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Indian Oil & Gas

April2008Sector Coverage

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Sector CoverageIndian Oil & Gas

April 2008

Table of Contents

1. Executive Summary ........................................................................................2

2. Introduction ......................................................................................................4

3. Historical Background ....................................................................................5

4. Importance of Oil & Gas in the Economy .................................................6

5. India’s Energy Position ..................................................................................9

6. Industry Structure: Overview ...................................................................15

7. Regulatory / Government body structure .............................................28

8. Michel Porter Analysis .................................................................................29

9. Critical Success Factors ...............................................................................30

10. Recent Trends & Budget Impact ............................................................33

11. Investment opportunities and current status of the project........38

12. Mergers & Acquisitions .............................................................................39

13. Conclusion .....................................................................................................40

14. Profile of Major Players .............................................................................41

Sector Coverage 1

Indian Sector Report - April 2008

1. Executive Summary

Indian economy has been growing at a very fast pace and is one of the fastestgrowing economies of the world. It is expected to play a remarkable role in globaloil and gas industry. India has emerged as the seventh largest importer of crudeoil in the world and fifth largest consumer of petroleum products. India’s oildemand has consistently been far in excess of its domestic production. 66 per centof its demand for oil is met through imports from Middle East and the balance fromother countries. The dependence on oil imports is expected to increase in thefuture. India’s production has increased at an annualized rate of 1.73 per centduring 2000-2006 which is lowest among BRIC Nations and during the sameperiod its consumption has increased by 3.31 per cent which is higher than BRICnations except China.

This sector is the major contributor to the government revenue contributing 15.18per cent through excise and custom duty. Petroleum exports have emerged as thesingle largest foreign exchange earner growing at a rate of 67 per cent. Netexport of petroleum products has grown by 78 per cent and 32.6 per cent in termsof quantity and value respectively during 2004-2007. The growth continues in thenew fiscal with export of petroleum products touching US$19.7 billion during April-December 2007.

Oil accounts for approximately 31 per cent of India’s total import bill. India’s crudeoil import as a percentage of total import has increased from 26.82 per cent inFY2000 to 30.84 per cent in FY2007. But due to sharp rise in oil prices import hasincreased by 348 per cent in absolute terms. Oil import as a per cent of India’sGDP has increased significantly from 3.94 per cent to 6.92 per cent during 2002-03 to 2006-07

India is fifth largest country in the world in terms of refining capacity andemerging as a global refining hub because of proximity advantages. It also enjoyscompetitive cost advantages; with capital costs lower as much as 25 to 50 percent over the other Asian countries. It is well placed to take advantage of theexpected global refining capacity deficit of around 112mtpa by 2010. But refiningmargins can take a hit because of the capacity additions by the end of FY2008-2009.

India is sixth largest energy consumer in the world and is one of the world’sfastest growing energy consumers. With a target GDP growth of 7-8 per cent andan estimated elasticity of 0.80, energy requirement is expected to grow at 5.6-6.4

per cent. The energy consumption matrix in India is dominated by coal, followedby Oil and natural Gas. This pattern is in contrast to the World EnergyConsumption Matrix, which is dominated by oil and gas. But over the yearsconsumption of oil has increased in comparison to coal.

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Exploration and Production sector has been given “infrastructure” status whichprovides a seven year tax holiday. But this sector carries a high degree ofuncertainty and hence a high amount of risk because of high initial investment andlong gestation period

Because of high international prices bottom line of the downstream companiestook a hit. Additionally, government also compensated the public sector companiesonly by issuing oil bonds, due to which Reliance- a private player is shutting downapproximately 1400 retail outlet by the end of April 2008. IOC has also put hisdecision on hold to open new 800 retail outlet due to increasing international crudeoil prices.

With international oil prices moving northward and no change in retail sellingprices, profitability of downstream companies are falling down. Industry made aloss of Rs 77,000 crores on account of under-recovery in FY07-08. According to oilmarketing companies, under-recoveries are expected to be around Rs 180,000crores in FY08-09. Government is issuing bonds to compensate downstreamcompanies and has also asked upstream companies to share a part of under-recoveries of the downstream companies.

The share of Natural Gas was around 8 per cent in India’s energy mix and isexpected to increase substantially to 20 per cent by 2025. The total provenreserves of Natural Gas in India at the end of 2003 was 1055 billion cubic meters(bcm) in 2007. At this production level, India’s reserves are likely to last around33 years, that is, nearly double than the 17.5 years estimated for oil reserves.

An expanding economy with its concomitant increase in energy demand is likely tothrow open huge investment opportunities in oil and gas industry. The IndianGovernment has earmarked US$12.77 billion for E&P and US$7.88 billion for thedownstream sector under the Tenth Five Year Plan. It is also planning to expandthe exploration licensing area from 44 per cent of the Indian sedimentary basin in2007 to 80 per cent by 2011-12 and 100 per cent by 2015.

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2. Introduction

The Oil & Gas sector has been adding fuel to the robust growth of the Indianeconomy. India has emerged as the seventh largest importer and fifth largestconsumer of the petroleum products. India has very limited energy resources tosuffice the requirements of its more than one billion population. This makes Indiaa very important player in the international oil and gas market. The crude priceshave been heading northward since a long period of time along with thecompetition to acquire petroleum reserves among the major economies across theworld. Energy security has become crucial for the policy makers across the world,which is reflected in their foreign policies. Despite of the slow implementation ofreforms and mixed responses from the foreign and local investors, the sector isable to grow at healthy pace.

Oil, gas, hydroelectricity, nuclear power and coal are Brazil 50.1 majorconstituentsof China 51.4conventionally used primary energy. Solar power and India 14.8 winds are two majorly used Russia212.2 sources of non-conventional Japan177.0energy. The Indian oil and gas sector constitutes 46 per United States340.5 cent of total conventional Asia & Oceania 41.0 primaryenergy World Total71.8consumption, which is lower than the world average of 62Source: EIA per cent. The per capita totalprimary energy consumption in India is 14.8 million Btu as compared to worldaverage of 71.8 million Btu and Asia Oceania average of 41.0 million Btu. Thisindicates huge potential growth for demand in India as a result of comparativelyhigher growth rate of consumption than the world average and continuouslyincreasing share of oil and gas in primary energy consumption. The oil and gassector gained importance on account of its multiple and widely used application ascompared to other primary energy sources.

Oil accounts for approximately 31 per cent of India's total import bill andcontributes over 20 per cent to the exchequer through customs and excise taxes.India's oil and gas sector has an insignificant share of less than 1 per cent inworld's oil and gas production, approximately 0.5 per cent of proved reserve andround about 3 per cent in petro product consumption. Historically, the sector hasremained highly controlled by the government. However, later on to some extentthe pricing of auto gas was deregulated in April 2002 and private sector playerswere allowed to operate in retailing of petroleum products.

Per Capita Primary Energy Consumption (Mn Btu)

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3. Historical Background

The history of India's oil industry dates back to 1867, with the first discovery of oildeposits in Assam. However commercially significant amount of oil was discoveredonly in 1889 in Digboi, Assam. Until 1947, there were no clear policies withrespect to overseeing the domestic oil industry. However, after independence fromBritish Colonial rule, new Indian Government became involved in the industry inmultiple ways, be it in establishing Government-owned companies or regulatingthe retail price of oil.

In 1954, from the backing of the Geological Survey of India, the Governmentfounded the Oil and Natural Gas Commission (ONGC). In 1959, ONGC became anoil exploration company and the Government also established Oil India Limited(OIL). In 1962 the Government established the Guwahati Refinery to process orrefine the resources after extraction, and the India Oil Corporation Limited (IOC)was born. Of India's 17 refineries, IOC owns seven of the facilities, maintaining a41 per cent market share in the refining space.

India’s local oil production, in relation to its production in the 1950s and 1960s gota terrific boost in 1974, when ONGC discovered Bombay High, an offshore oil field,off India’s west coast. Bombay High significantly increased India’s oil production.For example, in 1989, Bombay High's contribution was 65 per cent of the country’stotal output of 34 million tons. Discovery of this oil field and the consequentincrease in oil production motivated fresh explorations; with the belief that othersuch oil fields could be found. Many offshore explorations like those in Gujarat,Andhra Pradesh, Assam and Tamil Nadu have shown significant potential.

Considerable quantities of natural gas were foundGas Authority of India Ltd. (GAIL). This helpeddemand for natural gas as fuel and tosupply feedstock to fertilizer and petrochemicalspanning 1,700 kilometers across India wastransportation of natural gas.

in various offshore locations byin satisfying India’s increasing

plants. In addition, a pipelinebuilt in the 1990s for the

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4. Importance of Oil & Gas in the Economy

The oil and gas combined together contribute about 50 per cent of the worldenergy demand. Both oil and gas would play a significant role in the global primaryenergy supply. Not only oil and gas sector has important role in any economy butit also drives the economy. Economy gets thousands of everyday products, frommedicines to plastics to fibers for clothing and of course, gasoline, diesel and jetfuel for transportation. Moreover, there are no affordable substitutes for most ofthe products we get from oil. It is important to know that global competition for oilresources will continue to increase. Every day more oil-consuming nations arestriking deals with oil exporting nations to guarantee future supplies. These aremore than just economic ties. It contributes to foreign exchange reserves throughexports, for exporting countries like OPEC. Supply disruptions of oil and gas cancreate inflation, output loss, recession, energy crisis, downtrend in GDP rate,currency fluctuation and so many problems.

In the Indian context, the oil and gas sector has attained importance in severalways:

Oil import witnessed a considerable growth in the current decadeIndia has become seventh largest importer of crude oil in the world in 2005 fromninth place in last decade. The country is one of the fastest growing economies inthe world and is playing a very important role in global energy market. India isconsidered to be one of the major contributors in recent hike in crude oil pricesfrom below US$30 level in 2004 to current US$118 levels. India’s oil import hasincreased from 1.36 million barrels per day in 2000 to 1.73 million barrels per dayin 2006, i.e. at annualized growth rate of 4.16 per cent which was the secondhighest among the top ten oil importers in the world after China.

Top World Oil Net Importers, 2006(Million Barrels/ Day)

United States

Japan

China

Germany

S. Korea

France

India

Italy

Spain

Taiwan

3.43

2.51

2.16

1.89

1.73

1.57

1.56

0.94

Source: EIA

5.03

12.36

Annualized Oil Import Growth, 2000-2006

United States

Japan

China

Germany

S. Korea

France

India

Itly

Spain

Taiwan

-1.54%

1.71%

1.26%Source: EIA

-0.72%

0.27%

-0.22%

4.16%

2.52%

-1.12%

15.85%

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Strong growth in GDP resulted into rise in oil importIndia’s crude oil import as a percentage of total import has increased from 26.82per cent in FY2000 to 30.84 per cent in FY2007 i.e. increase of just 4 per cent. Butdue to sharp rise in oil prices, import of oil has increased by 348 per cent inabsolute terms. Oil import as a per cent of India’s GDP has increased significantlyfrom 3.94 per cent to 6.92 per cent during 2002-03 to 2006-07.

10150

8150

Rs. Billion6150

4150

2150

150

India's Total Import vs. Crude Import35% 40000 GDP Gr owth & Oil Import 8%

30% 30000 6%

25% 20000 4%

20%

2000 2001 2002 2003 2004 2005 2006 2007

India's Total Import

Oil as % of total import

Oil Import

10000

2002-03 2003-04 2004-05 2005-06 2006-07

GDP at current price (Factor cost)

Oil import as a % of GDP (Current price)

2%

Domestic oil production- comparatively very lowIndia accounts for only 1 per cent of total world oil and gas production. India produced 0.85 million barrels per day in 2006Annualized Oil Production Growth, as compared to world2000-2006 productionof84.59 5.81%Brazil million barrels per day. This demonstrates huge Russia6.26% demand supply gap in energystrivenation. 1.73%IndiaIndia’s oil production has increased at annualized China2.18%growth rate of 1.73 per cent during 2000 to 2006, which was lowest USA -1.39% among BRIC countries but higher than USA and Europe -3.75% Europe.

Japan 2.34%Source: EIA

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Oil consumption growing at a healthy pace India consumed about 3 per cent of total Annualized oil consumption growth, worldoilandgas 2000-2006 consumption.IndiaBrazil0.38% consumed 2.56 million Russia1.75% barrels of oil per day as India3.31%comparedtoworld consumption of 84.77 7.19%China million barrels per day USA0.82% in 2006. India’s oil consumptionhasEurope0.53% increased at annualized Japan -1.05% growth rate of 3.31 per Source:EIA cent which was higherthan USA, Europe, Japan, and BRIC nations except China during 2000 to 2006.A major source of revenues to the GovernmentOil contributed 15.18 per cent of total tax revenue to central and state exchequerthrough excise and custom duty in 2007. Oil contributed 49.22 per cent of totalexcise and 16.23 per cent of total custom duty in 2007. Excise and custom dutyfrom oil has increased at a CAGR of 14.56 per cent and 15.67 per cent respectivelyduring 2002 to 2007.

Petroleum subsidy as a percentage of total subsidies has reduced to 5.21 per centin 2007 from 12 per cent in 2002, which was substituted by oil bond ofgovernment of India.

The energy sector has an influence on the inflationary trend in India as energyprices constitute 14.2 per cent weightage in the wholesale price index.Approximately 38 per cent of ports and 7 per cent railway traffic are comprised ofpetroleum sector cargo.

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5. India’s Energy Position

India’s per capita energy consumption is relatively very low

According to the world standards, India’s current level of energy consumption isvery low. For the year 2004-05, the total energy consumption for India was 572 MTOE (Million tons oil Per Capita Electricity Consumption equivalent) and the per (KWH) capita consumption at 531 Kgoe (Kilograms India 457oil equivalent)

China

South Korea

Japan

USA

OECD

World Avg 2516

Source: IEA

8204

1585

7391

8076

13338

With a target GDPgrowth rate of 7-8 percent and an estimatedelasticityof0.80,energy requirement isexpected to grow at5.6-6.4 per cent. Thiswould mean a four-foldincreased in India’senergyrequirementover the next 25 years.

India’s Current Energy Basket

While India is well-endowed in coal, 71 per cent of its oil needs are met byimports. The below graph represent only primary energy sources that arecommercially exploited. Rural India is predominantly dependent on traditional fuelsources like firewood, animal drug and biomass, estimated at around 143 Mtoe perannum or approximately 44 per cent of total primary energy use.

India's composition of energy sources and usage

World's Primary Energy Sources (%)

Gas, 23Hydro, 6

India's Primary Energy Sources(%)

Oil, 36

Gas, 9

Nuclear, 6

Oil, 37

Hydro, 2Nuclear, 2

Coal, 28

Coal, 51

Source: Planning Commission of India, 2006

Sector Coverage 9


Future Energy Requirements and Supply Options

Given the present growth rate of 5 per cent in coal ResourcesUnitReserves production, India’s extractable Coal - ExtractableMtoe13,489 reserves would be exhausted OilMtoe786 in 45 years, and hence there Gas - including coal bed Mtoe1,866is a greater need to look at methane sustainable and cleaner fuels. Uranium - metalTonnes 61,000 Recentdiscoverieshold Thorium - metalTonnes 225,000 promiseforIndia’sgas HydelMW150,000 reservesandcoalbed methane. On the nuclear front, Source: Planning Commission of India, 2006 advanced technology needs tobe infused before being put for commercial use. Renewable energy especially windand solar power is expected to grow rapidly and supplement the short termrequirements. Over the longer term, it is expected to gain strategic importance asa sustainable fuel that would help build self-reliance in energy sources. The tabledetails the estimated energy reserves in the country.

Estimated energy reserves

Different scenarios developed both on supply-side are detailed as follows:

■ Energy efficiency in end-use: Efficient energy used in industry, lighting,home appliances etc. could possibly lower the energy needs by 142 MTOE in2031-32 (7.5 per cent of total requirement)

Increase of railway’s share in freight: Presently, most of the freight trafficis carried by roads. If the share of railways in freight increases from thecurrent 32 per cent to 50 per cent by 2031-32, there would be an estimatedenergy saving of 34 MTOE in 2031-32 (1.8 per cent of total requirement)

Increase in transportation efficiency: Use of mass transport and byefficient utilization of vehicles, it is estimated that up to 81 MTOE of energy bycan be saved by 2032. (4.3 per cent of total requirement)

Efficiencies in thermal power generation: Increase in thermal generationefficiency from present 31 per cent to 38-40 per cent through use of supercritical boiler technologies could lead to savings of 111 MTOE in 2031-32 (5.8per cent of the total energy requirements). Together, there is a potential tosave up to 351 MTOE by 2032 (19 per cent of the total energy requirements).

■

■

■

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On the supply side, the following options are envisaged:

■ Fully exploiting India’s potential of 150,000 MW from current level of 32,326MW

Successful development of Fast Breeder Reactor (FBR) technology andAdvanced Heavy WaterReactor (AHWR) will scale up nuclear generation

Development of Natural Gas sources (indigenous, pipeline import or LNG) forpower generation

Development of renewable energy sources (solar power, bio-diesel and windenergy)

The range of utilization of different fuels in 2032, as compared to currentlevels is shown below.

■

■

■

■

Comparison ofmarket trend

energy utilization in 2031-32 with present

Energy Consumption Scenario

ResourcesUtilization in 2031-32(MTOE)350-486104-150632-102213-3576-981200106201020

Current Utilization (MTOE)1192916775<1<1140<1<1

OilNatural Gas (including CBM)CoalHydroNuclearSolarWindFuel woodEthanolBio diesel

Source: Planning Commission of India, 2006

60

50

40

30

20

10

India vs. World energy consumption matrix

56

38

3024

8

25

7 2

Coal Nuclearenergy

6 4

Hydroelect ricit y

0Oil Nat ural Gas

World India Source: India Hydrocarbon Vision 2025

India is the sixth largestenergy consumer in theworld and is one of theworld’sfastestgrowingenergyconsumers.Theenergy consumption matrixin India is dominated by coal,followed by oil and naturalgas.Whilethispatterncontrast with the WorldEnergy Consumption Matrix,which is dominated by oil andgas, it is important to note

Sector Coverage 11


that the consumption of oil and gas has been growing over the years in India, incomparison with coal.

The eleventh five year plan of India estimates that the consumption of oil willincrease at the rate of 3.7 per cent annually, faster than the projected annualgrowth rate of 2 per cent for the world. Projections up to 2025 show anexponential growth in the demand for Gas.

Indian Government has earmarked US$12.77 billion for Exploration & Productionand US$7.88 billion for the downstream sector under the Tenth Five Year Plan. TheIndia Hydrocarbon Vision 2025 has committed investments of US$49.96 billion andUS$29.02 billion for the refining and marketing sectors respectively.

India Energy Consumption Matrix 2005

Natural Gas, 54%

India Energy Consumption Matrix 2025

NuclearEnergy, 1%

Oil, 26% Natural Gas, 20%

NuclearEnergy, 2%

Oil, 8%Coal,33%

Hydel, 4%

Coal,51%

Hydel, 1%

Source: India Hydrocarbon Vision 2025

Oil Production & Demand

India’s demand for oil has Oil Production & Demandconsistently been far in 350excess of its domestic Production + Oil EquityDemand 300production. It meets 66 per cent of its demand for250 crude oil through imports 200 from Middle East and the 150 balancefromother 100 countries.The 50dependence on oil imports 0is expected to increase in 1999-00 2001-02 2006-07 2011-12 2024-25thefuture.The Source: India Hydrocarbon Vision 2025 HydrocarbonVisionprovides a scenario for the future of oil demand and supply. The following diagramshows demand and supply (comprising domestic production and overseas oilequity that Indian companies will own) based on Hydrocarbon Vision 2025Projections.

400

Sector Coverage

(mn Metric Tonnes)

12


Liquid pipeline infrastructureIndia has one of the largest refining capacities in the world. The country hasattained self-sufficiency in refining crude oil. In 2003-04 the refining capacitystood at 126 MMTPA, against the annual consumption of about 107.7 MMTPA. In2003-04, the length of the crude pipelines was 5918 kms and that of the productpipelines were 7033 kms.

Petrol RetailsWith the APM dismantled, the Govt. of India is encouraging healthy competition inthe petroleum retailing sector. Its directed aim is to improve competitiveness andquality of service to the customer. Private sector participation in the retail marketis being particularly promoted. Petrol retail companies today offer a slew ofcustomer friendly initiatives such as online support to customers, strengthenmarket share through advertising and product differentiation, premium productsand customers loyalty programs. These initiatives have contributed to aprogressively changing petrol retail market in India, translating into quality servicefor the consumer.

The Government of India has granted licenses to many companies. A table is givenbelow regarding some of the companies to whom licenses have been granted.However, government control over the retail price has made petroleum retailunprofitable for the private sector companies. Recently Reliance has announced toshut down its entire operational retail outlet after which its market share fell tonear 0 per cent from 14 per cent in mid 2007.

CompanyONGC, MRPLShellRelianceEssarNumaligarh RefineryIOCL, BPCL, HPCL

No. of Retail Licenses11002000584917005102900

Source: Epitome Research * IOCL Retail Outlets include IBP Retail outlets

Ethanol blended fuel

Type of Outlets IOCL* HPCL BPCL

Retail fuel pumps

SKO/LDO Dealers

LPG Dealers

9930

3867

4232

4944

1658

1922

4926

985

1928

The National program for 5 per cent blending of ethanol with petrol was launchedon January 1, 2003 in the sugarcane producing states in the phase 1. Majority ofthe other states are planned to be covered in phase 2.

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Demand- Supply scenarioNatural Gas: The share of natural gas in India’s energy mix has increased from2.5 per cent in the early 1980s to around 8 per cent in 2003. It is expected toincrease substantially to 20 per cent by 2025. The gas supply would be metthrough domestic production, LNG imports from LNG terminals at Dahej, Hazira,future projects and monetization of Krishna Godavari basin (KG basin) gas foundin 2005-06 as well as through any future findings. The natural gas demand-supplyprojections by Government of India based on the ‘Hydrocarbon Vision 2025 ’isgiven below in the diagram.

450

400

350

300

250

200

150

100

50

81

151

Natural Gas (MMSCMD)391

313

231

158

95

170

2001-02 2006-07

Supply

2011-12

Demand

2024-25

Sector Coverage 14


6. Industry Structure: Overview

Oil & gas industry in India is mainly dominated by the public sector companies.Indian oil companies are broadly classified into upstream and downstreamsegments. Major players in the upstream sector are Oil and Natural GasCorporation (ONGC), Oil India limited (OIL), Reliance Industries and Cairn Energy,who explores crude oil & gas and produce it, for supply to downstream oilcompanies in the country. Oil refineries get allocation of imported and domesticcrude oil at a pooled price fixed by the Oil Co-ordination Committee (OCC).

The downstream sector players are primarily involved in refining crude oil (bothdomestically produced and imported); and marketing of petroleum products. Thesector in dominated by the 3 public sector undertakings Indian Oil Corporation(IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL). There are fewother standalone refineries namely Chennai Petroleum, Kochi Refineries,Bongaigon Refinery, Mangalore Refineries, Numaligarh Refinery etc, whichaccounted for the rest of the production. However, these standalone refineries arenow taken over by the major PSUs.

The Indian Petroleum Sector

Upstream Sector

Downstream Sector

Oil & GasExploration

Refining and Marketing

Natural GasDistribution

ONGC, RIL, OIL

IOC, HPCL, BPCL, ONGC,RIL, CPCL, BRPL, NRL, MRPL, Essar Oil

GAIL, RIL, IGL

The latest entrant into the market is Reliance Petroleum with its 27 million tonnesof refining capacity per annum plant in Jamnagar, Gujarat. However, this newrefinery will primarily focus on importing high sulfur crude oil and exporting higherstandard refined products. Oil marketing segment in India is primarily dominatedby the public sector undertakings.

Sector Coverage 15


There were few entrants after government allowed private sector to join themarketing bandwagon, which includes Reliance Industries, Essar Oil. However,these players are now shutting down there retail outlet because they were not ableto match the fuel price offered by state-run retailers, who get compensated by theGovernment for selling fuel below the cost. Reliance Industries, which runsapproximately 1400 retail outlets has announced to shut down these outlets bythe end of April 2008.

3000

('000 barrels/day)

2500

2000

India's Oil Production and Consumption

C onsumption

Net Imports

1500

1000

50019971998199920002001200220032004200520062007

Production

The Indian Oil & Gas sector isunder the purview of theMinistry of Petroleum andNatural Gas (MoPNG). The oiland gas industry has 2 sub-sectors:OilandGasExplorationandProduction(E&P), Oil & Gas Refining andmarketing of refined products(R&M). The annual turnover ofthe industry is over $65 bn.

6.1 Upstream Sector: Exploration & Production

Introduction

To meet the growing oil demand, India has invested in various explorations andproduction (E&P) projects over the last few years in order to boost domestic oilproduction.

The primary mechanism through which the Indian government has promoted newE&P projects is based on the NELP framework. Between 1999 and 2006, thegovernment awarded 168 oil and natural gas concessions in six separate licensingrounds. The seventh bidding round (known as NELP-VII) recently announced, with57 exploration blocks offered. As in previous rounds, ONGC and other Indiannational oil companies (NOCs) fared very well. ONGC secured a total of 104exploration blocks, often in consortium with other Indian NOCs.

Reliance Industries secured seven deepwater blocks in the Krishna-Godavari andMahanadi basins, which are considered to be some of India’s most promisingoffshore hydrocarbon basins. Notably, absent on the list of bidders for the NELP-VIare international oil majors. The Indian government was keen to attract oil majorsto utilize their vast deepwater experience and other technical expertise. Someindustry publications suggest that the Indian government will now move to anopen acreage system, in which domestic and international oil companies can applyfor available E&P projects at any time, rather than licensing rounds.

Sector Coverage 16


6.1.1 Overseas E&P

In recent years Indian NOCs are looked to acquire more and more equity stakes inE&P projects overseas. The most active company is ONGC Videsh Ltd., theoverseas investment arm of ONGC.As of September 2007, ONGC Videsh holds interests in 26 oil and natural gasprojects in 15 countries, spanning Russia, Sudan, Vietnam, Africa, Asia, LatinAmerica, and the Middle East. One of ONGC Videsh’s most high profile investmentsis its share in the Greater Nile Petroleum Operating Company (GNPOC), which hasengaged in E&P work in Sudan since 1997.

OVL is seeking a 30 per cent stake from Petronas of Malaysia in Block 8 in BlueNile Basin, northeast of prolific Melut Basin. Petronas Carigali Overseas has a 77per cent interest in the block. The remaining equity is with Sudan’s national oilcompany Sudapet (15 per cent) and High Tech Group (8 per cent). Petronas hasundertaken some seismic surveys in the block, and drilling is yet to begin. OVL hasalso shown interest in taking the unallocated 32.5 per cent stake in Block B whereFrench major Total is the operator. Total has 31-32 per cent stake in the block.The block also has White Nile as a partner. OVL already has three blocks in Sudan— 5A, 5B, and 1, 2, & 4. Petronas had waived off its pre-emption rights to allowOVL to buy Austrian firm OMV’s stake in Block 5A and 5B.OVL acquired OMV’s26.125 per cent stake in exploration block 5A and 24.5 per cent stake in Block 5Bfor $115 million.

ONGC Videsh also holds a 20 per cent stake in the ExxonMobil-led consortium thatoperates the Sakhalin-I project in Russia. According to company estimates, the oilfields associated with Sakhalin-I hold recoverable crude oil reserves of 2.3 billionbarrels. Production at Sakhalin-I started in October 2005, and is expected to reach250,000 bbl/d in early 2007. Oil from the Sakhalin-I project will be pipedwestward to the DeKastri terminal on the Russian mainland export, while somecrude oil will also be pumped into Russia’s domestic pipeline system for localconsumption.

6.1.2 Current Scenario

There are 26 sedimentary basins in India, covering a total area of approximately3.14 million sq. km. The sedimentary basins in India have been classified into fourcategories, based on: the geological knowledge of the basin; presence and/orindication of hydrocarbons; and the current status of exploration.

Sector Coverage 17


BasinCategory Nature

No. ofBasins

Onland andOffshoreArea (sq.km.)

Basins

Category IProvencommercialproduction

Identified prospectivelyKnownaccumulationHydrocarbons, but noCommercial Production

Geologicallyprospectivebasin

7 518500

Cambay, Assam Shelf, Bombayoffshore, Krishna-Godavari, Cauvery,Assam-Arakan Fold Belt, Rajasthan

Kutch, Andaman-Nicobar,Mahanadi-NEC

Himalayan Foreland,Ganga, Vindhyan,Saurashtra, Kerala-Konkan- Lakshadweep, Bengal

Karewa, Spiti-Zansakar,Satpura-South Rewa-Damodar, Narmada,Deccan Syneclise, Bhima- Kaladgi,Bastar, Chhatisgarh

Category II 3 164000

Category III 6 641000

Category IVPotentiallybasins

prospective10 461200

SubtotalDeep-watersTotal

26 178470013500003134700

Source: Directorate General of Hydrocarbons – Petroleum Exploration & Production Activities, India 2006-07

India's prognosticated hydrocarbon resource base, according to the Ministry ofPetroleum & Natural Gas, is 29 billion metric tonnes. So far, oil has beencommercially produced in only 7 of the 26 sedimentary basins, while the oilreserve established through exploration is only 6.8 billion metric tonnes, whichapproximately translates to 23 per cent of the total oil and oil equivalentsuspected to exist. Exploratory drilling, so far, has been confined mainly to onlandareas and up to water depths of 200 metres. Exploratory drilling has recently beeninitiated in some segments of the deep-water areas, which have an estimatedbasin area of 1.35 million sq. km and are believed to hold a significant resourcebase. Of the total sedimentary basin area of 3.14 million sq. km (including deepwaters), only 16 per cent falls under the moderate to well explored category. Ofthe balance, while exploratory activity has been initiated in approximately 27 percent of the area, over 57 per cent of the area continues to fall under unexplored(41 per cent) or poorly explored (16 per cent) category.

6.1.3 Major players

Oil and gas exploration is also dominated by ONGC & Reliance Industries, whichholds approximately 48.81 per cent & 34.73 per cent of the total area licensed bythe Indian government for hydrocarbon exploration. The following table below setsforth acreage licenses to oil companies under PELs as of March 31, 2007.

Sector Coverage 18


Licensed Domestic Production Area

Licensed for Oil & Gas Exploration(as of March 31, 2007)

(Sq. Km.) (%)

Licensee

ONGC

Reliance Industries Ltd.

Oil India Ltd.

Cairn Energy India Ltd.

Hindustan Oil Exploration Company Ltd.

FOCUS

ENI

OAO GAZPROM

Gujarat State Petroleum Corp. Ltd.

GGR

Jubilant Oil & Gas Pvt. Ltd

Canoro Resources Ltd.

TULLOW

NIKO

Hardy Exploration Production India Inc

PONEI

ESSAR

GEOPETROL

TOTAL

439442.09

312706.00

38091.55

28921.50

25124.00

18383.59

14445.00

7779.00

3784.17

3155.00

2566.00

1444.70

1277.00

957.00

859.00

635.38

430.50

295.00

900296.48

48.81

34.73

4.23

3.21

2.79

2.04

1.60

0.86

0.42

0.35

0.29

0.16

0.14

0.11

0.10

0.07

0.05

0.03

100

Source: Directorate General of Hydrocarbons – Petroleum Exploration & Production Activities, India2007-08

ONGC has undertaken onshore exploratory activities in the Himalayan foothills, theNorth-Eastern States, Gujarat, Andhra Pradesh, Tamil Nadu and Rajasthan. Its on-shore oilfields are located at Cambay and Ankaleshwar (both in Gujarat) and atRudrasagar and Galeki (both located in Assam). ONGC has undertaken offshoreexploratory activities in both the Eastern and the Western coasts. Its offshore fieldis located on the Western Coast at Bombay High.

OIL has been carrying out exploration in the sedimentary basins of Assam,Arunachal Pradesh, Rajasthan, Orissa (onshore and offshore), the Andamans(offshore), Saurashtra (offshore) and the Ganga Valley (Uttar Pradesh).

Its production is confined to the oilfields of Assam and Arunachal Pradesh and theTanot gasfield in Rajasthan. ONGC and OIL also hold the largest portion of leasedacreage for oil and natural gas production, accounting collectively forapproximately 80.73 per cent of the total territory licensed by the Government ofIndia for commercial production of crude oil and natural gas as of March 31, 2007.The following table sets forth the amount of domestic production area granted tolessees under petroleum mining leases, or MLs, in effect as of March 31, 2007.

Sector Coverage 19


Leased Domestic Production Area

Leased for Oil & Gas Exploration (as of March 31, 2007)

(Sq. Km.) (%)

Lessee

ONGC

OIL India Ltd.

CAIRN

BG-RIL-ONGC

GEOENPRO

CANORO

HOEC

INTERLINK

JTI

NIKO

SELAN

HERAMEC

HYDROCARBON RES.DEV.-PPCL

OILEX

23637.18

4811.01

2934.96

2678.00

11.00

52.75

120.84

16.70

57.00

74.25

189.65

34.15

67.08

13.65

8.33

7.60

0.03

0.15

0.34

0.05

0.16

0.21

0.54

0.10

4.40

172.80

0.01

0.49

Lessee

Leased for Oil & Gas Exploration (as of March 31, 2007)

(Sq. Km.) (%)

GSPCL

HARDY

RIL

Total

19.75

81.00

339.70

35235.14

0.06

0.23

0.96

100

Sector Coverage 20


6.1.4 The Crude Oil and Natural Gas fields

Crude oil and natural gas are currently produced from both onshore and offshorefields. The major onshore fields are located in Gujarat, Assam, Nagaland, TamilNadu, Andhra Pradesh and Arunachal Pradesh. In addition to production from theregions mentioned, natural gas is produced in Tripura.The major offshore fields are Cauvery Offshore, KG Offshore (Shallow and Deep),Mahanadi, Andaman, Cambay, Mumbai Offshore and Kutch.

Oil Production Trend

95%

75%

55%

35%

15%37%

1990-91

36% 35% 34% 34% 36%

2005-06

33%

2006-07

63% 64% 65% 66% 66% 64% 67%

90%

70%

50%

30%

10%

Gas Production Trend

71% 70% 71%78% 74% 72% 72%

22% 26% 28% 28% 29% 30% 29%

20 00- 01Onshore

20202002-03-04-030405Oil Offshore Oil

1990- 2000- 2002- 2003- 2004- 2005- 2006- 91010304050607 Onshore Gas Offshore Gas

6.1.5 Natural Gas

The natural gas in India is primarily produced by ONGC & OIL, with a market shareof 70.69 per cent and 7.13 per cent respectively in FY2007. The balance isundertaken by private/joint sector in the eastern & western offshore regions.Reliance has recently reported discovery of significant gas reserves at Krishna-Godavari and Mahanadi basins (more than 10 trillion cubic feet). The Indiannatural gas industry started off in the 1960s with production from the finds inGujarat and Assam. However, it picked up momentum only in the 1970s with thediscovery of associated gas at Bombay High. Subsequently, in the 1980s,production of free gas started from the South Bassien fields with the Gas Authorityof India Limited (GAIL) constructing India’s only onshore cross-country Hazira-Bijaipur- Jagdishpur (HBJ) pipeline in 1987. A large proportion of the gas producedat Bombay Offshore is now transmitted through the HBJ pipeline. In the 1990s,other fields at Tapti, Panna-Mukta and Ravva have been explored by the privatesector in JVs with ONGC and OIL. The transport, distribution and sale of naturalgas in India fall almost exclusively under the purview of GAIL (having more than85 per cent of the market share). Most of the transmission infrastructure isinstalled in the northwest of India, for transportation of gas from the Bombay Highfields, onto shore, and then to end users. The HBJ line is by far the mostsignificant of these pipelines. In addition to the HBJ pipeline, GAIL also owns andoperates regional gas grids of varying sizes in the states of Gujarat, AndhraPradesh, Assam, Maharashtra, Rajasthan, Tamil Nadu, and Tripura. These smallregional pipelines add up to about 1600 kilometers in total length.

Sector Coverage 21


6.1.6 Key Issues

High Risk Associated with Upstream SectorThe Exploration & Production (E&P) exercise is characterized by a high degree ofuncertainty and, hence, a substantial amount of risk. At every stage of the E&Pexercise, there is a very high degree of likelihood that the E&P efforts may have tobe abandoned.

80035

Million Tonnes

34

33

32

1990- 2000- 2002- 2003- 2004- 2005- 2006- 91010304050607

C rude Oil Natural Gas Source: MoP&NG

Oil & Gas Production Trends 35

30

25

20

15

1050Million Tonnes

780

760

740

720

700

030090 02 0420

05 0620 2019 20 2020 20

07

Billion Cubic Metres 950

850

750

650

C rude O il Na tura l G as S o urce : Mo P &NG

Stagnating ProductionOil & Gas production, in recent years, has been much higher than that in the early1980s. In 1980-81, the total crude oil and natural gas produced were 10.5 millionmetric tonnes (mmt) and 2.4 billion cubic metres, respectively. The discovery ofthe offshore Bombay High oilfields by ONGC in the mid-1970s and the subsequentdevelopment in the mid-1980s resulted in the total oil & gas production rising byaround three times over the 1980-81 level, in 1985-96. However, in the absenceof any new discovery, oil production has stagnated at the mid-1980s levels.

Gas production, on the other hand, showed a spectacular growth of 10 timesduring 1981-96, mainly because of the development of the South Basin fields andreduction in flaring in the Bombay offshore region. Further, the gas transportationinfrastructure has improved significantly with the laying of the Hazira-Bijaipur-Jagdishpur (HBJ) natural gas pipeline by the Gas Authority of Indian Limited(GAIL) in 1987. However, beyond 1996, the growth rate in gas production has alsobeen lower.

Pressure on ReservesThe total resource base of oil and gas is the entire volume formed and trapped in-place within the Earth before any production. The largest portion of this base isnon-recoverable by current or foreseeable technology. This inability is eitherbecause of unfavorable economics or intractable physical forces, or a combinationof both.

At the next level, the recoverable resources are divided into discovered andundiscovered segments. Although the crude oil reserves in India have grown byover six times during the past three decades, the past few years have seen asignificant depletion because of the absence of any new findings.

Sector Coverage 22

Billion Cubic Metres

Oil & Ga s Re s e rv e s


The life of oil reserves (as measured by the Reserve to Production or the R/P ratio)has also declined to 17.5 years in 2007 from a high of 45 years in 1980-81. Thetotal proven reserves of natural gas in India as at the end of 2003 was 1055 billioncubic metres (bcm). The gas production in India is currently around 31.75 bcm(billion cubic metres) in 2007. At this production level, India's reserves are likelyto last for around 33 years, that is, nearly double than the 17.5 years estimatedfor oil reserves.

6.1.7 Role of Private Sector

So far, the private sector has played a minor role in the upstream sector.Following the second oil price shock and the realization of rising oil imports, theGovernment of India opened the E&P to private sector in 1979. Since 1991,though there have been six rounds of exploration licensing (excluding NELP),limited success has been achieved in the award of the blocks. The primary reasonsbeing:

■ The exploration activities have been initiated only in few (15 per cent)potential oil-bearing areas

There has been a delay on the part of the government to award contracts foroil exploration.

In the absence of any major oil discovery for the past 15 years, the confidenceof the oil majors has gone down.

■

■

Private Players Share in Oil & Gas Production (%)

35

30

25

20

15

1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07

25%

20%

15%

10%

5%

0%

Crude Oil Production (MMT)

% of Oil Produced by Private Players

Natural Gas Production (BCM)

% of Gas Produced by Private Players

Source: MoP&NG

Since early 1990s, government turned its attention towards small and medium-sized oil fields. Under this, two kinds of contracts were offered to the privatesector - one, for small-sized fields, involved a production-sharing contract (PSC)with the government, second, for medium-sized fields which involved an equityparticipation of up to 40 per cent by ONGC/OIL.

This privatization program has been highly successful as these carried little risks.The development of these fields led to increase in production and the share ofprivate sector in the total oil and gas production.

Sector Coverage 23


To continue with the privatization process, in Dec'98, the government introducedthe New Exploration Licensing Policy (NELP). Under NELP, the government offeredfiscal incentives like: level playing field for National oil companies (NOCs),international oil price to contractors, zero cess liability and 50 per cent rebate onroyalty payments for seven years for deep offshore areas. Oil E&P has been given"infrastructure" status, which provides a seven-year tax holiday. NELP I failed toobtain a good response mainly due to low oil prices at the time of launch and high-risk nature of deep-water blocks. Since then, there have been five more rounds ofNELP till 2006. And in all these the award process happened in a very short spanof time. So far, the government has signed PSCs for 165 blocks awarded in thefirst six rounds of NELP. At present more than 84 per cent of the area under E&Pbelongs to the NELP Blocks. Recently, in Dec'07, NELP-VII was announced with 57blocks on offer which going to be awarded shortly. Due to attractive fiscal terms,transparent approach in bidding process, lesser time in awarding contracts andhigh success rate of oil strikes recently India has been able to attract internationaloil majors recently.

6.2 Downstream Sector: Refining & Marketing

Major Players and StructureAs of April 1, 2007, the Indian oil-refining sector had 11 companies (6 parentcompanies and 5 subsidiaries) with 19 refineries and a combined annual installedcapacity of 148.968 mmt.

Public sector Undertakings (PSUs):

■ Indian Oil Corporation Limited (IOC) and its two subsidiaries, ChennaiPetroleum Corporation Limited (CPCL) and Bongaigaon Refinery andPetrochemicals Limited (BRPL);

Bharat Petroleum Corporation Limited (BPCL) and its two subsidiaries, KochiRefineries Limited (KRL) and Numaligarh Refineries Limited (NRL);

Hindustan Petroleum Corporation Limited (HPCL);

Oil and Natural Gas Corporation Ltd. (ONGC) and its subsidiary MangaloreRefinery and Petrochemicals Limited (MRPL)

■

■

■

Private sector Undertakings •Reliance Industries Limited (RIL) •Essar Oil Limited (EOL)

ONGC and EOL are recent entrants in the refining business. ONGC has taken overMRPL in March, 2003 before that MRPL was a joint sector entity. The entry ofONGC into the refining segment appears to be its strategy in the direction ofbecoming integrated company along the oil & gas value chain.

Sector Coverage 24


RIL has the largest single location refinery in India with capacity of 33 mmt andplanning to become world’s largest single location refinery by adding capacity of29 mmt which is going to be completed by end of 2008.

India’s Installed Refining Capacity, Throughput and Capacity utilization (FY 2006-07) CapacityParentRefineryYearofThroughputCapacity Company('000CompanyLocationCommission('000 tonnes)Utilization (%) tonnes) IOCGuwahati1962100083983.90 IOCBarauni19646000546991.15 IOCKoyali1965137001295394.55 IOCHaldia19746000583697.27 IOCMathura198280008883111.04IOC IOCDigboi190165058690.15 IOCPanipat199812000943578.63 CPCLChennai196995009784102.99 CPCLNarimanam1993100061861.80 BRPLBongaigaon19792350206787.96 IOC Total602005647093.80 BPCLMumbai19551200012030100.25BPCLKRLKochi196675007742103.23 NRLNumaligarh19993000250483.47 BPCL Total225002227699.00 HPCLMumbai195455007419134.89HPCL Visakh195775009377125.03 HPCL Total1300016796129.20 ONGCTatipaka20017894120.51ONGC MRPLMangalore1996969012536129.37 ONGC Total976812630129.30RelianceRILJamnagar19993300036616110.96 Reliance Total3300036616110.96EssarEOLVadinar200610500176316.79 Essar Total10500176316.79

INDIA Total 148968 146551 98.38

Sector Coverage 25


Oil Refining capacity Marketshare, 2007 Overall Capacity Utilization, 2007

ESSAR 16.8%

111.0%

129.3%

129.2%

99.0%

93.8%

BPCL15%

IOC40% HPCL

9%

ONGC 7%

Essar 7%

RIL22%

RELIANCE

ONGC

HPCL

BPCL

IOC

The Indian petroleum sector has been under the government control. Keeping theconsumers and producers’ interest, the government decided to decontrol thesector in a phased manner. To maintain viability of public sector refineries in thedecontrolled regime, the government, in September, 2000, decided to integratethe pure refining companies with the integrated majors. Post-restructuring, theshares of IOC (Indian Oil Corporation) and BPCL (Bharat Petroleum CorporationLimited) in India's total refining capacity increased up to 40 per cent and 15 per cent, respectively. ONGC and HPCL had highest capacityMarketing Market share FY 2006-2007utilization over 129 per cent whereas IOC had lowest 93.8 per cent among BPCL, 18.8PSUs during 2007. Among private players RIL had highest capacity HPCL, 16.5 utilization over 111 per cent and EOL had lowest 16.8 per cent duringOthers (PSUs),2007.

IOC, 40.65.7

PrivateParties, 18.4

Consumption of Petro Products, April-Feb,'08

FO/LSHSNaphtha 10%

10%

LPG9% Petrol 8%

Kerosene 7%

Diesel38%

ATF4%Others

14%

Marketing of refined products in Indiais done mainly by 3 PSUs – IOC(combined with IBP - taken over byIOC in Feb'02), HPCL, BPCL and 2 private sector companies – RIL and EOL. The government has also decontrolled the marketing sector from April 1, 2002, with pricing of products linked to import parity prices. While the APM for Liquefied Petroleum Gas (LPG), Kerosene (SKO), Motor Spirit (MS) and Diesel (HSD) have been dismantled, prices of LPG (domestic) and Kerosene (Public Distribution System) are partially subsidized. While the three PSUs

Sector Coverage 26


account for 76 per cent of total sale of petroleum products in India, the balancesale of 24 per cent is accounted for by imports and also by sales by privateparties. Amongst the PSUs, IOC is the market leader with over 40 per cent marketshare, followed by BPCL and HPCL having 19 per cent & 17 per cent respectively.

The pie-chart shows domestic consumption data for the major categories ofrefined petroleum products, as a percentage of total domestic consumption ofrefined petroleum products.

Automotive fuels such as diesel (in particular high-speed diesel, or HSD) andmotor spirit, or MS (also referred to as gasoline or petrol), account for a significantportion of refined petroleum products sold domestically, making up approximately45.1 per cent of total sales of refined petroleum in India for the period April-February, 2008. The three major government-owned downstream oil companieshave historically dominated domestic sales of automotive fuels.

Petroleum products Net Export Growth of Petro Products,have contributed to 2004-07foreignexchange All Petroreservethrough78.0% 32.6%Products export. India has exported petroleum 209.6% FO / LSHS 98.0%productsworth Rs.39.78 billion in 60.5%Diesel ( HSD ) FY 2006-07. Net20.8% export of petroleum 74.3% ATFproducts has grown30.2% by 78.0 per cent 31.8% CAGR (Qty)CAGR (Rs.)Petrol (MS)and 32.6 per cent in 3.2% terms of quantityand Indian rupees respectively during 2004-07. The highest and the lowest netexport growth in terms of quantity and Indian rupees has been recorded byFO/LSHS (Furnace Oil / Low sulfur heavy stock) and Petrol (MS or Motor Spirit)respectively during FY 2004-07.

The three PSUs control an extensive distribution network consisting of retailoutlets, SKO and LPG dealerships and product pipelines. Earlier, the oil companiesused to set up the crude oil/product pipeline network in India. However, tofacilitate development of major product pipelines in future, the governmentcreated a new company, Petronet India Ltd (PIL). The refineries are expected toconstruct pipelines on their own. In recent past, oil companies have undertakenseveral measures to combat air pollution. Auto fuel quality has been improved toenable the automobile industry to comply with the prescribed emission norms.

Sector Coverage 27


7. Regulatory / Government body structure

The Ministry of Petroleum & Natural Gas is situated in Shastri Bhawan, New Delhiand is entrusted with the responsibility of exploration and production of oil andnatural gas, their refining, distribution and marketing, import, export, andconservation of petroleum products and Liquefied Natural Gas.

The Ministry of Petroleum & Natural Gas gets its authority under item no. 53, list1, Seventh Schedule, Article 246 of the Constitution of India. The item reads"Regulation and development of oil fields and mineral oil resources, Petroleum andPetroleum products, other liquid and substances declared by Parliament by law tobe dangerously inflammable”.

Cabinet Minister

Ministry of State

Secretary

Additional Secretary Additional Secretary (IC)

JS & FA

JointAdvisor

Dy. Sec.(Distt)

JS (Ref)

Dir(A&R)

Dir(Supp)

Dir(Vig)

JS (Exp)

Dir(Exp 1)

Dir(Exp II)

Dir(Exp III)

Dy. Sec.(Coord)

JS (Exp)

Dir(NG)

Dir(Mkt)

Dy. Sec.(Cons)

Dy. Sec. (Mkt)

JS (Exp)

JointAdvisor

JointDirector

Dir(IC I)

Dir(IC II)

Dy. Sec.(Distt)

Sector Coverage 28


8. Michel Porter Analysis

Entry Barriers

Large investments required with long gestationperiod Entry restricted into auto fuel marketing Technology intensive upstream sector Distribution & logistics intensive downstreamsector

Bargaining Power of customers

Inter-Firm Rivalry

High with bulk /corporate customers,who can purchaseproducts fromcompetitors

Otherwise Limitedbargaining power

Keen in deregulated products,e.g. lubricants With full deregulation,competition to hot up in allproducts

Bargaining power of suppliers

High because offew participants.

Marked bypresence of cartels.

Threat of Substitutes

Largely substitution from inter-petro products Limited substitution with other forms ofprimary energy products

Sector Coverage 29


9. Critical Success Factors

Reserve replacement ratio

Reserve replacement ratio indicates the extent to which a company replenishes itsreserve base as it is depleted by production. If a company replaces more than 100per cent of its production volume during a given year, its reserves will be larger atthe end of the year than at the beginning. Increases in the reserve replacementratio generally come from acquisitions or new discoveries. As oil and gas are non-replenishable resources, continuous additions to reserve base are necessary tosustain earnings growth. In the last decade, change in reserves position besidesbeing positive except for 1997, has always been more than the change inproduction levels. For instance, reserve replacement ratio of BP was 179 percentin 2007, compared to 127 percent of Shell’s. The reserve replacement ratio of BPhas exceeded 100 per cent for the past 15 years.

Geological knowledge and experience

The skill set to analyze subsurface geology is critical in reducing the lead time indeveloping or abandoning a prospective reserve area. This again has animplication on the cost front. This factor also determines the areas where acompany should bid.

Cost competitiveness

As the oil prices are not in the control of oil companies, it is important to focus onlowering the finding, development and lifting costs on an ongoing basis so as to bein a position to survive in phases of low prices.

Gas supply source

The ability to lock in to alternate gas supply sources (either through an existinggas producer / supplier or by venturing on its own into E&P activities) would becrucial for streamlining the supply chain and minimizing disruption.

Gas Pricing

Price of gas supplied should be competitive vis-à-vis alternate fuel such asNaphtha and Fuel Oil so that it remains a commercially preferred fuel.

Financial strength

As the exploration and production require large amount of financial resources, it isimportant for the players to raise the necessary capital at low costs.

Risk taking ability

The upstream business is characterized with high risk and high return. Hence, theability to take risks and absorb losses becomes extremely important. Companiesincreasingly form a consortium for bidding purposes so as to minimize risk.

Ability to win contracts

Normally, blocks are assigned based on competitive bidding. Hence, the ability towin contracts by competing with other major players becomes a key successfactor.

Sector Coverage 30


Technological advancement

The upstream segment is a technology intensive segment. The undiscoveredreserves are likely to be located in a more difficult environment and hence,technological advancements may be crucial to tap these undiscovered reserves.

Competitiveness of Indian refineries

In a deregulated scenario the competitiveness of Indian refineries influencesmargin expansion. The constituent of net cash margins, which is a measure ofcompetitiveness, includes the complexity level, operating costs and location ofrefinery. Thus Indian refineries have to perform so as to meet these successparameters and ultimately become more profitable.

Important Tariff Protection

This is the single most important factor in protecting the local refinery margins.Products sold in the local market enjoy an import parity price which includeslanded cost plus import duty. Previously the import duty on the petroleumproducts were less then the duty on the crude oil which use to create an anomalynow this has been corrected and duty structure on import duty has beenrationalized.

Product portfolio

The light distillate such as MS, ATF, Naphtha and LPG are considered to be highvalue products, whereas heavy distillates are considered to be low value products.The margins in the deregulated scenario will be higher on the high value productsand moreover demand growth rate for the high value products is higher than lowvalue products. Presently BPCL markets highest percentage high value products inits sales volume. In absolute terms IOCL has the highest sales volume of highvalue products.

Location of Retail outlets

This becomes important in a decontrolled regime. Retail outlets located in hightraffic industrial corridors, prime metropolitan areas and the deficit regions(primarily Northern) of the country, are likely to see a higher throughput and assetutilization and hence higher profitability.

Setting up retail outlets

Ownership of marketing assets and bringing more retail outlets under ownershipfor mitigating poaching risk assumes paramount importance in deregulatedmarket.

Upgrading retail stations

Upgradation of retail outlets and adoption of promotional schemes for increasingvolume off take and building customer loyalty, would play a very critical role in thefuture market.

Sector Coverage 31


Investment in strengthening retail infrastructureNOCs should invest more in strengthening the retail network inorganically byacquiring other player in pure marketing business only. For e. g. IOC acquiringIBP, having over 1500 retail outlets, and thus adding more muscle to its retailbusiness.

Gas Distribution Infrastructure

Well laid out pipeline network so as to optimally reach out to the customers.Further expanding the existing customer base and meeting the enhanced demandof the existing customers would be key to earnings growth.

Fully Integrated Player

There are very few big oil companies worldwide that are only into E&P. Giants suchas Royal Dutch/Shell, ExxonMobil, ChevronTexaco and BP Amoco are all presentacross the value chain from oil production to downstream products and even intopower generation. With the opening of the sector, this is the way to go in India aswell. At present there is no fully integrated player in India. Reliance and ONGC,along with Indian Oil, stand the best chance of emerging as truly integrated globaloil players from the country in the long run.

Sector Coverage 32


10. Recent Trends & Budget Impact

10.1 Union Budget 2008-09

■ Average crude oil (Dated Brent) prices moved up by over 11 per cent in 2007over the previous year to average US$72.7 per barrel as compared withUS$65.3 per barrel in 2006. This rise in prices over the last year is mainlyreflective of the continuing weakness experienced by the US dollar againstother world currencies, primarily the euro coupled with demand -supplymismatch.

Tighter global product markets are expected to improve average GRMs (GrossRefining Margin) for Indian refining entities in 2007-08 to US$6.5 - US$7.0 perbarrel when compared with the previous year of US$4.7 per barrel, as theirentire production, except auto (petrol and diesel) and cooking fuels [liquefiedpetroleum gas (LPG) and kerosene], is priced on import parity basis. Auto andcooking fuels are priced on trade parity basis (import parity and export parityin the ratio of 80:20) and export parity basis, respectively.

Although the appreciating rupee vis-à-vis the US dollar has lowered the impactof the rising international auto and cooking fuel prices on the retail sale ofthese products in domestic markets by oil marketing companies (OMCs), theycontinue to slide deeper into the red on this front in 2007-08. In 2007-08,blended auto fuel margins are expected to be in the negative Rs 3.5-4.0 perlitre as compared with a negative of Rs 1.97 per litre of 2006-07. Similarly,the total under-recovery on LPG and kerosene is expected to be Rs 159-161per cylinder and Rs 13-14 per litre, respectively, in 2007-08 as against Rs136.34 per cylinder and Rs 15.29 per litre, respectively, in 2006-07. Thus, thetotal under recovery on the retail sale of these fuels is expected to worsen in2007-08 to Rs 490-500 billion as compared with Rs 341 billion in 2006-07.

However, this will be offset by the loss-sharing mechanism followed by thegovernment in the current year (2007- 08) as in the previous year (2006-07).This is in the form of upstream assistance given by companies, such as Oil and

Natural Gas Corp (ONGC), GAIL (India) Ltd and Oil India Ltd (OIL), and oilbonds issued by the government in lieu of the losses suffered by OMCs onretail sales of auto and cooking fuels. This, coupled with higher refining profits,has improved operating profits of the refining and marketing industry for the 9months ended of 2007-08 to around Rs 166 billion as compared with thecorresponding period of the previous year when it was around Rs 103 billion.

Domestic consumption of petroleum products continued to grow at a healthyrate of 5.5 per cent during April- December 2007 as compared with theprevious year, backed by higher growth in petrol, LPG and diesel.

Differential pricing is followed for pricing domestic natural gas in the country,wherein a large proportion of the gas is allocated to sectors, such as power,fertilizers, transportation, and consumers, consuming less than 0.05 mmscmdof gas on a controlled preferential basis.

33

■

■

■

■

■

■

Sector Coverage


■ However, unlike retail auto and cooking fuels, the government seems to bemoving towards a market-determined pricing mechanism for natural gas, as ithas recently approved a market-evolved price for the gas from RelianceIndustries Ltd's (RIL) Krishna-Godavari (KG) Dhirubhai (D) – 6 blocks.

As against this, the price of imported natural gas, liquefied natural gas (LNG)averaged US$11 - US$12/mmbtu (cif) between April 2007 and January 2008.

We believe that the exchange rate will remain a critical element in determiningthe average crude oil price in 2008 in dollar term. Assuming no furtherdepreciation in the dollar-euro exchange rates from the levels of US$1.46 pereuro and an easing market for crude, its price is forecast to be US$74 – US$76per barrel in 2008 as compared with US$72.7 per barrel in 2007. We alsoexpect GRMs to decline from its 2007-08 levels to average US$5.0 –US$5.5per barrel in 2008-09 on the back of easing product markets. With thegovernment still actively involved in the pricing of retail auto and cookingfuels, the marketing business of OMCs is expected to remain strained even in2008-09. However, since the government is also likely to continue with itsfinancial assistance scheme, the overall profitability of the sector may notsuffer.

■

■

10.2 Impact factors

■ The withdrawal of customs duty exemption on naphtha for the manufacture ofpolymers and subjecting it to its normal rate of 5 per cent is expected tomarginally improve refining profits by Rs 7 – Rs 8 billion.

Reduction of 2.5 per cent in customs duty on project imports is likely to reducecapital costs of players in the oil and gas industry.

The replacement of ad-valorem portion of the excise duty (6.2 per cent) onunbranded petrol and diesel by an equivalent specific duty of Rs 1.35 per litrewould be revenue neutral.

However, this is expected to act as a cushion against the cascading effect ofany future change in international prices on domestic prices for consumers.

Reduction in peak excise duty (by 2 per cent) and CST (by 1 per cent) isexpected to be revenue neutral for the sector, as they are likely to be passedon to the final consumer.

■

■

■

■

Sector Coverage 34


10.3 Policy Initiatives

OverviewIndia offers favorable investment climate across all the sub-segments of oil & gas.The regulatory regime of India permits Foreign Direct Investment (FDI) intopetroleum sector without any constraints. Upstream sector investments arefacilitated by licensing policy (NELP) which provides a conducive regulatoryframework. A Downstream Petroleum and Gas Regulatory Bill awaiting enactmentwill set up a regulator to regulate downstream activities.

Key Features of Policy Initiatives

Upstream New Exploration Licensing Policy (NELP)■ Seventh round was launched on 13 December offering 57 blocks to national and international

■

■

■

players with revenue expectation of US$3.5 – US$4 billion.

Fiscal stability provision

Finalization of contract on the basis of Model Production Sharing Contract(MPSC) provided at the bidding stage

Petroleum tax guide provided with bidding documents

Possibility of seismic option in the first phase of the exploration period

NOCs also compete on the same terms.

No mandatory state participation/carried interest by NOCs

No payment of signature, discovery or production bonu

No Customs duty on imports required for petroleum operations

Freedom to sell crude oil and natural gas in domestic market at marketdetermined prices

Biddable cost recovery up to 100 per cent

Sharing of profit petroleum based on pre-tax investment multiple achieved andis biddable

No cess on crude oil production. Royalty payment for crude oil and natural gason ad-valorem basis.

■

■

■

■

■

■

■

■

■

■

Corporate Tax Deduction and allowances available to companies prospecting for oiland gas and they have a 7 year income tax holiday.

Sector Coverage 35


Draft Downstream Petroleum and Natural Gas Regulatory Board Bill■ Proposed Regulator to oversee all downstream activities in India which include refining, processing, storage, transportation, gas transmission and distribution.

■ Any company that wants to enter into the retail segment should have investedUS$444 million in any of the other segments of oil and gas.

Pipelines originating from refineries and ports will need to be built on acommon carrier principle. The company laying down the pipeline would haveto share 25 per cent of the carrying capacity with other companies.

■

Draft Gas Pipeline Policy that has merged with this bill, proposed to set up a gasregulator which would authorize laying down the pipelines for any entity desirousto transport gas along with preparing long term gas pipeline network and layingdown cap for negotiable tariffs.

Guidelines for laying petroleum product pipelineIn a major decision towards deregulation of oil sector and to attract investment inthe petroleum product pipelines, in November, 2002, Government had laid down anew Petroleum Product Pipeline Policy for laying pipelines in the country oncommon carrier principle. Guidelines for laying petroleum product pipelines werenotified on 20th November, 2002. Supplementary guidelines in this regard havealso been notified on 26 th October, 2004.

Auto Fuel Policy

Schedule for introducing improved quality fuels as per Auto Fuel Policy■ Euro-III Petrol & Diesel has been introduced from 1-4-2005 in all 11 identified cities (Delhi/National Capital Region, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad, Ahmedabad, Pune, Surat, Kanpur & Agra) in line with Auto Fuel Policy

■ BS-II Petrol throughout the country has been introduced w.e.f. 1-4-2005 inline with Auto Fuel Policy BS-II Diesel in all states except Rajasthan, West U.P,Uttaranchal, M.P, Punjab H.P and Jammu & Kashmir has been introduced from1-4-2005 as per Auto Fuel Policy

As per the revised program BS-II diesel has been introduced in Rajasthan from1-6-2005 and in West U.P and Uttaranchal from 1-7-2005

■

Introduction of BSII Diesel is proposed in a phased manner as per the revisedprogram as under:

■

■

M.P from 1-9-2005

Punjab, H.P and J&K from 1-10-2005

Sector Coverage 36


National Auto Fuel Policy

Comprehensive Policy on auto fuels, their availability and security of supplies,vehicle technology, and emission reduction in a cost effective manner.

10.4 FDI Limits

■

■

■

Exploration & Production – 100 per cent (automatic – no approvals required).

Petroleum Product Pipeline & Marketing - 100 per cent (automatic).

Natural Gas / LNG Pipeline - 100 per cent (non automatic – Approvals requiredfrom the Foreign Investment Promotion Board, GoI)

Refining – In case of state owned companies, FDI is limited to 26 per cent (26per cent held by NOCs and balance by public). In case of private Indiancompanies, FDI upto 100 per cent permitted under the automatic route

■

Sector Coverage 37


11. Investment opportunities and current status of the project

Discoveries by Reliance Industries

■ RIL has made 3 discoveries in KG Basin, two in Krishna Basin Deep Waters,one in shallow waters of Krishna Basin

Eight discoveries in Mahanadi Basin establishes the hydrocarbon potentialtowards the deeper part of NEC-Mahanadi Basin and opens up more acreagefor further hydrocarbon exploration efforts.

■

ONGC-28 Discoveries in 2007-08

■

■

■

Company has succeeded in 28 exploration discoveries

in Oil Sector

17 in Gas Sector

Reliance Petroleum Ltd – Refinery ahead of schedule

■ Company has marched rapidly and achieved 90 per cent progress at JamnagarRefinery

It is well positioned to reap benefits of its large scale, higher complexity, lowercapital costs and faster schedule to generate significant value in the refiningsector

■

NELP VII -Opportunities in E&P Sector

■

■

57 Blocks has been offered for bidding

Expected revenue generation is $3.5-4 billion

BPCL-10300cr Bina Refinery

■

■

■

BPCL is major stakeholder

EURO IV compliant petrol & diesel will be produced

46 per cent of the output will be diesel

Unclear stand of the Government Regarding Tax Holiday to E&P

■

■

■

■

■

Uncertainty exists in E&P sector regarding 7 year Tax Holiday

Income Tax Holiday has been Extended to 3 PSU refineries

BPCL’s Bina Refinery

IOC’s Paradeep Refinery

HPCL’s-MITTAL Bhatinda Refinery

Sector Coverage 38


12. Mergers & Acquisitions

Total 14 deals have taken place since August 2007 in Oil & Gas industryamounting to US$1679.2mn (disclosed amount of 9 deals). Biggest deal was aprivate placement deal, in which Cairn India Ltd raised finance from Petronas ofMalaysia, Orient Global Tamarind Fund of Singapore, amounting to US$627.5mn.BPCL’s acquisition of 10 per cent stake in M’boundi oil field will mark its entry intooil and gas rich Africa. The net proceeds will be used to fund capital expenditureand for general corporate purposes.

The following Table shows deals that took place in Oil & Gas industry

Acquirer name Nationality Target Name Nationality % sought Deal ValueUS$mn627.5

Petronas, Orient Global Malaysia,Singapore

India

CairnLtd.

India India 6

Investor Group EnCanBrasilLimitada

UndisclosedM'boundiOilFieldBOC India Ltd

Nagarjuna OilCo. LtdShiv-Vani Oil &Gas‘ExplorationAsian OilfieldServices Ltd.

Shiv-Vani Oil &Gas ‘ExplorationEastIndiaPetroleum Ltd

MissionBiofuels IndiaPvt LtdAlkorPetrooLtd

MissionBiofuels IndiaPvt LtdSanCristobalOil-field

Brazil 425

BPCL India RepCongo

India

India

India

Of 10 350

BOC Group PLC

Tata Sons Ltd

Investor Group

UK

India

India

42.4

26

7.8

152

86.1

24.5

Samara CapitalPartners Fund

Citigroup VentureCap. Equity Partner

GlobalPartners

Infrastructure

India India 21.4 7.2

United States India 7 2.5

United States India

Mission Agro Energy Ltd. Mauritius India

IVRCLInfrastructureprojects Ltd.

Mission Agro Energy Ltd.

& India India

Mauritius India

ONGC Videsh Ltd. India Venezuela

Sector Coverage 39


13. Conclusion

The Indian oil and gas sector comprises 46 per cent of total conventional primaryenergy consumption as compared to the world average of 62 per cent. The sectoris witnessing a huge demand and supply mismatch as consumption is far morethan domestic production. This gap is expected to increase further as growth indemand is expected to be more then new capacity addition. International EnergyAssociation estimates that India and China will contribute approximately 42 percent of incremental oil demand by 2030. Going forward, this indicates huge surgein investment and production activities in the Indian Oil & Gas Sector.

ONGC made 28 exploration discoveries in 2007-08. It has achieved an aggregateproduction of oil and oil equivalent of gas of 61.82 million metric tonne (1.8 percent higher than FY07). This includes ONGC’s share of production in joint venturesas well as ONGC Videsh Ltd’s (OVL) share of production from overseas assets.Reliance has also made three discoveries in KG basin.

In order to counter the effect of increasing crude prices, companies are exploringalternative sources like Coal Bed Methane (CBM), bio-fuel, ethanol blended petrol,etc. The government is also encouraging exploration of CBM by conducting biddingprocess to award blocks. Till now 23 blocks has been awarded to Indian andforeign company. India is the 4th largest coal producer in the world, so it holdssignificant advantage in this area. Because of the Government regulations indeciding the final price, downstream companies are incurring heavy losses everyday on all the petroleum products. To save their bottom line these companies havedecided to limit their supply of products by not providing new gas connections.

To attract foreign funds in oil and gas industry Government has allowed 100 percent FDI in E&P sector and in refining sector 100 per cent FDI is allowed in case ofprivate companies and in case of state owned companies FDI limit is 26 per cent.Indian companies are entering in joint ventures with foreign firms to tap newmarkets. BPCL’s acquisition of 10 per cent stake in M’boundi oil field will mark itsentry into oil and gas- rich Africa.

As an initiative to attract investment in this sector Government has launched NELPVII offering 57 blocks. The offered blocks include 19 deep water blocks, 9 shallowwater blocks and 29 onland blocks. NELP is expected to attract investment ofaround US$3.5 billion. Apart from Reliance many more private firms have alsoshown interest this time. Many discoveries have already been made by bigcompanies like ONGC and Reliance in KG Basin & Mahanadi Basin in the blocksoffered in previous rounds.

India is emerging as a global refining hub attracting a lot of investment. Many bigpublic sector companies are establishing refineries in joint venture with foreignfirms to capitalize this opportunity. RPL’s Jamnagar refinery is the largestgrassroots refinery in the world. Its remarkable ability to refine almost any kind ofcrude because of its unique configuration and high complexity, places it indecisively competitive position. Its access to fully integrated logistics and producthandling allows it to move its products abroad in cost effective and timely manner.

Sector Coverage 40


14. Profile of Major Players

11.1 Aban Offshore Ltd.

Key Data Company ProfileAban Offshore, formerly Aban Loyd Chiles Offshore, provides oil field services foroffshore exploration and production of hydrocarbons to the oil industry in Indiaand abroad. An Indo-US joint venture, the company was incorporated on Sep. 25,1986. It is India’s largest offshore drilling entity in the private sector where itsAmerican partner provides technical know-how. The company together with itssubsidiaries has 20 offshore assets including 15 jack-up offshore drilling rigs, 2drill ships, 1 floating production platform and a jack-up rig and drill ship each onbareboat charter.

BSE Code:

NSE Code:

BloombergCode:

Reuters:

CMP(10/4/2008)

Market Cap(Mn)

52 Week H/L

Price to Equity

Price to Book

523204

ABAN

ABANPP@IN

ABAN.BO

3550.40

133.96

5555.00/2225.00

-438.02

24.67

Aban Singapore was acquired to offer drilling services to large global oil and gasoperators. The company has obtained ISO 9001:2000 for its drilling operations.

Business SegmentsThe Company is in the business of providing and operating ships, vessels, rigs,structures, equipment and personnel required for on-shore and off-shore drillingand oil field services. Clients include Oil and Natural Gas Corporation, HardyExploration and Production (India), Oriental Oil Company (Dubai), Hindustan OilCorporation Company, Shell Brunei, Shell Malaysia etc.

Future plansBy 2009-10, all the new rigs under construction are anticipated to enjoy medium-term contracts at attractive rates. In view of this, it is expected to report asignificant increase in income over the three years from 2007-08.

Key Financials

SalesEBITDAEBIT

Net Income (Losses)Cash From OperationsTotal AssetsTotal Debt

Capital ExpendituresKey Ratios (%)Operating Margin

ROCEReturn on Assets

Debt /Equity RatioCash Flow per ShareDiluted EPSDividends per Share

20052895.411557.341005.21

(INR Million)200620074901.637175.482904.314030.961890.282765.40

822.622137.3017163.1411098.07

-8405.20

38.56

25.285.93

257.8458.0319.392.60

-140.012032.57121520.10108525.20

-35744.91

38.54

-6.22-0.43

2044.4755.14-8.113.00

516.55965.9410604.867179.05

-5656.82

34.72

25.996.63

325.9026.2114.022.00

Source: Bloomberg

Sector Coverage 41


11.2 Bharat Petroleum Corporation Limited

Key Data

BSE Code:NSE Code:BloombergCode:

Reuters:

CMP(10/4/2008)MarketCap (Mn)

52 Week H/L

Price to Equity

Price to Book

500547BPCLBPCL@IN

BPCL.BO

401.90

145.30

560.00/295.00

6.77

1.28

Company ProfileBharat Petroleum Corporation Limited (BPCL) is one of India's largest PSUcompanies. BPCL is engaged in the business of refining, storing, marketing anddistributing petroleum products The Company has refineries at Mumbai and Kochiwith a capacity of 12 million metric tons (MMT) and 7.5 MMT per annum,respectively for refining crude oil. Bharat Petroleum is considered to be a pioneerin Indian Petroleum Industry with various path-breaking initiatives such as Purefor Sure campaign, Petro card, Fleet card etc. Due to its impressive performance in2006-2007, BPC has moved up in the 'Fortune Global 500' list with a ranking of325 and currently.

Business SegmentsBharat Petroleum produces a diverse range of products, from petrochemicals andsolvents to aircraft fuel and specialty lubricants and markets them through its widenetwork of Petrol Stations, Kerosene Dealers, LPG Distributors, Lube Shoppes,besides supplying fuel directly to hundreds of industries, and several internationaland domestic airlines.

Future PlanThe implementation of the project for setting up of a 6 MMTPA refinery at Bina inMadhya Pradesh is progressing smoothly. Bharat Oman Refineries Limited, thejoint venture vehicle implementing the project, has assumed a challenging targetof December 2009 for mechanical completion of the refinery. BPCL has movedforward in its quest to have a significant presence in the upstream exploration andproduction sector. The efforts put in over the last couple of years have resulted inBPC having a participating interest in 14 blocks; 9 blocks are situated within Indiaand the others are located in the North Sea, in the United Kingdom, Oman,Australia and Timor.

(INR Million) 2005Sales644248.40EBITDA40009.21EBIT31199.50Net Income (Losses)15419.62Cash From Operations11364.19Total Assets264814.60Total Debt55452.20Capital Expenditures-19208.99Key Ratios (%)Operating Margin4.84ROCE21.70Return on Assets6.20Debt /Equity Ratio72.43Cash Flow per Share37.88Diluted EPS51.40Dividends per Share12.50

Key Financials

2006775160.8017326.437868.515372.9716750.72315252.2092625.88-22266.01

2007984192.3050555.2039534.4321451.9555257.67374889.40113666.20-20478.89

1.026.111.8593.3846.3314.862.50

4.0220.156.2299.96152.8459.3316.00

Source: Bloomberg

Sector Coverage 42


11.3 Cairn India Limited

Key DataBSE Code:NSE Code:BloombergCode:Reuters:CMP(10/4/2008)MarketCap(Mn)52 Week H/L

Company ProfileCairn Energy PLC is an independent, public oil and gas exploration and productioncompany based in Edinburgh, Scotland and quoted on the London Stock Exchange.Cairn successfully concluded the flotation of its Indian business in 2007. CairnEnergy PLC currently holds a 69.5 per cent interest in Cairn India Limited. TheCompany operates two processing plants, 11 offshore platforms and 200 kilometerof sub-sea pipelines.

Business SegmentsThe Company operates the largest producing oil field in the Indian private sectorand has pioneered the use of cutting-edge technology to extend production life.Today, they have an interest in 14 blocks in India. It is engaged into exploration,development of gas fields, and gas sales contract with public and private buyersand oil sales to four major refineries across India.

Future plansIndia’s rapid economic growth has led to significant demand for crude oil andnatural gas and it is expected that by 2010 Cairn India would be responsible for 20per cent of the country’s domestic crude production. With a planned five-foldincrease in production by 2010, Cairn India is working to reduce the country’sdependence on imported hydrocarbons. This increase is underpinned by thesustained production from existing assets, with a continued drilling program inRavva and important new developments planned in Block CB/OS-2 in the CambayBasin. The step-change in production occurs in 2009, when the Mangala field isplanned to come on-stream in Rajasthan. Production from Bhagyam andAishwariya is expected to follow. These fields have a targeted gross production of150,000 barrels of oil per day (bopd).

532792CAIRNCAIR@IN

CAIL.BO258.00

459.03

268.90/125.00

Sector Coverage 43


11.4 Essar Oil Limited

Key DataBSE Code:NSE Code:BloombergCode:Reuters:CMP(10/4/2008)MarketCap(Mn)52 Week H/LPrice to EquityPrice to Book

Company ProfileEssar Oil Limited (EOL) is an India-based company that is engaged in theexploration & production, refining and marketing of oil and gas. The E&P divisionoperates nine onshore and three offshore blocks for oil, gas and coal bed methane(CBM) in India, Myanmar, Madagascar and Nigeria with total acreage of about46,000 sq. Km. in onshore and 4,600 sq. Km. in offshore. The company hasproduction and development blocks in Ratnagiri (Maharashtra) and Mehsana(Gujarat) and exploration blocks in India, Myanmar and Africa. The Company isimplementing a 10.5-million metric-ton-per-annum oil refinery at Vadinar,Gujarat. EOL had a retail network of 1178 as at March 31, 2007.

Business SegmentsThe Company’s principal activities range from oil exploration to the downstreamsectors of marketing oil products and petrochemicals. It is organized into threedivisions: exploration and production, refinery and marketing. With a firm footholdin India, Essar Global has been focusing on global expansion withprojects/investments in Canada, USA, Africa, the Middle East, the Caribbean andSouth East Asia. Its Acquire Ontario (Canada) based Algoma Steel and US-basedcompanies, Minnesota

Future plansEssar Oil has acquired 50 per cent in 4 mt Kenyan refineries from Shell, Chevronand BP, and the acquisition will be completed by early 2008. It also plans todevelop the Ratna and R-series fields, with in-place reserves of 500 million barrelsof oil and recoverable reserves of 145 million barrels of oil. The management saidthey are going to put in USD 6 billion more to triple the capacity all the way from10.5 million tonnes p.a. to about 34 million tonnes p.a. by 2010.

Key Financials

200510451.20-627.90-690.1098.60328.6091042.4051147.10

500134ESSAROILESOIL@IN

ESRO.BO 262.65

299.31

360.00/47.40 -429.10 9.99

SalesEBITDAEBITNet Income (Losses)Cash From OperationsTotal AssetsTotal Debt

Capital ExpendituresKey Ratios (%)Operating MarginROCEReturn on AssetsDebt /Equity RatioCash Flow per ShareDiluted EPSDividends per Share

(INR Million) 2006 6366.30 -1288.40 -1335.00 -936.80 -1102.20 98421.10 65068.90

-19760.40

-20.97-3.80-0.99258.14-1.05-0.890.00

20074739.80-497.80-542.90-674.90-945.50158824.7088947.70

-36964.70

-6.60N/A0.11212.690.920.230.00

-330.80

-11.45-2.45-0.52296.97-0.86-0.610.00

Source: Bloomberg

Sector Coverage 44


11.5 GAIL (India) Limited

Company ProfileThe company was founded in 1984 under the name Gas Authority of India Limitedand changed its name to GAIL (India) Limited in 2002. GAIL is based in New Delhi,India.

Key DataBSE Code:NSE Code:Bloomberg Code:Reuters:CMP (10/4/2008)Market Cap(Mn)52 Week H/L

Price to EquityPrice to Book

532155 GAIL GAIL@IN GAIL.BO 445.85 377.03555.50/271.0 5 14.81 3.19

The company has expanded into gas processing, petrochemicals, liquefiedpetroleum gas transmission and telecommunications. It has also extended itspresence in power, liquefied natural gas re-gasification, city gas distribution andexploration and production through equity and joint ventures participation. GAILpossesses 27 oil and gas Exploration blocks and 3 Coal Bed Methane Blocks. It isestablishing its presence in the CNG and City Gas sectors in Egypt through equityparticipation in three Egyptian companies: Fayum Gas Company SAE, Shell CNGSAE and National Gas Company SAE. It also has stake in China Gas Holding toexplore opportunities in the CNG sector in mainland China. GAIL has a wholly-owned subsidiary company GAIL Global (Singapore) Pte Ltd in Singapore.

Business SegmentsGAIL (India) Limited, is integrating all aspects of the Natural Gas value chain(including Exploration & Production, Processing, Transmission, Distribution andMarketing) and its related services.

Future plansGAIL’s strategy is to integrate vertically in E&P sector (upstream) and in retail gas& petrochemicals (downstream). It is planning to construct new infrastructure 136MMSCMD in next five years aimed at tapping new sources of domestic gas & LNGand to reach new markets. The company will participate in overseas E&P biddinground and farm in opportunities in Asia Pacific, Middle East, CIS and Africa. Itplans to establish petrochemical business in Iran, Saudi Arab, Egypt andUzbekistan and have city gas ventures in Libya, Uzbekistan, Indonesia, and Syria.The company is planning to invest another Rs 180 million in augmentation andcreation of new infrastructure.

Sector Coverage 45


11.6 Hindustan Petroleum Corporation Limited


500104HINDPETRO HPCL@IN

HPCL.BO 251.35

85.11

405.90/205.0 5.09 0.89

Company ProfileHindustan Petroleum, with about 16 per cent market share, is one of the majorplayers in Indian downstream oil sector. The Company is ranked 336 in theFortune 500 of 2007. The Corporation operates 2 major refineries producing awide variety of petroleum fuels & specialties, one in Mumbai (West Coast) of 5.5MMTPA capacities and the other in Vishakapatnam, (East Coast) with a capacity of7.5 MMTPA. HPCL holds an equity stake of 16.95 per cent in Mangalore Refinery &Petrochemicals Limited. HPCL also owns and operates the largest Lube Refinery inthe country producing Lube Base Oils of international standards. This LubeRefinery accounts for over 40 per cent of the India's total Lube Base Oilproduction.

Business SegmentsThe vast marketing network of the Corporation consists of Zonal offices in the 4metro cities and over 85 Regional offices facilitated by a Supply & Distributioninfrastructure comprising Terminals, Aviation Service Stations, LPG Bottling Plants,and Inland Relay Depots & Retail Outlets. The main products of the companyinclude petrol, high speed diesel, superior kerosene oil, liquefied petroleum gas,aviation turbine fuel, naphtha, furnace oil, bitumen, low sulphur heavy stock,solvents, propylene and over 300 grades of lubes.

Future plansHPCL plans to expand its capabilities in both refining as well as marketingsegments. The marketing division is implementing two major product pipelineprojects connecting Mundra with Delhi and Loni with Solapur at an estimated costof Rs 19.6 billion in order to meet the demand in the northern sector. HPCL hasdrawn plans to set up a new US$3 billion refinery in India instead of expanding theplant’s capacity.

Key Financials (INR Million) 2005Sales624392.40EBITDA24122.10EBIT16876.20Net Income (Losses)14156.40Cash From Operations15538.50Total Assets200608.90Total Debt29209.60Capital Expenditures-13029.50Key Ratios (%)Operating Margin2.70ROCE17.78Return on Assets7.15Debt /Equity Ratio34.89Cash Flow per Share45.85Diluted EPS41.77Dividends per Share15.00

2006 2007

724388.00 10167.50 2559.40 4520.70 6930.20258466.40 73345.50-26263.10

0.35 5.30 1.9784.4520.4513.34 3.00

884994.20 28123.00 20343.10 16740.20 37576.30327836.40110317.40-39866.70

2.30 18.34 5.71115.30110.86 49.39 18.00

Source: Bloomberg

Sector Coverage 46


11.7 Indian Oil Corporation Limited

Company ProfileIndian Oil Corporation Limited (IOC) is India's largest down stream Oil Company.The Indian Oil Group of companies owns and operates 10 of India's 19 refinerieswith a combined refining capacity of 60.2 million tonnes per annum (1.2 millionbarrels per day). These include two refineries of subsidiary Chennai PetroleumCorporation Ltd. (CPCL) and one of Bongaigaon Refinery and PetrochemicalsLimited (BRPL). The company primarily operates in India with a presence in someAsian and African countries. IOC is currently India's largest company by sales witha turnover of Rs. 220,779 crore (US$51 billion), the highest-ever for an Indiancompany, and profits of Rs. 7499 crore (US$1.73 billion) for fiscal 2006. Indian Oilis also the highest ranked Indian company in the prestigious Fortune 'Global 500'listing, having moved up 18 places to the 135th position this year based on fiscal2006 performance. It is also the 20th largest petroleum company in the world.

Business SegmentsIndian Oil Corporation Limited is engaged in petroleum refining, pipelines-crude oiland petroleum products, petroleum products marketing, and research anddevelopment. The Company's products include Indane LPG, SERVO Lubricants,Autogas LPG, XtraPremium Branded Petrol, XtraMile Branded Diesel, XtraPowerFleet Card, Indian Oil Aviation and XtraRewards cash customer loyalty programme.During the fiscal year ended March 31, 2007, the Company had 16,607petrol/diesel stations (retail outlets), including 1,422 Kisan Seva Kendra outlets forrural customers, 6,973 bulk consumer outlets and 3,955 kerosene dealers.

Key Financials (INR Million) 2005Sales1316440.00EBITDA84526.40EBIT58744.50Net Income (Losses)54692.30Cash From Operations48969.70Total Assets781779.80Total Debt203295.90Capital Expenditures-75606.40Key Ratios (%)Operating Margin4.46ROCE21.28Return on Assets7.62Debt /Equity Ratio74.06Cash Flow per Share41.93Diluted EPS46.83Dividends per Share14.50

Key DataBSE Code:NSE Code:Bloomberg Code:Reuters:CMP (10/4/2008)Market Cap(Mn)52 Week H/LPrice to EquityPrice to Book

530965 IOC IOCL@IN IOC.BO 452.85 539.97810.00/349.00 6.86 1.45

20061524253.0097836.9072529.6051159.00-16887.50942687.50300630.10-6614.90

20071844607.00127626.8097517.4078674.50-25055.301041519.00294786.00-51072.40

4.7617.615.9398.11-14.4643.8012.50

5.2923.427.9380.67-21.0165.9819.00

Source: Bloomberg

Sector Coverage 47


Future plansIt plans a capacity addition of (+) 3.0 MMTPA (from 12 to 15 MMTPA) in Panipatand 1 5 MMTPA (from 6.0 to 7.5) in Haldia. It also plans to set up a 15 MMTPAgrassroot refinery with petrochemicals complex in Paradip. In its retailing segmentit plans to explore new markets, including penetrating the largely untapped ruralmarkets through Kisan Seva Kendras and introducing branded fuels and otherbranded products to maintain its position as a market leader. It also plans forwardIntegration into Petrochemicals by setting up Naphtha Cracker and downstreamPolymer complex at Panipat which is expected

Sector Coverage 48


11.8 Oil &Natural Gas Limited (ONGC)

Key DataBSE Code:NSE Code:BloombergCode:Reuters:CMP(10/4/2008)Market Cap(Mn)52 Week H/LPrice to EquityPrice to Book

Company ProfileOil and Natural Gas Corporation Limited (ONGC) is a public sector unit and one ofthe biggest Indian Multinational Corporations. It has 26 projects in 15 countries.ONGC owns and operates more than 11000 kilometers of pipelines in India. It hasestablished 6.42 billion tonnes of In-place hydrocarbon reserves with more than300 discoveries of oil and gas; 6 out of the 7 producing basins have beendiscovered by ONGC. It has also ventured into coal bed methane (CBM) andunderground coal gasification (UCG); UCG in 2008-2009. It is also looking at gashydrates as it is one possible source that could make India self sufficient inenergy.

500312 ONGCONGC@IN

ONGC.BO 1017.30

2175.881386.90/768.00 12.24 3.26

The oil major picked up 71.6 per cent equity in the Mangalore Refinery &Petrochemicals (MRPL) and also took up a 23 per cent stake in the 364 km longMangalore-Hasan-Bangalore product pipeline connecting the refinery to theKarnataka hinterland. ONGC has also entered the global field through itssubsidiary, ONGC Videsh. ONGC has made major investments in Vietnam,Sakhalin and Sudan. It has acquired 25 per cent equity in the Greater Nile oilproject in Sudan, the first producing oil property. ONGC Nile Ganga BV, a wholly-owned subsidiary, has been set up in the Netherlands to manage this property.

Business SegmentsONGC is engaged in the exploration, production, refining, transporting andmarketing of crude oil, natural gas, liquefied petroleum gas, natural gas liquid,ethane, propane and other products.

Key Financials (INR Million) 2005Sales597464.30EBITDAN/AEBIT215134.10Net Income (Losses)143390.00Cash From Operations190320.00Total Assets789989.30Total Debt40602.94

2006706807.60300297.80232540.70153976.20226003.10929838.7022341.49

2007822615.50333821.30255178.40177696.00292161.301107393.0016005.27

Capital Expenditures

Key Ratios (%)Operating MarginROCEReturn on AssetsDebt /Equity RatioCash Flow per ShareDiluted EPSDividends per Share

-54624.25

36.0131.8819.318.3588.9867.0426.67

-57589.66

32.9029.2217.913.94105.6671.9930.00

-111677.30

31.0228.7817.442.40136.6083.0831.00

Source: Bloomberg

Sector Coverage 49


Future plansThe company has outlined its strategic vision for 2001-2020. The company isfocusing on doubling reserves (i.e. accreting 6 billion tons of O+OEG) by 2020.Out of this, 4 billion tons are targeted from deep waters. It also plans to improveaverage recovery from 28 per cent to 40 per cent. It has plans to tie up 20 MMTPAof equity hydrocarbon from abroad.

It is planning to erect a new mini refinery unit at Tatipaka in the Krishna-Godavaribasin. The oil major also intends to expand its presence in the power sector byadding about 2,700 MW of gas-based generation capacity, for both captive andcommercial use, through three plants.

Sector Coverage 50


11.9 Reliance Natural Resources Limited

Key DataBSE Code:NSE Code:Bloomberg Code:Reuters:CMP (10/4/2008)Market Cap(Mn)52 Week H/LPrice to EquityPrice to Book

Company ProfileThe company was incorporated in 2000. It was formerly known as ReliancePlatforms Communications.Com Public Limited and changed its name to RelianceNatural Resources Limited in 2006. The company is vested with the gas-basedenergy undertaking of Reliance Industries. It has been awarded four blocks, overacreage of 3,251 square kilometers, for the exploration and production of coal bedmethane. It has also been awarded a block in the state of Mizoram under the NewExploration Licensing Policy for the exploration and production of oil and gas. It isactively involved in the development of coal blocks and the supply of coal to powerplants. It is also pursuing business opportunities in the field of city gasdistribution, laying of natural gas pipeline and sourcing of coal from multiplelocations.

Business SegmentsReliance Natural Resources Limited engages in sourcing, supplying, andtransporting gas, coal, and liquid fuels in India. It also involves in the exploration,production, and distribution of gas; and the mining of coal.

532709 RNRL RNR@IN RENR.BO 109.10 178.17249.70/23.35 479.82 12.44

Key Financials (INR Million)

SalesEBITDAEBITNet Income (Losses)Cash From OperationsTotal AssetsTotal Debt

Capital Expenditures

Key Ratios (%)Operating MarginReturn on AssetsDebt /Equity RatioCash Flow per ShareDiluted EPSDividends per ShareSource: Bloomberg

20071506.81124.81-12.55298.582272.0226722.4213041.00

0.00

-0.831.12100.911.730.200.00

* Since the company has just been incorporated, the data is not available

Future plansReliance Natural Resources planned in 2007 to invest Rs 160 billion in the gasbusiness. It is planning to acquire stake in coal mines abroad and enter intocontracts for importing fuel for Anil Dhirubhai Ambani Group’s thermal powerplants.

Sector Coverage 51


11.10 Reliance Petroleum Limited


532743 RPLRPET@IN

RPET.BO 187.15

842.18

295.00/74.20 N/A 6.26

Company ProfileReliance Petroleum Limited (RPL) is an India-based company. The Company hasbeen formed to set up a greenfield petroleum refinery and polypropylene plant tobe located in a special economic zone (SEZ) in Jamnagar, Gujarat, and WesternIndia. RPL has the world’s largest grass root refinery (27mtpa) at Jamnagar -Gujarat, accounting for 25 per cent of India's refining capacity. RPL also hasIndia's largest marine oil terminal at its captive port facility at Jamnagar, whichhas the capacity to handle 50mn ton of products every year.

Business SegmentsRIL’s business operations comprise of two business segments: refining andmarketing and petrochemicals.

Future plansWith an annual crude processing capacity of 580,000 barrels per stream day(BPSD), RPL will be the sixth largest refinery in the world. It will have a complexityof 14.0, using the Nelson Complexity Index, ranking it amongst the highest in thesector. The polypropylene plant will have a capacity to produce 0.9 million metrictonnes per annum. RPL has successfully completed the second year ofimplementation of its complex refinery, coming up in a Special Economic Zone atJamnagar. RPL has achieved 82 per cent overall progress in just 24 months sincecommencement of the Project. Based on the progress so far, RPL is on course tocomplete the project ahead of its initial schedule of December 2008. It is alsoplanning to strengthen its exploration activities in the next three to four years.

Key Financials (INR Million) 2007Cash FromOperations648.42Total Assets195679.10Total Debt54670.00Capital -164733.40ExpendituresKey Ratios (%)Debt/Equity Ratio40.65

Source: Bloomberg* Since the company waslisted in May 2006 and yet notstarted its operations, data is

Sector Coverage 52


11.11 Reliance Industries Limited

Key DataBSE Code:NSE Code:Bloomberg Code:Reuters:CMP (10/4/2008)Market Cap (Mn)52 Week H/L

Company ProfileReliance Industries Limited (RIL) is a Fortune Global 500 company and is thelargest private sector company in India. The Reliance group exports products inexcess of US$15 billion to more than 100 countries in the world. Some of RIL’sgroup companies include Indian Petrochemicals Corporation (IPCL), ReliancePetroleum (RPL), Reliance Retail, and Reliance Industrial Infrastructure.

Business SegmentsThe Company is organized into five business segments; exploration and productionof oil and gas, petroleum refining and marketing, petrochemicals, textile andretail. The petrochemicals segment includes production and marketing operationsof various polymers, polyesters, polyester intermediaries and other petrochemicalproducts. Its refining segment includes production and marketing operations of thepetroleum refinery. Its textile segment produces about 25 million meters of fabricboth for domestic and international markets. Its retail endeavor is aggressivelyworking on introducing a pan-India network of retail outlets in multiple formatslike Hypermarkets, Supermarkets, Convenience Stores, Specialty stores and RuralBusiness Hubs.

Key Financials (INR Million)

500325 RELIANCE RIL@IN RELI.BO 2640.05 3837.71 3298.00/ 1452.35Price toBusiness Segments 31.78EquityPrice to Book5.39

Refini ng62%

Petrochemi cals 36%

Other s 2%

SalesEBITDAEBITNet Income (Losses)Cash From OperationsTotal AssetsTotal DebtCapital Expenditures

Key Ratios (%)Operating MarginROCEReturn on AssetsDebt /Equity RatioCash Flow per ShareDiluted EPSDividends per ShareSource: Bloomberg

200529304.901881.691307.691217.491090.1017871.294647.291683.05

200634433.422210.171638.471155.70(381.49)21125.836737.187149.43

200740763.222820.372154.991738.60(553.68)23958.126780.971128.62

4.4621.287.6274.060.931.040.32

4.7617.615.9398.110.000.000.28

5.2923.427.9380.67-0.461.460.42

Future plansWith India projected to grow at 8-9 per cent, it would continue to expand its E&Pbusiness and plans to spend US$5.2 billion on the development of KG-D6. It hasalso announced the setting up of a global sized, integrated cracker andpetrochemical complex with a capacity of 2 MMTPA in the Special Economic Zoneat Jamnagar. The project is expected to go on stream by FY 2010-11.

Sector Coverage 53


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Sector Coverage 54

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