Pergamon
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Nciiuml &wiirw$ F k m . Vol. 22,
No I. pp 15-25, 1998
0 1998 Uniled Nation* Puhli\hcd hy Elwvicr Science Lld
PII: SO165-0203(97)00033-0
Printed in Great Britain
OlhS-I)21)7/YX %19.00+000
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Policy issues pertaining to the oil and
gas sector in India
Raghavendra D. Rao
This article distwses the various phases in petroleum product cfinsumption in India from I960 to 1996, and
analyses the chunges in consumption patterns. Consumption is growing rapidly although the intensity of
petroleum use und the proportion of petroleum in the overall secondary energy consumption is actually on
the decline. especiully since the mid-1980s. The proportion of middle distillates in total consumption,
especially HSD (High Speed Diesel) which accounts f o r 45%. is very high main1.v because of distortions
caused by Government subsidies. The article ulso analyses expected demand,for petroleum product.7 up till
the year 2010, emphasizing the need to address the particularly fast growing demandfor middle distillates.
Further, the urtide discusses vurious policy issues pertaining to upstream and downstream activities of oil
trnd gas .supply, tmd emphusizes the need f o r increased investment in exploration and development. better
munagement of existing reserves, rationalizution of pricing policies and the creation of modern infra.structure to meet growing nee&. 0 1998 United Nations Published by Elsevier Science Ltd
India has about 0.04% of the world’s proven reserves of
hydrocarbons. The prognosticated geological resources of
hydrocarbon in the country are estimated at 2 1.31 billion
tonnes, of which 61% are offshore and 39% onshore. However, established geological reserves are only 5.32 billion
tonnes. It is believed that half the prognosticated resource
represents natural gas, of which 12% has so far been proven.
In 1993- 1994, indigenous crude oil production in India
could meet only 47% of the country’s domestic requirement. In that year, the value of net crude oil and petroleum
product imports constituted 26% of total export earnings for
the year, despite subdued prices on the international oil
market. Over the following two years, domestic production
increased and in the year 1995- 1996,56.3% of the crude oil
consumed was met through indigenous production. For the
year 1996-1997, revised estimates again show a sharp
decline in domestic crude production because of the bad
management of existing reservoirs. The last 25 years have
seen a steep increase in the consumption of petroleum
products with a compounded annual rate of growth
(CARG) of 5 % . In the early 1990s, CARG was reduced to
2.7% caused by a slowing down of industrial activity.
However, the liberalization of the Indian economy in
recent years promises a faster rate of economic growth in
the years to come. This might, in turn, result in increased
consumption of petroleum products. The issue of managing
the growing demand for petroleum products is a critical
aspect of India’s future energy policy.
The entire range of petroleum supply activities, including
exploration, extraction and refining, and a large portion of
The author I S currently Energy Economist at Reliance Petroleum Limited.
Bombay. India. This article was written during his tenure at the Indira
Gandhi Institute of Development Research. Mumhai, India.
the transportation of crude oil, petroleum products and gas
in India is currently being handled by government controlled organizations. In the now liberalized scenario,
investment from the private sector is encouraged in the
form of joint ventures between private and government controlled organizations. Investment needs to be distributed
among the various upstream and downstream activities.
For upstream activities (exploration and extraction), investment needs to be spread among various potentially productive basins. Investment in downstream activities is required
to establish new refineries to ensure adequate expansion of
refining capacity required to meet the growing demand.
Decisions have to be taken regarding the time-path of
joint production of oil and gas from existing reserves, in
various reservoirs. The process configuration of existing
refineries need to be geared to meet the emerging pattern
of demand in India. Here, there is a need to invest in secondary conversion process units, such as Fluid Catalytic
Cracking (FCC) and Hydrocracking (HC) units, to meet
the growing demand for middle distillates. For a complete
picture of current supply issues, the dependence on imports
to meet demand and the relative costs of importing crude oil
and petroleum products vis a vis domestic production and
refining, also need to be given due consideration.
Consumption of petroleum products - 1960-1996
The consumption of petroleum products in India (Figure 1)
over the last 35 years, can be classified into distinct time
periods. Plotting petroleum consumDtion against the Gross
Domestic ProZult (GDP) across’ time ywill yield the
trajectory of intensity of petroleum use (IPE), illustrated
in Figure 2. The growth of consumption of petroleum
compared with growth in consumption of secondary
16
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Policy issues pertaining to the oil and gas sector: R. D. Rao
60
Petroleum c o n s u m p t i o n
-
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1.
c
0
=
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.-
=
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30 -
E
20
-
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10
-
-/
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Year
Figure 1 Consumption of mineral oils in India.
energy as a whole, indicates a faster rate of growth for
commercial energy sources other than petroleum (Figure 3).
However, the consumption of petroleum products in absolute terms grew at a very high rate. The ratio of total
secondary energy consumption to the GDP is defined as
the Intensity of Energy Use (IE). Figure 4 illustrates IE
across years for India.
During the first time period from 196011961 to 1966/
1967, and the second time period from 1967/1968 to
1971/1972, the consumption of petroleum grew at a very
high rate with an average annual growth of 20.68% and
18.94% (Table 1). The corresponding figures for the overall
secondary energy were 7.14% and 6.35%. However, the
effects causing the growth were different. In the first phase,
the growth can be attributed to the increasing proportion of
consumption of petroleum products in the overall secondary
energy consumption, the growth of the economy and the
0.025
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-
Figure 2 Intensity of petroleum use.
increasing intensity of energy use (IE), with all these factors
contributing evenly towards the growth in consumption. In
the second phase, the growth in consumption was fueled by
increased incremental growth in GDP and increased proportion of petroleum in the overall energy consumption, while
the intensity of energy use increased at a lower rate as
compared to the first phase. The year 197211973 experienced the effect of the first oil shock, with a dip in petroleum
consumption, caused by the reduced supply of oil. The third
phase from 1973/1974 to 1979/1980, marked the beginning
of a period of substitution of oil by other energy sources.
The increased consumption of petroleum in this phase was
mainly due to a brisk growth of the economy. The year
1980/1981 experienced the effect of the second oil price
shock, again caused by an increased international price of
oil. The slump in petroleum consumption was caused by
reduced proportion of petroleum consumption in the overall
Petroleum c o n a u m p t i o n I G D P
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Policy issues perruining io the nil and gus sector: R. D. Rao
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Ptxroleum consumption
200
.......... Total energy
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..
0
1
1
1
1
1
1
1
1
1
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Years
Figure 3 Petroleum and total secondary energy consumption.
secondary energy consumption, though the economy was
buoyant. The fourth phase from 1981/1982 to 1984/1985
saw the continuation of the trend of a higher level of
increase in the usage of secondary energy sources other
than petroleum. However, a healthy growth in the economy
and an increase in the IE, brought about an increased
consumption of petroleum products. The year 1985/1986
experienced the effect of a slump in the international oil
prices which increased the proportion of petroleum in the
overall energy consumption. This, along with a good
growth in the economy and the IE, saw a huge spurt in
petroleum consumption. The fifth phase from 1986/1987
to 199411995 shows a trend of decreasing average rate of
growth in the Intensity of Petroleum Use. The average
growth of Intensity of Energy use however, showed a
marginal increase during this period. Thus, the growth in
petroleum consumption during this phase can be attributed mainly to the growth in the economy and was
considerably dampened by decreasing proportion of
petroleum consumption in the total energy consumption.
With the liberalization of the economy, a high growth in
the economy can be expected in the years to come. Some
products like HSD and Kerosene are heavily subsidized
leading to massive consumption, especially of HSD, and
the price of certain products like MS (Petrol) were fixed
at a relatively high level, distorting the pattern of consumption (Figure 5). The planned decontrol of prices and
decanalisation of imports of all petroleum products might
show an increase in consumption of petroleum products
keeping pace with, and probably exceeding, the rate of
growth of consumption of the other secondary sources of
energy.
Year
Figure 4
Intensity o f total commercial energy u\e
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Policy issues pertaining to the oil and gas sector: R. D.Rao
Table 1 Average annual percentage growth of the salient factors affecting petroleum consumption
Years
1960/1961 to
1967/1968 to
1972/ 1973
1973/1974 to
1980/1981
1981/1982 to
1985/1986
1986/1987 to
1966/1967
197111972
1979/1980
1984/1985
1994/1995
Petcon
Totene
GDP
Petconmotene
Totene/GDP (IE)
20.68
18.94
-4.15
5.35
-4.05
7.96
23.87
3.27
7.14
6.35
1.79
4.84
5.47
7.87
10.97
5.57
2.99
4.98
-0.62
3.26
6.65
5.36
5.46
5.06
11.13
4.24
1.33
2.43
1.68
-1.11
2.39
5.23
0.52
11.61
-5.84
0.6
-9.03
0.03
11.62
-2.17
PetcodGDP (IPE)
17.41
13.28
-3.55
2.23
- 10.04
2.44
17.46
- 1.68
Projected pattern of demand for petroleum pro- of HSD almost doubled during the decade ending 19931994. In forecasts for the future, the demand for HSD is
ducts in india 1995-2010
The forecasts of demand for petroleum products have
important policy implications for the overall supply. A summary of demand forecasts (Rao and Parikh, 1996) for the
various products is given in Table 2 and described below.
Petrol (motor spirit = gasoline)
The automobile industry in India is growing fast, with many
multi-national car and two-wheeler manufacturers expanding
their operations or planning to enter the Indian market in the
near future. As a result, demand for petrol can be expected to
grow at a faster rate in the future. In forecasts, demand is
projected to grow at a rate of about 8% per annum during
the latter part of the 1990s, gradually increasing to an average
annual growth rate of 12%-13% by the end of the period
(2010-201 1). This high rate of growth in demand for petrol
can be attributed to the expected rapid increase in personalized
transport, in turn resuIting from increasing income levels.
HSD (high speed diesel)
HSD is a subsidized commodity in India, since an increase in
its price would have an impact on inflation. The consumption
estimated to grow at an average annual rate ranging from
around 7%-8% in the late 1990s to about I I % by 2010201 1. Demand is expected to grow from 29.59 million
tonnes in 1995-1996 to 108.2 million tonnes in 2010201 1. Thus, HSD is likely to hold its position as the most
consumed petroleum product in India. Manufacturers of
personal transport vehicles (motor cars, etc.) have begun
manufacturing HSD driven vehicles to take advantage of
its subsidized price, thus raising questions on the rationale
in retaining the subsidies. Moreover, the very high quantity
of import of HSD by India has been having an impact on the
international price. This in turn has resulted in a vicious
cycle of subsidy-driven increase in domestic demand leading to increased imports, leading to a higher international
price mark-up caused by the increased imports.
Fuel oils
The consumption of fuel oils has in the past shown a linear,
low rate of growth over the years. Future projections
indicate a continuation of this trend, with the demand
showing a marginal increase from 9.68 million tonnes in
1995-1996 to 11.88 million tonnes in 2010-2011. This
1 .0
0.8
'
0.6
0. 4
0.2
n
1981-82
1983-84
1985-86
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1987-88
1989-90
1991-92
Year
Light
Middle (SANS HSD)
Figure 5 Proportion of various distillates in overall petroleum consumption.
0
HSD
Heavy
1993-94
1995-96
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Policy issues pertaining to the oil und gas sector: R. D. Rao
Table 2 Summary of demand forecasts for selected years
~~
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Percentage average annual rate of growth
Product
Demand in million tonnes
Year
1995- I996
2000-2001
2005-2006
2010-2,01 I
1995- 1996 to
2000-2001
2000-01 to
2005-2006
2005-2006 to
2010-201 I
Petrol
4.52 (4.77)
29.59 (31.25)
7.12 (6.84)
43.02 (41.30)
12.22 (10.77)
65.88 (58.06)
23.24 (19.00)
108.2 (58.43)
9.54 (7.48)
7.77 (5.74)
1 I .40 (9.50)
13.7 I ( I 2.0)
10.43 (8.78)
14.96 (15.80)
1.90 (2.01)
9.68 (10.22)
1.41 (1.49)
22.89 (21.98)
2.60 (2.50)
10.43 (10.01)
I .53 (1.47)
34.68 (30.56)
3.61 (3.18)
11.14 (9.82)
I .66 ( I .46)
51.96 (42.47)
5.05 (4.13)
11.88 (9.71)
I .80 ( I .47)
8.89 (6.83)
6.50 (4.46)
1.50 (-0.41)
1.54 (-0.27)
8.66 (6.81)
6.76 (4.93)
1.32 (-0.38)
1.63 (-0.14)
8.42 (6.80)
6.97 (5.37)
1.30 (-0.23)
1.75 (0.14)
4.44 (4.69)
4.75 (4.56)
5.04 (4.44)
5.33 (4.36)
I .34 (-0.56)
I .22 (-0.53)
1 . I4 (-0.36)
HSD
Kerosene
+LPG
ATF
Fuel oils
LDO
Naphtha
+LUBE
8.90 (7.05)
Note: Figures in brackets denote per-capita share of demand (in kilograms).
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trend indicates a decreasing reliance on these fuels in the
industries, mainly caused by technological advances.
Other petroleum fuels
Demand for Aviation Turbine Fuel (ATF) is predicted to
grow at a rate of about 6% to 7.5% during the period 19951996 to 2010-201 1, from a level of 1.9 million tonnes in
1995- 1996 to 5.05 million tonnes in 20 10-201 1.
The forecasts for Light Diesel Oil (LDO), indicate that its
importance as a fuel in electric utilities, shipping and industries is on the decline mainly owing to the availability of
cheaper substitutes. Demand for LDO is expected to grow
from 1.41 million tonnes in 1995-1996 to 1.80 million
tonnes in 2010-201 I .
The demand forecasts for naphtha and lube oils combined, show a trend of stagnation. A marginal increase
from 4.44 million tonnes in 1995-1996 to 5.33 million
tonnes in 2010-201 1 is predicted. This can be attributed
mainly to the shrinking importance of naphtha in the
fertilizer and petrochemical sector, where gas is coming
up as an alternative fuel.
The change in Government policy to allow private
operators to import and market kerosene and LPG on the
Indian market is expected to increase supply, which in turn
will better satisfy the suppressed demand for these fuels in
the domestic sector as cooking and lighting fuels. The
demand is expected to grow from 14.96 million tonnes in
1995-1996 to 51.96 million tonnes in 2010-201 1. Thus,
according to these predictions, kerosene and LPG will continue to be very prominent among petroleum products in
India in the near future.
Thus, the demand for petroleum products: motor gasoline, HSD, kerosene, LPG and ATF is expected to grow at a
very rapid rate during the forecast period, whereas demand
for fuel oils, LDO, naphtha and lube oils is expected to grow
at a relatively lower rate. This pattern of demand, along with
other factors such as the quality of crude oil and the
expected relative international prices of crude oil and petroleum products, will determine the plan for an appropriate
refinery and processing configuration in India. The variation
in capital costs for alternative process configurations is very
large. Thus, to arrive at an optimal process configuration, an
analysis of alternative means of satisfying the demand,
which includes product import options and domestic refining with alternative process configurations, needs to be
undertaken. This requires a thorough study of likely market
developments and possible changes in Government policy
in the future, which might affect the prices of crude oil and
petroleum products, and the capital and operating costs of
refining. In India, the Government plans to de-control the
currently administered consumer prices of petrol in the near
future. The procedure and timing of the planned deregulation may also have a considerable impact on the future
demand pattern of petroleum products.
Issues in the supply of oil and gas
Exploration: increased investment needed
The prognosticated geological resources of hydrocarbon in
the country are estimated at 2 1.3I billion tonnes, of which,
61% are offshore and 39% onshore. Of this, proven geological reserves however, are only 5.32 billion tonnes. The
reserves are distributed in 26 sedimentary basins, of which
13 are considered more prospective. These basins are classified into four categories, of which Category I basins are
those currently producing, while Category 11, I11 and IV
basins have declining levels of prospectivity. It is believed
that half the prognosticated resources represent natural gas,
of which only 12% has been proven so far.
The Oil and Natural Gas Corporation (ONGC) and the Oil
India Limited (OIL) handle most of the exploration and
production of hydrocarbons in the country. The two companies expanded exploration activities in the early 1980s in an
effort to augment reserves, concentrating on previously
unexplored areas with increased emphasis on offshore
areas, consistent with the greater proportion of prognosticated resources in offshore areas. The 1980s also saw
increased exploration activities in the Category 11 and 111
basins. This was because geological surveys indicated
several large structures in Category I1 and 111 basins favourable for hydrocarbon accumulation. Some Category 11 basins
such as the Krishna-Godavari and Cauvery basins yielded
good results and have now been upgraded to Category I.
Certain Category I basins, like the Dahej and Gandhar
(onshore) and Neelam (offshore) fields also produced
encouraging results during the late 1980s (TERI, 1995),
contradicting beliefs that exploration had reached maturity
in Category I basins. Figure 6 shows metreage drilled in
onshore and offshore basins since 1980. As can be seen,
there had been a steady increase in the magnitude of
metreage drilled, especially in onshore basins, where there
20
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Policy issues pertaining to the oil and gus sector: R. D. Rao
r
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Year
Figure 6 Metreage drilled for exploration
was a quantum leap in drilling activity in 1985, with a peak
in 1989 after which there has been a downslide. Offshore
basins have also faced recent stagnation in the levels of
metreage drilled. The availability of recoverable reserves
got a boost with the discovery of Bombay High offshore
reserves in 1975-1976. From then on, the reserves from
offshore basins have been accruing at a steadily increasing
rate (Figure 7) to peak at 491 Million Metric Tonnes (MMT)
in 1991, with a subsequent leveling off. For onshore basins,
the availability was in the range of 125-145 MMT during
the period 197 1 to 1982, after which there had been a steady
increase in the reserves available. However, the quantity has
stagnated during the 1990s.
Thus, capital constraints have limited exploration activity
in India, leading to low reserve accretions in the past few
years. With the widening gap between indigenous production
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and demand, there is a need for exploration activities to be
stepped up. Involvement of the private sector in E and P
(exploration and production) activities by bringing in
technology and finance, the two most critically required
inputs, could step up the accretion of reserves and increase
domestic production of crude oil. In order to attract foreign
investment, eight rounds of bids were held between 1980
and 1994. In these rounds acreage was offered in a production sharing contractual system wherein private companies
enter into production sharing arrangements with the public
sector oil companies. The response to these bidding rounds
was not very encouraging owing to factors such as
inordinate delays in finalizing contracts and lack of adequate seismic field data. These difficulties were compounded by the perception that the oil fields offered were
of limited productivity, especially in comparison to those
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..........
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Figure 7 Availability of recoverable reserves of crude oil.
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Policy issues pertuining to the oil and gas sector: R. D.Rao
offered by other countries in the region, e.g. the People's
Republic of China, the Commonwealth of Independent
States and Vietnam. In order to improve participation, the
Government is now offering small and medium oil fields to
the private sector, allowing companies to conduct their own
seismic surveys and also encouraging joint ventures with
ONGC/OIL for exploration. Further, the Ministry of Petroleum has recommended that all exploration companies,
including the ONGC and OIL, be given the right to market
the extracted crude to any buyer, national or international,
without reserving for the government the first option to
purchase the entire output. The government will however
have the right to match the best offered price. The Ministry
is planning an amendment to the bid evaluation criteria for
the award of discovered fields since current criteria do not
attach a penalty for not achieving the projected recoverable
reserves. This gives room for the possibility of inflated projections of recoverable reserves by the bidders to project a
better Net Present Value.
The Ministry has also set up a committee to draft a
relinquishment policy of petroleum exploration licenses
for acreage leased out to the public sector companies.
Guidelines would be set up by which the PSUs would
have to give up acreage if no exploration is carried out
within the specified period. Hopefully, all these measures
will bear fruit in ameliorating the trend of declining exploration activity and depletion of recoverable reserves.
21
discovery, there has been severe dependence on this basin
alone, which currently accounts for two thirds of the total
domestic production. In the first half of the decade of the
1980s, production from Bombay high increased at a rate of
33% every year, and then stagnated during the latter half.
The flogging of oil fields for many years in succession
without timely water injection inputs led to extensive
damage, closure of several oil fields and a subsequent
decline in production. Thus, after attaining a peak value of
34.0 MMT in 1989- 1990, production declined for three
consecutive years. In 1994-1995. a well rectification program for the Bombay High field and some new field
development projects arrested the downward trend to
increase overall production by 19%, and a further 12%
increase in production from Bombay high in 1995-1996
brought about a 7% increase in national production.
Budget estimates of 35.65 MMT of crude oil to be
produced in 1996-1997 have had to be scaled down to
30.85 MMT. This gap of about 4.8 MMT between earlier
projections and current estimates will cost the exchequer an
additional 27.8 billion of Rupees (at US$22 per barrel of
crude). The shortfall is mainly caused by improper management of extraction at the Bombay High basin, and at the
Neelam and Heera western offshore fields. A shortfall is
also expected from the Assam and the Gujarat onshore
basins. Oil producing companies have admitted that the
estimated shortfall is mainly caused by flogging of wells
causing heavy damage. This has compelled the Ministry of
Petroleum and Natural Gas to question the "intrinsic
technical and managerial capability" of the oil producing
companies.
The import of crude oil declined during the early 1980s
because of increased domestic production (Figure 8).
However, since the mid-l980s, imports have been rising
steadily and peaked at 30.8 MMT in 1993-1994, accounting for 53.3% of total availability for the year. In 19951996, the share of imports declined in terms of quantity to
43.7%, but actually increased by 12% in terms of value over
the previous year because of an increase in oil prices.
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Extraction: need f o r better management of hydrocarbon
resources
With the recent spurt in international prices of crude oil, the
oil import bill is an increasing burden on the economy.
Thus, the issue of proper management of India's indigenous
resources has occupied center stage.
Figures 8 and 9 depict the production and import of crude
oil from 1970 to 1995. The discovery of Bombay high basin
and commencement of production from 1976 brought about
an increase in overall production of crude oil. Since its
Production
..........
Import
H
..
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Figure 8 Production and import of crude oil.
I
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Policy issues pertaining to the oil and gas sector: R. D. Rao
70
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Year
Figure 9 Production and import of crude oil
Given the ever-growing domestic demand for petroleum
and a volatile international market, proper management of
domestic resources can cushion India’s import liabilities to a
certain extent. Application of suitable EOR (Enhanced Oil
Recovery) techniques can extend the productive life of old
and depleted fields over a greater time span. Some positive
action seems to be in the offing in this respect with pilot tests
for chemical flooding, miscible gas injection and thermal
methods of EOR being conducted in various fields. These
techniques might replace water flooding and gas injection
techniques wherever applicable. The Oil and Natural Gas
Corporation, the main oil producing company in India, has
appointed a leading international management consultancy
company to look into their organizational structure and
recommend changes.
Indian Economy) survey, 14 new refineries and 5 capacity
expansion projects are envisaged. Five of the new refineries,
totalling 39 MMT of additional capacity, are currently in
various stages of implementation, and three of the expansion projects, providing an additional capacity of 7 MMT,
are now being implemented. India’s total refinery capacity
is expected to reach around 131 MMT by 2001-2002.
Utilization of existing refinery capacity has been consistently above 100% during recent years.
In refining, secondary conversion processes are used to
convert vacuum gas oil (middle to heavy distillates) and
other heavy fuel components into lighter distillates like
LPG, gasoline, HSD and kerosene. Since the forecasts for
India show an increasing demand for the lighter distillates
relative to heavy fuels, future refinery configuration needs to
put increased emphasis on investment in secondary conversion processes. The technology to be adopted for the
projected expansion of capacity, either by establishing
new plants or by expanding capacity in the existing ones,
should cater to the emerging pattern of demand for
petroleum products in the future. A policy needs to be
evolved to match the process configuration of the new
added refinery capacity to projected future requirements
for various petroleum products.
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Refining: need to regulate proposed capacity expansion
In contrast to the E and P activity in the country, the downstream refining sector has seen brisk growth in recent years.
The first refinery in India was set up at Digboi, Assam, in
1901 and is now being operated by the public sector Indian
Oil Corporation (IOC), which currently has the largest
market share.
From the early days of this century, India’s domestic
refining capacity has been growing steadily over the years.
It was stagnant at 51.85 MMT between 1988-1989 and
1992-1993. In 1993-1994, the capacity of the Guwahati
refinery was expanded by 0.15 MMT, a new refinery commissioned at Narimanam, Tamil Nadu, and a streamlining
project commissioned at Madras Refineries Ltd. to yield
another 0.9 MMT, increasing the overall capacity to
53.4 MMT. In 1994-1995, the Cochin refinery was
expanded by 3 MMT bringing the overall capacity to
56.4 MMT. Mangalore refinery with a capacity of 3 MMT
started trial production in March 1996 and the first quarter of
1996- 1997 saw the expansion of Bongaigaon refinery by
1 MMT. Thus, India currently has a refining capacity of
60.40 MMT.
The refining sector was opened to private sector participation. According to a recent CMIE (Center for Monitoring
Infrastructure: need to remove bottlenecks
In recent times, import of certain products like kerosene,
LPG, LSHS, and aviation turbine fuel, have been
decanalised and private agencies have been allowed to
import and distribute these commodities at market prices.
This has put a massive strain on the existing infrastmctural
facilities for storage and handling. Imports have been
constrained by insufficient storage and handling facilities
at the ports. Certain short term measures are being taken
by which four ports on the east coast and twelve on the west
coast have been identified for setting up facilities to receive
imported LPG. The efficiency of the pipeline network
carrying crude oil and petroleum products directly
affects refining costs and petroleum product prices. In
the long run, considerable investment will be needed
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Policy issues pertuining t o the oil und g a s sector: R. D. Ruo
towards establishing sufficient and modern infrastructural
facilities.
Pricing of petroleum products: need for rationalization
In India, the Government controls the price of all oil products, which are set to what is called an Administered Pricing Mechanism (APM). These prices are revised only
periodically. In order to ensure that refineries, oil producers
and traders get adequate returns in spite of "administered
prices", an Oil Coordination Committee, set up by the Government, operates an Oil Pool Account. The purpose of this
account is to provide crude oil to refineries at a fixed price;
provide assured cost plus prices to refineries for their products; ensure margins to the marketing companies; and
enable cross-subsidization of products.
The Administered Pricing Mechanism (APM), which
allows for a huge subsidy notably to Kerosene, LPG and
High Speed Diesel (HSD) has had a tremendous impact on
the petroleum sector. Consumption has grown by staggering
amounts, especially of HSD, forcing the import of this fuel
in huge quantities, which in turn has affected the
international price. While the recent hike in the domestic
price of HSD brought it closer to international prices, the
huge subsidies on kerosene and LPG continue to burden the
Oil Pool Account beyond reasonable limits. The very large
subsidy on LPG has dampened private sector participation
in LPG marketing, which has been further exacerbated by
the fact that FOB contract prices of LPG have been
rising sharply. Moreover, an additional 2% duty has been
imposed on LPG imports in the 1996-1997 budget, and
infrastructural bottlenecks of handling at ports and storage
facilities persist. This situation has caused some major private sector companies to withdraw from parallel marketing.
The distortions caused by these pricing policies ultimately
affect the consumer with an inevitable rise in petroleum
product prices.
23
To address the situation, however, the Ministry of Petroleum and Natural Gas recently tabulated some suggestions
for approval with the Cabinet Committee on Economic
Affairs (CCEA). These include
Introduction of adjusted import parity pricing for the petroleum products:kerosene, motor spirit, HSD, LPG and
aviation turbine fuel at the refinery gate instead of APM,
for all refineries from 1997-98;
Indigenous crude oil to be received by refineries at
international prices and imported crude at import parity
prices;
Dismantling the pricing mechanism in the oil sector in
phases as per the R-Group's (a committee set up to review
the policies of the oil and gas sector in India) recommendations; and
Treating the hydrocarbon sector on par with other
infrastructure sectors for fiscal incentives.
Hopefully, the implementation of these steps will
rationalize petroleum pricing and help improve the management and utilization of India's domestic oil resources and
scarce capital.
Natural gas: fuel of the future
There has been growing concern over the deleterious effects
of the use of fossil fuels on the environment. In this context,
natural gas has come to be recognized as the cleanest form
of energy. It produces 40% less carbon dioxide (C02) compared to coal and 30% less C 0 2 compared to oil, for the
same amount of heat generated. Natural gas is thus capable
of being an important factor in the attempt to reduce CO?
emissions.
The accrual of recoverable reserves of gas has been quite
rapid since the mid-1970s (Figure lo), increasing from 75.1
MTOE in 1974-1975 to 605.8 MTOE in 1993-1994.
Production was stagnant at around 2 MTOE till the 1980s.
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R e w r v c s i n ten MTOE
.......... Production in MTOE
Year
Figure 10
Available recoverable reserves and production of nalural gas.
24
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Policy issues pertuining to the oil and gus sector: R. D. Ruo
after which it was stepped up, and increased from 2 MTOE for fuel oils, LDO, naphtha and lube oils is expected to grow
in 1980-1981 to 19.2 MTOE in 1995-1996.
at a relatively lower rate. This pattern of demand along with
All post-production activity related to gas is controlled by other factors like quality of crude oil and expected relative
the Gas Authority of India Ltd (GAIL). During the 1980s, international prices of crude oil and products, will determine
the Government had earmarked gas to be utilized primarily the plan for appropriate refinery processing configuration in
by the fertilizer sector. Moreover, production of crude oil India. The government plans to de-control the currently
was not curtailed to avoid gas flaring, which led to 28%administered consumer prices of petrol, in the near future.
42% of released gas being flared. Once the Government The procedure and timing of the planned de-control may
allowed gas to be utilized by the power sector in the late also have a considerable impact on the future demand
1980s, the demand for gas soared and flaring declined. In pattern of petroleum products.
The availability of recoverable reserves of petroleum got
1995-1996, only 7% was flared. The policy of allocating
gas in predetermined quotas and controlled prices, led to the a boost with the discovery of Bombay High offshore
wastage and sub-optimal use of this resource. The policy reserves in the year 1975-1976. With a stepping up in the
objective for gas utilization should be to support use of the drilling activity especially since the mid- 1980s, there has
resource in as many ways as possible, rather than restricting been a steady increase in the reserves available. However,
gas utilization to one particular purpose. Use of gas should capital constraints have limited exploration activity in India
be encouraged especially as a substitute for oil products, leading to low reserve accretions in the past few years. With
such as diesel, which is currently being imported in huge the widening gap between indigenous production and
quantities, and fuel oils.
demand, there is a need for exploration activities to be
Current demand for gas by units for which gas is allocated stepped up. Involvement of the private sector in the E and
is 23.46 MTOE per year. Apart from the allocations made, P (Exploration and Production) activities by bringing in
there exists a registered demand of 81.31 MTOE a year. The technology and finance, the two most critically required
natural gas availability from indigenous sources in 1994- inputs, could step up the accretion of reserves and increase
1995 was about 16.28 MTOE leaving a huge shortfall in domestic production of crude oil.
Indigenous production of crude oil grew rapidly during
supply. It is estimated (CMIE, 1996), that the registered
demand for gas in 2001 -2002 will be 82.25 MTOE as against the eighties mainly because of increasing production from
an availability of 54 to 60 MTOE after taking into account the the Bombay High fields. However, flogging of oil fields for
likely availability through two sub-sea pipelines from Oman many years in succession led to extensive damage and
and Iran each delivering about 17 MTOE annually.
closure of several fields impeding production. A well rectiTo distribute gas, the Hazira-Bijapur-Jagdishpur pipeline fication program and development of new fields improved
project has been operational since August 1987, covering a the situation during the years 199411995 and 1995/1996.
distance of 1700 km, and supplies gas primarily to fertilizer However, the situation in the year 1996/1997 is expected
plants in the states of Madhya Pradesh, Rajasthan and Uttar to be adverse with a down-scaling of earlier production
Pradesh. The capacity of this network is being expanded to estimates. Given the ever growing domestic demand for
transport 10.45 MTOE of gas per year as against 5.7 MTOE petroleum and a volatile international market, proper
currently. A 22 billion rupee project to extend the southern management of our own resources can cushion India’s
gas grid is envisaged to connect the southern states. This is import liabilities to a certain extent.
expected to carry 3.13 MTOE of natural gas annually.
The downstream refining sector has seen brisk growth in
Efficient and economic distribution of natural gas would recent years. According to a recent CMIE survey, fourteen
go a long way in optimal utilization of this precious fuel.
new refineries and five capacity expansion projects are
envisaged. Of the new refineries, five of them amounting
to 39 MMT of capacity addition are under various stages of
Summary
implementation, and among expansion projects, three of
During the period I960/196 1 to 197 1/1972, consumption of them amounting to 7 MMT of additional capacity are
petroleum products grew at a very high rate, with an average under implementation. The refinery capacity is expected
annual rate of about 20%. The year 1972/1973 showed to reach around 131 MMT capacity by 2001-2002. The
decreasing consumption, mainly as a consequence of the capacity utilization in the existing refineries has been conoil price shock in that year. The years 1973/1974 to 1979/ sistently above 100% during recent years. The efficiency of
1980 saw the beginning of a period of substitution of pet- the pipeline network carrying crude oil and petroleum
roleum by other forms of energy, and consumption grew at a products have a bearing on the refining costs and prices of
lower annual rate of 5.35% supported mainly by a brisk petroleum products. In the long run, a lot of investments
growth in the economy. The year 1980/1981 saw the influ- need to go into establishing sufficient and modern infrastrucence of the second price shock. During the 1980s and to tural facilities. A rational pricing policy for petroleum prodate, there has been a pronounced decline in the share of ducts will go a long way in removing the current distortions.
The accrual of recoverable reserves of gas in India has
petroleum in the overall secondary energy consumption,
though the consumption of petroleum per se has been rising been quite rapid since the mid-1970s.It has increased from
steadily. This period has also seen a pattern of very high 75. I MTOE in 1974- 1975 to 605.8 MTOE in 1993- 1994.
consumption of middle distillates, such as HSD and kero- The production was stagnant at around 2 MTOE till the
sene, mainly because of a Government policy of subsidizing 1980s after which it was stepped up. It increased from 2
MTOE in 1980- 1981 to 19.2 MTOE in 1995- 1996. With
these products.
The demand for petroleum products: motor gasoline, the government allowing gas utilization by the power sector
HSD, kerosene, LPG and ATF is expected to grow very during the late 1980s, the demand for gas soared and the
rapidly from 1995/1996 to 2010/201 I , whereas the demand flaring was reduced. In 1995-1996, 7% of the gas was
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Policy issues pertuining to the oil and gas sector: R. D. Run
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flared. The policy of allocating gas in predetermined quotas
and the control of its price has led to its wastage and suboptimal use. The objective of gas utilization policy should
be towards not restricting gas to any particular use but to
encourage its use in as many possible ways and especially as
a substitute for oil products like diesel, which is imported in
huge quantities, and fuel oils.
Acknowledgements
25
The author is grateful to Dr. Jyoti Parikh for the many useful
discussions and suggestions.
References
CMIE (1996) Indiu’s energy secror. Economic Intelligence Service, Centre
for Monitoring Indian Economy. September.
Furtado, Andre T. and Suslick. Saul B. ( 1993). Forecasting of petroleum
consumption in Brazil using the intensity of energy technique. Energy
Policy, 21, (9), 958-968.
Rao. Raghavendra D. and Parikh, Jyoti K . (1996). Forecast and analysis of
demand for petroleum products in India. Energy Policy, 24, (6). 583593.
TERI (1995) TERI Energy Dutu Direcrov und Yeur hook (TEDDY), 1 9 W
1996, TERI, New Delhi, India.