The Indian oil and gas sector has come a long way from being a newly liberalised market in the mid-1990s to becoming one of the key industries in the country and a major refinery hub in the Asian region. Initially a virtual monopoly of public sector units, the oil and gas sector now has visible private participation. It has also graduated from producing onshore assets to deepwater offshore finds. There has been an evolution in the pricing mechanism with deregulation creating a market-linked system for setting the prices of petrol, diesel and other consumables. A growing pipeline network, increasing liquefied natural gas (LNG) imports and improving retail infrastructure have contributed to the growth of the sector that drives billions of Indians.
Indian Infrastructure looks at the milestones achieved by the oil and gas sector over the past 20 years.
NELP: Opening up the industry through competitive bidding
The New Exploration Licensing Policy (NELP) allowed the allocation of oil and gas blocks to private players through competitive bidding. It was approved in 1997 and became effective in February 1999. It offered schemes such as 100 per cent foreign direct investment (FDI) for international companies in the bidding process for block allocation, encouraging active participation of private players in the process. In the nine rounds held under NELP, 254 blocks were awarded till 2012.
Trends in oil and gas production: Expected to bridge the demand-supply gap
Passive domestic exploration and production of oil and gas has improved significantly over the past two decades. Post 1997, multiple blocks were awarded under the NELP. The domestic production of oil started to increase post 1997, with the production of 32.7 million tonnes (mt) of oil in 1998-99. A major share of this came from the KG basin. Soon after, however, production from the KG-D6 basin began to fall, which led to a massive decline in national production.
Gas production from onshore as well as offshore KG fields has also been declining since April 2010, resulting in much lower-than-expected domestic production. The KG basin production fell from 1,633 thousand metric tonnes (tmt) in 2013-14 to 1,553 tmt in 2015-16. This decline was attributed to the rapid consumption of the natural resources available and water ingress leading to a pressure drop in the wells. During the same period, the national production fell from 37.8 mt to 36.9 mt, declining further to 35.7 mt in 2017-18. The sharpest declines were in offshore fields, with the major decline in Reliance Industries Limited (RIL’s) KG-D6 basins. Production from the two gas fields in the KG-D6 block declined from 60 million metric standard cubic metres per day (mmscmd) in 2010 to 7.8 mmscmd in 2017. Further, RIL also plans to stop production from its MA oilfield in KG-D6 starting September 2018. In this scenario, the government is now offering a number of oil and gas blocks for exploration and production under the Hydrocarbon Exploration and Licensing Policy (HELP) and the Discovered Small Fields (DSF) bidding rounds to increase the domestic production going ahead.
HELP: Attracting the private sector
Approved in 2016, HELP has replaced the NELP regime. The policy is based on four propositions: a uniform licence for exploration and production of all forms of hydrocarbons; an Open Acreage Licensing Policy (OALP); a revenue sharing model; and marketing and pricing freedom for the oil and natural gas produced. Under HELP, a bidder, intending to explore hydrocarbons, could directly apply for the exploration of any new block and not wait for the government to float a tender for the same. The new regime was welcomed by the private sector, evident by the 110 e-bids received in the first round of OALP bidding (OALP-I) in May 2018. An empowered committee of secretaries cleared the award of blocks under OALP-I in August 2018 and the blocks are expected to be awarded soon.
DSF Policy: Supplementing conventional oil production
In addition to offering blocks under the OALP, the Ministry of Petroleum and Natural Gas (MoPNG) introduced the DSF bidding rounds in May 2016, for blocks which had remained commercially undeveloped previously. Under the first round of DSF held in May 2016, 46 contract areas consisting of 67 different small fields were offered. Together, these blocks contain 625 million barrels of oil and oil equivalent in-place gas spread over 1,500 square km. The round saw 134 bidders competing for 34 blocks, out of which 30 contracts were awarded to 20 companies in March 2017. The first production from the blocks is expected in 2019-20. In the second round of the bidding launched in August 2018, 59 DSFs clubbed into 25 contract areas are being offered. Bidding is expected to start in September 2018 and close in December 2018, with the subsequent signing of contracts expected in January 2019.
Increasing dependency on imports: A case for worry
As one of the fastest growing economies in the world, India’s energy needs are constantly increasing. Also, there is an increased focus on oil refining that has led to an increase in domestic consumption. However, insufficient domestic production has forced the country to increase imports to bridge the gap. From about 50 per cent in 1999, India’s import dependency on crude oil increased to over 80 per cent in 2018. The country imported 34.5 mt of crude oil and 19 mt of petroleum products in 1997-98. This increased to 220.4 mt and 35.9 mt respectively in 2017-18. Moreover, with the prices of crude oil showing a significant increase post 2016, India’s oil import bill also swelled up. It increased by 25 per cent from $87 billion in 2016-17 to $109 billion in 2017-18. Further, domestic companies have always had a significant interest in importing LNG. Imports of LNG started in 2004-05, with 2.5 bcm imported during the year. This increased to 26.3 bcm in 2017-18, growing at a compound annual growth rate of 19.8 per cent. India has an installed capacity to import 26.7 million metric tonnes per annum (mmtpa) of LNG through the four terminals, as of June 2018. LNG currently accounts for 45 per cent of the gas supply. There are currently four under construction LNG terminals with a total capacity of 23 mmtpa and 10 proposed LNG terminals with a total capacity of 46.55 mmtpa.
Pricing of oil and natural gas: A market- driven mechanism
The pricing mechanism of oil and gas has witnessed significant evolution in the last two decades. The administered price mechanism (APM) was prevalent till the late 1990s. Over time, an increasing need was felt for decontrolling the oil and gas market, which subsequently led to the dismantling of the APM mechanism in 2002, and gave the oil marketing companies (OMCs) the freedom to determine the price of petrol and diesel based on the international price of crude. Starting June 2017, they were given the freedom to revise the prices of petrol and diesel on a daily basis.
The price of domestic natural gas is being revised on a six-monthly basis since November 2014. There is a domestic natural gas price and a gas price ceiling for production from difficult fields, which is determined by the government. As per reports, the natural gas price and the gas price ceiling for April to September 2018 has been set at $3.06 per million metric British thermal units (mmBtu) and $6.78 per mmbtu respectively.
Increasing focus on refining: On a growth trajectory
Over the years, India has gained the status of being a refining hub. The installed refining capacity in the country has increased from 67.6 mtpa in April 1999 to 247.6 mtpa in July 2018. Meanwhile, the refinery throughput has also increased from 68.5 mt in 1998-99 to 251.9 mt in 2017-18. This segment has received significant government support such as automatic approval of up to 100 per cent FDI in refining projects. As of July 1, 2018, Indian Oil Corporation Limited (IOCL) emerged as the largest public sector refiner with an installed capacity of 69 mt, while RIL emerged as the largest private sector refiner with a capacity of over 68 mt.
CGD: Adopting a cleaner alternative
Natural gas has emerged as a cleaner and more efficient alternative for transportation and domestic use. For this, the central government cleared a proposal to supply piped gas in Delhi in 1998 and Indraprastha Gas Limited set up a chain of compressed natural gas stations in Delhi in 2000. To provide an impetus to the city gas distribution (CGD) sector in India, the Petroleum and Natural Gas Regulatory Board (PNGRB) was constituted under the Petroleum and Natural Gas Regulatory Board Act, 2006 via a gazette notification dated March 31, 2006. The PNGRB allocates geographical areas (GAs) across the country through competitive bidding.
So far, eight CGD bidding rounds have been concluded. The first bidding round was held in October 2008 wherein six GAs were offered. Since then, the PNGRB has offered 101 GAs under eight bidding rounds. The PNGRB, in May 2018, conducted the ninth CGD bidding round, under which it offered 86 GAs across 174 districts in the country. Out of these, it has approved letters of intent to 18 successful bidders for 48 GAs, as of August 2018.
Exploring unconventional fuel: Complementing conventional resources
The Government of India formulated the coal bed methane (CBM) policy in 1997 wherein CBM is explored and exploited under the Oil Fields (Regulation and Development) Act, 1948 and Petroleum and Natural Gas Rules, 1959 administered by the MoPNG. The initial CBM exploration in the country began with ONGC tying up with Coal India Limited (CIL) in 1999. In the four rounds of bidding conducted so far, 33 CBM blocks have been awarded. India produced 735 mmscm of CBM in 2017-18, which was about 2.3 per cent of the total gas produced in the country. In April 2018, the cabinet allowed CIL and its subsidiaries to explore CBM resources in their existing coal mining leases.
The MoPNG also allowed the exploration of shale oil and gas by the national oil companies vide its notification dated October 2013. This was done for the onland nomination blocks. A total of 56 blocks have been allocated to ONGC and Oil India Limited. However, the progress in exploration of shale has been slow due to a number of reasons including lack of information about where exactly to find gas. Now, with the Petroleum and Natural Gas (Amendment) Rules, 2018, the government has included shale in the definition of petroleum. This will allow private companies to explore and produce shale from already operational blocks.
Increasing LPG penetration: Helping rural households
The Indian liquefied petroleum gas (LPG) market, estimated at 5.4 mt in 1999, grew to 23.3 mt in 2017-18. The government launched the Pradhan Mantri Ujjwala Yojana (PMUY) in May 2016. The PMUY aims to provide clean cooking fuel to poor households who are otherwise vulnerable to various health hazards associated with indoor air pollution due to the burning of firewood. As of August 14, 2018, almost 52 million LPG connections to poor households have been released under the scheme.
Formation of a national gas grid
In the past 20 years, India’s natural gas pipeline network has grown to 16,771 km in operation and 11,377 km under construction, as of July 1, 2018. The 4,658 km long HVJ-GREP-DVPL pipeline operated by GAIL (India) Limited is the longest pipeline in the country. It was operating at 56 per cent utilisation as of April 1, 2018. The utilisation rate of pipelines varies significantly, with the Dabhol-Bengaluru pipeline reporting the lowest utilisation of 8 per cent and the Uran-Thal-Usar and Trombay-RCF pipelines reporting the highest utilisation of 91 per cent, as of April 2018. India is also a major contributor to the construction of the 1,844 km long Turkmenistan, Afghanistan, Pakistan and India (TAPI) pipeline, which will carry natural gas from the Galkynysh gas fields in Turkmenistan to Pakistan and India via Afghanistan. The first gas transport through the pipeline is expected in 2020. India is also planning to connect the entire north-eastern region through a natural gas pipeline by 2021, which will add over 1,500 km of natural gas capacity to the national gas grid.
DBT kerosene in PDS: Needs a push
The Direct Benefit Transfer (DBT) scheme for kerosene in public distribution system (PDS) was launched to bring reforms in the allocation and distribution of kerosene. The PDS scheme run earlier by the government saw severe pilferage and diversion of kerosene into adulteration of petrol and diesel. As opposed to other schemes where subsidised fuel was provided, under this scheme, the customer pays the non-subsidised price of kerosene at the time of purchase. Subsequently, the amount of subsidy is directly transferred to the bank account of the beneficiary. As of March 31, 2018, the DBT in kerosene scheme has been successfully implemented in all districts of Jharkhand. Other states have also been requested to join.
Under-recoveries in the oil and gas sector: An ongoing affair
Under-recovery has been one of the biggest pain points for the downstream oil and gas sector of the country’s oil companies. In 2014-15, the three major OMCs in the country — IOCL, Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited (HPCL) – reported an under-recovery of Rs 983.5 billion. The recent move to deregulate the prices of petrol and diesel was expected to help reduce the under-recoveries. This has definitely helped reduce the under-recoveries; however, more needs to be done as the OMCs are still reporting under-recoveries of PDS kerosene and domestic LPG. As per reports, OMCs reported an under recovery of Rs 75.9 billion in 2016-17 and Rs 46.7 billion in 2017-18 for PDS kerosene.
Restructuring of state-owned companies: Necessary capital for the government
The Cabinet Committee on Disinvestment agreed to treat IOCL, ONGC and GAIL (India) Limited as flagship companies of the Government of India in August 2000. As a result, the government shareholding in them will not be reduced below 51 per cent. However, the government has divested its stake in other state-owned firms. A case in point is ONGC’s acquisition of the government’s 51.1 per cent stake in HPCL for a consideration of Rs 369.15 billion. This led to the creation of a vertically integrated utility, which was present across both the upstream and the downstream segments.
Other programmes launched: Holistic growth of the sector
The central government, in April 2000, proposed to invest Rs 480 million in the National Gas Hydrate Programme (NGHP) for the exploration of gas hydrates, following which the Directorate General of Hydrocarbons identified vast reservoirs of gas hydrates along the Indian coast including the KG, Konkan and Kutch basins and near the Andaman Islands in the initial phase of the programme. The government is planning to launch the third stage of the programme this year to identify more oil and gas resources in the KG deepwater area.
The cabinet approved the National Biofuels Policy, 2018 in May 2018, which categorises biofuels into 1G, 2G and 3G. The country is targeting 10 per cent blending of fuel with ethanol by 2022 and 20 per cent by 2030.
It has also launched the Auto Fuel Vision and Policy (AFVP), 2025 and the National Seismic Programme (NSP). The AFVP, 2025 suggests a roadmap for improving fuel quality in the country going ahead and has proposed moving to the Bharat Stage (BS)-VI emission standard by 2025. The NSP traces hydrocarbon resources like oil and natural gas in the Mahanadi basin to better map the hydrocarbon resources in the region. India is also planning to set up a natural gas trading hub where natural gas will be traded and supplied through a market-based mechanism instead of formula-driven prices. Currently, the regulatory framework and the structure of the gas trading hub are under design, and a consultant has been appointed for the same. It is expected to become operational by December 2018.
There has been noteworthy progress in the sector driven by a number of measures introduced in the past two decades. While the NELP, HELP and DSF are helping the country increase its domestic production, policies supporting the exploration of unconventional resources are expected to complement this growth. Also, with initiatives such as blending of petrol with ethanol and increasing domestic production, oil imports are expected to reduce significantly. Overall, these reforms seem ambitious in nature and if executed properly, could significantly propel growth in the sector.