Oil - Infrastructure D.K.

Raghuwanshi
Natasha Verma
Parag Udas
Sushil Tandon
Surajit Bahulikar
Q &
Importance of OIL

Oil a major source of Energy…………

OIL & GDP relationship

Oil a plays a major role in GDP…………

Global OIL sources …………

Concentrated in middle east

Asia …………
Oil Industry a Background

65% Concentrated in middle

east Asia …………
Background of oil

•Oil is a liquid found under the earth’s surface which forms a key component of
global energy consumption.
•Most oil extracted today is found in the upper layers of the earth’s crust and is
found in some degree on all continents.
•The production rates of many countries with oil reserves vary widely with some
countries such as Norway and the UK having a dozen or so years or reserve
remaining while countries in the Middle East may have more than 100 years of
remaining reserves.

India Scenario
•The search for oil in India began way back in 1866 in Upper Assam. While oil
was struck at Digboi in 1889
•In view of the growing demand of crude oil, the Government formed Oil &
Natural Gas Commission (ONGC) in 1956 to boost the exploration of oil and gas
in the country.
•The discovery of oil and gas in the offshore region was made by ONGC in 1974
in Mumbai High which opened up a new vista for oil and gas exploration and
production in India.
 Market Structure – Global in Brief
•Oil sector is still oligopolistic: it is organized around a few global
private companies and the OPEC cartel. Although it controls only
40% of production worldwide,

•OPEC has until recently played a crucial role on price formation

owing to its policy for regulating supply. Available reserves and
spare productive capacities are chiefly located in the Middle Eastern
OPEC countries.

•Originally created, in 1960, to defend the interests of its members,

the cartel has progressively adapted its objectives: moving away
from a policy of sustained high prices in the 1970s and 80s to a
more consensual policy taking consumer countries into account.

• Any OPEC decision to increase or reduce production quotas may

lower or raise the price of crude oil.
Market Structure
 Market Structure - India
Krisha-Godavari, NEC-Mahanadi, Assam-Arakan
India's share is a meager 0.5 % of global oil reserves of 1,189 billion bbl, while it
consumes 3.2 % of global oil consumption every year. Major locations in India are
Kerala, Mumbai Hi, Kutch-Gujrat-Saurashtra, Cambay, Cauvary-palar,
Market Structure – India
Exploration
Market Structure – India
Refining & Retail
 Market Determinants
•The Market determinants are growth in GDP rate, overall industrial
growth and increase in transportation.
•The shortfall in parallel sectors like power will contribute to increase in
demand
•Increase in Gas based unit expansions like urea, fertilizers, power
plants etc will increase the demand
•The margins for natural gas are expected to be high
•Increase in Transportation
•Demand for transportation fuels will continue to increase
•Oil sector will account for a major part of all energy consumption
•India presently consumes around 130Mio T of oil per year with CAGR
of 8.4% from 96 till 06
•The margin on transportation fuel is expected to increase
Market Determinants
 DEMAND – SUPPLY GAP

Energy Source Demand Supply Gap/Shortage

Oil
155 42 (113)
(In MMT)
Global Per capita Consumption of
Oil

India & China Put together demand is

28% …………
Key Performance Indicators
Key Oil Performance Indicator
Exploration
Exploratory Spending:
Exploration G & G Professionals
Undeveloped Acreage (net)
Exploration Wells Drilled (net)
Percentage of Wells Operated
Seismic Acquired
%age Working Interest - Expl'n
Exploration Success Ratio
Exploration Cost/Well
Development & Production
Capital Spending:
Development Spending
Development Professionals
Development Wells Drilled (net)
Percentage of Dev. Wells Operated
%age Working Interest - Dev.
Development Cost/Well
Type of Performance Measured
 
Allocation of Resources
Capability
Exploratory Activity and Potential
Exploratory Activity
Degree of Control, Capability
Exploratory Activity
Exposure to Risk and Return
Ability to Find Reserves
Exploration Drilling Efficiency
 
Commitment/Allocation of Resources
Allocation of Resources
Capability
Development Activity/Efficiency
Degree of Control, Capability
Exposure to Risk and Return
Development Drilling Efficiency
Key Performance Indicators

Segment: Exploration & Production - 2 of 3

Key Oil and Gas Performance Indicator Type of Performance Measured
Resources Added: Success of Drilling/Development
Proved Reserves Added: Success of Drilling/Development
Reserves Added/Successful Well Efficiency of Drilling
E & D Finding Costs/BOE Added Efficiency of E & P Activities
Reserves: Value - Competitive Position
Production: Cash Generation
% operated Control
% operated Control
# of Producing Wells (net) Production Capacity/Efficiency
Daily Production/Well Producing Efficiency
Production Staff: Capability
Commercial Agreements Fairness of Risk/Reward Dist'n
Key Performance Indicators

Segment: Refining & Marketing - 2 of 2

Number of Retail Facilities Market Access
Sales Market Size; Distribution Efficency
Retail Market Share Level of Competition
Terminals Capacity, Control
Revenue Market Size
Operating Expenses Efficency
Capital Spending Resource Allocation
 Key Performance Indicators
Key Indicators. The following table shows the key performance indicators in
use today. This list is a direct result of the current business climate in the oil
and gas sector.
 Key Performance Indicators

•Refining Margins Comparable to International Standards

Key Performance Indicators
 Policy Changes
• Started in 1997 as NELP ( New Exploration & Licensing Policy)
•To bring in new players to bring in competition for NOC’s
• Bring in new financial investments
• Opening up of the acreages for active exploration by private or joint
venture companies
• NELP has introduced a level playing field for public as well as private
sector players
•The other main features of the terms offered by the Government inter alia
include - no signature, discovery or production bonus by the bidder; income
tax holiday for seven years from the start of commercial production, no
customs duty on imports required to be payable for petroleum operations,
 Cost Structure - Drilling
45000 120
40000
100
35000
30000 80
25000
60
20000
15000 40
10000
20
5000
0 0
1 2 3 4 5 6 7

Royalty expenses, taxes other than income taxes $ million

Othercosts $million
Total production costs $ million
Production mmtoe
Cost per tonne $
Cost per barrel $
 Cost Structure - Drilling
1999 2000 2001 2002 2003 2004 2005

Royalty expenses,
taxes other than
income taxes $
million 1674 2,604 2,506 2,187 3,127 3,525 4,881

Other costs $million 2514 25,119 30,007 31,739 33,956 37,119 42,534

Total production
costs $ million 20449 21,756 24,682 25,122 27,929 30,949 37,532

Production mmtoe 382 385.7 411.4 405.9 387.1 373.3 351.2

Cost per tonne $ 53.8 56.4 60 61.9 72.1 82.9 106.9

Cost per barrel $ 7.3 7.7 8.2 8.4 9.8 11.3 14.6
Cost Structure - Refining
 Post Reform Progress
Challenges/bottleneck/inhibiting factors
The management committee: The Management Committee (MC) has an
overpowering role in implementation of PSC (the MC is referred to 150 times in
the PSC). One wonders if the government has taken sufficient care to oversee
the functioning of these committees, which take decisions24 regarding tens of
thousands of crores of Rupees of public money. This becomes particularly
relevant in the context of the recent controversy

Lack of prompt actions by Government: Until forced by contractor action, the

government did not develop clarity on implementation of critical parts of PSC,
such as interpretation of gas pricing principles and has not yet articulated gas-
utilization policy. This has a long term negative impact on the sector.

Transparency: The most glaring deficiency relates to the lack of transparency.

None of the PSCs signed by government are in the public domain — despite
them being worth lakhs of crores of Rupees. The lack of transparency also
extends to the composition of the MC, major decisions by the MC, details of
investments, monitoring of timelines for different phases, committed work
program, relinquishing of blocks etc.
 Post Reform Progress
Challenges/bottleneck/inhibiting factors
Bottlenecks

Competition Issues
Structural: Dominance of PSU in the petroleum sector
Policy: Minimum investment of Rs 2000 crores required to enter marketing of
transportation of fuels
Government control on prices - Retail pricing of petrol, diesel kerosene and
LPG Way below IPP pricing

Subsidies In 2004-05 under-recoveries from LPG and Kerosene amounted to

Rs.17,842 crores and from petrol and diesel to around Rs.2,304 crores
(MoPNG 2005)

Regulatory

Provisions of the proposed PNGRB Bill and its impact on competition

Regulator to have a key role in protecting the interests of consumers by

fostering fair trade and competition amongst the entities
 Investment Required
Global Investments Pattern

Operating finance
Country Ownership Initial financing
requirement

US govt general budget

US Government n.a.
funded.
Government
Channelled through
Government and financed,
Japan government financial
private recovered by oil
institutions,
tax.
Government and state-run
China Government n.a.
companies
Membership fees
Debt financed with federal paid by refiners
Germany Agency
government guarantee. and importers,
recoverable.
Government and state-run
Government &
India companies, Financial
Private
Institutions
 Investment Required
•The government is hopeful of attracting $3.5 billion investments in oil and gas
exploration under the seventh round of New Exploration Licensing Policy (Nelp-
VII). The seventh round offers 57 oil & gas blocks. The bid closing date for NELP-
VII is April 11, 2008.

•The government has made certain improvements in this round to facilitate small
companies involved in exploration & production (E&P) activities. A new type of
blocks called 'type-S' covering small area upto 200 kilometres has been
introduced to attract small investors for exploration besides a special
dispensation in the form of waiver of technical capability criteria.

•Of the total committed investment of about $8 billion in previous six rounds of
NELP, about $4 billion had already been spent by oil & gas companies till March
2007. In previous six rounds, the government awarded 162 blocks. So far, the
largest commitment of $3.32 billion investment was received in under Nelp-VI
where 52 blocks was awarded.
•Under Nelp rounds, 49 oil and gas discoveries have already been made in
Cambay on land, North East Coast and Krishna Godavari deepwater areas,
accreting over 600 million tons of reserves. The government would launch road
shows for NELP-VII from January.
 Qualitative Assessment of the
Sector after Reform

•Creating an industry structure that fosters competition and innovation

•Transparent and participatory functioning of a gas regulator with increased powers

•Evaluation of the risk involved in exploration, and possibly separating exploration

and development activities. The timing and structure of NELP VII should be
reviewed based on this study.

•A substantially improved method of evaluation and control of investments, and

decisions regarding relinquishment and extensions

•There is also an urgent need to review the performance of ONGC in terms of the
blocks they bid for, the exploration costs, the gas/oil finds, and take appropriate
corrective actions
 Challenges Ahead……..

• High Dependency on crude Imports

•Deep Drilling required in exploration, leading to high
costs
• Bombay High stocks depleting by 2020
• Dynamic price movements and heavy subsidizing
by government
• Carbon Credits
• Change over to Bio Fuels is a must from Pollution &
Supply perspective
• Focus required on alternate energy resources as
demand is growing very high against the supply
Wonderf