India outlook: 1

“India outlook on crude oil”

Submitted by: Sahil Trehan

Infinity Business School

 

India Outlook: 2

Abstract

Oil is the single most important commodity that holds the position of a key factor in each and every economy of

the world. The world’s richest nations are at their current positions just because of the oil factor. The

importance of oil has reached such a level at which there is no country in the world, which doesn’t need oil and

its by-products and if somehow it doesn’t have much reserves of oil to meet their domestic demand, these

nations are ready to import the product at any cost. Many nations have a huge share of their earnings constituted

by oil exports only. Every industry requires oil to function properly either directly or indirectly as both crude oil

and its by-products serve as their inputs. Crude oil alone bears 60% share to meet the global energy needs in the

current scenario. The reason for this high share in the primary energy consumption in the world is due to the

advantages that oil has over the other constituents of primary energy such as diverse application, comparatively

lesser harm to the environment, easy handling, lower capital costs and above all higher efficiency.

Crude oil reserves on earth are estimated to be more than 1 trillion barrels that are mostly found in the Middle

East, Eastern Europe, Africa and Central America, Middle East being the top reserve holder. It is a clear fact

that oil is a limited resource and would finish off in a maximum of 40 years if the current rate of consumption

continues according to the reserves to production ratio. Of these 1 trillion barrels, the world produces around 75

million barrels per day. The largest crude oil producing country is Saudi Arabia followed by Russia US &

Brazil. The refining capacity of oil in the world as in 2002 was 4166 million tons. The consumption of crude oil

in the world has been rising with the change in time and the technological improvements that are accompanying

it. Oil is consumed all over the globe, consumption figures standing at 85 million barrels per day and United

States of America consumes the maximum level of oil in the world. The major consumer countries of crude oil

along with their consumption figures pertaining to the year 2006 are United States of America (20.7 million

barrels/day), China (6.9 million barrels/day) Japan (5.4 million barrels/day) and India (2.4 million barrels/day).

Regarding the world trade situation, one important aspect is the presence of an organization namely OPEC that

controls and regulates the exports and imports of most of the countries of the world. OPEC stands for

‘Organization of Petroleum Exporting Countries’ and the members include all the 12 major crude oil producing

countries and nations that are highly dependent on the revenues from oil and oil products. As a matter of fact,

OPEC nations have 75% of the world’s total crude oil reserves of 1 trillion barrels and control around 40% of

the world oil production. OPEC member countries also dominate the world exports of crude oil contributing to

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55% of the total world exports. The imports of crude oil are generally done by the countries, which do not have

appropriate reserves of oil and are incapable of satisfying the domestic consumption demand. The following is

list of the countries with their net import figures that are the major importers of crude oil in the world United

States of America (12.1million barrels per day) ,Japan (5.3 million barrels per day),China (2.9 million barrels

per day) and India (1.5 million barrels per day).

India outlook on crude oil

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Historical Background

Oil Industry History is more than five thousand years old, it also suggests that the demand was much

more than the supply and to fulfil this demand many people were looking to make a permanent solution and this

gave rise to oil companies. These oil companies then started to look at getting oil by drilling it out. First the

companies started to drill the oil out of land but with the growing demand the companies which were

collectively called the oil industry, started to drill the oil out of sea bed as well. According to Oil Industry

History the first structured oil well were built in the Gulf of Mexico. This was made on a place which was

nearly 100 meters deep. This was just the beginning of the making of the structured well both on lands and on

water. One can also see the Oil Industry History which suggests that European oil well were made during the

1920s. During the World War I between 1914-1918 demands for oil increased tremendously for functioning of

tank, ships and planes. Post World War II countries of the Middle East took a lead in oil production from the

United States.

History of crude oil in India

India was not known to the world in the context of crude oil and its by-product production. As late as in

1889, the presence of oil in India was discovered in Digboi in Assam. First crude oil refinery in India was set

up in Digboi in1901. Then the exploration and production activities were limited to the North Eastern part of

the country. In 1958 and 1974, two more places for crude oil production were identified namely Cambay

onshore basin and Bombay offshore basin. Initially the major international companies were given the job to

explore and produce oil in the country but after the shock in oil prices in 1973, whole of the sector was

nationalized.

Crisis

The extent of the commodity’s importance was shown to the world when the world’s most strong

economies were shaken up as the oil prices shot up in 1973 and 1979 when the gulf countries refused to supply

oil to the countries that were the supporters of Israel in its war with Egypt and Syria. The second crisis was in

1979 it had Occurred in the wake of the Iranian revolution. Oil Prices zoomed from $4 to $40 i.e. Tenfold

increase in 10 years which eventually lead to the giant jump in imports of merchandise in year 1974, thanks to

the first oil price increase by the OPEC. India had not found any indigenous source of oil then and was

primarily dependent upon the foreign oil. Nonetheless the total merchandise import bill never crossed $1

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billion, one of the primary reasons for that was the tremendous tariff rates and strict quotas on major imports.

In 1974, the policy makers, when they were pointed out the tremendous increase in trade imbalance from $16.2

million (1973) to $160.4 million (1974), efficiently blamed the oil price rise. This virtually brought importing

economy to bankruptcy, while country had no reserves to pay for imported oil, the import bill was growing very

fast and export earnings were sluggish. In1973 when imports increased from $191.7 million to $291 million

and again in 1976 went up to $402 million. But economically there was no way out. The protectionism was to

the highest level. Consider the 350% import tariff rate on automobiles and average tariff rate of 152%.

Domestic industries were well protected that they loved being monopolists and had no inclination for

technological innovation. After 1980 crisis it had created to a Huge USD bank for the USSR as it was one of

the big exporters of oil which lead to creation of new synergies between the Saudis and the US. It was decided

to flood the market with Oil to starve the Russians of Hard Currency.so by 1985 the Price of Oil Slid Back all

the way to USD 24. Then there was oil price shock in 1990 occurred due to the Iraqi invasion of Kuwait. Price

rose from $21 to $46. With the outbreak of hostilities in the Persian Gulf in 1990 and the consequent spiralling

of oil prices, there was tremendous pressure on India’s foreign exchange reserves, aggravating an already weak

balance of payments situation. Following this, the country plunged into a deep economic crisis. The rate of

inflation rose to a level much higher than what India had witnessed even six months earlier. Foreign exchange

reserves declined to a level covering only three weeks of imports, about $1 billion at the end of the financial

year 1990/91. To compensate for this decline, India entered into a stand by arrangement, together with a

supplementary loan, with IMF. Following IMF conditionality’s, various reform measures were undertaken to

raise the growth rate in a sustained way. Interesting to point out is that the “non-oil” imports and exports

showed a positive balance of trade for the Indian economy since year 2000. Hence oil imports formed the

major drain on the foreign reserves and constituted the main reason for balance of trade deficit.

Growth of Trade in crude oil in India

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Indian crude oil market

India is one of the non-OPEC countries much dependent on its imports to fulfil the domestic consumption

demand as it has a much lower level of production. India is a developing country and the requirement for the oil

as a primary energy constituent from the industries in the country is at its peak. The country has much depended

on coal to satisfy its energy needs in the earlier times but the use of crude oil and gas is taking over the

dominance of coal with the change in time. Oil and gas contribute to around 45% of the country’s total energy

consumption.

India has around 5.4 billion barrels of oil reserves with it and the domestic production has increased in the

recent past to reach the 0.8 million barrels per day mark. Mumbai high is the largest oil-producing oilfield in

India with a production of 2.6 lakh barrels per day. The refining capacity of crude oil in India is estimated at

around 2.1 million barrels per day. Regarding the consumption pattern of oil in India, it is the 6th largest

consumer country in the world having a consumption of 2.2 million barrels per day. This leaves the country

with a huge deficit in the demand-supply scenario and thus 70% of the consumption is met through imports.

India generally imports Oman-Dubai sour grade crude, Brent dated sweet crude and Bonny light crude. The

country imports over 1.5 million barrels per day that place it at the 9th position among the largest importers of

the world. Though the Indian production has increased in the recent times, the imports were raised by 5%

making due to the raised Indian demand of around 4.2%. The countries from which India imports crude oil are

Venezuela,Nigeria,Sudan,Iran,Kuwait. India is not among the major producers of crude oil, as it doesn’t have

much oil reserves. That is why it generally depends on imports of crude oil from other countries. However, the

production of oil and as a result the production of its by-products in India has increased in the recent past due to

exploration and findings of new oil reserves. The refining capacity of crude oil in India is over 2.1 million

barrels per day. The refining sector in India is held by both public and private sector, public sector being the

dominating one. The government aims to promote India as a competitive oil refining destination and industry

experts expect the country to be an exporter of refined products to Asia in the near future. India has 2.8 million

bbl/d of refining capacity, at 18 facilities. This is the fifth largest refinery capacity in the world. Privately-

owned Reliance Industries, at 1.24 million bbl/d, has the largest oil refinery complex in the world. Other key

upcoming refinery projects include Essar Oil’s Vadinar refinery expansion of 110,000 bbl/d in 2011, a new

20,000 bbl/d refinery in Bina in 2011 by a joint venture between Bharat Petroleum Corporation and Oman Oil

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Company Ltd, a 180,000 bbl/d refinery in Bhatinda in 2014 by Hindustan Petroleum Corporation and IOC’s

Paradeep refinery of 300,000 bbl/d in 2015. India is slated to add 840,000 bbl/d of refining capacity through

2015 based on currently proposed projects.

Trade patterns

Production and Consumption: The combination of rising oil consumption and fairly stable production

levels leaves India increasingly dependent on imports to meet consumption needs. In 2006, the country

produced an average of 846,000 barrels per day (bbl/d) of total oil liquids, of which 77 per cent, or 648,000

bbl/d, was crude oil. During 2006, India consumed an estimated 2.63 million bbl/d of oil. India registered oil

demand growth of 100,000 bbl/d during 2006. It is estimated that India will register similar growth in demand

in the year 2007 and 2008.

Trade: India is a net importer of crude oil. Its imports of crude oil have increased from 57,805 Trillion Metric

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Tonnes (TMT) in 1999-2000 to 90,434 in 2003-2004. However while the import of crude oil has gone up in

India, in the case of petroleum products India has moved from net imports of 15,861 TMT in 1999-2000 to net

exports of 6,723 TMT in 2003-2004.

Tariffs

Trade Liberalization

As a result of the trade liberalization attempted since July 1991 maximum tariff rates came down from a

peak of 355 percent in 1990-91 to 50.8 percent by the year 1998-99. The average weighted tariff rate has come

down from 87 percent to 20 percent from the same period. The non-tariff measures for most of the commodities

have also been phased from 1st April 2001. The process of trade liberalization is still not completed. It is

expected that the tariff rates will be lowered further in the coming years in the context of regional and bilateral

preferential trade arrangements as well as future WTO negotiations. Given the fact that demand for many of the

items of imports is price elastic, the future tariff reductions may lead to higher imports. In particular, consumer

goods imports may be highly sensitive to liberalization.In 2010 the government has cut the tariff on all crude oil

and petroleum imports from Brunei, a member Asean group. Against the earlier ad valorem duty of three per

cent and a customs duty of two per cent, the latter has been removed entirely.

Impact of irrecoverable levies

Many state governments in India are also levying irrecoverable taxes on crude oil and petroleum

products. In Mumbai, the two refineries of HPCL and BPCL pay an octroi @ 3% on crude oil entering the

municipal limits of Mumbai. Similarly, the state governments of Karnataka, UP, Bihar, Assam and Haryana

also levy entry tax on crude oil where the rates are as follows

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Duties

Government has given exemption from customs duties on goods specified in list 12 of customs

notification 21/2002 when imported for petroleum operations in specified areas subject to fulfilment of

specified conditions. However, payment of service tax is applicable on taxable services utilized for exploration

and production of crude oil and natural gas. Production of crude oil attracts Oil Industry Development (OID)

Cess at the rate of 2,500 per MT under Oil Industry Development Act 1974 and no CENVAT Credit is

available for the cess paid. National Calamity Contingent Duty (NCCD) of 50 per tonne is payable on crude oil

which was imposed vide Section 169 of the Finance Act 2003 and it was mentioned that it will be limited to

one year only i.e. up to 29.02.2004. Subsequently in the Finance Act 2005, NCCD was extended without any

time limit Compressed Natural Gas (CNG) usage in vehicles helps in the reduction of carbon emission. CNG

attract excise duty of 14% compared to the general rate of 10%.

Recommendations

E & P Activities related to Oil and Gas;

Exploration & Development and Production Operations of oil and gas is commonly known as E&P

activities. India’s high and accelerated economic growth rate needs matching growth in consumption and

supply of energy. India’s oil import dependence is about 70%.After the inflow of private investment under the

New Exploration Licensing Policy (NELP); the success rate of finding oil and gas in the country has been quite

high. This fact also proves that India has vast potential in this sector. It is equally important to note that

exploration of oil and gas is a high-risk venture requiring huge upfront investments, that too, without any

guarantee of success, the world over success factor being as low as 30%-35%.The imposition of 10% service

tax on this sector has increased the already high cost of exploration as CENVAT credit for the service tax paid

cannot be availed due to NIL excise duty on crude oil. This has adverse and direct impact on the exploration

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business, which this country cannot afford. In order to maintain cost efficiency, it is of utmost importance to

give specific exemption to E&P industry from service tax levy.

National Calamity Contingent Duty (NCCD);

50 per ton on crude oil vide Section 169 of Finance Act 2003 and it was mentioned that it will be limited to one

year only i.e. up to 29.02.2004. NCCD was extended to31st March 2005 in Finance Act of 2004. In the

Finance Act 2005, NCCD was further extended without any time limit.NCCD crude oil should be withdrawn to

reduce the impact of taxation on these products.

Insight on the future of trade:

It is clear from the above discussion that India is not a big oil producing country, it is deficient in

production of crude oil, however its refining capacity is fairly developed and it has emerged as a net exporter of

refined petroleum products. Since India relies on imports of crude oil to meet its domestic needs, the possibility

of India negatively influencing the world market prices of crude oil does not arise. Therefore there does not

arise the question of dual pricing in crude oil in India. However since India has emerged as a net exporter of

refined petroleum products, it could have a dual pricing mechanism for refined petroleum products. Due to

increasing refining capacities, India is set to be a top exporter of petro-products in Asia, surpassing South

Korea. India’s exports of refined products stood at 0.95 million barrels per day (b/d) as of June 2011 and US$

4.6 billion worth of petroleum products were exported during July 2011. India and China unlikely to make up

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for the combined Fall In US/Europe/Japan Demand. Major discovery drive around the world from Russia,

Brazil and India. However the strengthening in the USD is likely to keep Oil prices in backwardation over the

next 12 months, due to weakening of Key economies. A strong USD is a key factor that will keep Commodities

weak. Commodity Importing Economies (India) will be favourably affected in Case crude oil goes down.

References

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Websites:

http://www.crnindia.com/commodity/crudeoil.html#Overview

http://www.economywatch.com/world-industries/oil/history.html

http://www.business-standard.com/india/storypage.php?autono=416023

http://openlib.org/home/ila/MEDIA/2004/oil.html

http://www.evsroll.com/History_of_crude_oil_prices.html

http://www.idsa-india.org/an-may011.html