India’s US$110 billion oil and gas industry is one of the fastest growing sectors at around 12- 14% of the economy. It contributes 15% to the GDP. The industry is fragmented and dispersed; it has multiproduct and multi-faceted firms. The sector contributes about 45% to India’s primary energy consumption. India is the sixth largest crude consumer and the eighth largest crude importer in the world. About 30.87% and 11.21% are contributed by oil and gas sector to the overall imports and exports respectively. India has the sixth largest refining capacity i.e. 2.56m barrels per day representing 2.99% of world capacity. The compounded annual growth rate (CAGR) for oil consumption in India has been 3.2% from 1995 to 2007. India is among 20 largest consumers of gas. The oil sector in India is dominated by state-owned enterprises. Most of the country’s 19 refineries, barring two, have a capacity to process about 160m tones per year and are run by state-run companies. The major upstream oil companies which are into exploration are IOC, ONGC and RIL, and Aban Offshore, whereas the major downstream companies are BPCL, HPCL and MRPL, IOC Esaar Oil, and RIL. However, the government has taken steps to deregulate the industry and encourage greater private and foreign participation. In present scenario the government allows 100% FDI limit in oil & gas industry. The Government of India has revealed its intention to develop a strategic petroleum reserve (SPR). To carry forward the plan, the government has given approval for construction of storage tanks with 36.7m barrels of crude oil storage capacity. The SPR project is being led by the Strategic Petroleum Reserve Corporation Ltd, which is a part of the Oil Industry Development Board, a state-controlled organization that manages loans and grants to the oil industry.
The margins of downstream companies were severely hit because of the rise in the crude oil prices in the international market. The downstream companies will witness a shriveled margin due to rise in the oil prices as well as maintained prices by the government. The upstream companies like ONGC and Reliance will perform well during the year. The margins are lower due to net under realization of 3-4% of the total sales. Gross refining margins of all downstream companies are around US$9-10. For the purpose of inter-firm comparison, 11 companies were taken across the industry for analysis. The total operational expenditure of the industry is estimated to jump by 69% to Rs3233.56 billion during JAS08. The major expenditure of the industry is estimated to incur towards raw material as well as equipments used in the exploration of crude oil for upstream & downstream companies.
The total imports of the petroleum products during 2007-08 are estimated to be around 144.38MMT. Out of this around 84% is contributed by crude oil. In value terms the total exports of petroleum products for 2007-08 is estimated around Rs1076.03 billion. So the net import in term of value for 2007-08 is estimated to be around Rs2415.39 billion.
Because of the decrease in the crude oil prices, the profit margins of most of the downstream companies had increased, but the rupee depreciation against dollar adversely affected NPM of the downstream companies. As most of the downstream companies are going for capacity additions, the refining margins are getting affected. On the other hand, upstream companies specially, RIL increased crude oil production to 550,000bpa which accounts 40% of the India’s total production. Upstream companies faired well because of the exploration of new basins like the Krishna-Guava basin.
The government had given subsidy to most of the downstream companies so that they can offset the loss because of the rise in the crude oil prices. The government’s support for the downstream companies will continue for LPG, SKO and HSD. NELP-VII, a liberalized policy of Government of India for attracting private investments in oil & gas sector, will become active from October 2008.