Table of content of Industry Analysis

Introduction

Overview of the industry

o Evolution of oil and gas industry in India

o Global Environment

Key drivers

Porter’s 5 forces model

Top players… where is ONGC placed?

Future of the industry

Environmental impact

Introduction to Oil Industry:

EVOLUTION OF OIL AND GAS INDUSTRY IN INDIA:-

At Independence, India's domestic oil production was just 250,000 tones per annum.

The entire production was from one state-Assam. Most foreign experts had written off

India as far as discovery of new petroleum reserves was concerned. The Government

announced, under Industrial Policy Resolution, 1954, that petroleum would be the

core sector industry.

Growth of E&P Industry

Phase - I Birth and Pre-Independence era (1889-1947)

Phase – II Emergence and Growth of National Oil Companies (1947-1990)

Phase - III Opening up of Hydrocarbon Sector (1990-till date)

Phase – I [1889-1947]

Birth and Pre-Independence era

• Commercial discovery of crude oil made in 1889.

• Thereafter systematic drilling began in 1891.

• A small refinery built in Margherita in 1893 – shifted to Digboi in 1901.

• Industry showed modest growth over the next 50 years.

Phase – II [1947 – 1990]

• Oil and Natural Gas Directorate (the predecessor to ONGC) in 1955.

• Oil India Private Limited formed in 1959.

In 1961, it became a joint venture company between the Indian Government and Burmah Oil Company Limited, UK.

In 1981 it became a fully Govt. owned entity

• Creation of State owned refineries

Indian Refineries Limited in 1958

Indian Oil Company Limited in 1959

Both merged to form Indian Oil Corporation in 1964

In 70s Petroleum Sector was largely nationalized as Govt. took over the operations of IBP, Esso, Caltex and Burma-Shell.

Phase 3(1990-till date)

• The Nineties (90’s) saw the opening up of Petroleum Sector

• New Exploration Licensing Policy formulated by Govt. in 1997-98:

To provide level playing field to Public and Private players, with the aim of giving impetus to exploration in India.

Overwhelming response received for private and public players – both Indian and foreign.

• 100% FDI allowed in refinery sector in July, 2000.

• FDI limit increased from 26% to 49% in new refinery projects by PSUs in Jan.’08

• Oil and Natural Gas Commission becomes Oil and Natural Gas Corporation on 1st Feb.’1994.

• In 1997 ONGC is declared as one of the “Navratna” PSU.

• ONGC becomes a “Maharatna” PSU in 2010.

Key Drivers:

MAINTAINING GDP GROWTH

IMBALANCE IN SUPPLY AND DEMAND EQUATION

GROWING PRIMARY AND ENERGY REQUIREMENT

Key Thrust Area

1. Exploration – out of 3.14 sq. Kms.

• 22% - moderate to well explored.

• 20% - poorly explored

• 44% - exploration just initiated

• 14% - still remaining unexplored. (Source: ICRA)

Infrastructure and Development of New Finds

• Major finds made under NELP mostly in deep water and frontier

• Development of technology and Infrastructure for development of these finds will require massive capital infusion.

Redevelopment of Brown Fields

• Most of the major producing fields are aged & mature.

• Require induction of technology for improved production and Recovery Factor.

• Require revamping of surface facilities – more investment with lesser returns from mature fields.

Refining Sector

• Further capacity enhancement required to meet growing product demand.

• Technology up-gradation of existing refineries to meet future fuel norms.

Pipeline Network

• Increase in pipeline coverage for gas and product transportation required.

• Infrastructural requirement for development of projected gas market.

• Development of City Gas Projects

Development of Alternate Source of Energy

• Development of alternate sources of energy like CBM, UCG and Gas Hydrate in primitive stage.

• Capital investment required on the technology and development front.

PORTERS 5 FORCE MODEL

Threat of new entrants:

Due mostly to the industry that ONGC is in, it’s hard for there to be many new

entrants.

The only real threat that might arise would be another government funded Oil

and Gas company. The reason for this is that a government would not have as

hard a time raising funds and gaining access to resources. This is assuming

that the company would be researching and developing on domestic soil.

There is really not much of a threat because there are two main barriers to

entry that would be stopping potential threats. These would be very high

capital requirements as well as access to Cost disadvantages independent of

scale.

Bargaining Power of Suppliers:

ONGC is a vertically integrated company that really deals in all areas from

finding the product to refining the product to selling the product.

With this being said there is not much to worry about the bargaining power of the

suppliers.

Bargaining Power of Buyers:

Not too critical for most companies as refining operations are a part of the

complete supply chain, with the refining operations supplying the product to the

marketing company.

The industry that ONGC is a part of is different than many other industries. It

is different in the fact that people really cannot go without their product. While over a

long period of time it may be possible to find other fuels it is not really feasible in the

short term.

Threat of Substitutable Products:

Although gas, solar power etc exist as substitutes, none of them are big

enough to impact the demand of the petroleum products.

As stated above there is not a real alternative to oil at this time.

There is research being done to try and find substitutes. With the price of oil as high as it

is at this time, it is only giving more reason to try and find other fuel sources. This is

where the main players in this market must be careful. \

Intensity of Rivalry among Competitors:

The rivalry in the industry was low till as the industry was tightly regulated by

the government.

However, the level competition has increased with Reliance and other MNC

becoming more aggressive.

The largest competitors in this industry for ONGC are Exxon Mobile and

Royal Dutch Shell.

ONGC is currently in 14 different companies whereas Exxon Mobile is in 20

different countries.

While Exxon may be a larger company now ONGC is growing and is

becoming a very important global player.

Top players… where is ONGC placed?

The oil & gas companies in India have been actively participating in contributing towards the rapid growth of the economy of India. According to a report published by the Ministry of Petroleum and Natural Gas of India, the country has a total reserve of more than 1400 billion cubic meters of natural gas and 1200 million metric tonnes of crude oil as on the 1st of April 2010.

During the financial year 2009-10, the country has exported more than 50 Million Metric Tonnes of petroleum products with the contribution offered by the companies in the sector of Oil & Gas industry. The list of top players in India in the sector of Oil & Gas is given below:

Top 10 companies in the Oil & Gas sector in India:

• Indian Oil Corporation• Oil & Natural Gas Commission• Bharat Petroleum• Reliance Petroleum Limited• Essar Oil Limited• Gas Authority of India

• Hindustan Petroleum Corporation• Aban Offshore• Oil India Limited• Tata Petrodyne

Future of the industry

The future of Indian petroleum industry has good potential but it needs developmental activities in this sector to strengthen itself. The arena for business has now gone global since trade boundaries are fast dissolving. These developments present India with tremendous opportunities in the future to be one of the major players in the export of petrochemical intermediaries.

The future of Indian petroleum industry depends on:

Demand for petroleum is growing in leaps and bounds. Shifting focus to more production of olefin - ethylene, propylene, butadiene. Price and easy availability of crude oil and gas as feedstock.

As per the latest CII-KPMG analysis, the energy industry of India will help tin the expansion of the petroleum sector by bringing in investments worth US$ 120 billion-US$ 150 billion in the next 3-5 years. By 2012, the prospects in India Petroleum Industry are estimated to accomplish US $35 billion to US $40.

Environmental impact and future shortages

Petroleum industry operations have been responsible for water pollution through by-products of refining and oil spill

The combustion of fossil fuels produces greenhouse gases and other air pollutants as by-products. Pollutants include nitrogen oxides, sulphur dioxide, volatile organic compounds and heavy metals.

As petroleum is a non-renewable natural resource the industry is faced with an inevitable eventual depletion of the world's oil supply.

The Hubbert peak theory, which introduced the concept of peak oil, questions the sustainability of oil production.

It suggests that after a peak in oil production rates, a period of oil depletion will ensue.

Since virtually all economic sectors rely heavily on petroleum, peak oil could lead to a partial or complete failure of markets.

Source: AFX International Focus (2006): “Global Oil Industry faces Broad Spectrum of Political Risk” (10/04/2011)