Report No. 1172-IN m"BLIndiaOil and Natural Gas Sector ReviewMay 11, 1976

South Asia Programs Department

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents miay nototherwise be disclosed without World Bank authorization.

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INDIA

OIL AND NATURAL GAS SECTOR REVIEW

TABLE OF CONTENTS

Page No.

Summary and Conclusions ................................. I

Institutions ...................................................... 3

Exploration, Development and Production ......... 3Refining and Marketing ..................... 4Government Control over the Oil Industry .......... . 4

Exploration and Development ...................... 6

Production ............................................. . 7

Crude ...................... 0 .............................. 7Natural Gas ........................................ 9

Refining ........................................... 0............. 11

Consumption ............... * ........... ............. *............ 14

Pricing ......................................................... 16

Imports ................................................. 19

Investment ........... ........... ........... .... 0 .... 20

Financial Impact of Bombay High ...................... 21

ANNEX TABLES

MAP

This document has a restricted distribution and may be used by recipients only in the performanceof their offlicial duties. Its contents may not otherwise be disclosed without World Bank authorization.

INDIA

OIL AND NATURAL GAS SECTOR REVIEW

Summary and Conclusions

i. The oil price hike in 1973 and the ensuing international oil crisispresented India a challenge requiring difficult and rapid adjustments to thechanged situation., India's POL import bill almost tripled from 1972 to 1973,and then doubled between 1973 and 1974, contributing to an already difficultforeign exchange financing problem. The economic cost of alternative energyresources changed dramatically in a short period. The growing proportionaluse of petroleum products in the economy suddenly became very expensive.The leisurely and somewhat restricted pace of exploration and development,which had failed to add significantly to petroleum reserves in the previousdecade, now seemed inadequate. India's response to this challenge over thepast two years has been impressive, not only by setting in motion policies andinstitutional changes that will eventually improve the situation considerablybut also by achieving, in a very short time, solid successes whose effectshave already been felt.

ii. In exploration and development, the Oil and Natural Gas Commission(ONGC), underwent a change in management and strategy after 1973 with theresult of stepping up exploratory activity and broadening its activities tooffshore areas. This paid off almost immediately with the discovery of theBombay High field, which roughly triples proven recoverable reserves. TheCommission has moved more rapidly than many thought possible in the develop-ment of Bombay High to bring in the first oil before the summer of this year.Other promising offshore basins are being explored intensively both by ONGCand by foreign private firms. On-shore the level of activity is at an all-time high.

iii. Until the current year, increases in production of crude have beenconstrained to that available by further exploitation of known on-shore fields.Here again ONGC stepped up the pace of development and expanded production,though by only a small amount. The real promise in the medium-term lies inbringing ashore increasing quantities of Bombay High crude in the next fewyears. Domestic production will increase from supplying a third of require-ments at present to more than half of the 27 million tons needed in threeyears. This proportion should grow somewhat into the 1980s and could takeanother jump if any of the promising fields being explored yields oil.

iv. The Government of India also has embarked on an ambitious program

of expanding and modifying refinery capacity in the public sector. There arefour major refinery construction or enlargement projects and a major on-shorepipeline planned by 1980 to handle the increased production and special prop-erties of Bombay High crude. The GOI is also rapidly acquiring the remainingcapacity in the private sector by buying the assets of existing private com-panies. Refinery capacity in the aggregate is likely to be in excess of

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requirements for a few years in the early 1980s but this will add much neededflexibility in handling various qualities of crude and ease difficult trans-

portation problems. The new refinery capacity will also be more sophisti-cated and better able to balance the product pattern with domestic productdemand than the existing, somewhat rigid refineries.

v. Following the OPEC price increases in 1973 and thereafter, the

GOI abandoned its previous pricing policy and instituted a variety of changeswhose effect was to raise the prices of most products to a level that reflectstrue costs to the economy. This price policy has had a substantial impact.After rising at more than twice the rate of overall economic activity for thepast twenty years, total demand for petroleum products fell in 1974 and roseby only a modest amount in 1975 so that present demand is still atits 1973 level. Most effected were the highly visible products, gasoline,kerosene and light diesel used in agriculture. Consumption of fuel oil, usedin many industries for steam raising, also fell both because of prices and

because of an active program of controls and investment tax credits to en-courage substitution by coal. The prospects for the growth of demand in the

future is very uncertain as no one knows what will be the long-run effect ofhigher prices and government efforts to substitute more abundant resources ofenergy, particularly coal, for oil.

vi. During the period 1972 through 1975 a combination of large inter-national price rises and increased volume of imports resulted in precipitousincreases in the POL import bill, which commanded a rising percentage of totalcommodity imports, adding to persistent problems in financing the trade gap.Despite increases in production, this problem will not disappear as the POLimport bill will continue to rise through 1977/78 because of increasing de-mand and projected price increases in current terms. Then the value of POLimports will fall slightly in 1978/79 unless demand or prices rise fasterthan current expectations. Even then, India will be paying more than twicethe price for three-quarters the volume imported in 1973. But, of course,the import cost will be considerably less than it would have been had theextra oil not been found and the rate of growth in demand not been curtailed.

vii. The level of investment in the petroleum sector has been raisedsubstantially to match the revitalized development program. Outlays duringthe period 1974/75 - 1978/79 are two-and-a-half times those in the originalDraft Fifth Plan; for ONGC they are four times the original amount. Althoughpart of this increase is due to general inflation, real expenditure willrise considerably, mainly for the much expanded program of ONGC, which willtake 70% of total planned outlays in the sector, much of it in the form offree foreign exchange. The GOI has given full financial support to plansin the sector including making available the needed foreign exchange. Asinvestment plans for all sectors for the next few years are not fully for-mulated yet, it is unclear whether the large increase in investment in thepertroleum sector will be matched in other sectors or whether the plans ofother sectors will be cut back. Conceivably, the GOI could avoid curtailingplans elsewhere due to resource constraints by borrowing abroad for the

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development of Bombay High and thereby freeing funds for use in other areas.This issue has not arisen yet and the GOI's present attitude is a determina-tion to provide the sector, particularly ONGC, with what is needed to getthe job done.

Institutions

1. Exploration, Development and Production

The Oil and Natural Gas Commission, ONGC, is the public sector or-ganization with primary responsibility for the exploration, development andproduction of petroleum and natural gas reserves. It has exclusive rightsto undertake or supervise these activities offshore and on-shore except inlimited areas in Assam. ONGC is a large organization with over 25,000 em-ployers and about 1,500 technical experts with advanced degrees. The Com-mission has existed for over 20 years and until recently concentrated itsefforts on-shore. As a result it has substantial experience in all aspectsof on-shore operations but is just now acquiring offshore expertise. Afterthe OPEC price hike in 1973 and the ensuing oil crisis, ONGC broadened itsactivities to off-shore exploration in previously known promising structures,buying the know-how required from private oil companies but retaining deci-sion-making. This strategy quickly paid off in 1974, as one of the firstoffshore exploratory wells was sunk right in the middle of the Bombay Highstructure. Since then, ONGC has moved rapidly to expand offshore as wellas on-shore exploration and to develop the Bombay High field faster thanmany experts would have thought possible. With India's balance of paymentssituation adding urgency, ONGC has taken a series of steps leap-froggingmore cautious procedures of development; these steps have been successfuldue partly to luck, partly to wise and expeditious decisions, and partlyto the full financial and administrative support of the GOI. ONGC has beenrelieved of many burdens borne by other public sector organizations such asslow and inadequate foreign exchange availability and the pressure to usedomestic expertise and products. As ONGC has acquired foreign assistance inits offshore operations, it has followed a deliberate procedure of having itsstaff participate in the activities as fully as possible with the result thatit is rapidly gaining offshore expertise.

2. Oil India Ltd., OIL, is the other main producer of crude. It isowned 50% by GOI and 50% by Burmah Oil Co. and is limited in its activitiesto a small area in eastern India, Assam and Arunchal Pradesh. This year OILwill produce 37% of domestic crude, but this percentage will fall rapidly asONGC's production rises. OIL has a modest exploration program on-shore inits limited area in the eastern region and is expanding its crude pipelinethere to carry increased output from ONGC's fields to eastern refineries.The Assam Oil Co., AOC, owned 100% by the Burmah Oil Co, is the oldest ex-isting oil company in India, starting operations in the late 1800's. It

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produces a very small quantity of crude from a virtually depleted field andowns a small refinery at Digboi. As explained below, the GOI is likely totake AOC over and possibly OIL in the coming year. As a result neithercompany has a very active expansion program, although OIL is carrying onexploration in its area and is continuing the development of its fields.

3. Refining and Marketing

The Indian Oil Corp., IOC, a public sector organization, isdominant in the refinery and marketing field. Currently it owns and oper-ates 38% of the refinery capacity in India and markets over half of theproducts sold. It will continue to grow somewhat as the expansion of itsKoyali refinery is completed and if it operates the new Mathura refinery,as was originally intended. However, its expansion is likely to be limitedto this as there is a feeling in the GOI that IOC is large enough. Otherrefineries coming into the public sector will be administered separately,although the exact institutional arrangements have not been worked out yet.Until the last two years the remainder of the refinery capacity and market-ing network was in the private and joint sectors. As discussed below, theGOI is in the process of acquiring most of the refinery capacity throughpurchase of private assets.

4. Government Control over the Oil Industry. Within the framework ofthe Industrial Policy Resolutions of 1948 and 1956, private firms in theenergy sector were given a secondary and limited role. Always with a provisofor exceptions deemed to be the national interest, all growth in the capacityto provide energy was to occur within the public sector. In the oil industrythis policy was implemented by the creation of the Oil and Natural Gas Com-mission in 1956 and the limiting of private firms to their then-existingactivities. Beginning in 1974 the GOI has entered into a series of negoti-ations to acquire part or all of the assets of foreign firms operating in theoil industry. In March 1974, the GOI acquired a 74% interest in Esso'srefining and marketing operations and formed a new joint sector company,Hindustan Petroleum Corporation Ltd. (HPC). The agreement provides for thecomplete takeover of the company by 1981. In 1975 GOI negotiated with BurmahOil and Shell Oil Companies for acquisition of their refinery and marketingassets in India. An agreement was reached whereby the Burmah Shell refineryin Bombay and the Companies' marketing branch was completely taken over onFebruary 1, 1976. Government has indicated that it intends to enter intodiscussions in the next six to eight months for the acquisition of most of theremaining foreign interests in the oil industry in India. Negotiations areexpected shortly for the complete takeover of Caltex's refinery in Visakhapatnamand its marketing organization. Discussions leading to negotiations areexpected soon between GOI and the Burmah Group of Oil Companies over acquisitionof Burmah's wholly-owned Assam Oil Company (AOC) with oil fields and a refineryin Digboi, Assam and of at least part of Burmah's 50% interest in Oil IndiaLtd. with oil fields, pipeline and exploration units in the eastern region.

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5. The present ownership of the production and refinery capacity inIndia as of February 1, 1976 is as follows:

Production Crude Production %mtpa /a

ONGC - 100% GOI 5.20 62.5

OIL - 50% GOI, 50% Burmah 3.05 36.7

AOC - 100% Burmah 0.07 0.8

Total 8.32 100.0

Refinery Throughput Capacity %mt /b

IOC (Indian Oil Corp. - 100% GOI)(Koyali, Barauni, Gauhati, Haldia) 10.10 37.6

Former Burmah Shell in Bombay (now BharatRefinery, 100% GOI) 5.25 19.6

Cochin (52.4% GOI, 26.4% Philips, 21.2% otherprivate) 3.30 12.3

Madras (74% GOI, 13% National Iranian Oil,13% Amoco) 2.65 9.9

HPC Bombay (74% GOI, 26% Esso) 3.50 13.0

Caltex - Vishakhapatnam (100% Caltex) 1.55 5.8

AOC - Digboi, Assam (100% Burmah) 0.50 1.8

Total 26.85 100.0

/a million tons per annum.

/b million tons.

At the moment GOI owns 57% of the refinery capacity outright and owns control-ling interests in refineries with 35% more of the capacity. If Caltex, AOCand Burma's interest in OIL are taken over completely, GOI will own all ofthe production capacity in India, 65% of the refinery capacity and will holdcontrolling interests in all of the remaining.

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6. The position with Caltex and Burmah's interests in AOC is that the

GOI wants to buy the assets and the parent companies want to sell them, giventhe low profitability of their continued operation. Caltex is no longer

refining crude its parent company supplies but is required to refine crudearranged by the GOI. AOC's refinery for long has used its refinery capacity

mainly to refine crude for IOC as its capacity of 0.5 million tons throughout

capacity is much larger than AOC's production of 0.07 mtpa.

Exploration and Development

7. Proven oil reserves in India are very small, both in relation

to the size of the land area and to the size of the economy. But much of

India is yet to be fully explored. Of the 27 basins of sedimentary areas

both off and on-shore, less than half have had any exploratory activity and

only a handful have been explored extensively. A Soviet geologist, arguing

by analogy to similar geological areas explored elsewhere concluded thereshould be three billion tons of recoverable reserves on-shore and one billion

offshore. On-shore, less than 200 million tons of proved and indicated re-coverable crude reserves have been discovered, all in Gujarat and Assam, most

of it found more than ten years ago. On-shore reserves as of March 1976 willbe about 118 mt (1975's level of 126 mt minus production of 8.3 mt). Off-

shore, all proven reserves are in the Bombay High (BH) structure and their

exact level is unknown. Although the field has been deliminted, an estimateof reserves in place has been made only on its northern portion. How much of

these will be recoverable will not be known until production tests are carriedout and the reservoir's behavior is studied. ONGC is using 200 mt of total

recoverable reserves as a working estimate for the purpose of taking the ini-

tial development decisions. As is usual industry practice, ONGC is using a

conservative recovery percentage (20%) until more is known about the reservoir.

The prospects for finding additional reserves in India are good, especially

offshore in the Cambay basin containing BH and in the Bay of Bengal. In

March, 1976, oil of good quality was struck in a structure offshore, 70 km

west of Bassein quite near the BH field. The volume of recoverable reserves

and the rate of production will not be known until more detailed testing is

done. Any sustained increase in domestic crude output is critically dependent

on the discovery of substantial new commercially exploitable reserves.

8. ONGC has a very active program of exploration both off and on-shore.

ONGC is drilling its twelfth exploratory well and is completing the requireddevelopment wells in BH region. It expects to drill a total of 20-22 explora-

tory wells in the BH region, including some in promising satellite structures.

This is in addition to drilling some appraisal wells. Outside the BH region,

ONGC's own seismic survey ship, Anweshak (Explorer), is currently working

along the Coromandel coast. On-shore, ONGC is exploring widely over thecountry, in Kashmir, Tamil Nadu, Gujarat, Rajasthan, West Bengal, Tripura and

in other areas. ONGC's exploration activity is at an all-time high and GOIintends to maintain this level. The Fifth Plan target is to drill 1.4 mil-

lion meters (mm), of which 0.57 mm for exploratory wells and 0.832 mm for

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development wells. Other on-shore exploration is being done by OIL in its

limited area in Assam and Arunachal Pradesh. Offshore, three private, for-

eign firms are actively looking for hydrocarbons. Natomas of the CarlsbergIndia, a group of US companies, is exploring in the Bay of Bengal area. Read-

ing & Bates, also a US group, is working in the Kutch Basin. Asmara, aCanadian group of companies looking in the Cauvery Basin along the Coromandel

coast, is still in the seismic survey stage, its contract having been signed

only in October, 1975.

9. For the medium term, ONGC's activities are already at a high level

and are expected to be maintained. OIL will continue its program of explora-tion in its assigned area as will the foreign firms. The GOI's attitude

towards entering into further production-sharing exploration contracts is

mainly to wait and see what comes of the current ones. The GOI is not an-xious to rapidly expand this type of activity as one of its purposes is to

develop the capability of ONGC by their participation in these firms' activ-ities and there are limits to how much ONGC can take on. However, as twocontracts were signed in 1974 and one in 1975, it might be expected from

this schedule that another agreement might come about in 1976. Any furthercontracts are likely to be along the lines of the last two.

Production

10. Crude. Production of crude grew at the rate of 6% p.a. between

1966 and 1974. Due to ONGC's efforts, production should show a marked in-

crease in the future. In 1975/76 production will be 8.3 million tons, up

10.7% from the previous year. This 0.8 mt increase is all from ONGC's on-

shore fields and comes partly from Gujarat and partly from the eastern region.

In Gujarat, the Ankleshwar field has reached its peak; the increase comes

from the north Gujarat fields. The main determinant of raising production

in the west is the capacity to refine, by mixing and other methods, thehighly saline and corrosive north Gujarat crude. In Assam, the productionincrease came from normal development of ONGC's fields. The determinantof production there is the pipeline and refining capacity in the easternregion. Of the total crude produced, 5.2 mt is from ONGC (1.1 mt in the

eastern region, 4.1 in Gujarat), 3.05 from Oil India Limited (OIL), and 0.07

mt from Assam Oil Company (AOC). Production from OIL fields has stabilizedat about 3 mt per annum and can be maintained at this level for another 11

years with increased application of secondary and tertiary recovery methods.AOC's small field has long since passed its peak and its production will

continue to dwindle slowly.

11. In 1976/77, on-shore crude production will remain constant. In

Gujarat, the decline in Ankleshwar's production will be offset by increasesfrom the North Gujarat fields. No changes are expected in the eastern re-

gion. All the increase in 1976/77 is expected to come from the Bombay High(BH) field. Commercial production from BR will start in May this year and

will steadily build to a rate of 2 mt per annum by December 1976, so production

from BH in FY77 will be 0.5 mt and total production will reach 8.8 mt, a 6%

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increase over FY76. Production plans for the first phase of development of BHare well in hand and any possible hitches are expected to be minor and notsuch as could significantly alter the projection. The plan is to erect fourplatforms, one flare jacket, two single buoy moorings -- one for a storagetanker and one for a transport tanker -- and the interconnecting pipeline. Aturn-key contract has been signed with McDermott Corp. to fabricate some ofthe equipment and erect the platforms, buoys, jacket and pipeline. The workis in progress, the gathering system is being laid and the platforms will beinstalled in phases. The tankers are to be chartered from the Indian ShippingCorporation and are being modified to handle the crude; they are expected toarrive to time.

12. For the medium term, through 1980/81, the prospect is for a signi-ficant increase in production. Current expectations based on what is knownnow is that BH's ultimate production potential is 10 mt per annum which willbe built up in steps of 0.5, 2.5, 4.5, 6.5 in 1976/77, 1977/78, 1978/79 and1979/80 respectively to reach 8.5 mt exploitation by end of 1980. Fullexploitation should be realized some time in 1981. Production from theon-shore Gujarat fields will remain steady up to 1980 as again declines fromAnkleshwar will be offset by increases from north Gujarat. In the easternregion, production from OIL's fields will remain constant, AOC's will declinemarginally and ONGC's will increase by 1 mt per annum due to planned increasesin pipeline and refining capacity. The resulting production in 1980/81is expected to be 17.75 mt, 115% higher than current levels, as follows:

ONGC: 14.7BH (8.5)Gujarat (4.1)E. Region (2.1)

Oil (E. Region) 3.0AOC (E. Region) 0.05

Total 17.75

This estimate, of course, depends largely upon BH reaching its expected produc-tion level. However, as things look now, the estimates for BH are conservativeones and there is some chance of higher production levels. Actually ONGC isplanning on a faster rate of development; the above estimates provide somecushion for the inevitable hitches that occur in development of oil fields.Other possibilities for production within this time period depend entirely ondiscovery in the near future and rapid development of as yet unknown commerciallyexploitable reserves by ONGC on-shore, ONGC and private foreign firms off-shore, or by ONGC's subsidiary, Hydrocarbons Ltd., in collaboration with thenational oil companies in Iran or Iraq. Not included in the above estimatesare 0.7 mt of crude which is India's share of already producing fields in Iranand which will be imported for the first time in 1976/77. Finds in the nearfuture conceivably could add to production by 1980/81, but based on currentdevelopment plans the above is what is expected at the moment.

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13. The overall quality of Indian crude is good with low sulphur contentand generally of a light nature. BH and Gujarat crudes, however, are waxyand have high pour points that require heating or other treatment to handle.The following is a comparison of selected characteristics of BH crude andthe well-known Arabian light crude:

CRUDE PROPERTIES

Bombay High Arabian Light

0 API 39-44 34

% Sulphur by weight 0.15 1.7

Pour Point °C 30 -26Salt Content PTB 10-50 4

Compared to Arabian light, BH crude yields 6-7% more light distillates, 3-4%more middle distillates, and 10% less heavy ends. The crude is high in aro-matics, which make it a good crude to produce petrochemical feedstocks butpoor for aviation fuel. The kerosene made from BH crude has a minor smokingproblem, which can be easily corrected by mixing with other kerosene. The

low sulphur heavy stock (LSHS) has a vey high pour point (50°- 600), makingit an awkward fuel; but it is a good quality for secondary processing intolighter distillates. BH crude gives very low yield for asphalt and lubes.All of these characteristics must be considered when arrangements to handleand refine BH crude are made. Assam crude is somewhat heavier with moresulphur but has a lower pour point.

14. The cost of producing oil in India, of course, is higher thanin the Persian Gulf but is roughly equivalent to that of some other majorproducers, such as Venezuela. The main determinant of costs of productionis the size of the fields discovered. The Oil Price Committee has put thelong-run marginal cost of finding, developing and producing crude on-shorein India at roughly US$4.00 per barrel at the well-head. However, the costof developing and producing known on-shore fields might be half that. Thecost of BH crude has been estimated by ONGC at about US$2.50 per barrelat the surface, but including the exploration and overhead expenses of ONGCwould make the per barrel cost considerably above that, depending on thequantity produced. The cost of producing in Assam is higher than in westernIndia as the oil is at a greater depth. In addition, Assam crude is fartherfrom major consumption centers. One of the benefits of BH crude is its prox-imity to Bombay with its refinery capacity and large demand for petroleumproducts.

15. Natural Gas. Both associated and unassociated natural gas isfound within India. But most is associated with crude oil production. Up-to-date information (1975/76) and estimates on natural gas reserves, produc-tion and utilization is not as available as that for crude petroleum. Re-serves at the end of 1974 were 67.86 billion cubic meters (bm3); production

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since then would have reduced them perhaps by about 2 bm3, but two new gasfields will have increased reserves by a large and unknown amount. A naturalgas field in Tripura, east of Bangladesh in India has been discovered but theexploitable reserves of natural gas are undetermined. There is a large amountof associated natural gas in the oil structure at Bombay High. Using theestimates for the potential natural gas production from BH and assuming thesame ratio of reserve to production that held in 1974 for all India, the

reserve of associated gas at BH would be 38.74 bm3, so the total of reserves

of natural gas in India would be of the order of 105 bm3 plus what exists inTripura and in other BH structures. Production of natural gas in 1974 was

1.9 bm3 or 5.3 million cubic meters per day (mm3 per day). Total utilization

was 1 bm3 or 53% of production. This figure is somewhat misleading, however,as a significant portion, 15% of total production and 29% of total utiliza-tion, is used in the Assam oil fields themselves mainly for reinjecting intoproducing structures to increase crude recovery. The remaining 47% of pro-duction is flared for lack of utilization capacity, mainly in Assam. Of the

1 bm3 of utilized natural gas, 539 mm3 or 1.48 mm3/day were used in Assam

and 471 mm3 or 1.29 mm3/day in Gujarat. In Assam 54% was used in the fieldsthemselves, 41% was used by the Assam Gas Company and the remaining 5% byother users. In Gujarat 42% was used by power generating utilities, 38% wasused by the Gujarat State Fertilizer Co. and other industries in Baroda, andthe remaining 20% by others. Abstracting from minor year to year variations,consumption by each of these users have grown steadily. Total utilization hasgrown by an annual compound rate of growth of about 12.5% between 1965 and1974. Production grew by slightly less than this, 11.5% per annum over theperiod. However, production could well accelerate as in most oil fields theproportion of gas to crude rises as more crude is produced.

16. Production of natural gas at BH will occur whether utilized or notas crude is extracted from the structure. Current estimates place natural

gas production at 0.6 mm3/day when crude production is 2 mt per annum. When

crude production is 10 mt per annum natural gas production should be 3 mm3 /dayor somewhat more than is being produced in western India now. There is alsounassociated natural gas in the BH structure and, though the field has not beentested yet, ONGC's estimate puts potential total production of both associated

and unassociated gas at 5 mm3/day. ONGC has a proposal to utilize the associated

gas from BH in two stages. In the intermediate period, before a pipeline can belaid to shore, there is contingency plan to place a liquid petroleum gas (LPG)

modular production package to extract butane and propane gas at the produc-tion site, liquify it and transport it ashore. This would utilize 25% byweight of the natural gas produced. However, if a pipeline to shore canbe built quickly this first phase plan might be dropped. For ultimate de-velopment, plans are to pipe the gas ashore near Trombay, fractionate itinto methane; butane and propane (LPG); and ethane and heavier gases andtransport it to consumers. Methane would be used as feedstock for fertil-izer or, to the extent not used by fertilizer factories, by other industriesas a fuel. The propane and butane would be used as LPG for home cooking.

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Ethane would be used in the petrochemical industry in and around Bombay. Thecurrently existing ammonia unit of the Fertilizer Corporation of India (FCI)at Trombay could be altered to use methane as a feedstock. The main useof methane would be in the ammonia unit of the Trombay V fertilizer plant tobe built by 1980. In fact, virtually all of the methane portion of the 3 mm/day of natural gas could conceivably be used by FCI at Trombay in the exist-ing and planned ammonia units, the methonal plant and two new boilers. Theconsumer demand for LPG is strong and persistently unmet now because of ascarcity of gas. The currently existing petrochemical industry in Bombaycould use the ethane up to a certain production level. Then additionalpetrochemical capacity is envisioned.

17. The facilities needed to utilize BH natural gas are (a) a pipelinefrom field to shore; (b) gas/oil separation facilities at the shore terminal;(c) gas processing plant; (d) trarnsport facilities to carry the various frac-tions to users; and (e) converted or newly built facilities to take thegas as feedstock or fuel, Many of these plans need further study. Therealready exists a committee made up of representative of ONGC, HindustanPetroleum Corporation Ltd., Indian Petrochemical Corporation and others tocommission a complete feasibility study to be ready by October 1976. ONGCalso is proceeding with another feasibility study on the same schedule fortransportation of both the crude and gas ashore near Bombay.

Refining

18. Refinery capacity grew rapidly in India during the 1960's and theimport of petroleums product fell to a very low level by 1970. Product importshave increased slightly since then but because of another round of expansionof capacity, India should be roughly self-sufficient in refinery capacityby the early 1980's. The private sector's share of refinery capacity isat a very low level and is likely to disappear altogether in the near future.The joint sector's share has fallen and will continue to fall in the wakeof the nationalization program and the large expansion in the public sector.India's existing refineries are relatively simple and somewhat rigid intheir output mix of products. Because of the strong demand for middle dis-tillates, light distillates and heavy ends sometimes are considered sur-plus products which have a disposal problem. All of the planned refineryprojects have included secondary processing facilities which will contri-bute much needed flexibility in product pattern. Given the GOI's policyof encouraging the substitution of coal for fuel oil, there is particularpromise in converting heavy ends now being used for fuel into middle distil-lates. This will save both on crude imports and on additions to primaryrefinery capacity.

19. Installed refinery capacity at the end of 1975/76 is the same aslast year, 27 mt of throughput capacity. The completion of Haldia refineryin 1974 near Calcutta was the latest addition to capacity. Refinery crudethroughput will be about 22 mt in FY76 (8.3 mt of domestic crude production

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and 14 mt of imports) and production of products will be 20.7 mt (based on7% allowance for refinery boiler fuel and losses). This is 7% higher pro-duction than last year. In recent years India has produced from domesticand imported crude 85-90% of the petroleum based products consumed. Importsof products are mainly middle distillates (kerosene and high-speed dieseloil) and fuel oils because of particularly heavy demand for the first typeof products, the pattern of production in Indian refineries and the low in-ternational price of fuel oil. Although self-sufficiency in capacity torefine products consumed is a goal of the GOI, because of inflexibility inrefineries, consumption and production of products probably can never bebalanced. Nevertheless, the GOI has planned expansion in refinery capacityto be able to produce a high proportion of products consumed. But no addi-tions to refinery capacity will occur in 1976/77.

20. Plans to expand refinery capacity are based on four major refineryprojects and one major pipeline project. The Bongaigaon refinery in WesternAssam will add 1 million tons of throughput capacity (mttc) by end of calen-dar year 1977. This will enable an increased production of ONGC's field inthe eastern region. A major expansion of the Koyali refinery in Gujarat willadd 3 mttc, also by the end of CY1977. Expansion of the Bombay refinery ofHindustan Petroleum Corp. will add 2.5 mttc by April 1978. The Mathura re-finery in Western UP will add 6 mttc by the end of CY1979. This sums to anadditional 12.5 mttc for a maximum total throughput capacity of 39.5 mt bythe end of CY1979. At 95% utilization and 93% outturn of products, thiscapacity can produce 35 mt of products, which is higher than any estimateof demand for 1980/81. So India will then be roughly self-sufficient, thoughsome marginal imports (and exports) of products may be necessary to balancedemand with the production pattern. Associated with the Koyali expansionand the Mathura refinery is the Salaya-Koyali-Mathura pipeline under con-struction to carry either BH or imported crude from the West Coast terminalat Salaya to either the Koyali or Mathura refineries. This involves a singlebuoy mooring 6 Km from shore near Salaya, a pipeline to a central tank farmon-shore, 270 KM of pipe from Salaya to Birangam (near Ahmedabad), a 175 kmbranch from Birangam to Koyali, and 820 km of pipe from Birangam to Mathura.Investment in the four refineries and the pipeline are as follows:

Bongaigaon Rs 220 million (US$ 24 m)Koyali (expansion) Rs 560 million (US$ 62 m)Bombay (HPC expansion) Rs 150 million (US$ 17 m)Mathura Rs1500 million (US$167 m)Salaya-Koyali-Mathura

pipeline Rs1880 million (US$209 m)

These are total costs in 1975 prices.

21. As mentioned above, planned additions to refinery capacity in Indiawill result in 39.5 mttc by the start of 1980/81, which would be enough capa-city at a high utilization rate to produce 35 mttc of products net of refine-ry boiler fuel and losses. However product demand is unlikely to reach thatlevel by 1980/81. Based on an 8% growth rate next year and 6% per annum

thercafter, product d-mand would bc 30.7 mti 194810/81. This is not a min--

mum possible figure; the most recent experience has been a minus 3.3% growthbetween FY73 and FY74 and a plus 3.7% growth between FY74 and FY75. Much de-pends on the rcsponse of the Indian economy to increase in prices and otlerefforts by Government to curb consumption of petroleum products and goodswhose production is based on petroleum. A growth rate of 3% per annum bet-ween FY76 and FY81 would put demand at only 25.9 mt in 1980/81. This wouldrequire a throughput capacity of only 29.3 mt, meaning that about 10 mttc,or more than will be created by the Mathura refinery, will be unutilized.Of course, refinery utilization may not reach the 95% assumed above for tech-nical or operational reasons. The point of this illustration is that growthof demand is uncertain and that given this uncertainty, India could end upin 1980/81 with some very expensive underutilized refinery capacity in theaggregate. The alternative would have been to delay the construction ofthe Mathura refinery with the then almost sure prospect of importing someproducts. However, there are two other considerations that have been used toexplain the planned refinery expansion. One is the difficulty of transportingproducts from India's west coast to northwest India, the supply zone of theMathura refinery. The west coast of India is for many reasons the preferredlocation for both the import and production of products destined for Punjab,Haryana and other areas in northern India. But there are severe rail load-ing and transport constraints on the west coast and across the Western Ghats,the coastal mountain range. If the projected rapid rates of increase indemand for petroleum products in the Northwest are realized, the costs oftransport will rise precipitously and movement might become a physical im-possibility. The Mathura refinery contributes to the solution by beinglocated in the north and being supplied by a crude pipeline.

22. The second consideration is that refinery capacity for BH crudeis a somewhat different question than overall refinery capacity becauseof the crude's heavy wax content and high pour point. The first 2 mt ofBH crude will be refined in Bharat Refineries, the former Burmah Shell re-finery in Trombay. The Burmah Shell refinery after completion of minormodifications underway will have the secondary processing capacity andother technology to process up to 3.5 mt per annum of BH crude. Processingmore than 2.5 mt per annum, however, would seriously reduce the refinery'scapacity in distillation and underutilize capacity in other areas. The HPC(formerly Esso) refinery at Trombay will use its planned expansion of capac-ity to refine 2.5 mt of BH per annum. HPC should be ready to take BH crudeby mid-1977. The Mathura refinery scheduled to be ready by 1980 can handle3 mt per annum of BH crude. Koyali will be able to refine 2 mt per annumafter 1980 when its catalytic cracker is installed and when production fromon-shore fields in Gujarat begins falling. The above allocation of refinerycapacity will be able to handle a total of 10 mt per annum of BH crude, whichis the current estimate of ultimate production, and it will be able to handle

BH crude on the schedule it is to be produced. In addition, several of theexisting coastal refineries can handle small amounts of BH's production ifthe need arises, which is likely during short intermediate periods. The

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possibility of exporting BH crude, either temporarily are permanently, hasnot been seriously considered by GOI becaue of the extra transport costs ofexporting BH crude and importing some other crude and because BH crude is ofthe type needed for India's product demand.

23. The GOI is aware of the urgent need to analyze the plethora of al-ternative in refining products and transporting both crude and products toconsuming centers. The problems are complex given the regional distributionof demand and differential growth rates; the location of existing refineriesand their technical capacities to handle crude and distill products; the ca-pacity of the existing transport grid and demands upon it from other sectors;the recent availability of BH crude; and the possibilities of discovering newsources of crude. It was recognized that the ad hoc measures used in the pastwere no longer adequate and because of this the GOI set up an Industry Optimi-zation Working Group and a Working Group for the Optimal Utilization of BombayHigh Crude and Natural Gas. The charge of these working groups is to supplyinformation and make recommendations to the GOI on development alternativesbased on their technical, economic and financial analysis.

Consumption

24. During the period 1951 through 1973 consumption of petroleum prod-ucts grew very rapidly, a total growth of almost 600% with yearly compoundrates of 8-9%, which are two to three times the growth in total national pro-

duct. Overall, the Indian economy was becoming more intensive in its use ofcommercial energy and particularly of petroleum products. This is bothbecause each sector's output has become more energy-intensive and the shift inproduction and consumption has been toward more energy-intensive sectors.Nevertheless, India uses less than 1% of the world's oil consumption. Themajor direct use of oil is in the transport and household sectors, 49% and 28%of direct use, respectively in 1970/71. However, as part of electricitygeneration is based on fuel oil, the mining and manufacturing sectors, using71% of total power generated, are major indirect users of oil. The agriculturaland household sectors have experienced the largest percentage increase in oilconsumption; however, the largest absolute increase in demand has come fromthe transport sector. Transport alone accounted for half of the incre-ase inoil consumption from 1951 to 1973. India has a higher proportional consumptionof middle distillates than industrialized countries because of much heavierhousehold demand for kerosene and somewhat heavier demand for high-speeddiesel. The following are the percentages of various products in the totalnet product demand:

1974 - Percentage Distribution of PetroleumConsumption by Product

Product % Product % Product %

Naphtha 7 Kerosene (SKO) 13 Fuel Oils (FO) 26Motor Spirit (MS) 6 High Speed Diesel (HSD) 29 Bitumens 4Other light 2 Light Diesel Oil (LDO) 5 Lubes & greases 2Light Other middle 5 Other - heavy IDistillates 15 Middle Distillates 52 Heavy Ends 33

- 15 -

Reflecting its use in transportation, high speed diesel has had a very high

growth rate of 15% per annum. Unlike industrial countries, growth of demand

for motor spirit, or gasoline, has been modest by comparison, only about 3%per annum. However, demand for other napthas, especially for fertilizer pro-duction, has grown rapidly.

25. Following the OPEC price increase in 1973, the GOI raised domestic

product prices by hefty amounts in an effort to curb demand. By September

1974, the prices of gasoline, light diesel oil, and naptha were roughly double

their price one year earlier; furnace oil was 2.7 times its previous price;

kerosene was 75% higher; and HSD was 20% higher. Since then, there have been

two additional price increases for kerosene, HSD and furnace oil. As a re-

sult, the overall demand for products fell in 1974 by 3.3%; the percentage

change for individual products was: naptha, +11%; gasoline, - 21%; kerosene,

- 17%; HSD, + 20%; light diesel oil, - 16%; and fuel oils, - 6%. This adds

up to a severe restriction of household demand. Light diesel oil, used in

agricultural pumps sets, was also hard hit. The scope for further reductions

in total consumption by curbing household demand is probably not great. Now,

only 6% of total demand is gasoline and one estimate puts gasoline consump-

tion by private individuals at only 10% of this. Kerosene, 13% of total de-

mand, is the main item of household consumption. The remaining 80% of prod-ucts is used in production or transportation, making it difficult to reduce

without curtailing economic activity in the short run. The main hope lies

in encouraging more efficient use of energy of all forms and substituting

more abundant fuels for oil. These are longer run solutions which the price

increases, if maintained in real and relative terms, will help to achieve.

26. Consumption of petroleum products in 1975/76 will be 22.5 mt,

3.7% higher than the 21.7 mt in 1974/75, 1/ so consumption in 1975/76

is about the same as in FY74. In 1975/76, consumption of naphtha and liquid

petroleum gas rose by 14%; kerosene and high-speed diesel rose by 5-6%; light

diesel oil bitumen and various lubricants fell modestly; and the remaining,mainly motor spirit and fuel oil stayed virtually constant. Growth of consump-tion in the future is very uncertain due to the great changes brought about by

the price hikes of the last two and a half years and the GOI's policies toinfluence demand for petroleum products. Although annual rates of growth up

to 1973/74 were around 9%, higher relative prices encouraging substitution are

expected to cause the trend rate of growth to shift downward. But there is no

very good basis for projecting demand within the limits of 0% to 9% growth

p.a. The experience of the last two years, a 3% fall followed by a 3% rise,indicates little about the future, except that demand has some elasticity with

respect to price. Planning of refining capacity seem to be based on about an

8% per annum growth through 1980/81. Another source mentions 5-6%. Growth in

1976/77 is expected to be above trend because of no growth of demand over the

last two years, possibly an emergence from the industrial recession, and

1/ These and other figures on consumption of products are net of refineryboiler fuels and refinery losses, which average 7% of refinery through-

put.

- 16 -

because three fertilizer plants using naptha as feedstock will begin operationnext year. If, because of the increase in industrial activity expected, wetake 8% as a growth rate of FY77 over FY76, demand will be 24.3 mt of products.If we then allow demand to grow at 6% a year thereafter, consumption in1978/79 will be 27.4 mt and 30.7 mt in 1980/81. For individual products,naphtha consumption will continue to grow rapidly, as there are few price orother changes to curb it; HSD will continue to grow steadily as its use intrucking, rail transport and agriculture is fundamental to economic growth andthere are no close substitutes; gasoline will continue to grow modestly as theconsumption is already at a very low level relative to the rest of the worldand relative to its level in the recent past; kerosene also will continue togrow modestly as it is a basic commodity of domestic consumption even in ruralareas; but there will be some effect of efforts, to encourage the use of softcoke for cooking and electricity through accelerated rural electrification forlighting; fuel oil will grow but its use for steam raising in industry will becut drastically by a government program to raise its price, provide taxcredits for coal utilizing equipment, and regulate new industries so as toensure they are based on coal for heat generation.

Pricing

27. In product pricing, the GOI has followed consistenty a policy ofusing the price mechanism to curb domestic demand over the last two years.Through a variety of administrative and tax measures, the prices of mostproducts to consumers are above, in some cases considerably above, theirequivalent import prices. Not only such a highly visible product as gaso-line but such an essential household commodity as kerosene are priced abovetheir import price. This demonstrates the GOI's willingness to price theseproducts using their opportunity cost to the economy as a basis rather thantheir financial cost of supply, which are lower, as roughly a third of totalavailability is derived from lower cost domestic crude production. Productprices are the end result of a complex system of petroleum pricing. Becausethere have been a series of basic changes in the last two years, it is worth-while to report on the salient features of the present system that determinesprices at the well-head, to the refinery, ex-refinery, ex-storage, and atthe retail level.

28. In 1974, following the increase in the Persian Gulf price of crude,

the GOI completely abandoned the previous import parity concept of pricingdomestically produced crude and adopted a principle based on the calculatedlong-run marginal cost of finding and producing crude within India. The OilPrices Committee conducted a study into the long-run cost of crude produc-tion and made recommendations to the GOI as to the level of prices producerswithin India should receive. The GOI accepted their recommendations that thedomestic price of crude should be the rupee equivalent (at Rs 8/US$) of $3.60per bbl for a certain quality, net of any duties. With duties, mainly a cessfor the Oil Development Fund of Rs 60 per ton, the f.o.b. price to refinerieswas, and is, the rupee equivalent of $4.58 per bbl. This calculation is beingredone by the Oil Prices Committee which is expected to submit its final reportby the end of June 1976. This calculation will no doubt have to be done on a

- 17 -

regular basis as it is extremely difficult to estimate the cost of productionin fields yet to be explored, particularly off-shore; and the GOI will wantto ensure that domestic reserves will be exploited at any cost up to theimport price of crude. Refineries that use imported crude pay the f.o.b.Persian Gulf price plus freight. However, as it was intended that the ex-refinery price of products would be uniform throughout India, a weightedaverage cost of domestic and imported crude f.o.b. (i.e., before freightcharges) was calculated to be $8.65, based on the domestic price $4.58 and thethen prevailing Persian Gulf price of $10.60. Each refinery pays to or receivesfrom an industry crude equalization fund the difference between their originalf.o.b. price and the figure $8.65. The effect of this is to make the cost ofcrude to every refinery the same in f.o.b. terms, namely, $8.65 after account-ing charges. After September 1975, the f.o.b. Persian Gulf price was nolonger $10.60, but $11.60. On December 1, 1975, the prices of kerosene,high-speed diesel and furnace oil were raised Rs 120 per kiloliter and LPG wasraised Rs 2.50 per 15 kg cylinder. The price increases were calculateed tojust offset the price of crude and the increased recovery of funds eventuallyfinds its way back to those refineries that paid the higher cost of importedcrude.

29. At the same time as the shift from import parity in price of crude,the old import parity concept for pricing products ex-refinery was abandonedfor a new concept that can be called the "retention price concept." Usingthis concept requires a complex series of calculations for each refinerydesigned to take into consideration the complexities unique to each refinery,the product mix of each, the consumption demand of the area served by therefinery, the broader national requirements for refinery products and theprice policy of the GOI, while ensuring refineries do not make above normalprofits and retaining an incentive for refineries to operate optimally undercriteria established by the GOI. For each refinery the GOI (Oil Prices Com-mission) calculates the total recovery of funds required by each refinerybased on an assumed optimum level of operations, optimum product mix, normallosses, working capital needs and a yield (15%) on capital assets. Then theGOI calculates an index for products produced (e.g., SKO = 1.0, HSD = 0.95,FO = 0.70) by each refinery based on the techniques of the refinery, demandin the country, social value of the product, and other considerations forthe purpose of converting the various products into standards units. Thestandard units so calculated are summed and divided into the total recoveryof funds required by the refinery to find the value for one standard unitof output. Then this price per standard unit is multiplied by each product'sindex number to find the retention price (the price the refinery retains)for each product. The uniform All-India ex-refinery price is calculatedby taking a weighted average of each refinery's retention price for eachproduct. The difference between the uniform ex-refinery price and eachrefinery's retention price-is paid to or received from another industrycentral pool account. It should be noted the retention prices are notcalculated on the actual costs of refineries but on the costs calculatedby the GOI based on optimum operating conditions. If refineries do notoperate at the optimum levels and if some costs are not included, the re-fineries suffer the loss. The GOI believes this adds an incentive for re-fineries to ensure optimum operation.

- 18 -

30. The prices of products ex-oil companies storage points is in prin-ciple the ex-refinery price plus the calculated cost of transportation anddistribution by cheapest method plus excise duties for most products (seeAnnex Table 5). For some products the excise duty is a large part of theex-storage price. For prices in effect now (i.e. after December 1, 1975) atBombay locations the following are the excise duties as a percentage of theex-storage price:

Product % Product %

MS 73 LDO 20SKO 40 FO 16HSD 38 Napththa 0

The difference between the sum of the ex-refinery price plus excise dutyand the ex-storage price is not uniform for all products nor does it varyby amounts that can be taken as differentials in handling costs. Built intothe ex-storage prices is a feature of cross-subsidization. The differentialsfor gasoline and furnace oil are more than twice those of kerosene and HSD.The ex-storage price of naphtha fo.r fertilizer use is less than its ex-refinery price.

31. The retail price is very close to the ex-storage price. Changesin the ex-refinery prices may or may not be fully reflected in the retailprice. The final price includes substantial excise duties and industry poolaccount surcharges. In determining the final price to consumers, GOI takesinto consideration factors such as cost to the economy of using individualproducts, foreign exchange constraints, which sections of the community arelikely to use a particular product, and others. As mentioned above, pricesto consumers are above their equivalent import cost:

Domestic Ex-Storage Price asProduct % of Equivalent Import Cost

Motor Spirit 342Kerosene 123HSD 137

Light Diesel Oil 120Fuel Oil 146Naphtha for fertilizer use 45

The lack of excise duty on naphtha for fertilizer feedstock and its resultantlow price is due to an effort by the GOI to keep the price of domesticallyproduced fertilizer low so the prices to farmers, a weighted average of thedomestic and import prices, will not rise further and further discouragefertilizer applications. Following the jump in world market prices in 1974,the GOI virtually doubled the price to farmers causing a fall in fertilizerconsumption in 1975. Prices have been reduced somewhat and GOI hopes toreduce them further, or at least hold them constant. As the proportion of

- 19 -

indigenous to imported fertilizers increases, the price of indigenous fertil-izer can be increased without increasing either the pooled price or the sub-sidy from General Revenues. The GOI is expected to take this opportunity toincrease the price of naphtha to fertilizer plants. In the meantime, giventhat modes of new fertilizer production are centralized decisions, its lowcost will not necessarily lead to extravagant selection of naphtha as feed-stock.

Imports

32. Because most petroleum products are derived from imports eitherin the form of products or crude, and because of the economy's increasedproportional use of petroleum products, India's energy supply on the wholewas becoming more dependent on imports. Nevertheless, since the early 1950'suntil 1971, India had progressively reduced the proportion of petroleumproducts derived from imports to 68%. Between 1971 and 1974, the proportionrose slightly to 72%; but this trend has reversed itself; in 1975/76 lessthan two-thirds of demand was supplied by imports and by 1978/79, only abouthalf will be imported unless demand exceeds current expectations. Indiamust take some satisfaction in this situation as during the period 1972through 1975 the combination of large price rises and increased volume ofimports resulted in precipitous increases in the POL import bill, whichcommanded a rising percentage of total commodity imports. Although onlya relatively small portion of the economy runs on oil and, consequently, theprice increase had a relatively small direct impact on the domestic economyas a whole, the increased import bill did cause problems in financing thetrade gap. This problem will not completely disappear as the POL importcost will continue to rise through 1977/78 because of increasing demand andprojected price increases. The value of POL imports will fall in 1978/79unless demand or prices rise faster than current expectations; but Indiawill still be paying more than twice the amount for three-quarters of thequantity imported in 1973. A decline in POL imports volume is expected tocontinue into the 1980's based on planned rates of development of the BombayHigh field and a small increase in on-shore production. This projectioncould be upset by higher rates of growth in demand. But, also, the highlevel of exploratory activity going on in India could result in discoveriesthat could be exploited by the early 1980's given ONGC's recent accomplish-ments.

33. Imports of crude petroleum in 1975/76 are scheduled to be 14 mt.The import of products in 1975/76 is likely to be lower than the 3 mt thoughtearlier. The 1.2 mt of middle distillates contracted for with the USSR willbe delivered. The balance is mainly fuel oil purchased in the open market.However, demand for fuel oil has slackened in recent months and stocks areample. The volume of imports already received plus the balance of the USSRcontract adds to 1.6 mt. Imports for the remaining three months of FY76 arelikely to raise this figure to 2.0 mt. Taking this figure, the value of

imports will be Rs 12.51 billion -- Rs 10.56 billion for crude and Rs 1.95billion for products. This is US$1.45 billion, the same figure as last year

- 20 -

as the fall in products imports just offsets international price increases.Imports in 1976/77 are unknown but one figure mentioned is 15.2 mt. Thattogether with 8.8 mt of production would mean 24 mt as throughput to India'srefineries, which would utilize throughput capacity at 88%, which shouldcause no problems. A throughput of 24 mt would result in a net productionof 22.3 mt of products which, if demand increased by 8% to 24.3 mt, wouldimply products import at this year's estimated level of 2 mt. The value ofthese imports in FY77 is hard to calculate. It depends on the f.o.b. priceof crude, freight rates, and the type of crude imported (see Annex Table 1).Using as a base the average delivered price in 1975/76 and percentage in-creases projected by IBRD Commodity Forecasts, the cost of 15.2 mt of crudeand 2 mt of products would be US$1.68 billion. On the same basis the valueof POL imports in 1977/78 and 1978/79 would be US$1.80 billion and US$1.77billion respectively. In 1978/79 the US dollar value of imports will fallfor the first time as the projected fall in imported crude volume more thanoffsets anticipated world market price increases of crude.

Investment

34. The urgency derived from the impact of oil price rises on the bal-ance of payments; the existence of promising sedimentary basins yet to beexplored; the high pay-off of rapidly developing and utilizing known oiland gas fields, especially at Bombay High; and the desire to achieve self-sufficiency and public ownership in oil production, refining and distribu-tion all add up to extraordinary incentives to accelerate investment in thedevelopment of India's petroleum and natural gas sector. Public investmentin the sector has grown rapidly in the last few years and plans for the re-mainder of the Fifth Plan call for even higher outlays. Current estimatesof investment during the period 1974/75 to 1978/79 are two-and-a-half timesthose in the original Draft Fifth Plan, which, of course, was in 1972/73prices and which was drawn up before the 1973 OPEC price increases. Al-though part of this rise is a result of general inflation, real expendi-ture will rise considerably. Much of the increase is for the greatlyexpanded exploration, development and production operations of ONGC, whosecurrently planned five-year outlay is four times the amount originally envi-sioned. ONGC accounts for 70% of total investment in the sector over thefive years. Only 30% of ONGC's outlay comes from GOI's general revenuebudget and this percentage should diminish as ONGC begins to recover devel-opment expenditures; the remainder is internally generated funds, along withrelatively small amounts from the Oil Development Fund or loans from the OilIndustry Board. The increased outlays on refining, transporting and market-ing of products are mainly price increases, as all of the currently plannedmajor refinery and pipeline projects were included in the Draft Fifth Plan.As a rough indication of order of magnitude, overall investment in the pe-troleum sector in the next year is about 10% of total planned outlays for allsectors, as compared to the original Fifth Plan average of less than 3%.

35. Investment in the exploration and development of oil and naturalgas reserves rose from US$212 million in 1974/75 to US$373 million in 1975/76 and will rise steadily to US$558 million by 1978/79. Over 90% of the

- 21 -

five-year total of US$2 billion is for ONGC's operations. Oil India Ltd.,the only other major organization exploring and producing, has a modest ex-ploration and development program, notably an expansion of their pipelinein Assam to carry ONGC crude to a refinery. The major refinery and pipe-line projects are discussed in para. 20 above. The rise in investment inrefining and marketing is more rapid than for exploration and developmentbut it starts from a much lower base and does not require such large quan-tities of foreign exchange. The total outlay for these activities risesfrom US$52 million in 1974/75 to US$182 million by 1978/79. India basicallyhas the refining and marketing capacity to meet most of the country's needs.The refinery expansion program is based on normal growth of demand, the spe-cial needs in refining BH crude, special constraints in moving products tothe northwest, and the advisability of making existing and new capacity moreflexibility in its product pattern.

Financial Impact of Bombay High

36. As discussed in more detail throughout the report, the oil andnatural gas fields at Bombay High will have a major impact on the sectorand on India's economy as a whole. The development of BH is both a veryprofitable investment in itself and will save large amounts of freely con-vertible foreign exchange. Although the investment costs are large andmainly incurred in foreign currencies, the net impact of BH on India'sbalance of payments will be positive from 1977/78 onwards:

- 22 -

INDIA - FOREIGN EXCHANGE IMPACT OF BOMBAY HIGH

1975/76 1976/77 1977/78 1978/79 1979/80 1980/81

Productionin milliontons - 0.5 2.5 4.5 6.5 8.5

Import Price -cost and freight,US$/ton - 95 102 110 118 126

Value of importssubstituted byBH crude, US$millions - 48 255 495 767 1071

Productive capac-ity at end ofyear - milliontons - 2 4 7 10 10

Investment - for-eign exchangecomponent inUS$ millions /a 65 122 89 132 132

Net foreign ex-change impact -value of importssubstituted minusinvestment - US$millions -65 -74 166 363 635 1071

/a Total development cost of BH at US$600 million, 90% of which is in for-eign exchange, actual/estimates in 1975/76 and 1976/77, remainder phasedin proportion to productive capacity added during year.

The foreign exchange savings will exceed US$1 billion per annum when fullproduction is reached. However, BH will stimulate investments in addi-tion to the field's development. ONGC is proceeding with an active off-shoreexploration program in other areas of the Cambay Basin and elsewhere alongIndia's coast. Investments made profitable by the availability of the asso-ciated natural gas at BH are undetermined but likely to be large. For themoment, GOI has not sought any sources of financing outside of Governmentfunds, relying on its capacity and determination to make available whateverfunds in whatever currencies are required. As a result, Plan Outlays in

- 23 -

the petroleum sector have increased more rapidly than in other sectors. Ifexpenditures on BH development result in undesirable cuts in investmentin other sectors without projects that could easily attract foreign financing,

there may be a case for GOI to consider external borrowing for BH ratherthan cut back desired investment elsewhere.

INDIA ANNEX TABLE I

PPTROLEUM SRCTOR U8UhARY TABLE

ACTUALSB ESTIATES AND PROQEETIONSI CRUDE AND PRODUCTS PRODUCTION AND EMPORES 1951-1981

CY1951 cY1961 CY1971 CY1972 CY1973 CY1974 FY1975/16 FY1976/77 FY1977/78 FY1978/79 FY1979/80 FY1980/81A C T U A L S EtirAteO P R 0 J E C T 1 0 N S

Physical Production & Availability of petroleum - millton ton.

Crude produttion '/ 0.27 0.51 7.19 7.37 7.20 7.49 8 3 0 8 L0.6 13.b 15 8 17.8Crde iport. 0.0 5.97 12.69 12.31 13.44 13.97 14.0 15 2 13.7 13.5 13.2 13.1Refinery throughput 0.27 6.44 19.59 19.67 20.52 20.78 22.3 24.0 24.5 27.3 29 0 30.9P-ed-tt produotton (et) 0.25 6.09 18.23 18.20 19 13 19.30 20.7 22.3 22.8 25.4 27.0 28.7Product imports 3/ 3.49 2.48 1.93 3.26 3.74 2.95 2 0 2.0 3.0 2.0 2.0 2 oProdouts anailnhitty 3.74 8.57 20.16 21.46 22. 87 22.25 22 7 24.3 25.8 27 .14 29.0 37.?Produets consumption 3.89 8.26 19.49 21 40 22.48 21.74 22.5 24.3 25.8 27.4 29.0 30.7

ProPortiot of Petroleum Ienorted - p-r.e.te

2 of trode throughput Imported 0 93 65 63 65 67 63 63 56 49 46 42X of prodocts anailobhi itportad a. produftt 93 30 10 15 16 13 9 8 12 7 7 7% of prod ucte anolIble laporntd In forI of

crude (.in.e . ee.. ) and product. 93 94 68 69 71 72 66 66 61 53 49 46

Voine of iFPort. 00$ milli cn /tn fien. yearata-tino in caloodor oeor ahown

Cr-de leporna no. n.e. na. 0.0. no. 1197 1221 1419 1401 1482 1559 1655Produice impurie 0.0 n.e. n.e. n.-. n.a 253 225 244 395 283 304 325Totol POt iponis no.I 201 261 265 719 1451 1446 1683 1796 1763 1863 1930

pOL teporna as o X of Tonol errhendlec Imports no. 8.6 10.0 9.9 18.3 25.3 24.4 .O. .0 . n a. n

1/ ProjectIons of crudo productlo n f,o 1976/77 to 1980/81 booed on -orrootly planned deneDop-en- of known fold only a, mplalned in tent.2/ Crude impuri peojetitnn ore bosod on the difforenna bhattao projooted dend eod domentic production plu product, importe. Crude, hether Impo-tnd or do-letic it rela- d

to producte by oubeotlog 7% foe refi-eoy boila- fuel aed loan..3/ Producet Impoet projtione are judg-octe based on the re-iduel beteeon pro-Jcted demad end tho domestic capacity to refine producce in eac.h por in . rond number. I, is

i,poaeiblo to be pronle ae r-finery nepJcity iteelf will umey by the type of crud- proce.e. d in .ech refioery aod at even uhon copatity Is onough for onerall .elf-eoffiiincy,ton prod-oce vill bh imported.

4/ -hcrernquird, the following each nge recath mg e uted to convert repeat intn US dolloce: 1970/71 - R 7.500 - US$ 1974/75 - R 7.976 USI197I/72 -P. 7.444 -us$5 1975/76 0: 8.650 -US$1

1972/73 - Re 7.706 - USSI1973/74 - Re 7.791 U 0S0

5/ Produ-t..cteun.ption prnjncted teovtnng gtl groth between 1975/76 ted 1976/77 and 67 p.o. there-ften.

INDIA ANNEX TABLE 2

CRUDE PETROLEUM

PROVED AND INDICATED ON-SHORE RESERVESAND DOMESTIC PRODUCTION - 1966-75_

(million tons)

Ratio of Reserves

Year On-Shore Production to ProductionReserves (Duration period)

1966 153.0 4.65 32.9

1967 154.8 5.67 27.3

1968 141.0 5.85 24.11969 132.3 6.72 19.7

1970 127.8 6.81 18.8

1971 113.8 7.19 15.8

1972 125.2 7.37 17.0

1973 127.3 7.20 17.71974 124.5 7.49 16.6

1975 * 116.2 8.30 14.0

* IBRD Provisional Estimate.

Source: Ministry of Petroleum and Chemicals, Indian Petroleum and

Petrochemicals Statistics - 1974.

INDIA ANNEX TABLE 3

NATURAL GAS. RESERVES, PRODUCTION & UTILIZATION. 1965-74

Year Reserves Production Utilization Flared Gas Ratio of Utilization(bm3) --------------- (mm3)--------------- to Production

1965 - 737 346 391 471966 63.15 803 372 431 461967 67.25 1221 465 756 381968 63.34 1317 604 712 461969 65.60 1384 729 655 531970 62.48 1424 676 748 471971 62.29 1509 761 748 501972 62.51 1564 926 638 591973 66.44 1674 912 762 541974 67.86 1918 1010 908 53

Sources: Ministry of Petroleum and Chemicals,Indian Petroleum & Petrochemicals Statistics, 1974.

INDIA ANNEX TABLE 4

CONSUMPTION OF PETROLLEUM PRODUCTS(thousand tons, calendar years)

% of Net Compound Rate % change

1951 1961 1965 1968 1970 1971 1972 1973 1974 Products of Growth 1974 over(Actual) (Prov.) 1974 1951 - 1971 1973

Naphtha - - 30 460 837 1,107 1,280 1,454 1,609 7 infinite 11Motor Spirit 1/ 820 859 1,093 1,256 1,411 1,516 1,586 1,605 1,269 6 3 - 21Other 90 139 238 245 327 371 416 432 428 2 7 - 1

TOTAL, Light Distillates 9tO 998 1.361 1.961 2.575 2.994 3.282 3.491 3.306 15 6 - 5

Kerosene 1,059 2,192 2,525 2,816 3,262 3,457 3,506 3,451 2,871 13 6 - 17Nigh-speed diesel oil 271 1,396 2,327 3,189 3,735 4,221 4,620 5,193 6,255 29 15 20Light diesel oil 442 651 725 987 1,047 1,190 1,385 1,360 1,138 5 5 -16Other 118 345 609 673 1,126 889 1.006 1,000 979 5 11 - 2

TOTAL, Middle Distillates 1,890 4,584 6.186 7,h65 8,870 9,757 10.517 11.004 11,243 52 9 2

Fuel oils 900 1,889 3,191 4,087 4,651 4,974 5,549 5,932 5,573 26 9 - 6Bitumens - 408 599 623 751 949 1,144 1,134 873 4 infinite - 23Lubes and greases 175 359 444 487 535 563 588 635 476 2 6 - 25other products 13 18 97 184 205 252 324 287 273 1 16 - 5

TOTAL, Heavy ends & others 1 088 2675 4,331 5.381 6,142 6,738 7.605 7.988 7.195 33 10 -10

Net total, all products 3.888 8.256 11868 15.007 17 587 19.489 21.404 21.744 100 8 - 3

Refinery boiler fuel 2/ 25 138 411 822 1,148 1,151 1.224 1,204 1187 21 - 1

Gross total, all products 3,913 8_394 12,279 15.829 18,735 20,640 22.628 23,687 9 - 3

1/ Including power alcohol up to 1956.2/ Including fuel used for power generation in captive plants at five of the nine refineries at present in operation.

Source: Data supplied by the Ministry of Petroleum and Chemicals.

ANNEX TABLE 5

India: Composition and Development of Major Product Prices, andComparison with IrnPort Price, Selected Dates, 1973-1976

Rs . A/iloliterImport

Domestic Prices PriceAug. 31 Nov. 30 Sept. 18 July 14 Dec. 1 Jan. 21

1973 1973 1974 1975 1975 19764/

1 . Motor SpiritEx-refinery price 187 251 539 531 531Excise duty 1063 2046 2046 2144 2144Ex-storage price I/ 1411 2457 2847 2945 2945 860

2. Kerosene t/Ex-refinery price 215 293 645 551 551Excise duty 329 428 428 428 428Ex-storage price 541 717 914 964 1084 878

3. High Speed Diesel OilEx-refinery price 172 232 502 564 564Excise duty 512 413 413 413 413Ex-storage price 737 697 895 975 1095 802

4. Light Diesel OilEx-refinery price 165 221 477 535 535Excise duty 178 178 178 178 178Ex-storage price 373 429 880 880 880 734

5. Furnace OilEx-refinery price 100 131 273 487 487Excise duty 108 108 108 137 137Ex-storage price 240 280 654 763 883 604

6. Naphtha (for fertilizeruse) 1/

Ex-refinery price 201 236 323 497 497Excise duty - - -

Ex-storage price 252 252 486 486 486 1078

l/ EX-storage prices vary slightly with the particular storagepoint. These figures are for Bombay. In a few cases the ex-refinery price plus excise duty exceeds the ex-storage priceas there was under-recovery of price (i.e., cross-subsidization) -e.g., September 18, 1974 prices for kerosene and high speed diesel.

2/ Domestic prices are for superior kerosene. The import priceis for regular quality.

3/ Naphtha prices are in Rs./ton.

4/ The import prices are lowest f.o.b. price Bandar Mah-Shahr, Iranor, in the case of naphtha, Ras-Tanura, Saudi Arabia on January 21,1976 as reported in Platte Oilgram plus average freight rates,Bandar Mah-Shahr to Bombay during the period Nov. 16 - Dec. 15,1975.

INDIA ANNEX TABLE 6

PRODUCTION OF CRUDE PETROLEUM IN INDIA BY CCdPANY(Thousand tons, calendar years)

YEAR AOC Oil India ONGC TOTAL

1951 269 - 269

1956 307 89 - 396

1961 184 319 10 513

1965 158 1,742 1,122 3,022

1968 117 2,771 2,965 5,853

1970 107 3,070 3,632 6,809

1971 98 3,146 3,941 7,185

1972 93 3,183 4,097 7,373

1973 84 3,102 4,011 7,197

1974 72 3,080 4,338 7,490

1975 68 3,050 5,200 8,318

Source: Ministry of Petroleum and Chemicals, Indian Petroleum & Petro-chemicals Statistics, 1974, with 1975 data supplied by the Ministry.

INDIA ANNEX TABLE 7

CRUDE THROUGHPUT OF INDIAN REFINERIES:PRIVATE, PUBLIC AND JOINT SECTORS

1960 1965 1970 1971 1972 1973 1974

Throughput (million tons)

Private Sector 6.09 8.21 7.47 8.39 7.83 9.03a/ 5.68a/

Public Sector - 1.54 6.34 6.62 6.84 7.01 7.28

Joint Sector - - 4.65 4.58 5.00 4.47 7.82TOTAL 6.09 9.75 18.46 19.59 19.67 20.51 20.78

Respective shares (percentages)

Private Sector 100.0 84.2 40.5 42.8 39.8 44.0 27.4

Public Sector - 15.8 34.3 33.8 34.8 34.1 35.0

Joint Sector - - 25.2 23.4 25.4 21.9 37.6TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0

a/ This total includes the following quantities imported by the Indian OilCorporation for processing in private sector refineries on a conversion basis.

1973 1974(Thousand tons) '000'Tonnes

Burmah-Shell (Bombay) 735 1,104Esso (Bombay) 317 550Caltex (Vishakhapatnam) 29 68

TOTAL 1.0811722

Source: Data supplied by the Ministry of Petroleum and Chemicals.

INDIA ANNEX TABLE 8

ESTIMATED REFINERY THROUGHPUT CAPACITY(million tons)

Sept 1974 InstalledThroughput Capacity as

on 1-1-75A. By refinery and ownership

1. Public Sector

Koyali 3.80 ) 3.80)Barauni 2.80 ) 7.40 3.00) 10.10Gauhati 0.80 ) 0.80)

Haldia 2.50)

2. Joint Sector

Cochin 3.30 ) 3.30)Madras 2.50 ) 9.30 2.65) 9.45Hindustan Petroleum (Bombay)a/ 3.5 0b/) 3.50)

3. Private Sector

Burmah-Shell (Bombay) 5.25-/ 5.25)Caltex (Vishakhapatnam) 1.55c/) 7.30 1.55) 7.30Digboi (Assam) 0.50 ) 0.50)

2A4.00 26.85B. By location

1. Inland refineries 7.90 8.10

2. Coastal refineries 16.10 18.75

!/ Until recently this refinery was owned by ESSO and was therefore in the privatesector. The Government of India has now acquired a 74% equity interest ofESSO Eastern's operations in India including the Bombay refinery. From March1974 this refinery therefore passed into the joint sector category.

b/ The recognized capacities of these three refineries, on the basis of whichthe private companies are permitted (or, in the cases of ESSO and Burmah Shellat Bombay, were permitted) to import crude are as follows:

Burmah-Shell (Bombay) 3.75 million tonsESSO (Bombay) 2.75 million tonsCaltex (Vishakhapatnam) 1.25 million tons

TOTAL '7.75 million tonsFrom June 1973 the balance of 2.55 milTiER tons throughput between recognizedand actual capacity became available for utilization by Indian Oil Corporationon a conversion basis.

c/ On February 1, 1976, the owners of this refinery became the GOI whosubsequently renamed it Bharat Refineries, Ltd.

Source: Data supplied by the Ministry of Petroleum and Chemicals.

hNRI TABLE 9

India: Filfth Plan Outlay of Petroleum Industry. Orioldal Fifth Pln Total. Annual Outlayo and Five Year Sum. By Malor Entiv(in Rupees Millions)

1975/76 Revised 1976/77 Planned 1977/78 Planned 1978/79 Planned1974/75 Actuals Estimates Outlay Outlay Outlay

Total Of which Total Of which Total Of which Total Of which Total Of which Five YearOutlay GOI Outlay GOI Outlay GOI Outlay GOI Outlay GOI Sum of

(Actuals) Budget- Budget- Budget- Budget- Budget- Outlaysary ary ary ary ary

SupportL/ SupPort Suoport SuopOrt Sugport

Exploration and Development ofOil and Natural Gas Reserves:

1) Oil and Natural GasCommission 1808 - 2883 900 3652 1382 4156 1510 4783 1222 17282

2) OJI India Ltd. 100 - 343 259 388 281 608 n.a. 237 n.a. 1676

Subtotal Exploration ofDevelopment 1908 - 3226 1159 4039 1662 4763 n.a. 5019 n.a. 18958

Petroleum Refining and Trans-porting, Marketing and Distri-buting Petroleum Products:

1) Indian Oil Corporation 2/ 358 50 603./ 210 1000 753 1349 n.a. 1540 n.a. 48502) Bongaigaon Refineries Ltd.!/ 55 45 165 165 238 238 214 214 98 98 7703) OtherA/ 3 - 16 2 51 35 n.a. n.a. n.a. n.a. 2897/

Subtotal Refinery & Marketing 415 95 784/ 377 1289 1026 1563§/ n.a. 16 3 8 i" n.a. 5909.7/

Grand Total 2323 95 4010§/ 1537 5329 2688 6326k/ n.a. 6657/ n.a. 248672/

Source: Ministry of Petroleim.

Budgetary support does not inolud funds from Oil Development Fund or loans from Oil Industry DevelopmentBoard. These funds are ijoluded in total outlys.

/ Includes IOC expenditure on the Koyali eipenmion, the Hathura Refinery and the Salaya-Korya.ii4athura pipeine.

t/ Excludea outlays on petrochemical development at Bongeigaon.

/ Made up of outlay on Coohin Refineries Ltd., Madras Refineries Ltd., Hindustan Petroleua Corp. Ltd. And Lubrisol Indi. Ltd.Ltd.

/ Includes a Rs 7 million uncovered deficit.

,/ Does not include expenditures on Madras Refineriea and Hinduetan Petroleun Corp. Ltd. to be made in theae yearsas e3penditure is not phased as of yet.

7/ Includea outlays on Madras Refineries Ltd. and Hindustan Petroleum Corporation whioh are planned to totalRe 198 million and Re 70 million reapectively over five year period.

IBRD- 12190

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