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PANORAMA


Issue
9


9




PANORAMA



OIL and GAS
SECTOR

August 2012








Crude oil is essentially a complex mixture of
various hydrocarbons, typically from C1 to
C60. It is a naturally occurring flammable
liquid, found generally beneath the

earth’s
surface.

CLASSIFCATION OF OIL INDUSTRY

The Oil Industry is involved in the global
processes of exploration, extraction, refining,
transporting and marketing of oil products.
Based on these, it is primarily classified into
three types:

Upstream

The

upstream sector industry deals with the
exploration and the extraction of crude oil.
This primarily includes searching for potential
underground or underwater oil and gas fields,
drilling of exploratory wells, and subsequently
drilling and operating the w
ells that recover
and bring the crude oil and/or raw natural gas
to the surface.

Midstream

Midstream operations primarily begin after
the initial production phase. Midstream
activities include the processing, storing,
transporting and marketing of oil, nat
ural

gas and natural gas liquids. In much of the oil
and gas industry, mid stream operations are
integrated into the downstream operations.

Downstream

The downstream sector includes petroleum
product distribution, retail outlets and
natural gas distributio
n companies. The
downstream industry directly reaches to
consumers through thousands of products
such as petrol, diesel, jet fuel, heating oil,
asphalt, lubricants, synthetic rubber, plastics,
fertilizers, pesticides, pharmaceuticals,
natural gas and propa
ne.

CLASSIFICATION OF CRUDE

The two essentially properties that define
any kind of crude are its API gravity and
sulfur content. The API gravity is a measure
of the crude oil’s density.

Higher the API
gravity, lighter is the crude and contains
higher propo
rtion of lighter hydrocarbons.
Light crude oil is more desirable than heavy
oil since it produces a higher yield of petrol.

The sulfur contents in the crude measure its
purity. Lower the sulfur content, sweeter is
the crude. Generally the crude with less t
han
0.5% sulfur is referred to as sweet crude.

OIL SECTOR

BY [ANKUR GOYAL & SAHIL PATWA RAJESH]


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Sweet oil commands a higher price than sour oil
because it has fewer environmental problems and
requires less refining to meet sulfur standards
imp
osed on fuels in consuming countries
.


The price of a barrel of oil is highly dependent
on

both

its grade, determined by factors such as its
specific gravity or API and its sulfur content, and its
location.

Based on geographical location, the major
classification of crude are:

West Texas Intermediate (WTI)

-

It’s a very high
quality sweet, light oil used as a benchmark for
North American crude.

Brent Crude

-

It is the leading global price
benchmark for Atlantic basin crude oils. It is used
to price
two thirds of the world's internationally
traded crude oil supplies.

Dubai
-
Oman



It is used as benchmark for Middle
East

sour
crude oil flowing to the Asia
-
Pacific region.

The OPEC Basket

-

It is a weighted average of
prices for petroleum blends produced by OPEC
countries.

GROWTH DRIVERS

Demand from emerging economies

Global oil demand growth over the past
decade remained robust despite experiencing
rising oil prices and the onslaught of
the
economic crisis. China and India contributed
to half the global oil demand growth over the
past decade.

Technological innovation

Innovative technology will make the
extraction of unconventional sources more
profitable and environmentally acceptable.
Fo
r instance the modern technique of
hydraulic fracturing has resulted in extraction
of shale gas and n
atural gas from deep sea
areas.

Higher

Oil prices


Higher oil prices will enable investors to increase
investments in this sector.

The sudden jump in the
l
ast decade has made various unconventional
sources commercially viable.






MAJOR CHALLENGES

Innovative exploration techniques

With the limited reserves of conventional oil,
the world is increasing

made to look

towards
newer sources like oil sands and shale oils for
satisfying its needs. This will call for
development of sophisticated modern
techniques that will make their extraction more
eco friendly and economically viable.



Volatility in oil and gas prices

Oil & Gas companies are increasingly
concerned about the spike in oil prices
resulting from supply issues, ongoing

regulatory battles and continued uncertainty
in political domain.

Regulatory and legislative changes and
increased cost of compliance

The
Oil & Gas industry has been
crippled due to the moratorium
placed on offshore drilling,
following the BP oil spill in the
Gulf of Mexico. The

concerns have
also been raised towards the
potential environmental impacts
of various extraction techniques,
resul
ting in contamination of
ground water, risks to air quality,
the migration of gases to the
surface, surface contamination
from spills and flow

back and the
health effects of these.
Compliance to stricter safety and
environmental guidelines requires
massive

investment by players in
the industry.

Natural disasters and extreme
weather conditions

As exploration further enters deepwater
areas, there is a major concern of the impact
of hurricanes and tropical storms. The loss of
lives and property, and the resu
lting
economic and social implications are dire.


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PRICING OF OIL

Like other commodities, the price of crude oil
is essentially determined by the market forces
of supply and demand. It experiences wide
variation in prices in times of shortage and
over supp
ly. The demand for oil is highly
dependent on global macroeconomic
conditions.

OPEC, the Organization of the Petroleum and
Exporting Countries, is an intergovernmental
organization of 12 countries. It yields a
considerable influence on the determination
of prices in the global market by controlling
the supply form its member nations. As of
November 2010, OPEC members collectively
hold 79% of world crude oil reserves and 44%
of the world’s crude oil production capacity.

Overview of India’s Oil Sector

India’s rapid growth in the past decade has
made it one of the front runners in the
incremental growth in demand for oil. The
importance of oil in India can be gauged from
the fact that it accounts for 36 percent of the
Primary Energy Mix in India. Taken w
ith
natural gas, this percentage rises to 45
percent. However, the proportion of natural
gas is approximately one
-
third that of the
world average, once again indicating the
potential for rapid growth.

With the daily consumption of more than 3
Million barre
ls of oil per day, India imports
around three fourths of its oil needs. This
reflects highly on our export bill. The steep
decline of rupee, which has fallen by over 15
per cent so far this fiscal, has made imports
more expensive. In India except petrol, t
he
price of major petroleum products like
kerosene and diesel are regulated by the
Government, entailing a huge subsidy burden.

The major public sector oil companies of India
are ONGC, IOCL, GAIL, HPCL, OIL and BPCL.
The private sector has seen a fast grow
th in
the last few years owing to lucrative business
opportunities. In particular, several private
sector companies have come up in the
downstream operations. Jamnagar Refinery,
owned by Reliance Industries is the world’s
largest refinery with an aggregate

refining
capacity of 1.24 million barrels per day.







EMERGING TRENDS

With the rapidly growing energy demand and
fast depletion of conventional sources of oil,
the world is moving towards newer and
unconventional petroleum deposits. Higher
oil prices a
nd advanced technology of
extraction have made these sources profitable
and environmentally acceptable at some
places. Oil sands and shale oil are two of the
prime examples.

Oil sands are essentially loose sand saturated
with a dense and extremely viscous
form of
petroleum known as bitumen. These
generally exist in the semi
-
solid or solid
phase. The Athabasca oil sands of Canada
contain around two third of the world’s oil
sands reserves.

Oil shales are primarily sedimentary rocks
that are yet to be exposed
to optimum
conditions of high heat and pressure to
convert their trapped hydrocarbons into crude
oil. US has the world’ largest deposits of
these.

CURRENT HAPPENINGS AROUND THE
WORLD

US sanctions on Iran

Oil prices saw a jump when US announced the
sanction
s against Iran, the second biggest crude
producer in the Organization of Petroleum
Exporting Countries. According to the estimates,

the sanctions had an impact of curtailing Iran's
oil exports by up to 1m barrels




per day. The announcement of the embargo
immediately created transitional price friction in
the global market. The major countries that were
affected were Southern European
nations, which

scrambled to find alternative suppliers,
increasing oil prices by $1
0 to $15 per barrel for
them.

Euro Crisis

Euro crisis has highlighted the growing inter
dependence of oil prices and macro economic
conditions. The slackening of demand from
the European nations as well as other major
emerging economies due to slower grow
th
have brought prices down from 120$ per
barrel to the 90$ level in the last one year.



FAST FACTS





87 million Barrels per

day

Current world consumption of petroleum

3.3 million Barrels per day

India’s daily consumption of oil

PANORAMA


Issue
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37%

30%

24%

9%

Power
Industrial
Fertilizer
CGD
GAS SECTOR

BY [KIRTIKA SHARMA, ANKUR GOYAL &
SAHIL PATWA]

Natural Gas
-

Demand

Historically, the Gross Domestic Production
(including flaring and internal consumption
by companies) of Natural Gas in India has
been ahead of its
supply. However, in the
recent past, although the natural gas
markets have grown, we are again in a supply
shortfall scenario.

In 2011, the gas demand in India was around
160 mmscmd. More than half of this demand
(51%) came from Western India, with the
Nor
th, South and Eastern region contributing
29%, 14% and 6% respectively. The West is
likely to remain the largest gas consumer,
driven by strong infrastructure penetration
and growth in power and industrial sector.

Power consumes the largest amount of gas
in India followed by industrial sector.
Additionally, conversion of liquid fuel plants
in power and industrial sectors are expected
to drive short
-
term growth. Rapid growth is
expected in city gas demand; several new
sites have been planned for CGD operati
ons.

Sector

wise
Gas Demand

in India

(2011)



Natural Gas
-

Pricing

At present multiple price points exist as far as
pricing is concerned. Price control for
domestic supply is primarily government
regulated. However, for spot and contracted
LNG, the p
ricing is more market driven.
Fertilizer gets preferential allocation of
domestic natural gas. There is significant
demand destruction in power sector due to
inability to afford large volumes of high
priced

gas. Future pricing is expected to be more
market

driven.


Natural Gas
-

Supply


The main sources of Natural

G
as include
APM (
administered

price mechanism) gas,
KG
-
D6, JVs

/

private parties and spot and
contracted LNG.



The supply shortfall between demand and
domestic supply is expected to continue.
Decline in KG
-
D6 production from the peak
of ~60 mmscmd in 2010 is a huge concern.
Hence, there is reliance
on spot and
contracted LNG for G
as which provides an
opportunity fo
r companies investing in LNG
terminals. International players like GDF
Suez and Mitsui have also expressed an
interest in establishing LNG terminals.








Natural Gas


Key Issues



Gas allocation is primarily
government controlled and is
driven by government policies
rather than sector demand and
affordability.



Infrastructure development is slow.
There are delays in construction of
pipelines and LNG terminals.



There are delays in CGD (city gas
distribution) bidding and award
due to issues
with regulator
(PNGRB).



For NELP, there is a lack of interest
from global players driven by
absence of well
-
defined,
transparent and consistent policy
.


Natural Gas Companies in India


37%

34%

9%

13%

7%

APM
KG-D6
JVs/private
Contrated LNG
Spot LNG
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PANORAMA


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