A Study of the Economic Factors Affecting the Oil & Natural Gas Sector in India

Microeconomics

An Analysis of the Microeconomic Factors Affecting the Oil & Gas Industry[pic 1]

Submitted to: Dr. Shamim Mondal

Devyani Garg | B013

Ankita Gupta | B019

Prakhar Gupta | B022

Shubham Gupta | B023

Sunder Srinivas Harish | B024

Shantanu Manohar | B036

Garima Shukla | B056

Contents

Motivation and Introduction        3

Recent Regulatory Environment        4

Government Initiatives        4

Impact of the Union Budget        5

Demand and Supply        6

Factors Affecting Demand        6

Factors Affecting Supply        6

Complements        7

Substitutes        8

Competitors        9

Nature of the Market        9

Entry and Exit Barriers        10

Entry Barriers        10

Exit Barriers        11

References        12

Appendix        13

Four-firm Concentration Ratio        13

Motivation and Introduction

This report is intended to be a simplified overview of the oil and gas sector in India, giving its readers quick bytes on the industry, and the recent trends shaping the same.

The oil and gas industry ranks amongst India’s eight core industries and it has a great impact on other important sections of the economy. Few important facts and highlights of Indian oil and gas industry are:

• Growing population growth and economy are the main drivers for its demand and supply, which is impacted every year
• 1ndian oil and gas Industry’s imports consists of 15% for refinery and 67% for upstream
• Oil imports contribute about 81% of India's total domestic oil consumption
• Increase in domestic oil and gas production and demand for biofuel has reduced crude oil imports
• Oil and Gas industry has proven oil reserves of 635 MMT
• It also has proven natural gas reserves of 54 Trillion Cubic Feet
• The estimated shale gas contribution is 96 Trillion Cubic Feet  
• India is the third largest consumer of crude oil and petroleum products after China and US

A recent report points out that in 2040, India’s import bill for oil and gas would be $460 billion as compared with $65 billion in 2015.

According to BP’s statistical review of world energy for June 2017, primary consumption basket for India is skewed, having 57% by coal, 6 percent by gas and just 2 percent by renewables. While according to International Energy Agency’s World Energy Outlook 2016, India is going to be the largest source of oil demand growth and consumption is set to increase by 6 million barrels per day, there are numerous of future challenges that have led to decline in the Indian oil and gas production.  And this foretells that demand would be met by imports.

Energy Security Vision 2025 –  India today produces an equivalent of 70 million of oil and oil equivalent gas. Making a target to increase domestic production by 50 percent by 2025, we need to take many measures to ensure it reaches a value of 105 million tonnes of oil equivalent. To empower this, several policies are taken by government to remove challenges faced by companies while investing and increasing ease of doing business scale has made oil and gas industry a huge contributor towards Make in India initiative.

Recent Regulatory Environment

The Government of India has recently taken many regulatory steps to promote the oil and gas industry in India (India Brand Equity Foundation, 2017). Further, the latest union budget also has a moderately positive impact on the industry (Financial Express, 2017).

Government Initiatives

1. The GOI has a plan of building a nine million tonne (MT) refinery as well as a 60 MT refinery in in Rajasthan and Maharashtra respectively, auction oil and gas fields, increase use of liquefied natural gas (LNG), and is having a discussion with Saudi Arabian Oil Co (Saudi Aramco) regarding investment in India. (India Brand Equity Foundation, 2017)
2. The Government of India has a plan of merging state oil companies to create an integrated oil major to utilise the synergy among state entities to achieve efficiency and cost competitiveness. (India Brand Equity Foundation, 2017)
3. The GOI plans to come up with a new policy to renew and extend the lease tenure of 28 oil and gas blocks in the country which will attract more investments into these fields. (India Brand Equity Foundation, 2017)
4. The Cabinet Committee on Economic Affairs, GOI, has approved to award contracts on 23 onshore and 8 offshore contract areas to discovered small oil and gas fields that earlier belonged to Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL). (India Brand Equity Foundation, 2017)
5. The Union Cabinet has approved the National Mineral Exploration Policy (NMEP), which will pave the way for auction of 100 prospective mineral blocks to attract private sector in exploration, besides involving state-run agencies. (India Brand Equity Foundation, 2017)
6. The Ministry of Petroleum and Natural Gas is seeking to enhance India's crude oil refining capacity through 2040 by setting up a high-level panel, which will work towards aligning India's energy portfolio with changing trends and transition towards cleaner sources of energy generation. (India Brand Equity Foundation, 2017)
7. The Union Cabinet has allowed state-owned oil firms to evolve their own crude oil import policies which involve freedom to choose source companies as well as pricing for their crude oil imports, thus allowing them to compete in the market effectively. (India Brand Equity Foundation, 2017)
8. In a major drive to enhance the petroleum and hydrocarbon sector, Government of India has introduced initiatives like the Hydrocarbon Exploration Licensing Policy (HELP), Marketing and Pricing freedom for new gas production, grant of extension to the Production Sharing Contracts and assigning the Ratna offshore field award to Oil and Natural Gas Corporation (ONGC) for development. (India Brand Equity Foundation, 2017)
9. The GOI plans to incentivise gas production from deep-water, ultra-deep-water and high pressure-high temperature areas which are presently not exploited on account of higher cost and risk, and also to augment the investment in nuclear power generation in the next 15 to 20 years. (India Brand Equity Foundation, 2017)
10. The Government of India is in the process of identifying at least 50 potential blocks of 100 sq. km and above to be given to companies for bringing private investment in the mineral exploration sector. The Ministry of Petroleum and Natural Gas has put up for comments a draft policy, to opt for revenue-sharing model while auctioning future oil and gas blocks for exploration to private companies, compared to production-sharing mode earlier, in order to make the process more transparent and market-oriented. (India Brand Equity Foundation, 2017)

Impact of the Union Budget

1. A Decrease in custom duty on LNG has led to boost R-LNG demand prospects and will benefit the end-consumers. (Financial Express, 2017)
2. Allocation of 1,200 crore for FY2018 for GAIL’s Phulpur-Dhamra-Haldia Pipeline Project would thrust towards new LPG connections to poor families and thus, will increase LPG penetration in turn resulting in higher LPG sales volumes and marketing profits for Oil Marketing Companies (OMCs). (Financial Express, 2017)
3. energy security would be increased due to Increased allocation for oil reserves. Setting up Integrated Oil & Gas PSU would result in several benefits like improvement in economies of scale and better bargaining power for crude oil. (Financial Express, 2017)
4. set-up of an additional two strategic crude oil reserves in Chandikhole in Odisha and Bikaner in Rajasthan that would take the country’s strategic oil reserve capacity to 15.33 million tonnes. (Financial Express, 2017)

Demand and Supply

Factors Affecting Demand

1. Economic Growth – As economic growth of a country increases, the demand for oil and gas increases and when the economy is in decline, the countries’ demand for it decreases. Crude oil demand is derived from demand for petroleum products, which is determined by economic growth.
2. Owing a Private Car – There has been drastic increase in car sales in India from about 40000 cars a year in 1980s to 18.07 lakh units in 2013 alone. Earning capacity of population has increased and market is flooded with credit options which marks easy purchase of car. Also, car is no longer seen as a status symbol but is looked upon as a matter of necessity. This massive spike in car buying trend leads to a growth in demand of petrol.
3. Supreme Court Directive – The Supreme Court of India imposed a ban on the sale of large diesel cars in December 2015 till Mar 2016. Cars having engine capacity of 2000 cc and above were banned in the national capital. Toxic situation and worsening air pollution in the city prompted the court to issue this ban. It also prohibited all trucks older than 10 years to pass through the capital city. This action on one hand reduced the demand for diesel and on the other hand increased the demand for petrol.
4. Impact of Technological Improvements – Due to technological advancements, the fuel efficiency has been increasing. As a result, the demand for the oil and gas can decrease. Future technological advancement can decrease the price of substitutes like bio fuel by improving the process of creation of biofuel. The presence of a cheaper substitute like biofuel in large quantities can decrease the demand for oil and gas.

Factors Affecting Supply

1. OPEC – OPEC still holds considerable power to affect the global supply of oil and gas as the share of OPEC in global crude oil production is expected to remain stable till 2020. This is because incremental supply from new fields in non-OPEC countries is expected to slow down on subdued crude oil prices. Slower growth in incremental output from unconventional sources in the US, Canada and Brazil will be matched by production from Middle East countries, primarily Iraq and Iran.
2. Non-OPEC production – The Non-OPEC like the U.S, Russia, and China can impact the supply of oil and gas as they are the major producers after OPEC. They increased their production and broke the monopoly created by OPEC. The incremental supply from new fields in non-OPEC countries is expected to slow down on subdued crude oil prices. Slower growth in incremental output from unconventional sources in the US, Canada and Brazil will be matched by production from Middle East countries, primarily Iraq and Iran.
3. Geopolitical Risks – The geopolitical tensions, like in the Middle East, can affect the supply of oil and gas. When Kuwait war was happening, nearly all of Kuwait’s and Iraq’s oil production was taken offline and Kuwait’s oil wells suffered extensive damage from sabotage by retreating Iraqi forces. Oil supplies from both these countries were disrupted during this period and for the next few years.

Complements

A complement refers to a complementary good or service that is used with another group or service. Generally, the complement has little or no value when it is consumed alone but when combined with any other good or service increases the overall value of the offering