Indian Petroleum Industry: Group 8

INDIAN PETROLEUM
INDUSTRY
Group 8
Agenda
• Introduction
• Competition in Exploration
• Competition in User Industries
• Competition in Refining Industry
• Competition in Gas Industry
• Conclusion
Introduction
The output pattern of refineries seldom matches domestic
consumption
patterns, there have to be some imports of refined products. For the
same there is no single market in oil. There are three types of oil
distribution arrangements :
• There are oil markets in the US and Western Europe where
common crudes of those regions are traded.
• Considerable quantities of oil are sold through contracts of varying
lengths.
• A certain proportion of oil is allocated by governments at prices of
their choice; these prices may or may not be aligned to
international market prices.
Competition in Exploration Industry
• The New Exploration Licensing Policy (NELP)
was launched by the Government in 1997-98
budget for accelerating the pace of hydrocarbon
exploration in the country.
• It took 2 fiscal years to finalize.
• A slurry of tax incentive were promised to
prospective investors.
• After several go and halt signs by GOI, NELP
finally got Underway in 1999.
Objective of NELP
• Private participation for Intensive exploration
of Indian basins.
• Provide avenue for opening up of acreages in
ultra deep water & frontier areas.
• To bring-in new & state of art technology in
exploration & exploitation.
• Transparent Bid Evaluation system.
Main features
• There is Fiscal stability provision in the PSC (Production
Sharing Contract ).
• No customs duty on imports.
• No mandatory state participation.
• No carried interest by National Oil Companies (NOC).
• Freedom to the contractor for marketing of oil & gas in the
domestic market.
• No cess on crude oil production.
• Royalty to be paid on crude oil & natural gas on Volume basis.
• Income tax holiday for 7 yrs from start of commercial
production.
From NELP-I to NELP-VII
• Since the operation of the NELP in 1999, in seven rounds of NELP,

203 Production Sharing Contract (PSC) have been signed, thereby
increasing the area under exploration more than four times.
• In the NELP-VII, 181 bids were received from 95 companies
including 21 foreign companies. Under NELP, 68 oil and gas
discoveries have been made by private/joint venture (JV)
companies in 19 blocks, which have added more than 600 MMT of
oil equivalent hydrocarbon reserves.
• As on April 1, 2009, investment commitment under NELP is about
US$ 10 billion on exploration, against which actual expenditure so
far under NELP is about US$ 4.7 billion. In addition, US$ 5.2
billion investment has been made on development of discoveries.
Progress Made so Far
NELP-VIII
• India's eighth round of New Exploration Licensing Policy

(NELP-VIII) is offering the highest ever number of 70
exploration blocks covering an area of about 1,63,535 Sq.
Km.
• Extensive consultation the views of various stakeholders
have been taken into account while finalizing the bid
documents for NELP-VIII and CBM-IV which contain
some improvements and simplification in the bid
evaluation criteria and Model Contract/ Model Production
Sharing Contract.
Competition in User Industries
 Lack of competition in oil refining & gas products.
 Reasons:
- Gov. dominance of user industries and the losses.
- Liquidity problems
- Delay payments for the feedstocks.
 Two important industries are:

- Electricity, market for gas & furnace oil
- Fertilizer, preffered feedstock are gas & nephtha.
Electricity Industry
 Dominated by Electricity Board, department of state governments.
 Prices decided by Govn. & fixed at unremunerative levels.
 Enormous debts to coal and oil companies.
 Therefore, unpromising customers for gas and furnace oil by private
companies.
 Implement Regulatory Commission Act in 1998 to appoint a Central
Electricity Regulatory commission.
 Passed a new Electricity act in 2002 which introduced competition from
private sector.
 But pricing practices does not change.
 Hence, Electricity board continued to be financially weak & poor
customers for hydrocarbon products.
Fertilizer Industry
 Produces nitrogenous, phosphatic and mixed fertilizer.
 Phosphatic & complex fertilizers were decontrolled in 1992 & nitrogenous

in 1994.
 But Urea remained under control administered by FICC.
 FICC operates a retention price scheme.
 Input cost rises, results in paying an enormous fertilizer subsidy.
 to keep down subsidy, input prices keep low as possible.
 These two industries are unattractive as customers.

Competition in Refining Industry
Refinery licences were given to:
• the Birla group (jointly with Hindustan Petroleum
Corporation, a subsidiary of IOC) in 1988,
• the Essar group in 1993
• Reliance Industries in 1996.
On 1 April 2002, the government announced the abolition
of the Administered Price Mechanism. It introduced
• Direct subsidies on kerosene and LPG
• Raised taxes on petrol and domestic crude
• The petroleum ministry issued retail distribution
licences to ONGC,GAIL, OIL, Reliance Industries,
Mangalore Refineries, Essar Oil and Cairn Energy.
• Of the licensees, only Reliance and Essar opened a
significant number of pumps.
• Reliance set up pumps which were shopping centres
at the same time - sold 410 kiloliters a month as
compared to public sector outlets which sold 140
kilolitres, taking their share of retail sales close to 14
per cent.
• In 2007, Reliance applied for the status of a 100% export-oriented unit; it
got that status in 2008. In 2007-08, its exports came to 60 per cent of its
sales.
• On 24 March 2008, Reliance announced that it was closing down all its
petrol pumps.
• Reason : the government was subsidizing petrol and diesel sold out of its
companies’ pumps, but did not give the subsidies to private competitors.
So retail sales were no longer profitable for Reliance.
• Essar did not take a public decision to close down pumps; it simply
stopped regular supplies to its pumps
• From May 2008, retail sales of petrol and diesel oil are a government
monopoly
• Thus, there is no competition.
Consequences of lack of competition
• One consequence of this lack of competition was

the recurring shortage of diesel oil in Tamil Nadu
between May and August 2008, when Reliance
was exporting it at the same time.
• Reliance had no petrol pumps any more, so it
could not have supplied the market.
• It could have sold diesel to public sector oil
companies, but then it would have breached the
conditions of its EOU status.
To improve competition
Since some refinery products are considered
luxuries and others necessities, taxes on them
will be different; and the average tax on
refined product will be high. In the
circumstances, the tax system can be
simplified and competition in refining
intensified by not taxing crude at all, and
concentrating all taxation on refined products
Competition in Gas Industry
• Gas requires an expensive transport network in the form of pipelines;
hence gas producers prefer to sell to as few consumers as possible, and
prefer large buyers.
• Unless pipelines of different suppliers get interconnected, there is no
competition between them; each has a monopoly of supply to the
customers connected to its pipeline.
• Potential customers: electricity and fertilizers, owned by the central
and state governments. Most of the enterprises in them make losses
which are financed by governments
• It would be impossible for new private plants to compete with these
plants. Since these markets are closed, the only feasible option for
Reliance is to sell its output to GAIL at whatever price it can get, and
let the government distribute it to plants of its choice.
To improve competition
• Currently, all pipelines in India are owned by gas or

oil companies, and thus insulate them from
competition.
• If all the pipelines were common carriers and carried
oil, gas or products for all customers without
discrimination at preannounced prices, refineries and
gas-based plants would spread out more evenly
across the country
• There would be greater competition amongst them.
Conclusion

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INDIAN PETROLEUM

• Since the operation of the NELP in 1999, in seven rounds of NELP,

• India's eighth round of New Exploration Licensing Policy

 Lack of competition in oil refining & gas products.

 Two important industries are:

 Phosphatic & complex fertilizers were decontrolled in 1992 & nitrogenous

 But Urea remained under control administered by FICC.

 FICC operates a retention price scheme.

 Input cost rises, results in paying an enormous fertilizer subsidy.

 to keep down subsidy, input prices keep low as possible.

 These two industries are unattractive as customers.

• One consequence of this lack of competition was

• Currently, all pipelines in India are owned by gas or

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