnated at the mid-1980s
levels. Gas production, on the other hand, showed a spectacular growth of 10 times during 1981-
96, mainly because of the development of the South Bassein fields and reduction in flaring in the
Bombay offshore region. Further, the gas transportation infrastructure has improved significantly
with the laying of the Hazira-Bijaipur-Jagdishpur (HBJ) natural gas pipeline by the Gas Authority
of Indian Limited (GAIL) in 1987. However, beyond 1996, the growth rate in gas production has
also been lower.

Oil & Gas Sector
Table 1.2
Oil and Natural Gas Production in India
1980-81 1996-97 1997-98 1998-99 1999-00 2000-01 2002-03 2003-04
Crude Oil
('000 metric
tonnes)
ONGC- 4,231 8,502 8,388 8,101 7,921 8,428 8,445 8,384
Onshore
ONGC- 4,985 20,183 19,863 18,286 16,727 16,629 17,559 17,681
Offshore
OIL 1,291 2,870 3,094 3,294 3,283 3,286 2,952 3,002
Private JVCs 0 1,346 2,514 3,042 4,018 4,083 4,088 4,317
Total 10,507 32,901 33,858 32,722 31,949 32,426 33,044 33,384

Natural Gas
(mn. Cubic
metres)
ONGC- 937 4,484 4,948 5,327 5,478 5,555 5,866 5,779
Onshore
ONGC- 673 16,794 18,102 17,514 17,774 18,465 18,376 17,805
Offshore
OIL 748 1,467 1,670 1,713 1,729 1,861 1,744 1,880
Private JVCs 0 510 1,681 2,874 3,465 3,596 5,405 6,489
Total 2,358 23,255 26,401 27,428 28,446 29,477 31,391 31,953
Source: Ministry of Petroleum and Natural Gas
Pressure on Reserves
The total resource base of oil and gas is the entire volume formed and trapped in-place
within the Earth before any production. The largest portion of this base is non-recoverable by
current or foreseeable technology. This inability is either because of unfavourable economics
or intractable physical forces, or a combination of both. At the next level, the recoverable
resources are divided into discovered and undiscovered segments.
Although the crude oil reserves in India have grown by over six times during the past three
decades, the past few years have seen a significant depletion because of the absence of any
new findings. The life of oil reserves (as measured by the Reserve to Production, or the R/P
ratio) has also declined to 19 years2 in 2003 from a high of 45 years in 1980-81.
The total proven reserves of natural gas in India as at the end of 2003 was 854 billion cubic
metres (bcm)1. The daily gas production in India is currently around 87.3 mcm (million cubic
metres)3, compared with 6.5 million cubic metres per day (mmscmd) in 1980-81. At this
production level, India’s reserves are likely to last for around 27 years, that is,
relatively longer than the 19 years estimated for oil reserves.
! Increasing role of private sector
Encouraging Discovery by Reliance

Reliance has recently reported discovery of significant gas reserves in its deep-water block at
Krishna--Godavari. The total in-place volume is estimated to be 14 trillion cubic feet. The
2 Source: BP Statistical Review of World Energy, June 2004

3 Source: Ministry of Petroleum & Natural Gas

Oil & Gas Sector
cost of developing the reserve is likely to be around Rs. 75 bn. and the development process is
expected to take around three-four years. The gas production is likely to be around 40
mmscmd equivalent to around 60% of the existing gas supply of 65 mmscmd. The success of
Reliance is likely to increase the confidence level of the other explorers and we may see
additional gas finds in this region in the future. There is a very high likelihood of discovering
more significant finds in the region as the discovery confirms this particular region had the
hydrocarbons developed during the history of earth. Internationally, it has been observed
that a large discovery is followed by similar discoveries in that basin. More discoveries in this
region is likely to be predominantly gas because this region is tectonically more ancient. This
gas find is likely to improve the energy availability scenario in the country. However, the gas
shortage in the country is likely to continue. As against the current gas demand of around
151 mmscmd, the demand is likely to reach around 231 mmscmd by the time gas production
from Reliance starts. This would imply a gap of 125 mmscmd, assuming production from the
existing fields are maintained at the current level.
Minor role of other private players

Barring the above major discovery, attempts to induct the private sector in oil exploration
have not seen encouraging results. The Government of India (GoI) opened the Indian E&P
sector (including oilfield equipment and drilling services) to private capital in 1979, following
the second oil price shock. In addition to oil prices, the effect of a rising level of oil imports
and the concern that an insular policy on exploration would leave the industry behind in the
adoption of the latest upstream technology also had an impact on the policy-making front.
There was little success between 1979 and 1991, when there were three rounds of bidding.
Multinationals like Chevron did search for oil in the 1980s but with no success. However,
Shell had, in July 1999, struck oil in its exploration block located in the Barmer district of
Rajasthan; the production test and assessment are still in progress. The consortium of Cairn
Energy (India), Tata Petrodyne and ONGC has discovered oil and gas in four fields in the
Gulf of Khambhat (offshore Gujarat) in 2001. These four fields are Lakshmi, Ambe, Gauri
and Parvati in Cambay offshore block CB/OS-2. Lakshmi field started production towards
2002 end with a plateau production of around 120 million cubic feet of gas per day. Further,
Cairn has also made five discoveries in the KG-DWN-98/2 block in the Krishna Godavari
Basin. The discoveries are estimated to have 200 million barrels of oil equivalent of inplace
reserves. Cairn Energy plans to develop these fields in the short to medium term. In
Rajasthan, Cairn has struck oil at two places in RJ-ON-90/1 block.
So far, there have been six rounds of exploration licensing since 1991 (excluding bidding
under the NELP) and some success has been achieved in the award of blocks to a consortia of
Indian/multinational companies as a result of these efforts. A total of 35 exploration blocks
have been awarded during these bidding rounds.
There are three major reasons for the limited success in private sector participation in the
exploration blocks. First, exploration activities have been initiated in only a few potential oil-
bearing areas. In fact, it is believed that over 85% of the potential oil bearing exploration
blocks have been retained by the NOCs (even though they may not have the resources to
develop these blocks), while only the balance 15% has been given out to the private sector.
Second, there has been considerable delay on the part of the GoI to award contracts for oil
exploration. For instance, the contracts for some of the exploration blocks, which were signed
between 1991 and 1994, were awarded only in June and July 1998. These two months saw
the award of as many as 13 contracts. The unusual speed and timing of this is attributed to
the GoI’s desire to send out positive signals to foreign investors, following the adverse
international publicity and economic sanctions brought about by the May 1999 nuclear tests.
Third, in the absence of any major oil discovery since the past 15 years have probably
reduced the confidence of the oil majors in the prospects of existence of major oil reserves.

Oil & Gas Sector
On the field development front, in the early 1990s, the GoI, faced by a severe foreign
exchange currency crisis, began to turn its attention to the development of small and
medium-sized fields that had already been shown to possess recoverable reserves. Two kinds
of contracts were offered. The first one was meant for the small-sized fields and involved a
production-sharing contract with the GoI with no equity participation from the NOCs (viz.,
ONGC and OIL). The second type of contract was meant for the medium-sized fields and
involved an equity participation of up to 40% by ONGC/OIL. The first offer of developing
fields to the private sector was made in August 1992. This led to the award of 15 small-sized
and five medium-sized fields to the private sector. The second round of offer of
medium/small-sized fields was made in 1994. This led to the award of 10 discovered fields
(including one medium-sized field) to a consortia of Indian/multinational companies.
The privatisation programme for discovered oilfields has been a highly successful one since
these carried little risk. The development of these fields has resulted in increase in the
production volumes and the shares of the private sector JVs in the total oil & gas production,
as the following Chart demonstrates.
Chart 1.3
Private JVs- Production and Share in Share of Private JVCs in total Oil
Total Production (% ) & Gas production is on the rise
7000 25.0%
6000
20.0%
5000
4000 15.0%
3000 10.0%
2000
5.0%
1000
0 0.0%
1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2002-03 2003-04
O il('000 tonnes) G as (m n.cubic m etres)

Share ofJV C s (O il) Share ofJV C s (G as)
The development of the fields offered to the private sector has led to a substantial increase in
production from these fields. The Ravva fields were taken over by the Videocon-led JV
consortium in February 1995. In this JV, the Videocon Group has a 25% stake, Cairn Energy
22.5% (operator), ONGC 40%, and Ravva Oil (Singapore) Pte with 12.5%. The JV managed to
raise oil production from 6,000 barrels per day to 35,000 bpd in December 1996 and further
to 50,000 bpd currently. In addition, the Ravva field produces 65 million cubic feet of gas per
day. Similarly, the Mukta-Panna field, which was earlier operated by Enron, with the other
consortium members being Reliance and ONGC, has seen oil production rising by over 150%,
from 11,000 bpd, before the consortium took over, to about 30,000 bpd currently. The gas
production has also increased from 0 to 2.8 mmscmd. The Tapti field now produces around
5.7 mmscmd of gas. The PY-3 offshore field, located 18 km off Pondicherry and operated by
the consortium consisting of Hindustan Oil Exploration Company, Hardy Exploration &
Production Inc. (operator), Tata Petrodyne and ONGC, produces about 4,500 bpd of oil.
The recent gas discovery by Reliance signals the increasing role of the private sector in the
upstream sector. Accordingly, the share of the private sector is expected to increase
significantly from the current 12-15% in India’s oil & gas production in the times to come.

Oil & Gas Sector
The GoI had also developed cold feet over other policies, such as inviting private
participation in the Enhancing Oil Recovery (EOR) Programme for the Bombay High oilfield
of ONGC. It was proposed that in this EOR programme, the private party would be handed
over the entire field for operation and the "excess" recovery of oil from the field would be
shared between ONGC and the participating private firm. There had been no response from
the GoI on this front, after bids were invited from the private sector for participating in this
programme in 1994. The offer was subsequently withdrawn (following opposition to the
privatisation process) and ONGC was asked to develop its own plan. Only in January 2001,
ONGC has announced commencement of a Rs. 75 bn. redevelopment plan for the Mumbai
High field. This redevelopment plan involves steps such as fresh drilling and improving upon
the crude extraction process.
Gas Distribution
Gas Supply
The gas reserves of NOCs are getting depleted. Further, till the Reliance gas discovery in
2002, despite strong exploration efforts, there had not been a major discovery in India since
the discovery of Neelam Oilfield in 1987 (17 years have elapsed since then). The gas
discovery by Reliance is expected to improve the domestic gas supply by over 60% from the
current levels. It would also boost the investor confidence in investing in exploration in
deepwater reserves of India. There is a very high likelihood of discovering more significant
finds in the region as the discovery confirms this particular region had the hydrocarbons
developed during the history of earth, and since, the reservoir pools were already known
from seismic and other surveys, there is high likelihood that many such reservoirs would be
having gas (predominantly gas because this region is tectonically more ancient). Further, the
RIL-ONGC consortium has re-estimated gas reserves in the mid and South Tapti fields at
higher values and production from these fields is expected to increase in the medium term.
However, the increased production which is almost equivalent to the current level of gas
production from the private sector players (around 12% of the country’s total production)
would be insufficient to meet the strong demand for natural gas in the country. On the other
hand, many players have chalked out plans to import LNG, which is expected to provide
additional supplies of natural gas in the country. The LNG suppliers are however concerned
about the viability of their project in the light of the gas discovery by Reliance.
Distribution Network
By virtue of its ownership of around 4,400 km of natural gas pipelines, GAIL enjoys a
natural monopoly, as this infrastructure is unlikely to be replicated. Further, by owning such
infrastructure GAIL occupies a unique position. With a rising customer base and an expected
rise in gas supply (from the LNG projects and the private sector fields), GAIL may be
expected to have a disproportionately higher share of all new supplies.
Downstream Refining & Marketing

E x t e n t o f C o m p e t i t i o n a m o n g d o m e s t i c / i n t e r n a t i o n a l p l a y e r s : With the deregulation of
the sector from March 2002, competitive forces have started playing an important role in the
operations of the downstream refining and marketing sector. Examples of this include:
Launching Premium products such as Speed Petrol by BPCL; Customer loyalty program
such as ICICI Bank – HPCL co-branded credit card; Branding such as Pure for Sure by
BPCL; Increasing control over retail outlets for mitigating poaching risk; Strengthening
market infrastructure. However, price competition (like in other sectors such as FMCG) has
not started and companies continue to sell products at the same price at a given location.
This may change once the likes of Reliance and Essar enter the marketing segment.
B a r r i e r s t o e n t r y f o r n e w p l a y e r s : Government of India stipulation state an investment of
Rs. 20 bn. across the oil & gas chain for qualifying for auto fuel marketing. Given the size of
global players, this does not appear to be a major amount. However, for smaller companies,

Oil & Gas Sector
this is a major entry barrier. There are two routes for entry for a new player in the Indian
market. One by acquiring companies and second by setting up own facilities. While the first
option has been indefinitely delayed due to postponement of HPCL dis-investment, the
second option has time and cost implications. So accordingly, while marketing license has
been given to several companies, it is still some time before we see active competition in the
marketing segment.
I n t e r n a t i o n a l C o m p e t i t i v e n e s s : There are 2 measures of international competitiveness –
refining complexity in the refining business; and marketing throughput per retail outlet. The
PSU refineries have a relatively lower refinery complexity (less than 5) as compared to a
global average of 6. However, the refineries are upgrading their capacities and accordingly
this index is improving. Moreover, the duty protection ensures higher refining margins as
compared to regional margins. The retail throughput is however higher as compared to many
countries.
Chart 1.4
Nelson Complexity Index
In d i a 4 .7
W o rl d 6 .6
U SA 1 0 .2
UK 8 .2
M e x ic o 7 .3
Ge rma ny 8.4
C a na d a 8 .5
A us t ra il i a 8.0
0 2 4 6 8 10 12
F l u c t u a t i o n s i n D e m a n d / S u p p l y g a p : The commissioning of the Reliance refinery resulted

in a surplus in the Indian market and is likely to remain oversupplied in the medium term
as per our estimates, under alternate scenarios of demand growth. However, the quantum of
surplus is expected to diminish.
Chart 1.5
Demand - Supply of Refined

Products ('000 tonnes)
160000
140000
120000
D em and (3% grow th)
100000
80000
60000
Supply
40000
20000
0

Oil & Gas Sector
PLAYERS
P l a ye r s Ty p e a n d O u tl i n e
Player Type (already Covered in the Section on Industry Structure)
Outline of Major Players
ONGC
Oil and Natural Gas Corporation Ltd. (ONGC) was formed in 1959, under an act of
Parliament as a "Commission". It was subsequently converted into a "Corporation" governed
by the Companies Act, 1956, in June 1993. ONGC is engaged in the exploration and
production of crude oil, production of liquefied natural gas, naphtha and kerosene. The sales
mix comprises Crude Oil, Natural Gas and other products such as LPG, Gasoline, Naphtha
and Superior Kerosene Oil.
IOC
Indian Oil Corporation (IOC), the largest integrated downstream oil company in the country,
was incorporated in 1959. As of FY2004, IOC (excluding subsidiaries) owned seven of the
country's 18 oil refineries and had over 31% share of the refining capacity, with a 43%
market share in petroleum product sales. IOC also had a vast marketing infrastructure
comprising 9,138 retail fuel pumps, 3,521 kerosene outlets, 167 terminals & depots, 87 LPG
bottling plants, 4,337 LPG distributors and 94 aviation fuel stations spread across the
country, and an extensive 6,837 km of pipeline network with a capacity of 54.97 mmtpa for
transporting crude oil and petroleum products. Post the industry restructuring in FY2001,
CPCL and BRPL have become IOC’s subsidiaries. Also, IOC has taken over IBP, following
GoI’s disinvestment in February 2002. IOC also has a lubricants plant, through a wholly-
owned subsidiary, Indian Oil Blending Ltd.
BPCL
Bharat Petroleum Corporation Limited (BPCL) is the second largest integrated oil refining
and marketing company in India by sales and market share for petroleum products (18.9%),
next only to Indian Oil Corporation (IOC). With a refining capacity of 6.9 mmtpa, it has
approximately 5.5% share of the domestic refining capacity. In addition to petroleum
products, BPCL also produces petrochemicals such as hexane and linear alkyl benzene
(LAB). The company's sole refinery was set up in Mumbai in 1957, following the joint
venture agreement signed in 1951 by the Government of India with Burmah Oil Co. of the
UK and Shell Petroleum Company. In December 1975, the GoI signed an agreement with
Burmah-Shell for the acquisition of the company, following which it was nationalised in
January 1976 and named Bharat Refineries Ltd. In 1977, the name of the company was
changed to BPCL. BPCL has a 250 km long product pipeline from Manmad to Mumbai.
During FY2001, the industry restructuring resulted in BPCL gaining control over the two
refining companies–Numaligarh Refinery Ltd. (NRL) and Kochi Refineries Ltd. (KRL).
HPCL
Hindustan Petroleum Corporation Limited (HPCL) is the third largest integrated oil refining
and marketing company in the country by sales volume. It has approximately 18% share of
the market and 10% share of the country's refining capacity. It came into existence in 1974
with the amalgamation of Esso Standard Refining Co. and Lubes India Limited with Esso
Eastern Inc., following which the government acquired the Esso group's stake with the
nationalisation of the oil sector. In 1978, HPCL acquired its second refinery at Vizag when
the government nationalised Caltex Oil Refining (I) Ltd. In 1979, Kosangas, a liquefied

Oil & Gas Sector
petroleum gas (LPG) marketing company, was merged with HPCL. Currently, HPCL has two
major refineries at Mumbai (5.5 mmtpa) and Vizag (7.5 mmtpa) with a total capacity of 13
mmtpa. HPCL has an extensive marketing infrastructure for retailing its products, which
comprises terminals, depots, LPG bottling plants, aviation plants and retail pump outlets
spread across the country. Following disinvestment, public issue and warrant conversion
over 1992-97, the GoI’s holding in HPCL has now come down to 51%.
RIL
Promoted by India's largest private sector company (Reliance Industries Ltd.), Reliance
Petroleum Ltd. (RPL) has set up a 27 mmtpa (metric million tonnes per annum) oil refinery
at Jamnagar, Gujarat. Spread over 7,000 acres, this refinery is the largest grassroot refinery
in the world. Along with the refinery, RPL has set up a captive power plant with a
generating capacity of nearly 300 MW. The total investment at the Jamnagar site (including
investments in the refinery along with an aromatic complex and a 500 MW independent
power plant by the Reliance Group) is expected to be over Rs. 240 bn. RPL had initiated a
phase-wise commissioning of the refinery in July 1999 and was able to commission it
completely in January 2000. Commercial production from the refinery commenced in April
2000. In September 2002, RPL was merged with parent RIL with retrospective effect from
April 1, 2001. The capacity of the refinery was expanded to 33 mtpa in FY2004.
GAIL
Gas Authority of India Limited (GAIL) was set up by the Government of India in August
1984 as a 100% undertaking for processing and distributing natural gas in India.
Subsequently, the Government's equity stake in GAIL has been brought down in phases to
67.34% through the issue of global depository receipts (GDRs) and through disinvestment.
Initially responsible for constructing and operating the Rs. 17.5 billion Hazira-Bijaipur-
Jagdishpur (HBJ) gas pipeline, GAIL took over the Oil and Natural Gas Corporation's
(ONGC's) gas distribution pipelines in 1992. GAIL receives gas from the upstream oil
companies like ONGC and Oil Indian Limited (OIL) and sells largely to industrial
consumers. Except for some insignificant direct gas sales by OIL in North East India and by
Gujarat Gas and GSPL in Gujarat, GAIL is currently the sole natural gas transmission and
distribution company in India. In addition to gas distribution, GAIL has ventured into gas
processing by setting up liquefied petroleum gas (LPG) extraction plants--two at Bijaipur in
Madhya Pradesh and one each at Vaghodia (Gujarat), Auraiya (Uttar Pradesh), Usar
(Maharashtra) and Lakwa (Assam)-and has commissioned a gas-based petrochemicals
complex at Auraiya. Natural gas sales account for the bulk of GAIL's total sales. As the
future growth strategy in the gas sector, GAIL is increasingly investing in sourcing of gas,
expansion of existing markets and development of new markets, and expansion of existing
pipeline infrastructure as well as development of new pipeline facilities. It has also ventured
into the telecom sector by setting up OFC-based network.
Petronet LNG
Realising the ease of transporting natural gas as LNG4 and the growing demand for fuel in
India, the GoI had set up a new company Petronet LNG, with GAIL, ONGC, IOC and Bharat
Petroleum Corporation Limited (BPCL) as the main promoters. Petronet LNG has been
entrusted with the task of developing terminals in the country for importing LNG. Petronet
LNG has signed a gas purchase contract with Ras Gas, Qatar, for the import of 5 mmtpa of
4 When Natural Gas is cooled to a temperature of approximately -161 deg. C at atmospheric pressure, it condenses to
LNG. The volume reduction is by 600 times. The weight of LNG is half that of water; actually about 45% as much.
LNG is colourless, odourless, non-corrosive and non-toxic. Neither LNG, nor its vapour can explode in an unconfined
environment. The supply of LNG involves four stages: Generation of upstream gas, Liquefication at Site, Shipping of
Liquid Gas, Re-Gasification of Shipped Gas, and, Transportation via Pipelines to End-users.

Oil & Gas Sector
LNG at Dahej (Gujarat) and 2.5 mmtpa at Kochi (Kerala). The Dahej terminal was
commissioned in January 2004.
Ra nk ing
The ranking of different players in the Indian Oil & Gas sector on different operating and
financial parameters is presented in the following tables.
Table 1.3
Oil Production Share
ONGC 78.1%
OIL 9.0%
Private/JVC 12.9%
Table 1.4
Gas Production Share
ONGC 71.4%
OIL 5.2%
Private/JVC 23.4%
Table 1.5
Refined Product Market Share
IOC 43.3%
BPCL 18.9%
HPCL 18.1%
Others 19.7%
Table 1.6
Revenue
Company (Rs. mn.)
IOC 1167756
RIL 518020
HPCL 515177
BPCL 482543
ONGC 320639
GAIL 124090
MRPL 113906
IBP 106502
KRL 98639
CPCL 87390
BRPL 29279
Gujarat Gas 5135

Oil & Gas Sector
Table 1.7
Net Profit
Company (Rs. mn.)
ONGC 86644
IOC 70048
RIL 51600
HPCL 19039
GAIL 18781
BPCL 16946
KRL 5551
MRPL 4594
CPCL 4001
BRPL 3037
IBP 2147
Gujarat Gas 644
Table 1.8
Operating
Company Margin
ONGC 55.1%
GAIL 27.2%
Gujarat Gas 20.1%
RIL 19.3%
BRPL 15.8%
KRL 10.2%
IOC 8.8%
CPCL 8.1%
HPCL 6.3%
MRPL 6.3%
BPCL 5.9%
IBP 2.9%
Table 1.9
Company Net Margin
ONGC 27.0%
GAIL 15.1%
Gujarat Gas 12.6%
BRPL 10.4%
RIL 10.0%
IOC 6.0%
KRL 5.6%
CPCL 4.6%
MRPL 4.0%
HPCL 3.7%
BPCL 3.5%
IBP 2.0%

Oil & Gas Sector
Ke y S u cc es s F ac to r s
Upstream Exploration and Downstream
The key success factors in the upstream segment of the oil & gas value chain includes:
• Geological knowledge and experience: The skillset to analyse subsurface geology is
critical in reducing the leadtime in developing or abandoning a prospective reserve
area. This again has an implication on the cost front. This factor also determines the
areas where a company should bid.
• Reserve Replacement to Production (R/P) Ratio: As oil and gas are non-replenishable
resources, it is of utmost importance to keep on adding to the reserve base so as to
sustain earnings growth.
• Cost competitiveness: As the oil prices are not in the control of oil companies, it is
important to focus on lowering the finding, development and lifting costs on an ongoing
basis so as to be in a position to survive in phases of low prices.
• Financial strength: As the exploration and production require large amount of financial
resources, it is important for the players to raise the necessary capital at low costs.
• Risk taking ability: The upstream business is characterised with high risk and high
return. Hence, the ability to take risks and abosrb losses becomes extremely important.
Companies increasingly form a consortium for bidding purposes so as to minimise risk.
• Ability to win contracts: Normally, blocks are assigned based on competitive bidding.
Hence, the ability to win contracts by competing with other major players becomes a
key success factor.
• Technological advancement: The upstream segment is a technology intensive segment.
The undiscovered reserves are likely to be located in a more difficult environment and
hence, technological advancements may be crucial to tap these undiscovered reserves.
Natural Gas Distribution

In ICRA’s opinion, the key success factors in gas transportation would include:
• Gas supply source: The ability to lock in to alternate supply sources (either through an
existing gas producer / supplier or by venturing on its own into E&P activities) would be
crucial for streamlining the supply chain and minimising disruption.
• Pricing: Price of gas supplied should be competitive vis a vis alternate fuel such as
Naphtha and Fuel Oil so that it remains a commercially preferred fuel.
• Distribution Infrastructure. Well laid out pipeline network so as to optimally reach out
to the customers.
• Customer base: Expanding the existing customer base and meeting the enhanced
demand of the existing customers would be key to earnings growth.
Downstream Refining & Marketing

The shift from the APM regime to the decontrolled market is seeing a gradual shift from a
seller’s market to a buyer’s market. This is likely to bring increased level of consumerism
along with efficiencies in operations. In ICRA’s view, the key success factors for the
downstream refiners and marketers in the decontrolled regime are: effective crude
procurement, effective crude sourcing and product distribution logistics, economies of scale,
investment in secondary processing facilities, effective project construction management,
competitive construction costs, effective pricing strategy, effective downstream integration
and presence in export markets. While the tariff structure and the refinery configuration will
play a very important role in determining the margins of Indian refineries, the marketing
margins of the marketing companies are expected to be a function of the replacement cost of
the marketing assets and are likely to see an increase in line with the existing marketing
margins in deregulated markets, which are three to four times the margins earned by Indian

Oil & Gas Sector
companies under the APM. However, the surplus in the domestic market, in addition to the
flexibility that the oil companies may have in changing retail prices under a high price
environment, may provide a limit to which these margins would increase. For example,
prices of auto fuel were kept unchanged during April – May 2002 and again in December
2002 and April-June 2004, despite rising international prices. Further, currently there is no
price competition in the auto fuel segment. The prices are revised every fortnight in
consultation with the government and all the oil companies maintain the same pump price.
However, with the entry of private players like Reliance, one may expect this trend to change
and there may be significant price competition among the players. Thus, an effective pricing
strategy may become one of the important growth drivers of market share in the future.
Further, refiners that currently do not possess adequate access to the marketing
infrastructure will have to invest significantly in the same as their profitability might suffer
in a deregulated scenario. The market is likely to become very competitive and the
competitive pressures would ensure that the consumer gains in the long run. Acquisition of
the GoI’s stake in IBP has further strengthened the marketing infrastructure of IOC.
The Indian Downstream Refining & Marketing sector has been fully deregulated with effect
from April 1, 2002. Pricing of all products (excepting LPG for domestic usage and SKO for
PDS) has now become market determined. Pricing of LPG (DOMESTIC) and SKO (PDS) is
controlled and the GoI provides subsidies on these products. These subsidies are expected to
be phased out in the next couple of years. Timely receipt of the correct amount of subsidies
would play an important role in deterring the liquidity and profitability of the oil companies.
Dismantling of APM has a number of implications for the players in this industry which are
detailed below.
Refining margins have now become volatile. The ex-refinery price of the refineries are now
linked to the international prices and, accordingly, the Gross Refining Margins (GRMs) move
in line with the movement in the regional refining margins. However, the 7.2% duty
protection to the Indian refineries implies that the Indian refining margins would enjoy a
premium over the regional refining margins. ICRA is of the opinion that the current
tariff structure will play a very important role in supporting the margins of Indian
refineries. ICRA’s estimates show that if the existing regional refining margins are
US$2.5/bbl at crude price of US$25/bbl, the average refining margin in India would be higher
by around 89% because of the duty protection. The variation of the Indian refining margin,
with alterations in crude prices and regional refining margin, is shown in the following
Table.
Table 1.10
Variation in Refining Margins ($/bbl)
Crude Price Regional Refining Indian Refining Premium of Indian refining
Margins Margins Margins
25 2.5 4.7 89%
25 1.5 3.6 137%
25 0.5 2.4 377%
20 2.5 4.4 75%
20 1.5 3.2 113%
20 0.5 2.0 305%
Source: ICRA estimates

Oil & Gas Sector
The assumption in the above example is that the current tariff protection continues if not
increased to the level of 12% as was earlier proposed by the Nirmal Singh Committee. On the
contrary, if the GoI implements the recently announced Kelkar Committee
recommendations, the duty protection is likely to decrease to around 5%. In this case, the
premium over the regional margins is likely to reduce.
Table 1.11
Variations in Refining Margins ($/bbl)
Crude Price Regional Refining Indian Refining Premium of Indian refining
Margins Margins Margins
25 2.5 4.0 60%
25 1.5 2.9 93%
25 0.5 1.8 260%
20 2.5 3.8 50%
20 1.5 2.7 77%
20 0.5 1.6 210%
Source: ICRA estimates
One issue of concern for the Indian market is the oversupply situation, which is likely to
continue over the medium term. This implies that either refineries may be forced to operate
at a lower capacity utilisation levels--a loss-making proposition for newer refineries due to
higher operating leverage--or these units may be forced to export products--another loss-
making proposition since export sales would be at FOB prices less transportation cost, unlike
domestic sales which are at CIF price plus transportation costs. However, the price
realisation and margins would be higher if one exports products of premium quality to
Western countries like the US – wherein the cost of refining is higher because of
environmental pressure. Reliance has adopted this strategy and is increasingly exporting
premium quality products. Barring this, however, the earnings prospects from the refining
segment seems to be limited because of the oversupply situation.
On the marketing side, marketing margins under APM were quite low since the companies
operated under a cost plus assured return basis. The marketing margins in other
deregulated markets are quite high–around three to four times the margins earned by the
Indian companies under APM. While, marketing margins have improved from the APM
level, they have not yet reached their potential level. The oil companies in India have not
fully benefited from the decontrol of auto fuel prices due to high oil prices globally coupled
with limited flexibility in changing retail prices. Further, LPG and SKO are contributing
negatively to the earnings of the marketing companies due to fixed retail prices coupled with
subsidies far lower than the actual outgo of the oil companies.
The marketing margins are primarily a function of the replacement value of the assets. On
initiating full decontrol, they are expected to increase from the regulated level and settle in a
band--the upper limit defined by the cost of setting up a retail outlet and the lower limit
defined by the cost of closing a retail outlet. The logic is: if one considers a particular
product, which has historically been sold at controlled prices, earns greater margins on
decontrol (which is greater than the return on setting up and operating a retail outlet) many
new entrants would enter the market. This would result in diminishing of the margins till
the point the new retail outlets just manage to meet their cash operating cost, beyond which,
the new outlets would be forced to close operations and the margins would improve with
lesser number of players in the market. This trend has been witnessed in other markets
where deregulation was initiated. For example, countries like France and Australia - where
the margins in the controlled regime was higher than the replacement value of assets –

Oil & Gas Sector
witnessed a decline of about 50% and 30% respectively in the marketing margin post
deregulation. Similarly, a jump in marketing margin of over 30% and 100% was witnessed in
countries like Thailand and Singapore respectively on initiation of the decontrol process. The
margins in these countries were controlled at artificially low levels in the controlled regime.
Location of the retail outlets assume paramount importance in a decontrolled regime. Retail
outlets located in high traffic industrial corridors, prime metropolitan areas and the deficit
regions (primarily Northern) of the country, are likely to see a higher throughput and asset
utilisation and hence higher profitability.
Thus, ownership of marketing assets assume paramount importance in deregulated markets.

The market becomes very competitive in the long run and the players adopt a number of
strategies to increase customer base and improve market share and, therefore, earning
prospects. Some of the market-related strategies are mentioned as follows:
• Launching premium products. For e.g., Speed petrol by BPCL; Premium petrol and
Super diesel by IOC; and Power petrol by HPCL.
• Customer loyalty programs. Petrocard and Smartfleet Card by BPCL; ICICI Bank-
HPCL co-branded credit card and prepaid HP Smart 1 card by HPCL; Smart Gold
prepaid card, Indian Oil-Citibank co-branded credit card and Power plus fleet card in
association with Sundaram Finance by Indian Oil.
• Branding: Pure for Sure by BPCL, Quantity & Quality by IBP, Club HP by HPCL
• Increasing control over retail outlets. For preventing poaching of retail outlets, oil
companies are increasing their control over the retail outlets. For e.g., IOC has increased
the share of controlled retail outlets from 22% in FY1999 to 43% in FY2002. HPCL has
also improved it from 57% in FY2001 to 67% in FY2002. BPCL also has around 68%
retail outlets under its control as of March 2002.
• Strengthening market infrastructure. This is being done by adding new retail
outlets, improving the quality of existing retail outlets and selling other products and
services at the outlets. For e.g., “In & Out”, the branded convenience format leverages
the strength of individual players in differing fields to offer a bundle of products and
services through BPCL’s network.
In a deregulated market, apart from the tariff structure and presence of marketing assets, it
is the competitiveness of Indian refineries that will ultimately influence margin expansion.
The constituents of net cash margina measure of competitivenessinclude the Complexity
Level, Operating Costs and Location of Refinery. On the complexity front, the average Indian
refinery's complexity is significantly lower than the world average, with the average Indian
refinery complexity index at a little over 4 versus the world average of 6.6, and hence,
adequate investments will have to be made in adding secondary processing facilities like
catalytic reformers and hydrocrackers. Newer refineries, such as those of RPL, have an
advantage on this front and are expected to see an enhancement of margins on this count.
The operating costs of existing Indian refineries are competitive with respect to a
pacesettera refinery or group of refineries that excels over a whole range of performance
benchmarks, including energy efficiency, productivity and yield. The new private sector
Indian refineries are expected to reap the advantages of economies of scale and be
competitive on the operating cost front. However, the higher fixed costs (interest and
depreciation ) relative to the PSU refineries may act as a drag on the net margins of the
newer refineries.
On the location front, a refinery situated in a high-demand, product-deficient region that

receives crude by pipeline can achieve margins up to US$2/bbl, or even higher. Similarly,
coastal refineries without any marketing infrastructure may face the threat of dumping.

Oil & Gas Sector
ICRA’s projections on the demand-supply scenario show that India has shifted from its
historical product-deficient position to one of a surplus market. However, given the size of
the Indian market, regional supply-demand balances will play a key role in determining the
product price realisations of individual refineries. This, in turn, will attract investments
either to increase production or to build infrastructure so that the products can be delivered
to deficient areas, particularly the Northern region of the country.
INVESTMENT CLIMATE
Growth Trend
India witnessed a healthy consumption growth of refined products during the period FY1981
– FY2000 of 6.8%. However, thereafter the slowdown in the economy resulted in a modest
consumption growth of 2.7% during the period FY2000-FY2004. The consumption growth has
more or less tracked the economic growth due to strong co-relation with GDP growth.
Chart 1.6
Petroleum product Consumption vs.

GDP growth
8
7
6
5
4
3
2
1 Consumption
0
Grow th (CARG)
VII Plan 1990- 1991- VIII Plan IX Plan
(1985- 91 92 (1992- (1997- GDP grow th
90) 97) 02)
Historically, there used to be a deficit of petroleum products in India. There always used to
be a gap between production from the refineries and consumption. The deficit used to be met
through imports. The situation changed in FY2001 with the full year operation of the
Reliance refinery, which was commissioned in FY2000. Post FY2001, India has started
witnessing a surplus situation in refined products.
Chart 1.7
Domestic Production & Consumption

of Petroleum Products (mn. tonnes)
150
100 Consumption
50 Production
0
81
FY 5
FY 0
FY 5
FY 0
FY 1
FY 2
FY 3
04
8
0
19
19
19
19
20
20
20
20
20
FY
FY

Oil & Gas Sector
Chart 1.8
Y-o-Y growth in Refining Capacity
80.0%
60.0% 60.7%
40.0%
20.0%
8.3% 12.5% 7.7%
0.0% 1.9% 0.0% 1.9% 0.1% 2.0%
96
97
98
99
00
01
02
03
04
19
19
19
19
20
20
20
20
20
FY
FY
FY
FY
FY
FY
FY
FY
FY
The year FY2000 has also seen capacity expansions by other players such as: MRPL (6 mtpa
expansion); HPCL, Vishakhapatnam (3 mtpa expansion);IOC, Koyali (3,500 mtpa
expansion). The total incremental capacity added during FY2000 was 60.7% of the installed
capacity in FY1999. Other years showing relatively higher incremental capacity addition
were FY1996 (8.3%); FY1999 (12.5%) and FY2004 (7.7%).
Increased level of investment has been made in the marketing segments. For example, the
retail outlets increased by 28.3% during FY1999-2004
Chart 1.9
Retail Outlets
30000 22940
17189
20000
10000
0
FY1999 FY2004
The trend of production in Oil & Gas has already been discussed in the section on “Market
Characteristics”.
I n d i a Adv a n ta ge / Di s a dv a n ta g e
Advantage Disadvantage
Low per capita consumption of Petroleum products Marginal consumption growth in the recent past
Surplus in most refined products Inadequate availability of crude oil & natural gas. LNG
projects and gas discovery by Reliance may ease the
pressure to some extent.
High level of taxes Refined products enjoy duty protection
Extensive marketing and distribution infrastructure Infrastructure bottlenecks (Roads, Railways, Ports)
Sector has been theoretically fully decontrolled Declining level of subsidies and rigidity in retail prices
affect the profitability in the marketing segment. Price
competition has not happened as yet.

Oil & Gas Sector
Regulations
The Indian oil sector is under the purview of the Ministry of Petroleum and Natural Gas
(MoP&NG). This ministry is entrusted with the responsibility of overseeing exploration and
production of oil and natural gas, and the refining, distribution, marketing, import, export
and conservation of petroleum products. The three key organisations under the
administrative control of the MoP&NG are the Oil Co-ordination Committee (OCC)5, the
Oil Industry Development Board (OIDB) and the Directorate General of
Hydrocarbons. Set up in 1975, the OCC played a pivotal role in the Indian oil sector, by
assuming responsibilities in the areas of:
• determining the product mix of refineries;
• allocating indigenous and imported crude oil to Indian refineries;
• planning for imports, transportation requirements and storage infrastructure, based on
short-term estimates for supply/demand;
• administering the pricing mechanism for controlled petroleum products;
• monitoring the oil pool account;
• co-ordinating marketing functions;
• organising monthly industry co-ordination meetings and supply plan meetings to resolve
problems and work out supply plans and maximise product yields; and,
• monitoring the performance of the oil industry to achieve optimality.
With the full decontrol of the petroleum sector from April 1, 2002, the OCC has been
dismantled and has been replaced by the Petroleum Planning and Analysis Cell (PPAC). The
PPAC's role is to analyse the trends in the international oil markets and domestic prices;
forecasting and evaluation of petroleum imports and export trends; maintenance of
information database and communication system to deal with emergencies and unforeseen
circumstances. It also has the role of administering the subsidies in LPG sale as well as the
freight subsidy for far-flung areas and operationalise sector-specific surcharge schemes.
The OIDB, also set up in 1975, provides financial and other assistance as is appropriate for
the development of the oil industry. The financial assistance is extended by way of loans and
grants for activities like prospecting, refining, processing, transporting, storing, handling
and marketing of mineral oil and oil products.
Set up in April 1993, the Directorate General of Hydrocarbons (DGH) functions as an

independent regulatory body for supervising the activities of companies in the upstream oil
& gas sector in the national interest and to oversee that oilfield development in the country
confirms to sound engineering practices.
Cr i ti c a l Is s u es tha t n ee d to b e a d d re s se d
! Auto fuel prices: Revision of prices of auto fuel (MS and HSD) require the approval of
the Government, despite the fact that these products have been deregulated. Non-
revision of prices of auto fuel, especially during periods when international prices rise,
affect the marketing margins of oil companies.
! Price Competition: There is no price competition in auto fuel among the different
players at any given location in the country (barring some exceptions reported in
Gujarat). The implication of this is that the consumer is yet to see the full impact of
deregulation/
5 Replaced by Petroleum Planning and Analysis Cell (PPAC) on April 1, 2002

Oil & Gas Sector
! Subsidy on LPG/SKO: In the case of these two fuels, while the retail prices are rigid in
nature, the subsidy from the government (to compensate for the difference in
international prices and domestic retail prices) is low and is showing a declining trend.
This has resulted in oil companies showing losses on account of under-recovery in these
two products.
! Regulatory Issues: As mentioned in a subsequent section on regulations, the Gas
Pipeline policy and the Petroleum Regulatory Bill are still awaiting finalisation.
Finalisation of these regulatory issues is expected to streamline the operations of the
various companies in natural gas distribution and petroleum products marketing.
! LNG Issues: Promoters of LNG projects are requesting the GoI to put in place a
comprehensive fiscal policy on LNG for the successful commercialisation of their projects.
Some of the concessions desired by the promoters include:
• Classification of LNG import terminals as infrastructure projects. This would entitle
them to all the tax incentives available to infrastructure projects;
• Concession on import duty on capital goods imported for setting up LNG terminals.
The current import duty is 53.8%; and,
• Uniformity in sales tax on the sale of natural gas. This varies from 3% to 22%,
depending on the location of the terminal and the ultimate consumer.
The LNG promoters as also the other gas suppliers have two other areas of concern
! Absence of bankable customers: The key customers of gas are the Power and
Fertiliser sectors. Both these sectors have shown reluctance to switch to LNG. The power
sector is unwilling to switch to LNG as LNG prices are normally linked to Naphtha
prices – which are much higher than the Fuel Oil price to which natural gas prices are
linked. Further, there is a need for restructuring and rationalisation of the power sector
and the State Electricity Boards (SEBs) so as to improve the creditworthiness of the
customers. For the fertiliser sector, with the abundance supply of Natural Gas in the
middle east, it makes more sense to manufacture a fertiliser like Urea in the Middle East
at a cost of $100/tonne and import it to India, rather than rely on gas sourced through
the LNG route and manufacture Urea domestically at a much higher cost of $250/tonne.
However, piped natural gas for supply to residential and commercial customers may find
an attractive customer base for the LNG suppliers. This option appears to be more
attractive commercially due to economies of scale and also due to the fact that the piped
natural gas would be competing with LPG prices. To substantiate this point, it may be
mentioned that the piped natural gas (currently supplied in Delhi and Mumbai) costs
approximately Rs. 1806 for a household per month as compared to Rs. 260 for LPG.
6 Consumption of 15 m3 of piped natural gas at Rs. 11.8/ m3

Oil & Gas Sector
Chart 1.10
Naphtha versus FO price
300
250
200
150
Naphtha
100
FO
50
0
FY1999
FY2000
FY2001
FY2002
FY2003
FY2004
Source: Compiled from Industry Sources
Figures are Arab Gulf price (US$/tonne)
! Finalisation of a Gas Regulatory Bill addressing issues such as creation of a

competitive gas market, ensuring a level playing field for all players and to ensure that
the customer gets the best value for their money.
H u m a n R e s o u r ce s
Compared to many other sectors, the Oil & Gas sector is not labour intensive. However, as
this is a very specialised industry, the industry employs skilled labour. The total labour
employed by this industry is estimated to be 1,30,000 approximately. The employee strength
of some of the prominent companies is mentioned in the following table.
Table 1.12
Company No. of Employees
ONGC 40,000
GAIL 3,500
IOC 31,500
HPCL 11,300
I n fr a s tr u c tu r e
The Infrastructure facilities of some of the key players in the Oil & Gas Industry is
mentioned as follows:
IOC
Indian Oil's Marketing Network is spread throughout the country with over 22,000 sales
points (the largest in the country). These include petrol / diesel stations, consumer outlets,
lube distributors, SERVO SHOPS, SKO/LDO dealers, LPG distributors, etc. The Regional
offices look after the North, East, West and Southern Regions of India, and Assam Oil
Division supplements operations in the NorthEast. A number of State Level, Divisional and
Indane Area offices have been established in each Region.

Oil & Gas Sector
Petroleum products are essential inputs to the industrial, transportation, commercial and
household sectors. The Constituents of the extensive network of sales points is shown below:
Table 1.13
Unit Number / Quantity

Divisional Offices 44
LPG Area Offices 35
State Offices 15
Terminals and Depots 167
Aviation Fuel Stations 94
Total Product Tankage 68.89 Lakh kl.
LPG (Indane) Bottling Plants 87
LPG Bottling Capacity 3654 Tonnes p.a.
Petrol / Diesel Stations 9138
SKO/LDO Dealers 3521
Indane Distributors 4337
SERVO Stockists 204
Bulk Consumer Outlets 4858
Towns with Indane 2064
Indane Customers 349 Lakh
HPCL
HPCL’s infrastructure comprises refineries, cross - country pipelines, LPG bottling plants, lube blending
plants, and other facilities. This is supported by its extensive network of retail outlets, regional offices,
terminals and depots as mentioned in the following table.
Table 1.14
The HP Network
4 Zonal Offices
37 Retail Sales Regional Offices
18 Direct Sales Regional Offices
21 LPG Sales Regional Offices
35 Terminals, Installations and Tap - off Points
2 LPG Import Installations
40 LPG Bottling Plant
10 Aviation Servicing Facilities
Lube Blending plants and a lube pipeline for base oil
6
evacuation
90 Inlay Relay Depots
4729 Retail Outlets
1638 SKO/LDO Dealerships
1822 LPG distributorships
The Corporation has its own product pipelines. The Mumbai - Pune Product Pipeline (MPPL) in
Western India of 3.67 MMTPA capacity is 161 kms long and is used for transporting MS, SKO,
HSD & LDO to the terminals at Vashi and Pune. Another Pipeline, from Visakhapatnam in the
South - East to Vijaywada, runs for 350 kms and has a capacity of 5.38 MMTPA. This pipeline
has been extended to Secunderabad with a throughput capacity of 1.94 MMTPA expandable to 3
MMTPA
BPCL
The Retail SBU of Bharat Petroleum is engaged in the retailing of Petrol, Diesel and
Kerosene, besides various Non-Fuel Products and value-added services through its network
of 4562 retail outlets and 970 Kerosene dealers.
The Corporation meets its LPG customers' needs through its huge infrastructure comprising an All India
network of over 1600 Distributors and more than 42 LPG Territory Offices
GAIL
GAIL is the owner and operator of:
• India's largest Gas Transmission Networks (4600 km pipelines)
• World's longest exclusive LPG pipeline (1269 km)

Oil & Gas Sector
• Seven Gas Processing Facilities with an aggregate capacity of 1.3 MMTPA of LPG,
Propane, Pentane and SBP
• India's largest gas-based Petrochemicals Complex with an installed capacity of 260,000

TPA of Polyethylene (HDPE, LDPE, LLDPE)
• Optic Fibre Cable Network of more than 8,000 Kms to offer bandwidth as a Carrier's
Carrier in the Telecom sector
POLICY FRAMEWORK
T a x a ti o n
The Indian Oil & Gas sector is a heavily taxed sector. The petroleum sector contributes to
over 20% of the customs and excise duties collected by the government. The major
components of the revenue contributed by the oil companies to the state and central
exchequer are as follows:
• Corporate Taxes: At the rate of 35% of profit before tax;
• Crude Oil: Royalty of 20% of well-head value with a ceiling of Rs. 850/tonne; Cess of Rs.
1800/tonne under the Oil Industries Development (OID) Act; Sales tax of 4%; Custom
duty of 10% on imported crude; Rs. 50/tonne National Calamity Contingent Duty
(NCCD).
• Natural Gas: Royalty of 10% and sales tax varying from State to State; On Liquefied
Natural Gas (LNG), 5% customs duty and 16% Excise Duty. Sales tax on LNG varies
from State to State, and Gujarat State (in which 2 LNG projects are present) has recently
(February 2004) slashed the sales tax on LNG from 20% to 12%.
• Petroleum Products: Custom Duty and Excise Duty (as detailed in the following
tables). Sales tax and other state level taxes on domestic sales (as detailed in the
Annexure)

Oil & Gas Sector
Table 1.15
Custom Duties
(in %)
FY2002 FY2003 FY2004 FY2004 ® FY2005
LPG 10 10 10 10 10
MS 20 20 20 20 20
Naphtha 10 10 10 10 10
Kerosene 5 10 10 10 10
Diesel 20 20 20 20 20
ATF 20 20 20 20 20
FO/LSHS 20 20 20 20 20
Bitumen 20 20 20 20 20
Others 20 20 20 20 20
Natural Gas 10 10 10 10 10
LNG 5 5 5 5 5
Table 1.16
Excise Duties
(in %)
FY2002 FY2002 (R) FY2003 FY2004 FY2004 ® FY2005
LPG 8 8 16 16 16 8
MS 32 90 32 +Rs.7/l 30 + Rs. 7.5 /litre 30 + Rs. 7.5 /litre 26+Rs.7.5/l
Naphtha 16 16 16 16 16 16
Kerosene 8 8 16 16 16 16
Diesel 16 20 16 + Rs. 1/litre 14+Rs.1.5/litre 14+Rs.1.5/litre 11+Rs.1.5/litre
ATF 16 16 16 16 8 8
FO/LSHS 16 16 16 16 16 16
Bitumen 16 16 16 16 16 16
Others 16 16 16 16 16 16
Natural Gas 0 0 0 0 0 0
LNG 16 16 16 16 16 16
There have been some occasions when oil companies have been able to extract concessions
from the government. For example, the refinery set up Reliance at Jamnagar (Gujarat) was
provided a 15-year Sales tax (including Central Sales Tax) deferral by the Gujarat State
Government.
P o l i c ie s
This Section discusses the various regulations at the National and regional level, which is
expected to have a direct/indirect impact on the various oil and gas, companies operating in
India.
Gujarat Gas Act

Key Features of The Act
With the objective of regulating the transmission, supply and distribution of Gas in Gujarat,
the Government of Gujarat had notified Gujarat Gas Act, 2001 vide a gazette notification
dated April 28, 2001. The proposed role of the regulator as per this act was as follows:

Oil & Gas Sector
a) to regulate transmission, supply and distribution of gas in the State and laying of
pipelines there for,
b) to promote gas industry in the State in accordance with the direction given by the State
Government
c) to give direction to a licencee for ensuring compliance of terms and conditions of a licence
held by him,
d) to regulate the charges for transmission,
e) to promote efficiency, economy and safety of use of gas in the State,
f) to give direction to a supplier or bulk consumer for ensuring compliance by him of the
standards of safety, operation and environment for supply or bulk consumption of gas,
g) to set and enforce standards of safety, operation and environment for transmission,
supply and distribution and bulk consumption of gas,
h) to lay down by regulations the principles of common carrier for transmission and
distribution and to enforce the same.
i) to adjudicate upon the disputes and differences amongst licensees and suppliers, or
between the specified company and a licensee or a supplier or between a supplier and a
person who buys gas from supplier and to refer matters for arbitration if considered
necessary, in accordance with the provisions of this Act,
j) to hold, wherever necessary, an inquiry in accordance with such procedure as may be
prescribed,
k) to advise the State Government on matters relating to transmission, supply and
distribution of gas in the State, and
l) to perform such other functions as may be prescribed or as are supplemental, incidental
or consequential to any of the functions entrusted to it by or under this Act.
On notification of the Gujarat Gas Act, the key emerging issue was that multiple gas
regulatory frameworks by various states may appear in the medium to long term as gas is
expected to occupy a prominent share of the Country’s primary energy consumption. This
may in turn result in operational complexities for inter-state pipelines, as different segments
of the same pipeline may be subjected to different regulatory frameworks. Thus, the
legislative competence of the Act was referred vide a Presidential reference to the Supreme
Court of India in October 2001.
Status of The Act

On 25th March, 2004, a five-judge bench of the Supreme Court quashed the Gujarat
government’s controversial Gujarat Gas Act and with it the state’s attempt to regulate its
gas sector independent of the Central Government. The Supreme Court declared that “States
have no legislative competence to make laws on the subject of natural gas and Liquefied
Natural Gas under Entry 25 of List II of the seventh schedule to the Constitution”. As per
the judges, Natural gas being a petroleum product, under Entry 53, List I, the Union
government alone has got legislative competence. In their ruling, the five judges were clear
that Gujarat does not have “any legislative competence” to enact the ‘Gujarat Gas
(Regulation of Transmission, Supply & Distribution) Act, 2001’ with the damning verdict
that: “The Act is to that extent ultra vires of the Constitution.” Spearheading Delhi’s
argument against Gujarat was India’s Attorney General, Soli Sorabjee. Judges said they
agreed fully with Sorabjee’s contention that: “The Central government has undertaken the
task of ensuring balanced growth in supply, transmission and distribution of natural gas and
natural gas being a ‘petroleum product’ falls exclusively in the domain of central legislation.”
Sorabjee argued that the Gujarat Gas Act impinged directly upon the authority of the Union
and was unconstitutional. Judges further demolished the argument of Gujarat counsel Ashok
Desai who argued that Entry 25 of List II includes all types of gases and therefore any
legislation related to ‘gas and gas works’ was perfectly within the legal competence of the
state. But in their 31-page ruling, judges distinguished between the term ‘natural gas’ and

Oil & Gas Sector
‘gas works’ and ruled that Entry 25 of List II covered only ‘manufactured gas’ and not
‘natural gas’.
Oil ministry officials believe the Supreme Court ruling paves the way for the swift
introduction of long pending legislation to oversee the Indian hydrocarbon sector.
With the quashing of the Gujarat Gas Act, the regulatory framework for the pipelines in
Gujarat (and elsewhere in the country) would fall under the proposed Petroleum Regulatory
Board Bill, 2002 and the national gas pipeline policy, both of which are awaiting finalisation.
Till such time that these are finalized, it appears that the Oil ministry will have the final say
in the issues relating to the pipelines in Gujarat State. The state owned pipeline companies
(such as GSPL) expected to now take permissions to lay pipelines from the Oil Ministry
instead of the State Government for laying its future pipelines
The Petroleum Regulatory Board Bill, 2002

Key Features of The Bill
This bill was introduced in the Parliament on May 6, 2002 to provide for the establishment of
the Petroleum Regulatory Board to regulate the refining, processing, storage, transportation,
distribution, marketing and sale of petroleum and petroleum products excluding production
of crude oil and natural gas so as to, protect the interests of consumers and entities engaged
in specified activities relating to petroleum and petroleum products, ensure uninterrupted
and adequate supply of petroleum and petroleum products in all parts of the country,
promote competitive markets and for matters connected therewith or incidental thereto.
The Board is expected to:

(a) protect the interest of consumers by fostering fair trade and competition amongst the
entities;
(b) authorise entities to —
(i) market notified petroleum and petroleum products;
(ii) establish and operate liquefied natural gas terminals;
(iii) lay, build, operate or expand a common carrier;
(c) declare pipelines as common carrier;
(d) regulate —
(i) access to common carrier by regulations so as to ensure fair trade and competition
amongst entities;
(ii) transportation rates for common carrier by regulations;
(e) in respect of notified petroleum and petroleum products —
(i) ensure adequate availability;
(ii) ensure display of information about the maximum retail prices fixed by the entity for
consumers at retail outlets;
(iii) monitor prices and take corrective measures to prevent profiteering by the entities;
(iv) secure equitable distribution;
(v) provide by regulations and enforce, retail service obligations for retail outlets and
marketing service obligations for entities;
(f) levy fees and other charges as determined by regulations;
(g) maintain a data bank of information on activities relating to petroleum and petroleum
products;
(h) perform such other functions as may be entrusted to it by the Central
Government to carry out the provisions of this Act.
Status of the Bill

While the original bill was introduced on May 6, 2002, it was referred to a Parliamentary
Standing Committee attached to Ministry of Petroleum for review. The bill is awaiting
enactment.

Oil & Gas Sector
The Draft Gas Pipeline Policy

Key Features of The Bill
On September, 29, 2003, the Government of India announced a draft pipeline gas policy
envisaging laying of 7,000 kilometre of long pipelines network for gas transportation at a cost
of around Rs. 180 bn. (US$4bn.) in the next five to six years.
As part of this policy, the Government proposes to set up a National Gas Grid on the pattern
of the National Power Grid to manage the distribution effectively. While individuals would
be permitted to lay pipelines for distribution purposes up to a certain limit, say 100 km, but
if the length was beyond the prescribed limit, the construction work would be carried out in
accordance with the "common carrier principle'' to avoid duplicity and wasteful expenditure.
The main objective was to put in place the distribution system for carrying the gas with its
availability likely to improve with its having been struck at several places and arrangement
having been tied up for movement of LNG.
Under the proposed policy, all trunk pipelines covering more than one State or operating at a
pressure more than the notified level will be built or managed by a company to be notified by
the Government and till it is notified by Gas Authority of India Limited.
The policy envisages appointment of a regulator under the Petroleum Regulatory Board Bill
2002 for regulating transmission, distribution, supply and storage system for natural
gas/LNG and to promote development of the sector. The regulator will ensure access to gas
pipelines on non-discriminatory common carrier principle for all users. Cabinet approval
would be obtained for setting up of the regulatory authority and the Bill would be put before
Parliament for discussion. And the tariff for the transmission pipelines and distribution
pipelines would be approved by the regulator.
The salient features of this draft policy is as follows:
1. Objectives
Gas sector and gas transport in particular is developing rapidly in India. With the recent
discoveries of gas on the Western Coast and the Eastern Coast offshore and on-land in
Rajasthan, there is need to promote investment in gas pipelines and to provide inter-
connectivity between regions, consumers and producers. The present guidelines aim to
provide a framework for future growth of the gas sector.
Government of India in public interest propose to adopt the following guidelines for laying
natural gas pipelines in the interim period till a statutory provision is made.
2. Regulation of Gas System.

A Regulator will be appointed for regulating, transmission, distribution, supply and storage
system for natural gas/liquefied natural gas (LNG) and to promote development of the sector.
He will oversee access to the gas pipeline on non-discriminatory, common carrier principle
with level playing field for all users. He will approve tariff rates for gas transmission in all
cases where gas is transported on common carrier principle and tariff has not been finalized
by the users with the owners of the pipeline. He will also perform such other functions as
may be prescribed or assigned to him in relation to above subject. Till a Regulator is
appointed under the Petroleum Regulatory Board Bill, 2002, Government will perform its
functions.

Oil & Gas Sector
3. Transportation of Gas
Transportation of all gas will be done through a network of pipelines laid in accordance
with authorization granted by the Regulator. No pipeline will be laid without such
authorization. Any producer of gas or other person desirous of transporting gas owned
by it will negotiate with the pipeline owner on term of transportation as may be
mutually agreed. If any issue arises relating to operation of pipeline on non-
discriminatory basis or tariff of pipeline, the parties may approach the Regulator who
may pass such orders as may be appropriate and fair on the facts of the case.
4. Long Term Plan

The Regulator will prepare a long term plan for Gas Pipeline Network. He will prepare a
perspective plan for the growth of gas pipeline network in various States and across various
Regions in consultation with the State Governments to enable industrial growth,
development of such networks and extensive commercial usage of gas. While approving new
gas pipelines the long term plan will be kept in view by the Regulator.
5. Policy for Grant of Authorization

(i) Any person or company desirous of laying a pipeline for transmission of natural gas will
apply to the Regulator who will, after a summary scrutiny regarding financial
capability, existing gas network, expected utilization of pipeline capacity and linkage
with gas producing and consuming areas get it published for filing objections within a
period of ninety days.
After considering the objections filed within the above period and other details of the
proposal, the Regulator will either grant or refuse authorization for laying of gas
pipeline within sixty days of the last date of filing of objections.
The Regulator while deciding on the above issue will consider (i) long term plan for
development of pipeline network (ii) impact of pipeline on efficiency, and inter-
connectivity of gas transportation system, (iii) effect on monetization of gas being
produced and (iv) enhancing availability to consumers of gas. While giving the
authorization the Regulator may prescribe additional pipeline capacity to take care of
future gas transportation needs or lay such other conditions as are considered essential
for an efficient gas transmission system.
(ii) All trunk pipelines for transportation of gas across the country covering more than one
state or pipelines with natural gas pressure of more than notified level will be
built/managed by a Company to be notified by the Government and till it is notified by
GAIL.
(iii) Any producer of gas, subject to prior permission of the Regulator (and for the PSU’s
Central Government) will have the right to sell gas within 100 kms. of well head or
land fall point to consumers directly and lay the pipeline for this purpose.
7. Use of Gas Pipeline

All gas pipelines except captive transmission gas pipelines laid for exclusive use of a large
consumer will be built on common carrier principle and their capacity will be expanded or an
additional pipeline laid if so desired by the Regulator to meet the requirement of new
players.
If a person owning the pipeline is unable to expand it or take steps within a reasonable
period to do so, the Regulator may get the expansion done through the notified Company or

Oil & Gas Sector
in any other manner. The entire pipeline along with the old system made will then be
maintained by the notified Company or as desired by the Regulator, till such time as may be
necessary to provide services to the consumers and enable recovery of investment.
The pipelines will be used by all players on non-discriminatory basis.
8. Tariff
Tariff for the transmission pipeline and/or for the distribution pipelines would be approved
by the Regulator so as to provide a reasonable rate of return as may be fixed by the
Regulator. This tariff should be applied as a cap to enable lower negotiated rates based on
market prices.
9. Grid Connectivity
To ensure grid connectivity the Regulator may issue appropriate directions for operations of
any pipeline network existing on the date of this policy or for which any authorization has
been granted and the pipeline is yet to become operational and such direction may include
taking over management of the pipeline by the notified Company for a specified time.
10. National Advisory Council

To promote and develop the gas sector there shall be “National Advisory Council” consisting
of stake holders of the gas grid system. The Council will give advice on the matters to the
Government, and if so desired, to the Regulator.
Status of the Policy

The Policy is awaiting finalisation.
The NELP
Key Features of The Policy
India is heavily dependent on imports to meet the rapidly growing demand for petroleum
products. Current demand and supply projections indicate that the level of self-sufficiency is
likely to decline to about 30% over the next few years. Substantial efforts are therefore,
necessary to boost the level of exploration activity in the country, so that, new finds can be
made and the level of crude oil and gas production significantly increases in the years to
come. India today remains one of the least explored regions with well density per thousand
sq. kms. being among the lowest. It is also evident that vast amount of capital investments
are necessary if exploration efforts are to be substantially augmented. Therefore, there is
need to attract both the National Oil Companies (NOCs), as well as, private sector oil
companies to invest in this critical area.
With this background, a New Exploration Licensing Policy (NELP) was formulated by the
government in 1997-98 to provide a level playing field in which all parties could compete on
equal terms for the award of exploration acreage. The salient features of the NELP are:
A. GENERAL
• Fiscal stability provision in the contract

• Finalisation of contract on the basis of Model Production Sharing Contract (MPSC)
• Petroleum tax guide is in place to facilitate investors
• Possibility of seismic option in the first phase of the exploration period
• NOC's to compete for acreages

Oil & Gas Sector
B. FISCAL AND CONTRACTUAL TERMS
No payment of signature, discovery or production bonus
• No customs duty on imports required for petroleum operations

• No minimum expenditure commitment" during the exploration period
• No mandatory state participation/carried interest by NOCs.
• Freedom to sell crude oil and natural gas in domestic market at market related prices
• Biddable cost recovery limit up to 100%
• Sharing of profit petroleum based on pre-tax investment multiple achieved and is
biddable
• No cess on crude oil production
• Royalty payment for crude oil on ad-valorem basis
o 12.5% for on land areas
o 10% for offshore areas
• Royalty on deep water areas (beyond 400m bathymetry) - 5% for first seven years after
commencement of commercial production
Option to amortise exploration and drilling expenditures over a period of 10 years from first
commercial production
• Contribution to site restoration fund fully deductible in same year for income tax
• Liberal depreciation provisions making companies eligible for further tax adjustments
Infrastructure status - 7 years tax holiday from commencement of production
• Conciliation and Arbitration Act, 1996, which is based on UNCITRAL model shall be
applicable.
C. BID TERMS
Companies would be required to bid for:
• Work programme commitment

• Profit petroleum share expected by the contractor at various levels of pre-tax
multiple of investments .
• Percentage of annual production sought to be allocated towards cost recovery
D. BID EVALUATION CRITERIA

Evaluation of bids will be carried out based on weightage assigned under the following four
main criteria:
Criteria Weightages on a scale of 100 points Shallow Offshore & Onland Areas Deepwater
blocks
Table 1.17
Weightages on a scale of 100 points
Criteria
Shallow Offshore & Onland Areas Deepwater blocks
a. Technical
capability 6 9
b. Financial 4 6
strength 60 56
c. Work programme 30 30
d. Fiscal package
For work programme, the maximum weightage would be given to the work programme
commitment for exploration phase-I.

Oil & Gas Sector
Status of the Policy
So far 4 NELP rounds (past 5 years) have been announced and a total of 90 blocks were
awarded. This is against around 30 blocks awarded in the 10 years prior to the NELP. In the
4th round of NELP A total of 24 blocks comprising onland & offshore, including deepwater
blocks, are on offer are under offer under the fourth round of NELP. ONGC has bagged 15 of
the 24 oil and gas exploration blocks on offer in the fourth round of New Exploration
Licensing Policy (NELP).
The results of the NELP-IV bids have been evaluated and the recommendations have been
forwarded to the Empowered Committee of Secretaries (ESC). Following approval, Cabinet's
nod will be sought.
Cairn Energy won an on-land block on its own strength and one in association with ONGC.
BPCL bagged three blocks in partnership with ONGC. Meanwhile, HPCL bagged two blocks
in consortium with ONGC.
Gujarat State Petroleum Corporation bagged three on-land blocks - one in partnership with
Jubilant Enpro Ltd and GeoGlobal Resources, another with Jubilant Enpro, GeoGlobal and
Price Petroleum and the last with Enpro Finance and GAIL (India) Ltd.
RIL, which teamed up with Hardy Oil of UK to bid for eight of the 12 deepwater blocks on
offer, bagged one block. Totally, 19 companies bid for 22 out of the 24 oil and gas blocks on
offer. BG Group, Canadian Niko Resources and Russia's Zarubezneftgaz did not bag any
block.
Chart 1.11

Oil & Gas Sector
PROJECTS
Project initiatives of the major oil companies are presented in this section.
ONGC
Oil and Natural Gas Corporation Ltd plans to invest close to Rs 30,000 crore on LNG, power
and petrochemical projects in the three to four years.
This will be in addition to ONGC's annual investment target of Rs 10,000 crore on projects in
India and Rs 5,000 crore abroad. ONGC plans to exploit power-trading opportunities arising
from the Electricity Act 2003 by setting up three new gas-fired power projects totaling a
capacity of 3,546 MW.
The company also plans to sell around 1,000 MW surplus power produced at its Mumbai
High offshore platforms, Uran and Hazira assets apart from the Tripura and Assam
installations. It plans to set up a 1,000-MW plant at the Dahej special economic zone, a
1,446-MW plant at Mangalore and a 1,100-MW power station at Ennore in Tamil Nadu.
Total investments in power would be close to Rs 10,000 crore.
The company will need five to six million cubic metres of gas per day to fire these power
projects. Most of this would be gas saved after the company achieves zero flaring at its
installations by 2005-06.
ONGC plans to set up a 10-million-tonne LNG terminal at Mangalore, scheduled for

completion within 36 months after work begins at a cost of Rs 9,000 crore. It also plans to set
up petrochemical projects at Mangalore and expand capacity at Dahej. It also plans to double
the capacity of its Tatipaka refinery and will set up another mini-refinery at Ankleshwar. It
also plans to produce petrol, diesel and aviation turbine fuel at Uran.
ONGC is looking at enhanced oil and gas recovery from 15 onshore fields and will develop
three new fields G1-GS15 in the coming year he said. ONGC will outsource service contracts
for 93 marginal fields during this year, he said. The company will set up only three to five
new retail outlets under its brand name in this financial year.
IOC
DETAILS OF MAJOR ONGOING PROJECTS
(Estimated Cost More than 100 Crore)

(Rs. One crore = 10 million rupees = US$ 0.21 million approx.)
(One Million Metric Tonne per annum = 20,000 bpd)
PARA-XYLENE / PTA AT PANIPAT REFINERY
Project Cost: Rs. 5104 crore

Expected Commissioning: August 2005

Oil & Gas Sector
Benefits
On implementation, the production of para-xylene/PTA will result in import substitution and
value addition besides having an export potential.
Brief Description
The project envisages putting up of facilities at Panipat Refinery for separation of para-
xylene from 110-150 degree C Naphtha cut by pooling the feedstock from Mathura and
Panipat Refineries. The project considers facilities like splitter, reformer, extraction plant,
and toluene disproportion plant besides utilities for production of para-xylene.
PANIPAT REFINERY EXPANSION BY 6 MMTPA

Expected Commissioning: October 2005
Benefit
To meet the growing deficit of petroleum products in the high demand Northwest region of
India.
Brief Description
The proposed facilities comprise an additional CDU of 6 MMTPA along with Hydrocracker,
Delayed Coking Unit, Diesel Hydrotreater, Hydrogen Plant and Sulphur Recovery Plant.
NAPHTHA CRACKER AND POLYMER COMPLEX AT PANIPAT (HARYANA)

Expected Commissioning: 2nd Quarter of 2007
Benefits
This project is a cornerstone for Indian Oil’s entry into petrochemicals and a new business
line for growth. For the State of Haryana, this project shall lay the foundation for creation of
a world-class petrochemicals hub, which will engender significant industrial activity in the
coming years.
Brief Description
The project envisages setting up of a Naphtha Cracker based on captive utilisation of
naphtha from Panipat, Mathura and Koyali refineries of Indian Oil. With a capacity of
800,000 MT/year of ethylene production, the Cracker complex will have associated units viz.
hydrogenation, butadiene extraction, benzene extraction etc. besides downstream polymer
units like swing unit (LLDPE/HDPE), a dedicated HDPE unit, Polypropylene unit and MEG
unit.
GRASSROOT REFINERY AT PARADIP

Expected Commissioning: In 2009-'10.
Benefit
The project will help in partly meeting deficit of distillates viz. LPG, Naphtha, MS, Jet/Kero,
Diesel and other products, in the eastern part of the country.

Oil & Gas Sector
Brief Description
A 9 MMTPA grassroot refinery is planned to be constructed at Paradip in the state of Orissa.
The Refinery will have, apart from a Crude and Vacuum Distillation Unit, a Hydrocracking
Unit, a Delayed Coker Unit and other secondary processing facilities. It will also have an
integrated gasification combined cycle plant for production of steam, power and hydrogen
from petroleum coke for captive use in the refinery. This will be the most modern refinery in
India with nil residue production and the products would meet stringent specifications. 3344
acre of land has been taken over by Indian Oil and necessary infrastructure development
jobs prior to setting up of the main refinery are progressing.
CONSTRUCTION OF POL TERMINAL FOR ERIP, PARADIP
Project Cost: Rs 569 crore

Expected Commissioning: To synchronise with refinery completion.
LPG MARKETING TERMINALS AT PARADIP

Project Cost: Rs 220.81 crore
Expected Commissioning: To synchronise with refinery completion.
LINEAR ALKYL BENZENE PROJECT AT GUJARAT

Expected Commissioning: August 2004
Benefit
The project would help in improving the profitability / value addition of the refinery through
conversion of Kerosene stream into high value product.
Brief Description
The facility will enable production of 0.12 MMTPA of Linear Alkyle Benzene.
ADDITIONAL DIESEL HYDROTREATMENT FACILITIES AT MATHURA

Expected Commissioning: December 2005
Benefit
On implementation of this project the entire diesel produced from Mathura refinery will be of
0.035% wt sulphur (Bharat Stage III or Euro III specification).
Brief Description
Mathura refinery currently produces two grades of HSD - major production conforming to
BIS 2000 quality (of sulphur content 500-ppm max) and part production of low sulphur grade
(of sulphur content 500-ppm max). The low sulphur grade HSD partly meets the
requirements of NCT/NCR at present. The project is envisaged to cater to the future
requirements of HSD for NCT/NCR/Taj Trapezium area.
MS QUALITY UPGRADATION AT MATHURA
a) At Mathura
Expected Commissioning: January 2005

Oil & Gas Sector
Benefit
The implementation of this project will improve the quality of MS to meet EURO quality
norms.
Brief Description
Mathura refinery currently produces two grades of MS - major production conforming to BIS
2000 quality and part production of low benzene grade. The project is envisaged to cater to
the future requirement of MS for NCT/NCR/Taj Trapezium area.
b) At Haldia
Expected Commissioning: July 2005
c) At Gujarat
Expected Commissioning: June 2006
PANIPAT REFINERY EXPANSION LINKED PIPELINE PROJECT

Expected Commissioning: To be implemented in following three components. Phase-wise
commissioning schedule is given as under:
Brief Description:
a) Mundra - Kandla Crude oil Pipeline and Conversion of Kandla - Panipat Section
of KBPL to crude Oil Service.
Projects consists of following:

* Utilising Gujarat Adani Port Ltd.’s (GAPL) proposed Single Point Mooring (SPM) facilities
and associated 48” diameter marine as well as on-shore transfer pipeline for handling
additional crude oil for Panipat Refinery expansion and taking to Mundra crude oil terminal.
* Developing a tank farm consisting of 8 x 60000 kl crude oil storage tanks at Mundra and
laying 73 km 28” diameter pipeline from Mundra to scrapper station at Churwa (near
Gandhidham).
* Conversion of Kandla-Panipat section of KBPL into crude oil service.
Installation of crude oil handling facilities at Mundra by GAPL and construction of Mundra
tank farm as well as mainline progressing in full swing.
Expected Commissioning: December 2004, to synchronise with completion of Panipat

Refinery Expansion Scheme.
b) Extension of Koyali-Viramgam-Sidhpur product pipeline up to Sanganer

The project consists of extension of Koyali-Viramgam-Sidhpur Product Pipeline by 18”
diameter, 506 km long pipeline up to Sanganer and providing connection with Kot-Salawas
branch line at Kot and delivery facility at Sanganer Tap-Off-Point. Construction of mainline
and stations is in progress.
Expected Commissioning: November 2004.
c) Panipat-Rewari Product Pipeline

Project consists of laying 12” diameter, 160 km long product pipeline from Panipat to Rewari
and connecting to the delivery facility at Rewari. Construction of mainline and stations is in
progress. Project would be completed by Sept. 2004.

Oil & Gas Sector
CHENNAI-TRICHY-MADURAI PRODUCT PIPELINE SYSTEM
Project Cost: Rs. 409.26 crore

Expected Commissioning: July 2005
Brief Description: The Project consists of laying 526 km long pipeline from Chennai to
Madurai (14” diameter - 256 km and 10” diameter – 270 km, cost: Rs. 287.74 crore) and 157
km of 12” diameter branch pipeline to Sankari (cost: Rs. 75.47 crore) and construction of
marketing terminals at Trichy and Sankari (cost: Rs. 46.05 crore).
BRANCH PIPELINE TO CHITTAURGARH FROM SIDHPUR-SANGANER

PRODUCT PIPELINE
Project Cost: Rs. 127.68 crore
Expected Commissioning: December 2005
Benefit
Pipeline is meant for cost effective product placement at Chittaurgarh marketing depot,
which is getting constructed as a resitement of old Kota and Udaipur depots.
Brief Description: Project consists of laying a 12” diameter 160-km long pipeline from
Lasariya on Sidhpur-Sanganer Product Pipeline to Chittaurgarh (cost: of Rs. 82.58 crore) and
construction of marketing depot facilities (cost: Rs. 45.10 crore).
HPCL
1. Punjab Refinery Project

HPCL planned to set up a 9 MMTPA grass root refinery project at Phulokhari in Bhatinda district
of Punjab through its 100% subsidiary company. Guru Gobind Singh Refinery Ltd. The
estimated cost of project was Rs. 98 billion (June 1998 prices). Considering the change in Supply -
demand scenario, it is envisaged to implement the project in phases, initially as a 6 MMTPA
Refinery at a estimated cost of Rs. 8336.45 crores (Sept. 02 prices). All Environmental clearances
for the Project as well as linked projects have been received. Land, admeasuring 2000 acres
(approximately) has been acquired. All major statutory approvals have also been obtained.
Refinery and all associated facilities including SPM, COT and Crude Oil Pipeline are likely to be
completed during the year 2006.
2. Green/Clean Fuel Projects at Refineries

n order to meet the Euro III norms for MS & HSD products, Mumbai Refinery is setting up
project facilities at a cost of Rs. 1152 Crores. Similar projects for clean fuels at Visakh Refinery is
also under consideration
BPCL
Refinery has plans for massive expansion & modernization to increase capacity and efficiency, improve
safety, decrease energy and to meet stringent future product specifications.
Refinery Modernization Project

Plans worth Rs.1500 Crores of investment are being implemented as indicated below:
• Crude Distillation Unit / Vacuum Distillation Unit to improve yields and efficiency.

Oil & Gas Sector
• Hydrogen plant, Hydrocracker, SRU and associated facilities, to enhance product quality.
• Mounded LPG storage facility (instead of conventional Horton spheres) to improve safety
• 3rd Gas Turbine to be self sufficient in Power.
Enterprise Resource Planning (ERP)

ERP solution viz., SAP, a high-end solution to the business is being implemented right across the
organization. Once implemented this software will help to integrate nearly all the functions of the
organization enabling planning, tracking and using of resources (people, material and money) in the
best possible way.
Manufacturing Execution Solution (MES)

In keeping with our vision to be the best Refinery in the business, MES from M/s. Aspen Tech is being
implemented in the Refinery, which will include
• PIMS for Supply chain Management
• IP 21 for Production Management
• Advanced Process Control and Real Time Optimization.
• Simulation of Process Units
• Training Simulator
• LIMS for Laboratory Information Management.
GAIL
GAIL has conceptualised the following Pipeline Projects, most of which will form part of the
National Gas Grid:
1. Dahej-Vijaipur (DVPL)
The DVPL pipeline will lift gas from R-LNG terminal at Dahej to Vijaipur. Its first section
Dahej-Vemar is 82.5 km. The second section 527.5-km Vemar-Vijaipur will run parallel to
the existing HVJ pipeline. This pipeline, which total section is 42" in diameter and 610 km
with 30-MMSCMD capacity, has been completed in 2004.
2. HVJ Expansion Phase-III
The 920-km HVJ Expansion Phase-III project extends to Punjab, Haryana, Rajasthan and
Uttar Pradesh. This pipeline system with three new compressor stations and 12 terminals is
proposed for countrywide transportation and distribution of R-LNG to the existing and
future consumers.
The pipeline will be extended from Dadri to Sonipat, Panipat, Sangrur, Doraha (Ludhiana) to
Nangal and Bhatinda in Punjab and Haryana sectors. The pipeline will also be extended
from Vijaipur to Kota to Mathania and from Ibrahimpur to Dhaulpur in the Rajasthan sector
and the HVJ Auraiya-Jagdishpur line will be extended to IFFCO Phulpur in the Uttar
Pradesh sector.
3. Dahej - Hazira-Uran - Dabhol

The 1166-km Dahej-Hazira-Uran-Dabhol pipeline has a capacity of 24 MMSCMD, 12
MMSCMD from Dahej and 12 MMSCMD from Dabhol. The trunk pipeline route passes from
Dahej to Hazira to Gavlpada to Bhoirpada to Chindhran to Panvel to Dahivli to Ambewadi to
Dabhol. In addition, there are lines from Gavlpada to Nasik, Chindhran to Trombay,
Sanpada & Thana, Panvel to Uran, Dahivili to Pune, Ambewadi to Usar and Dabhol to
Kolhapur. The Hazira-Uran section will be implemented in Phase-I.
4. Dabhol-Bangalore-Chennai
The Dabhol-Bangalore-Chennai project consists of 850-km Dabhol-Bangalore pipeline and
around 300-km Bangalore-Chennai pipeline. The trunk pipeline passes from Dabhol through
Kinjalkarvadi, Kasari river bank, Kharaklat, Tappalkatti Harva forest, Gadag,

Oil & Gas Sector
Gannaikanahalli, Gullur, Sarajapur, Palmaner, Chittoor, Kattivakkam to Chennai. The

capacity of this pipeline is 10 MMSCMD from Dahej.
5. Kakinada-Hyderabad-Pune-Panvel
The 1035-km Kakinada-Hyderabad-Pune-Panvel pipeline passes from Kakinada,
Peddapuram, Samalkot, Rajahmundry, Khammam, Hyderabad, Barsi, Pune, Lonavala,
Khandala and Panvel. The pipeline capacity is around 20 MMSCMD from Peddapuram.
6. Kakinada-Kolkata
The 1000-km Kakinada-Kolkata project pipeline passes through Peddapuram to Srikakulam,
Ganjam, Khorda, Bhubaneshwar, Cuttack, Jajpur, Baleshwar, Bhadrake, Kharagpur,
Medinipore, Hugli and Naida to Pandua near Kolkata in West Bengal. The pipeline capacity
is 10 MMSCMD.
7. Kakinada-Chennai
The 580-km Kakinada-Chennai pipeline project passes from Peddapuram to Vijaywada to
Machilipatnam to Guntur to Ongole to Nellore to Gammudipudi to Ponneri to Chennai. The
pipeline capacity is 10 MMSCMD.
8. Kolkata - Jagdishpur
The 853-km Kolkata-Jagdishpur pipeline extends from Pandua, Katoya, Bardhman,
Chittranjan, Giridih, Navada, Gaya, Daudnagar, Haziaribag, Buxar, Ballia to Jagdishpur.
The pipeline capacity is 10 MMSCMD.
9. Kochi-Coimbatore-Bangalore
This pipeline project consists of 100 km offshore Kochi-Kayamkulam designed for a capacity
of 1.4 MMSCMD and 860 km onshore portion designed for a capacity of 11 MMSCMD. The
onshore portion of the pipeline passes from Kochi to Alwaye to Kanjirkod to Mangalore and
Bangalore.
10. PY-1 to PPN Power Plant Project

The natural gas from PY-1 offshore field (HOEC) will be transported through offshore &
onshore pipeline considering landfall point at Porto-nova to PPN Power Plant. The pipeline
consists of 20 km offshore section and 70 km onshore section, with a capacity of 2.5
MMSCMD.
11. Myanmar-India Pipeline Project

This project planned to lay a pipeline from Myanmar-India Border at Tripura to Pandua-
Krishnanagar in West-Bengal through Northeast states or to lay offshore pipeline directly
from Myanmar to Haldia in West-Bengal, India. The approximate length of this pipeline for
onshore alternative through the Northeast states is about 800 km and for direct offshore
alternative route is about 550 km.
12. Pata Petrochemical Project
GAIL's Petrochemical Complex at Pata in Auraiya District of Uttar Pradesh, with a
production capacity of 260,000 TPA of Polyethylenes (LLDPE and HDPE) and 10,000 TPA of
Butene-1, consists of a Gas Sweetening Unit, Gas Cracker and two downstream polyethylene
plants: Dedicated HDPE plant of 100,000-TPA capacity licensed by Mitsui, Japan and
LLDPE/HDPE (Swing plant) of 160,000 TPA capacity licensed by Nova Chemicals, Canada.
Project Expansion
The complex is being expanded in two stages. In the first stage the LLDPE/HDPE (Swing
plant) is being de-bottlenecked to increase its capacity from 160,000 TPA to 210,000 TPA at a
cost of Rs 76.27 crore. In the second stage, the ethylene capacity at the complex is being

Oil & Gas Sector
increased from 300,000 TPA to 440,000 TPA by increasing the number of cracker furnaces
from four to five. Simultaneously, the polymer capacity is being increased by setting up a
new LLDPE/HDPE (Swing Unit) of 120,000 TPA. The cost of the expansion project is Rs 647
crore. This project is scheduled for completion in the fiscal year 2006-2007.
RIL
Key project being executed by RIL includes development of its recently discovered gas field.
RIL plans to develop the Deepwater Gas fields in Block KG-DWN-98/3(KG-D6) in the
Krishna Godvari basin, offshore East Coast India. This is the block where RIL made world’s
largest gas discovery in 2002. Based on exploration of 8 wells, the in-place reserves in KG-D6
block has been estimated at 14 trillion cubic feet (TCF). 2 more exploratory wells have been
drilled and the successful gas discovery and reserve potential is still being ascertained. Over
25,000 line-km of 2D and 6000 sq. km. Of seismic data has been obtained. Currently, the site
for onshore terminal has been acquired. Land for landfall point is being negotiated.
Infrastructure development has been initiated in the acquired land. Environment clearance
has been obtained from the State Government. The options for laying gas pipelines is being
evaluated. Production from KG-D6 is expected from 2006-2007. In the upstream segment,
apart from this project, RIL is undertaking an appraisal program in Yemen and is also
launching Coal Bed Methane (CBM) campaign in 3 blocks in Chattisgarh and Rajasthan.
In the downstream segment, RIL is building up its marketing infrastructure for selling
automotive fuel. It plans to develop 2000 Retail Outlets by the end of FY2005. 11 outlets are
already running. Another 400 are in different stages of construction.
LNG Projects
Realising the ease of transporting natural gas as LNG and the growing demand for fuel in
India, the GoI had set up a new company Petronet LNG, with GAIL, ONGC, IOC and Bharat
Petroleum Corporation Limited (BPCL) as the main promoters. Petronet LNG has been
entrusted with the task of developing terminals in the country for importing LNG. Petronet
LNG has signed a gas purchase contract with Ras Gas, Qatar, for the import of 5 mmtpa of
LNG at Dahej (Gujarat) and 2.5 mmtpa at Kochi (Kerala). Apart from Petronet LNG, a
number of other players have shown interest in developing LNG import terminals in the
country (refer Table 3).

Oil & Gas Sector
Table 1.18
LNG Projects
Port State Company/ Capacity Expected
Location Consortium (mmtpa) Commissioning Date
Pipavav Gujarat British Gas, NTPC, Sea King 2.5 NA
Infrastructure
Maroli Gujarat UNOCAL 2.5 NA
Dahej Gujarat Petronet LNG 5.0 Commissioned
Kakinada Andhra Pradesh Indian Oil, Petronas, BP Amoco, Kakinada 2.5 NA
Port Co.
Ennore Tamil Nadu TIDCO + Partner 5.0 NA
Kochi Kerala Petronet LNG 2.5 NA
Tuticorin Tamil Nadu Indian Gas 2.5 NA
Vizag Andhra Pradesh TOTAL/HPCL 2.5 NA
Mangalore Karnataka Finolex 2.5 NA
Hazira Gujarat Shell 2.5 Q3 2004
Trombay Maharashtra Tata Power, TOTAL 3.0/6.0 NA
Dabhol Maharashtra Dabhol Power Company 5.0 NA
Gopalpur Orissa Al-Manhal 5.0 NA
Jamnagar Gujarat Reliance 5.0 NA
Source: Ministry of Petroleum & Natural Gas; Companies
As may be seen from the above table, only 2 projects (Petronet and Shell) are in the advanced
stage. In fact, Petronet’s LNG terminal at Dahej (Gujarat) has already been commissioned.
There is an uncertainty regarding the future of the other projects.
LNG projects are highly capital intensive. In a LNG project, the costs of liquefaction and
transportation are prohibitively high. A typical 3mmtpa LNG project would have liquefaction
costs amounting Rs. 125 bn., and transportation costs of around Rs. 80 bn assuming new-
dedicated tankers. Because of the capital-intensive nature of the LNG projects, it is doubtful
at this stage whether the LNG importers would be in a position to price LNG competitively
relative to other competing fuels and provide an effective solution to the shortage of natural
gas in the country.
Petronet’s LNG project at Dahej

Petronet LNG Ltd. has set up India' s first LNG Receiving and Regasification Terminal at
Dahej, Gujarat.
The Dahej LNG Terminal has been designed to handle a nominal capacity of 5 MMTPA
initially, which is equivalent to 20 MMSCMD of natural gas, with a provision for expansion
up to 10 MMTPA. Natural Gas from this terminal is being distributed to consumers through
a pipeline from Dahej to the Vijaipur, which runs parallel to the existing HBJ Pipeline from
Vemar (84 KM from Dahej).
The Dahej site is ideally located to satisfy the enormous demand of Power, Fertilizer and
other users located in the industrial belt between Vadodara and Surat. Gujarat Maritime
Board allotted 55 Ha. of land for setting up LNG Terminal. The marine facilities for Dahej
Terminal includes a 2.4km long all weather Jetty . The receiving, storage and regasification
facilities include unloading arms, two tanks of 160,000 cu. mtrs. capacity each, vaporization
system and utilities and off-site facilities. The cost of the terminal is US $ 550 million and
was mechanically completed and thereafter, received the first ever LNG cargo in India on
30th Jan 2004.

Oil & Gas Sector
The Company has an added advantage of having access to the existing gas distribution
infrastructure in South Gujarat through its promoters ONGC and GAIL.
Dahej Terminal commenced gas supplies to its offtakers (GAIL, IOC and BPCL) on 29th Feb
2004 and after the commissioning of the gas pipeline, commenced commercial operations
from 1st April, 2004. In the initial year of operation, the terminal is currently supplying 10
million standard cubic meters per day of Regasified LNG, which is being marketed in the
States of Gujarat, Maharashtra, Madhya Pradesh, Rajasthan, Uttar Pradesh, Delhi,
Haryana and Punjab through the HBJ Pipeline network.
LNG Sourcing
The Company has followed a transparent International Competitive Bidding process and
selected Ras Laffan Liquefied Natural Gas Company Ltd. (RasGas) as the preferred
LNG supplier for 5.0 MMTPA (million metric tonnes per annum) at Dahej and 2.5 MMTPA
at Kochi. This selection was based on the strong commercial package, which was jointly
submitted by RasGas and Mobil LNG Inc. This supply alliance with RasGas and Mobil
provides numerous fundamental advantages, which will pass through to the consumers.
Inherent economic advantages resulting from the geographic proximity of Qatar to India and
the cost-effective expansion of existing liquefaction facilities has resulted in a supply package
from RasGas, which could not be matched by any other supplier.
Early deliverability and access to Qatar's vast gas reserves, providing long-term supply
security with virtual unlimited capability to meet India's growing energy needs supplement
this cost advantage. Ras Laffan Liquefied Natural Gas Company Limited (RasGas) is
situated on the North East coast of Qatar-one of the world's largest offshore recoverable non-
associated natural gas fields. It was established by Emiri Decree in 1993. Currently, RasGas
is owned by Qatar General Petroleum Corporation (QGPC), Mobil QM Gas Inc., ltochu
Corporation and Nissho Iwai Corporation. RasGas laid the foundation stone for the Train 3
on January 14, 2002. The first cargo of LNG from RasGas was received at Dahej LNG
Terminal on January 30, 2004.
EPC Contract
Through transparent and competitive process, Company finalized the Engineering,
Procurement and Construction (EPC) contract within the schedule date. The Company had
awarded the EPC Contract to the Consortium led by M/s Ishikawajima Harima Heavy
Industries Company Ltd. (IHI), Japan. The other members of the consortium are M/s Ballast
Nedam International BV-Netherlands, M/s Toyo Engineering India Limited, M/s Itochu
Corporation, M/s Mitsui Company Limited, Japan and M/s Toyo Engineering Corporation.
The Consortium Leader M/s IHI is one of the most reputed construction companies in the
field of LNG regasification terminals.
The Consortium has mechanically completed the facilities and subsequently carried out the
commissioning of the LNG terminal. The terminal is now supplying gas to the offtakers of
LNG. The facilities completed include
• 2.4 KM long Jetty
• Unloading platform at Jetty head with unloading arms etc.
• 2 LNG tanks of 160,000 m3 gas storage capacity
• Vaporisers (Shell & Tube vaporizers and Submerged Combustion Vaporisers)
• Boil off compressor and recondenser
• Send out facilities for gas and metering
• Flare
• Utilities as plant and instrument, nitrogen and glycol

Oil & Gas Sector
• Power generation and switch guard

• Fire fighting & safety
• Control Room, DCS and other instrumentation
• Associated piping etc
• Buildings
PMC Contract
PLL has selected M/s Foster Wheeler Energy Limited, UK as the Project Management
Consultant (PMC). The PMC contractor is responsible for regular view and monitoring of the
Dahej Project. The PMC assists the Company and its project Management Team in
implementation of the project. A team of PMC is deputed to project site for reviewing and
monitoring progress of the project and quality control.
Foster Wheeler has over a century of experience, reputation for engineering excellence, cost-
effective global procurement and world-class construction standards-or what is called EPC
Excellence. Foster Wheeler have built process, power and industrial facilities in more than
125 countries.
Foster Wheeler is an international organization that provides engineering services and

products to a broad range of industries, including the petroleum and gas, petrochemicals,
pharmaceutical, chemical processing, power-generation industries etc.
These services include design, engineering, and construction as well as project management,
research, plant operation and environmental services.
LNG Transportation
PLL is responsible for the arrangement of transportation of LNG from RasGas in Qatar to
PLL's Regasification Terminal at Dahej. Through transparent and competitive process, PLL
finalized the bids in respect of Time Charter of two LNG Tankers. PLL signed Time Charter
Agreements on 31st March, 2001 with the Consortium (Shipowners) led by M/s Mitsui OSK
Lines Limited of Japan a leading company in LNG shipping business, for Time Charter of
two (2) LNG Tankers of 138,000 cu.m capacity each, for transportation of 5 MMTPA LNG
from RasGas, Qatar to LNG Terminal at Dahej, Gujarat for a period ending 30th April 2028.
M/s Mitsui OSK Lines is one of the largest operator of LNG tonnage and the other members
of the consortium are NYK Line & K line of Japan, The Shipping Corporation of India
Limited and Qatar Shipping Company (Q' Ship), Qatar. Two separate companies for the two
Tankers in the name of India LNG Transport Company (No.1 / No.2) Limited have been
incorporated.
The Shipowners signed shipbuilding contracts with Daewoo Shipbuilding and Marine
Engineering Company (DSME), South Korea, for construction of two-membrane type LNG
Tankers of 138,000 cu.m capacity each. The LNG Tankers are built as per Bureau Veritas
Classification and Indian Register of Shipping. The Port of Registration of the LNG Tankers
is Valetta, Malta.
The first LNG Tanker - DISHA (Hull No. 2210) has been delivered on 9th January, 2004 and
the Tanker is transporting LNG from Ras Laffan, Qatar to LNG Terminal, Dahej. The
delivery of second LNG Tanker (Hull No. 2211) is scheduled for 16th December 2004.
The Indian Shipping Company will be major equity partner in the Ship owning company and
the Tankers will be managed/ maintained and operated by Indian personnel within five
years of the registration of the Tankers.
Shipping Consultant
PLL appointed M/s Marine Service GMBH, Germany as the Shipping Consultant. The
Shipping Consultant is providing necessary technical advice on various technical documents,

Oil & Gas Sector
drawings & design of tankers and also specialist to supervise review & conform progress
quality monitoring of the construction of LNG tankers at the shipyard in conformity with
latest standards as per provision of Time Charter Agreement and Ship building contracts,
beside various other works as per requirement of PLL.
Port Operation at Dahej

PLL signed Port Operation Services Agreement with the consortium of PSA Marine (Pte)
Ltd., Singapore and Ocean Sparkle Ltd., India (public limited company titled as M/s Sealion
Sparkle Port and Terminal Services (Dahej) Limited). The Port Operator shall own and
operate Tug Boats, Mooring Boat and Pilot Boat and shall undertake safe towing, mooring &
pilotage of the LNG Tankers and maintenance of jetty facilities at LNG Port at Dahej. The
pilots engaged by Port Operator have thorough local knowledge and have undergone
simulation training for smooth, safe and efficient berthing.
The unloading of LNG and quick disbursement of LNG tankers at Dahej LNG Port are being
carried out by utilizing the services of Shipping Agency and Independent Cargo Surveyor.
Offtakers
GAIL (India) Limited, one of the promoters of PLL, would transport the Regasified LNG for
both Dahej and Kochi Terminals. The RLNG would be marketed in the States of Gujarat,
Maharashtra, Madhya Pradesh, Rajasthan, Uttar Pradesh, Delhi, Haryana & Punjab
through HBJ Pipeline network.
The Gas Sale and Purchase Agreement signed with GAIL, IOCL and BPCL, the Offtakers,
are in place.
Project Financing
The company has achieved financial closure by syndicating its long-term funds requirement
on limited recourse basis with a consortium of Banks and FI. Loan documents for Rs. 1804
crores long term funds have been executed.
The company after bringing in ADB (Asian Development Bank) as a 5.2% shareholder, made
an Initial Public Offer (IPO) of Rs. 261 crores representing 34.8% of the paid -up capital. The
IPO was successfully closed with a premium of Rs. 5.
The Company has also tied up its entire operational insurance requirements with a
consortium of Insurance Companies.
End-Consumers
Petronet LNG Limited has entered into Marketing Alliance for the entire throughput
quantity of 5.0 MMTPA (17.54 MMSCMD) of Regasified-LNG through the Gas Sale &
Purchase Agreements with the three Promoter - cum - Offtakers i.e. GAIL (India) Ltd.,
Indian Oil Corporation Limited and Bharat Petroleum Corporation Limited (Public Sector
Undertakings of the Government of India) in the ratio of 60:30:10 respectively. The three
Promoter Companies are classified as "NAVRATNA" Companies of the Government of India
considering the strategic nature of their industry and fundamental strengths. In the case of
Dahej LNG Terminal, GAIL (India) Limited, one of the Promoters-cum-Offtakers shall be the
sole transporter of the entire quantity of Regasified-LNG available. The other Offtakers of
regasified LNG viz. IOCL and BPCL will use the pipeline of GAIL (India) Limited by
executing Gas Transmission Agreements.
The three off-takers, GAIL (India) Limited (GAIL), Indian Oil Corporation Limited (IOCL)
and Bharat Petroleum Corporation Limited (BPCL) have, in turn, signed the Gas Sales
Contracts for the supply of Regasified-LNG with their respective consumers.

Oil & Gas Sector
Mainly, the consumers of Regasified-LNG are the existing consumers, whose current demand
is unmet or are currently using liquid fuels, like, Naphtha /FO/ LSHS. In addition, some of
the consumers shall be using Regasified-LNG for the expansion of their capacities, once the
LNG is made available to them.
The entire quantity of 5 MMTPA of LNG is consumed by the existing consumers falling in
the States of Gujarat, Maharashtra and along the HBJ Pipeline route. GAIL has also
upgraded their Hazira-Bijaipur-Jagdishpur pipeline from Dahej to Vijaipur by synchronizing
with the Dahej LNG Terminal. With a view to meet the growing shortfall of Natural Gas for
the consumers Ex Uran (Mumbai), GAIL is also setting up necessary pipeline infrastructure
from Dahej to Uran for supplying Regasified-LNG.
Petronet’s LNG project at Kochi

Petronet plans to set up an LNG Receiving and Regasification Terminal at Kochi (Kerala) for
2.5 MMTPA nominal capacity, which is equivalent to 10 MMSCMD of natural gas with
provision of expansion up to 5 MMTPA. The Government of Kerala has shown keenness to
have equity in the Kochi Terminal. Kochi Port Trust has allocated 40 Ha. of land at Puthu
Vypeen Island for the development of LNG Terminal which includes construction of Jetty
and Breakwater.
Storage and Regasification facilities will include unloading arms, two tanks of 110,000 cu.m
capacity each, vaporization system and utilities and off-site facilities. The estimated cost of
the project is Rs. 2,000 crores.
The Company has identified consumers in and around Kochi for utilization of regasified
LNG. All the pre-project activities including various on-shore and off-shore surveys /
investigations, preparation of Detailed Feasibility Report and Basic Engineering Package,
Mathematical and Physical Modeling Studies, Terrestrial and Marine Environment Impact
Assessment Studies have been completed.
The Company has received Environment Clearance from the Ministry of Environment &
Forest, New Delhi.
RasGas, Qatar will supply 2.5 MMTPA of LNG to Terminal at Kochi as per the Gas Sale and
Purchase Agreement signed with them.
Shell’s LNG project at Hazira

In 1999, a consortium led by Shell Gas BV was awarded a contract to develop an all-weather, multi-
cargo port at Hazira, State of Gujarat, India. The construction of a world-class liquefied natural gas
(LNG) regasification terminal, in response to increasing demand for natural gas in northwest India, is
driving development of the port. The world-class $500-million port and LNG terminal will have to
function with significant tidal currents and in the face of the southwest monsoon and tropical storms.
Shell Global Solutions was asked to provide an integrated package of technology and project
delivery services to the consortium for development of the port and LNG terminal. Initially
sized for 2.5 MMTPA (10 MMSCMD), the terminal can be expanded to handle a throughput of 5 MMTPA.
The project is at advanced stages of completion and would be ready for LNG deliveries in 2004 (Fourth
Quarter).
Hazira was designated as a port location by the Gujarat Maritime Board (GMB). In 1997, the GMB, on
behalf of the Government of Gujarat, invited applications by international competitive bidding for the
development of an all-weather, multi-cargo port at Hazira. The initiative was to be LNG-driven in
response to the increasing requirement for natural gas as a fuel in northwest India. Following a
rigorous evaluation process by GMB, Gujarat Infrastructure Development Board (GIDB), under the
overall supervision of the state government, accepted the commercial bid of a consortium led by Shell
Gas BV in November 1999. There then followed an intensive period of surveying, designing and

Oil & Gas Sector
environmental studies by Shell Global Solutions to develop both the terminal concept and the phased
master plan for development of the port facilities for LNG and other cargoes.
The Phase 1 terminal infrastructure includes 10,000 m 3 /hr unloading facilities on the jetty for LNG
carriers up to 145,000 m 3 capacity. Cryogenic lines storage link the jetty to two 160,000-m 3 cryogenic
LNG storage tanks. Open-rack vaporisers heated by seawater are used to regasify the LNG before high-
pressure send out by pipeline. The site master plan allows space for doubling the storage capacity and
achieving 10 Mt/yr throughput in the future. The Hazira project is conceived around an ambitious
development plan for port development for a number of cargo types. Initial operations will be for LNG
import and subsequent phases will include facilities for container and bulk cargoes.
The site is located in a challenging physical environment with significant tidal currents and
exposure to the influence of the southwest monsoon weather patterns and tropical cyclones.
Shell Global Solutions planned and implemented a comprehensive and focused programme of
investigations and studies designed to support a safe and cost-effective port concept. Key
components of the port infrastructure to be constructed during Phase 1 include a jetty for
LNG carriers of 75,000- to 145,000-m 3 capacity rock structures forming the jetty approach
and creating a protected basin to limit wave exposure, currents and siltation at the LNG
berth a dredged approach and turning basin to provide safe access by LNG carriers.
Construction of the Hazira terminal is on target to commence supplies from Quarter 3 2004.
A brief summary on site progress follows:
• Land reclamation and foreshore protection completed
• Base slabs for both cryogenic tanks in place
• Concrete construction work for LNG storage tanks underway (See site photos)
• Jetty construction in progress
• Over 3000 people involved in construction at site
FY2004 PERFORMANCE OF MAJOR PLAYERS

Mo d e s t G r o w t h i n D e m a n d a n d P r ic e V o l a t i l i t y
Demand for petroleum product increased by 3.4% during 2003-04 on an Year on Year basis to
107.7 mn. tonnes against 104.1 mn. tonnes in the previous year. However, there was a mixed
trend in product wise consumption growth. Products witnessing positive consumption growth
included LPG (11.4%), MS (4.8%), Aviation Turbine Fuel (10.1%), HSD (1.5%) and Bitumen
(10.5%). Products displaying negative consumption growth included Naphtha (-1.4%) and
SKO (-2.0%). HSD, which accounts for the bulk of the petro product consumption (40%),
witnessed a reversal in consumption trend during the year. While the demand for HSD
witnessed a negative growth of 3.7% in the first half, the consumption growth was above 6%
in the second half.
During the year 2003-04, crude oil prices remained strong and witnessed volatility due to a
factors such as geo-political uncertainties in Iraq, unrest in Venezuela & Nigeria and lower
level of stocks in US. The crude oil stocks in the US fell below 270 million barrels, a level
traditionally equated with minimum operating inventories, and was at their lowest level
since 1975.

Oil & Gas Sector
E a r n i n g s o f Ups tr ea m Com p a n ie s
India’s premier upstream company in the energy sector, ONGC has declared poor 4QFY04
and FY04 results with the topline declining by 33% and the bottomline witnessing a dip of
46% YoY for the quarter. For the full year, the topline has declined by 7% while the
bottomline has witnessed a dip of 18% due to the negative impact of subsidy sharing.
Table 1.19
(Rs m) 4QFY03 4QFY04 Change FY03 FY04 Change
Net sales 124,195 83,077 -33.1% 342,773 320,639 -6.5%
Other income 3,680 4,800 30.4% 19,593 15,471 -21.0%
Expenditure 58,289 40,603 -30.3% 158,718 143,834 -9.4%
Operating profit (EBDITA) 65,907 42,474 -35.6% 184,055 176,806 -3.9%
Operating profit margin (%) 53.1% 51.1% 53.7% 55.1%
Interest 155 292 89.0% 1,132 468 -58.7%
Depreciation 12,860 16,694 29.8% 41,277 55,719 35.0%

Profit before tax 56,572 30,288 -46.5% 161,238 136,090 -15.6%
Tax 19,787 10,425 -47.3% 55,945 49,446 -11.6%
Profit after tax/(loss) 36,785 19,864 -46.0% 105,293 86,644 -17.7%
Net profit margin (%) 29.6% 23.9% 30.7% 27.0%
No. of shares (m) 1,425.9 1,425.9 1,425.9 1,425.9
Diluted earnings per share (Rs)* 103.2 55.7 73.8 60.8
P/E ratio (x) 10.1
(* annualised)
The shock decline in topline for the year is a result of the subsidy sharing agreement on
account of LPG and kerosene, according to which ONGC had to suffer under-recoveries to the
tune of nearly Rs 27 bn in FY04, which was not the case in FY03. Although crude oil prices
were soaring during the last quarter, ONGC had to sell crude to the oil marketing PSUs at
subsidized rates, resulting in lower realizations. But for the control on pricing by the
government, the company would have witnessed better numbers in the topline and hence
profits. The company is further said to have provided for subsidies of Rs 10.5 bn towards its
natural gas business.
Table 1.20
Expenditure break-up
(%) of sales 4QFY03 4QFY04 FY03 FY04
Raw materials consumed 0.2% 0.2% 0.5% 0.5%
Staff cost 0.5% 3.7% 2.9% 3.0%
Statutory Levies 22.0% 26.2% 25.6% 26.4%
Other expenditure 24.2% 18.8% 17.4% 15.0%
To the company’s credit, it has been able to reduce expenditure by 9% for the year and this
has resulted in operating margins improving by 140 basis points. Although the statutory
levies have increased during the year, the company was able to arrest other expenditure. At
the same time, for 4QFY04, the staff cost has risen from 0.5% to nearly 4%, which could
largely be a result of high retention costs and employee separation benefits. The reduction of
30% in total expenditure during the quarter is largely because of the reduction in other
expenditure.
Chart 1.12

Oil & Gas Sector
Looking at the quarterly performance, it is clear that ONGC has been suffering at the hands
of the government policies such as subsidy sharing agreement and also towards the
contribution to the gas pool account. The company’s performance has been showing a
downward trend since the beginning of 3QFY04. The quarterly performance has largely
dipped due to the fact that the subsidy sharing agreement was not prevalent during the last
fiscal.
On a full year basis, the company’s cost of depreciation has increased by 35%. The cost also
includes depletion and amortization expenses. As the oil fields are aging, the company’s
expenditure on redevelopment seem to have increased and therefore the rise. However, the
net profits have been arrested at a decline of 18%, which could largely be attributed to the
59% decline in interest outgo for the company.
E a r n i n g s o f Ga s D is t r i b u t o r s
GAIL India has posted decent 4QFY04 and FY04 results with a 10% YoY increase in the
topline during the 4QFY04 and 14% YoY jump in the bottomline for the same period. On a
full year basis, the topline has risen by 6% while the bottomline has shown an improvement
of 15%. Also, the company has been able to improve its operating profits by a strong 26% YoY
during the quarter.
Table 1.21
Net sales 30,742 33,831 10.0% 117,677 124,090 5.5%
Other income 1,247 816 -34.5% 3,188 2,497 -21.7%
Expenditure 22,090 22,972 4.0% 87,398 90,356 3.4%
Operating profit (EBDITA) 8,653 10,859 25.5% 30,278 33,734 11.4%
Operating profit margin (%) 28.1% 32.1% 25.7% 27.2%
Interest 374 343 -8.2% 1,864 1,395 -25.2%
Depreciation 1,453 1,697 16.8% 6,419 6,605 2.9%
Profit before tax 8,073 9,635 19.3% 25,183 28,231 12.1%
Extraordinary items - - - - - -
Tax 2,442 3,245 32.9% 8,792 9,450 7.5%
Profit after tax/(loss) 5,631 6,390 13.5% 16,391 18,781 14.6%
Net profit margin (%) 18.3% 18.9% 13.9% 15.1%
No. of shares (m) 845.7 845.7 845.7 845.7
Diluted earnings per share (Rs)* 26.6 30.2 19.4 22.2
P/E ratio (x) 9.8

Oil & Gas Sector
(* annualised)
Table 1.22
Segmental Results
Gas processing and sales 27,127 30,139 11.1% 104,152 110,057 5.7%
% PBIT margin 27.4% 30.9% 23.8% 25.1%
LPG 718 760 5.8% 2,151 2,644 22.9%
% PBIT margin 42.4% 48.7% 33.8% 44.9%
Telecom 35 67 91.4% 117 202 73.7%
% PBIT margin 4.6% -131.1% 8.0% -45.5%
The company’s topline has grown by 10% during the quarter. This could be largely attributed
to the fact that gas sales, which contribute nearly 98% of the revenues, have increased by
11% YoY and LPG business has shown an improvement of 6% YoY for the same period. One
of the reasons for an improvement in gas sales could largely be the fact that the company
could have increased its realizations by way of a proportionate increase in spot sales vis-à-vis
the corresponding period last fiscal. Also, high demand in case of LPG, which is expected to
grow at a CAGR of 8%, has resulted in the growth. Had it not been for the Rs 4,280 m that
the company had to bear as a part of subsidy sharing agreement between GAIL and other
PSUs, revenues from this segment could have been higher.
Table 1.23
Expenditure Break-up
(%) of sales 4QFY03 4QFY04 FY03 FY04
purchases 53.0% 49.4% 54.4% 54.0%
consumption of raw materials 5.8% 4.6% 6.9% 6.3%
staff cost 1.1% 1.4% 1.3% 1.3%
other expenditure 11.9% 12.5% 11.7% 11.1%
GAIL has witnessed a marginal rise of 4% in expenditure during the 4QFY04 as compared to
the corresponding period last fiscal. During the quarter, gas purchased as a percentage of
sales has declined by almost 400 basis points. However, a rise in other expenses and staff
cost has resulted in the net increase of 4% YoY. This increase has been offset by a more than
proportionate rise in the revenues resulting in a 26% jump in operating profits. To put things
in perspective, operating margins have improved by 400 basis points YoY during the 4QFY04
as compared to the corresponding period last fiscal.
GAIL has been able to control its cost of purchases and raw materials (gas) during the
quarter by 400 basis points and 80 basis points respectively, resulting in higher EBIT
margins. Higher realizations in gas sales coupled with controlled costs have led to an
improvement of 250 basis points in the EBIT margins in the gas segment, while the LPG
segment has witnessed a giant leap of 630 basis points in its EBIT margins during the
4QFY04, as compared to the corresponding period last fiscal.
Chart 1.13

Oil & Gas Sector
The company’s performance on a quarterly basis has witnessed volatile business with sales
dipping during the second quarter and recovering during the third and fourth quarters. The
same is the case with net profit and operating profits during the year. The dampener has
however been the subsidy sharing agreement.
The company has witnessed a jump in EBIT margins in its gas business, which shows an
improvement of 25% YoY during the quarter, while the LPG business has grown by 21% YoY
for the same period. However, the telecom business, which remains a worry, has posted
losses, thereby dragging profits. The bottomline has improved by an impressive 14% as a
result of higher realizations and the company’s ability to arrest the costs at lower rates. It is
interesting to note that although a small portion of revenues has been contributed by the
LPG business, it has witnessed a substantial increase of around 64% in EBIT, on a full year
basis.
E a r n i n g s o f Dow n s tr ea m Com p a n ie s
For the three integrated public sector undertakings (PSUs), Sales growth was in the range of
6-11%, Operating profit growth was in the range of 13-19% and the net profit growth was in
the range of 15-34%.
Table 1.24
YoY Growth
January - March 2004 April 2003 – March 2004
HPCL BPCL IOC HPCL BPCL IOC
Sales 5.44% 11.4% 2.84% 5.99% 10.8% 7.31%
Other Income 57.17% 69.9% 12.05% 8.79% 34.7% -1.44%
Total Expenditure 7.55% 13.5% 3.11% 5.32% 10.3% 6.80%
Operating Profit -19.60% -17.3% -0.05% 16.95% 19.4% 12.92%
Interest -42.08% -34.2% -28.03% -63.63% -57.3% -42.55%

Depreciation 4.44% -7.3% 0.48% 5.63% 16.7% 12.47%
Tax -12.87% -18.5% 103.53% 23.11% 28.5% 16.83%

Oil & Gas Sector
Net Profit -16.88% -8.2% -15.90% 23.84% 34.3% 14.55%

OPM -23.74% -1.8% -2.82% 10.35% 0.4% 5.22%
NPM -21.17% -0.7% -18.22% 16.85% 0.6% 6.75%
Crude Throughput -0.57% 7.1% 11.47% 5.96% 0.6% 6.72%
Market Sales (incl. Exports) 5.28% 6.9% 10.33% 3.66% 2.6% 2.21%
Pipeline throughput 5.03% NA 12.84% 0.49% NA 9.88%
Avg. Refining Margin 14.67% 44.5% 13.25% 20.16% 25.1% 28.33%
NA – Not Applicable / Not Available
As Reliance Petroleum Ltd. (RPL) has been merged with parent Reliance Industries Ltd.
(RIL) with effect from April 1, 2001, the results of RPL is not being disclosed separately with
effect from Q2 2002-2003. However, the key features of the refining division performance as
reported in 2003-2004 results of RIL, are as follows.
• During the year, Reliance’s refinery took its second planned shutdown of certain units,
since it began commercial operations in April 2000. This opportunity was also utilised to
complete the final phase of Yield and Quality improvement program, which will provide
flexibility in processing wider varieties of crude oil, capture product quality premiums in
the international markets, and operate at increased capacity.
• Refinery recorded 109 % of capacity utilization based on the original nameplate design
capacity of 27 MMTPA for the year under review. The refinery processed 29.6 million
tonnes of crude during the year under review. This capacity utilisation compares
favourably with the utilisation rates for other refineries, both in India and abroad, at
91% for North America, 87% for Europe, and 88% for Asia Pacific region. The full impact
of the increased capacity is expected to be reflected from 2004-05 onwards.
• Exports of refining products during the year under review were 7.61 million tonnes,
compared to 6.57 million tonnes in the corresponding previous year.
• The work on setting up of Retail Outlets at various locations continues as planned.
Reliance already has the necessary approvals for setting up 5,849 retail outlets in India.
With phased completion of the setting up of various Retail Outlets, Reliance will have
significant presence in retail marketing of transportation fuels across the country.
Reliance expects to bring about a major shift in the retailing of transportation fuels.
These retail outlets would have state-of-the-art supply chain management and fleet
management systems. This will leverage Reliance Infocomm's information technology
and communications infrastructure. These retail initiatives will further enhance long-
term shareholder value through forward integration from refining into marketing.
• The segmental results of RIL show good performance by its refining division. The
revenue from the refining division during Q4 2003-2004 at Rs. 120 bn. was 32.1% higher
than the figure for the corresponding previous. The Profit before Interest and Tax at Rs.
10.9 bn. was 42.4% higher than the figure for Q4 2001-2002. For the year 2003-2004,
revenue from refining division at Rs. 416 bn. was 20.9% higher than the figure for 2002-
2003. Profit before Interest and Tax for 2003-2004 was Rs. 35 bn. This was higher by
49.3% over the 2002-2003 level.

Oil & Gas Sector
Outlook
The earnings of upstream companies is likely to remain strong in the immediate term due to
sustainability of international oil prices at high levels. However, the issue of sharing under-recoveries
with the downstream companies may impact the performance of Companies like ONGC (as was the
case in FY2004). Gas distributing companies are expected to show growth in revenue and profits due to
expected increase in gas volumes (due to LNG projects along with domestic gas discovery) and fixed
nature of transportation tariffs.
The issue of declining subsidies on LPG/SKO along with rigidity in retail prices suggests continuing
under-recoveries for the downstream oil companies. Marketing margins on automotive fuel may also
suffer due to unclarity on the government’s position in allowing the oil companies to revise retail prices.
The downstream refining and marketing sector otherwise offers growth opportunities for the different
players. Demand for petroleum products is likely to pick up in the future due to positive trends in the
country’s economic growth. In the refining segment, while the surplus situation in most products is a
matter of concern, the current duty structure protects the Indian refining margins. With deregulation,
the marketing segment is witnessing ongoing changes in the market dynamics. The marketing segment
is expected to continue witnessing ongoing initiatives by the oil companies. These initiatives are
expected to be centred around the interests of the consumers and may involve steps such as improving
product range, refurbishing the retail outlets, selling non-fuel items and providing value added
services.
OTHERS
INIT IATIVES in UNION B UD GET FY2 00 5
• Reduction in government subsidy by 46% (from Rs. 65.73 bn. to Rs. 35.59 bn.)
• No increase in railway freight
• Educational cess of 2%
• Lower increase in incremental capacity required for additional depreciation of 15%
IMPACT: NEGATIVE
The implicit message that is derived from the government’s decision to reduce government
subsidy is that the downstream refining and marketing companies (viz. IOCL, HPCL and
BPCL) along with other players like ONGC and GAIL (assuming that the subsidy sharing
scheme as in FY2004 is adopted in FY2005 also) are expected to bear a large portion of the
under-recoveries in LPG and SKO on their own. As there has also been no clear cut
indication of the government’s stand on the flexibility of these oil companies to revise retail
prices of automotive fuel, it is expected that the marketing margins of these oil companies
may come under pressure.
IOCL, HPCL, BPCL

Negative Impact
Post APM Subsidies Revised FY2004 Budget FY2005 Impact
and other Expenditure
(Rs. crore)
Subsidy on LPG & 6292.44 3500.00 Negative
Kerosene for PDS
Freight Subsidy 79.32 59.00
Compensation for 200.99 Nil
irrecoverable taxes

Oil & Gas Sector
Total 6572.75 3559.00

Oil & Gas Sector
Annexure 1 State Level Taxes

Oil & Gas Sector

Oil & Gas Sector

Oil & Gas Sector

Oil & Gas Sector

ICRA Oil - Gas 2004

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ICRA Oil - Gas 2004

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Oil & Gas Sector

ICRA Sector Analysis

Date October 2004

Report by ICRA Information, Grading and Research Service 2

EXECUTIVE SUMMARY ...................................................................................................................... 4

Report by ICRA Information, Grading and Research Service 3

The Indian Oil & Gas Sector

Key Success Factors

Report by ICRA Information, Grading and Research Service 4

• Major Player(s): Oil and Natural Gas Corporation Limited (ONGC)

• Performance of Major Player(s) during FY2004

• Key Issues facing the Industry

• Strategies Employed for Facing Deregulation

• Major Player(s): Gas Authority of India Limited (GAIL)

• Performance of Major Player(s) during FY2004

Report by ICRA Information, Grading and Research Service 5

! 14.6% growth in net profit

• Key Issues facing the Industry

• Strategies employed for facing Deregulation

• Other Players: Managalore Refinery and Petrochemicals Limited (MRPL); BPCL’s

• Performance of Major Player(s) during FY2004

• Key Issues facing the Industry

Report by ICRA Information, Grading and Research Service 6

• Strategies employed for facing Deregulation

Report by ICRA Information, Grading and Research Service 7

OUTLINE OF THE SECTOR

The Indian Petroleum

E&P Companies Refined Product Marketing

Report by ICRA Information, Grading and Research Service 8

Government Controlled Companies: ONGC, OIL, IOC, Hindustan Petroleum

Report by ICRA Information, Grading and Research Service 9

The Indian oil refining sector has 10 companies:

IOC IOC Barauni 1964 6,000 4,304 71.7%

Report by ICRA Information, Grading and Research Service 10

All Companies Parent Companies

Source: Ministry of Petroleum & Natural Gas

Report by ICRA Information, Grading and Research Service 11

Upstream Exploration and Production

! High level of business risk

Report by ICRA Information, Grading and Research Service 12

40% Abandon Licence

Drill First Exploratory Well (US$7,000,000) 80% Abandon Licence

Appraisal Programmes for 60%

Preparation of Development Plans (US$25,000,000) 35%

Final Development (US$800,000,000)

Production and Cash Flow

Source: Hydrocarbon Perspective Report

Report by ICRA Information, Grading and Research Service 13

Total 10,507 32,901 33,858 32,722 31,949 32,426 33,044 33,384

! Increasing role of private sector

Encouraging Discovery by Reliance

2 Source: BP Statistical Review of World Energy, June 2004

Report by ICRA Information, Grading and Research Service 14

Minor role of other private players

Report by ICRA Information, Grading and Research Service 15

O il('000 tonnes) G as (m n.cubic m etres)

Source: Ministry of Petroleum & Natural Gas

Report by ICRA Information, Grading and Research Service 16

Downstream Refining & Marketing

Report by ICRA Information, Grading and Research Service 17

Nelson Complexity Index

F l u c t u a t i o n s i n D e m a n d / S u p p l y g a p : The commissioning of the Reliance refinery resulted

Demand - Supply of Refined