OIL AND GAS SECTOR : WORLD OVERVIEW

The population of the world continues to grow, as does the average standard of living, increasing
demand for food, water and energy and placing increasing pressure on the environment. The
population of the world doubled from 3.2 billion in 1962 to 6.4 billion in 2005 and is forecast to grow
to 9.2 billion in 2050.

Supplies of oil, gas, coal and uranium are forecast to peak as reserves are depleted. At the same
time, fear of climate change is putting pressure on the energy sector to move away from carbon
burning to nuclear, solar and other environmentally friendly energy sources.

Oil accounts for between 34% and 37% of the world's primary energy. Components of crude oil are
feedstocks to the chemicals, plastics and fertiliser industries.

Crude oil is extracted from the earth and refined to create a range of gas (liquified petroleum gas -
LPG), liquid (gasoline, diesel, jet aviation fuel, paraffin, etc) and solid (bitumen) petroleum products.
The most sought after crudes are those that are "light" (i.e. contain a high proportion of short chain
molecules) and "sweet" (i.e. low sulphur content) as they are easier and cheaper to refine.

RESERVES

According to the 2008 BP Statistical Energy Survey, the world had proved oil reserves of 1237.875
billion barrels at the end of 2007, while consuming an average of 85219.7 thousand barrels a day of
oil in 2007. OPEC members hold around 75% of world crude oil reserves. The countries with the
largest oil reserves are, in order, Saudi Arabia, Iran, Iraq, Kuwait, United Arab Emirates (UAE),
Venezuela, Russia, Libya, Kazakhstan and Nigeria.

According to the 2008 BP Statistical Energy Survey, the world had proven natural gas reserves of
177.35 trillion cubic metres and natural gas production of 2939.99 billion cubic metres in 2007.

In November 2006, Wood McKenzie and Fugro Robertson reported that the USGS had
overestimated Arctic oil and gas resources. Also most would be gas so that oil would amount to less
than 25% of previous estimates in North American / Greenland basins.

Although the world has 3,600 billion barrels of unconventional oil reserves, these require significant
energy and water to extract. Wood Mackenzie estimated the world's unconventional oil reserves as
comprising heavy oil (107 billion barrels), extra heavy oil (457) and shale oil (2,800). The main
sources are Canada, Venezuela, Madagascar and Texas.

According to the 2008 BP Statistical Energy Survey, the world had a 2007 refinery capacity of
87913.34 thousand barrels a day.

INDIAN OIL AND GAS INDUSTRU WITH RESPECT TO REST OF THE WORLD

http://www.eia.gov/emeu/cabs/india/full.html

In 2009, India was the fourth largest energy consumer in the world, after the United States, China,
and Russia. Despite a slowing global economy, India’s energy demand continues to rise. As vehicle
ownership expands, petroleum demand in the transport sector is expected to grow in the coming
years. While India’s domestic energy resource base is substantial, the country relies on imports for a
considerable amount of its energy use.

According to Oil & Gas Journal (OGJ), India had approximately 5.7 billion barrels of proven oil
reserves as of January 2011, the second-largest amount in the Asia-Pacific region after China. India’s
crude oil reserves tend to be light and sweet. India produced roughly 950 thousand barrels per day
(bbl/d) of total liquids in 2010, of which 750 bbl/d was crude oil. The country consumed 3.2 million
barrels per day (bbl/d) in 2010.

In 2010, India was the world’s fifth largest net importer of oil, importing more than 2.2 million bbl/d,
or about 70 percent of consumption. A majority of India’s crude oil imports come from the Middle
East, with Saudi Arabia and Iran supplying the largest shares. Iranian oil’s share of Indian imports has
decreased in recent years, largely due to issues with processing payments.
NEW EXPLORATION LISCENCE POLICY launched in 2000

Downstream/Refining

According to OGJ, India had 4.0 million bbl/d of crude oil refining capacity at 21 facilities as of
January 1, 2011. India has the fifth largest refinery capacity in the world. Reliance Industries’
Jamnagar complex is the largest oil refining complex in the world, with a total capacity of 1.24
million bbl/d. This facility, which is located in northwest India to minimize transit costs from the
Middle East, can process a wider variety of crude grades than older Indian refineries.

Subsidy

OMC’s are compelled to sell products at prices below world market prices and accept “under-
recoveries” (losses), which are born mostly by upstream national oil companies and the central
government. These subsidies cost the Indian government more than $20 billion per year.

India deregulated gasoline prices in 2010, but this has had relatively little impact on the subsidy bill,
because gasoline represents a small share of product demand. Most of the support goes to
kerosene, diesel fuel, and liquefied petroleum gas (LPG), which are used more widely by the
country’s economically disadvantaged classes

Natural Gas

According to Oil and Gas Journal, India had approximately 38 trillion cubic feet (Tcf) of proven
natural gas reserves as of January 2011. EIA estimates that India produced approximately 1.8 Tcf of
natural gas in 2010, a 63 percent increase over 2008 production levels. The bulk of India’s natural
gas production comes from the western offshore regions, especially the Mumbai High complex,
though fields in the Krishna-Godavari (KG) are increasingly important.
In 2010, India consumed roughly 2.3 Tcf of natural gas, more than 750 billion cubic feet (Bcf) more
than in 2008, according to EIA estimates. Natural gas demand is expected to grow considerably,
largely driven by demand in the power sector. The power and fertilizer sectors account for nearly
three-quarters of natural gas consumption in India. Natural gas is expected to be an increasingly
important component of energy consumption as the country pursues energy resource diversification
and overall energy security.

Despite the steady increase in India’s natural gas production, demand has outstripped supply and
the country has been a net importer of natural gas since 2004. India’s net imports reached an
estimated 429 billion cubic feet (Bcf) in 2010

LNG Terminal at Dahej and Hazira

Dahej LNG facility with a capacity of 6.5 million tons per year (mtpa) (975 Bcf/y). India’s second
terminal, Hazira LNG, started operations in April 2005, and is owned by a joint venture of Shell and
Total. The facility has a capacity of 3.6 mtpa (488 Bcf/y). New terminals at Kochi and Dabhol are
scheduled to come online in 2012

KEY ISSUES FACING INDIA OIL AND GAS SECTOR

India’s economic growth of GDP leading to the rise in demand of the energy. Energy security is
ensured by guaranteeing three factors – availability, accessibility and affordability of energy
resources.

India rely on the Coal, Oil and natural gas for the production of energy, the decline in the domestic
coal production leading to the import of coal, the supply of the natural gas also remains well below
projection

Current energy deficit

Although the country has the world’s fourth-largest coal reserves, the demand-supply gap of coal
has been consistently increasing, with domestic just 0.7% of the world’s proven oil reserves while
accounting for 3.9% of the global oil consumption thus importing 73% of its oil consumed. Similarly,
the country has 0.8% of the world’s proven natural gas reserves, while accounting for 1.9% of the
worldwide gas consumption, which results in India importing nearly 20% of its natural gas consumed
through LNG.

Stagnant Domestic Production

The Economy is growing while the domestic production in the oil and gas remains stagnant. The Case
of Reliance in Kakinada, Krishna Godavari D6 basin(However, a steady drop in production from the
KG-D6 from 60 mmscmd in 1Q11 to 45 mmscmd in 2012) not helping the cause also the India’s Oil
and gas reserves remains constant the foreign E&P needs a major push.(OVL Case)

Disruptions in supply from Middle East

The Middle East and North Africa, which supplies 60% of India’s oil requirements have witnessed
high degree of geopolitical volatility in recent times.3 The recent upheaval in the Middle East,
especially in Libya and Egypt triggered a drop in crude oil production in the region, resulting in
increased

Gas Infrastructure (Pipeline) in the west only

natural gas (LNG) terminals were located in the western part of the country. As a result, the pipeline
infrastructure was concentrated only in the western India, which has adversely impacted the
availability of gas in the rest of the country. The low availability of gas and limited infrastructure has
curtailed development of a gas market in the country. Over the next few years, the availability of gas
is likely to increase on the back of incremental supplies from the KG-D6 basin

Inadequate Upstream Infrastructure

As a result, the production of oil and gas remained stagnant and not been able to keep up with the
rise in demand. The sector has limited participation from foreign and private players as is visible
from their declining participation in New Exploration Licensing Policy (NELP) rounds. For instance, a
total of 21 foreign companies participated in NELP-VII (2009) while only 8 companies took part in
NELP-IX (2011).12 Further, companies have spent just US$7.2 billion, out of their investment
commitment of US$20.7 billion until NELP VII

Shortage Of Oilfield Services

Companies are increasingly falling short of their exploration targets with a high incidence of cost
over runs and delays in work commitment. The issue is accentuated by the lack of domestic
expertise in the manufacture of rigs, particularly deepwater rigs, and the time lag in the delivery of
new rigs. Further, most of the rig assets held by Indian companies are aging over the next few years
have to be retired or substantially upgraded to remain operational, which is likely to further increase
the shortage.

Increase competition to procure oil equity abroad

The acquisition of oil assets abroad is emerging as a key challenge for India as a country is facing stiff
competition, especially from China, in its quest to secure oil resources. The aggressive acquisitions of
Chinese NOCs are often backed by the state financing from China Investment Corp., the country’s
sovereign wealth fund that has a corpus of around US$375 billion.19 In addition, Chinese companies
are supported by diplomatic initiatives of the Chinese Government, offer to invest in social
infrastructure projects and the provision of soft loans to countries where they seeking access to oil
and gas reserves. The GoI is encouraging Indian companies to expand t heir overseas operations.
However, India’s overseas investments in oil and gas lag behind that of Chinese companies

Difficulty in Sourcing long term Gas supplies from abroad

Iran-Pakistan-India pipeline, Kyrgyzstan-Afghanistan-Pakistan-India pipeline.

Oil Subsidy
Oil subsidy in petrol removed but the OMC’s have to take inofficial permission also petrol forms very
small percentage in the use in the vehicles.

REGULATORY ISSUES
Check the PDF

Refnery sector delicensed in 1998 • New Exploration Licensing Policy (NELP)announced by Govt. in
the year 1999 • Administered Pricing Mechanism (APM) dismantledrom April 2002 • Marketing o
transport uels (Petrol, Diesel& Aviation Fuel) is now permitted subject to meeting minimum
investment o aboutUS$ 0.44 billion in oil and gas sector
IMPORTANT PROJECTS OF OIL AND GAS SECTOR INDIA

FUTURE OUTLOOK OF OIL AND GAS SECTOR IN INDIA

- Quest for security of supply
- Natural Gas along with LNG will gain prominence in the overall primary energy mix
- India Becoming a global refining hub on back of major capacity expansion and massive investment
Refer PDF

OPPORTUNITIES IN THE SECTOR

- Opportunities of foreign investment and technology partnership in the upstream sector
Deep water and ultra deepwater oil & gas resource hold a key to substantially increasing domestic
supply.
- Opportunities for transaction and partnership of assets abroad
Scouting for Oil and Gas
- Opportunities in unconventional Oil and Gas (CBM, Shale Gas and UCG)
CBM (contributes 10% of total natural gas production in USA)
It is a well known fact that Shale Gas has transformed the landscape of the energy industry in the
United States with the country becoming a net exporter of natural gas from a net importer of gas
- Opportunities for E&P services and equipment companies
- Substantial latent demand in the natural gas sector
- Opportunities in City Gas Distribution Sector
- Refining Hub
- Opportunities for Pipeline transportation

CHALLENGES
- limited participation by foreign companies in the Indian upstream sector
- Upstream Skill technology and equipment shortage
- Refer PDF

KEY PLAYERS OF OIL AND GAS INDUSTRY

Cairn India
High Production of Oil
New oil field contributing : Bhagyam and Aishwarya

Reliance
GRM’s Peaked in 2011, slowdown
KG D6 Basin
The non core business

OMC’s
All time high subsidy burden
Reforms for deregulation
ROE’s are declining
Rupee depreciating
Payment by government to OMC’s for subsidy burden

GAIL
No recent Projects , Dhabol Terminal and Kochi LNG

Essar Oil
High Debt, one third of EBITDA will go towards interest service

ONGC
Subsidy
Production not increasing
New Oil fields

http://www.investopedia.com/articles/basics/11/common-multiples-used-in-oil-and-gas-
valuation.asp#axzz2D2SOTiNe

http://www.investopedia.com/articles/basics/11/common-multiples-used-in-oil-and-gas-
valuation.asp#axzz2D2SOTiNe

http://www.investopedia.com/university/important-ratios-for-analyzing-oil-and-gas-stocks/
introduction.asp#axzz2GqVOOww2

Multiples

EV/EBITDA :
Used to find out the value of the oil and gas company. It is unaffected by the company’s capital
structure. The EV/EBITDA ratio compares the oil and gas business, free of debt to EBITDA. This is
important as the oil and gas firm usually have lot of debt and EV includes cost of paying it off.
A low ratio indicates that the company might be undervalued. The lower the multiple the better, and
in comparing the company to its peers it could be considered undervalued if the multiple is low

P/E ratio :
(Market Value per Share/Earning per share)
High PE suggest that investors are expecting higher earning growth in the future compared to
companies with a lower PE. It’s more useful to compare the PE ratio of one company to the other
company in the same industry, to the market in general or against the company’s own historical PE.
If a company were trading at a multiple of 20, the interpretation is that an investor is willing to pay
$20 for 1$ of current earning.
The only disadvantage is that the denominator earning is susceptible to manipulation.

Price to Cash Flow:

(Share Price/Cash Flow per share)
A measure of market’s expectation of a firm’s future financial health. As this measure deals with
cash flow, the effect of depreciation and non cash expenses are removed. This is a indicator of
relative value
Cash flow are harder to manipulate using subjective depreciation methods. To limit the volatility in
the price 30 day or 60 day average price can be used. Operating cash flow is used

Company EV/EBITDA P/E Price/Cash Flow

Essar Oil 11.11 0.00 23.47
RIL 6.87 14.55 7.29
ONGC 5.19 11.69 14.16
Cairn 405.13 39.28 747.26
IOCL 6.32 32.49 246.38
HPCL 7.86 25.95 -68.21
BPCL 8.49 8.98 -0.81
GAIL 8.32 12.04 47.75
OIL 0.24 9.7 1.184