Energy value chain has 2 stages - upstream (exploration and production) and downstream (refining and marketing). Post extraction from reserves, crude oil is processed to yield various petroleum products, which are then marketed.
The gas consuming sectors can be broadly classified into – Priority (CGD, power, fertilizers) and non-priority sectors (steel, refining etc). The gas demand in India is met through either domestic supplies or imported gas (LNG). There are broadly two pricing regimes for the gas in country – Administered Pricing Mechanism (APM) and non-APM, which applies to imported gas (LNG) and gas produced from JV fields.
There are presently three major pipeline entities in gas transportation in the country – GAIL (operating HVJ and DVPL), RGTIL and GSPL. The natural gas is sourced from KG-D6, Mumbai offshore, Cambay Basin, Ravva Offshore, KG Basin, Cauvery basin and imported LNG.
As per the Government mandate, the priority sector has the first claim over domestic gas. One must note that the GoI changed the priority of domestic gas allocation and allocated highest priority to the CNG and PNG (domestic) segments of the CGD sector ahead of core sectors – Power and Fertilizers.
Among the key petroleum products, diesel and petrol are deregulated. However, kerosene and LPG still operate under regulated pricing regime. Further, the Government has announced direct benefit transfer to avoid the misuse of the policy.
How to Research the Energy Sources Sector (Key Points)
In the upstream segment, supply from the domestic market caters to 20%-25% of the total demand for crude oil. In the gas segment also, with the domestic gas supplies on a decline, the share of imports in gas sector is rising. In the downstream segment, refining has seen significant capacity addition in the recent past. Crude oil price prices fell to levels as low as US $ 29per barrel in 2016 due to oversupply and a subdued global demand. However, with OPEC agreeing for a production cut, oil prices have shown good recovery towards the end of 2016.
In the past, we have seen a fair degree of correlation between the growth in petroleum products and the growth in the overall economic activities. Thus we expect the long term demand to be in line with economic growth. In current scenario, oil is oversupplied while demand remains relatively muted due to slowdown in the global economy. However, the oversupply is being brought under control with planned production cuts by both OPEC and non OPEC member nations.
Barriers to entry
In the upstream segment, government permission is required to commence operation. Finding, exploration, development and production cost of oil fields are significant, thus barriers are higher.
Bargaining power of suppliers
Crude prices are globally determined and are highly susceptible to geopolitical events, economic growth and demand factors, economic policies, and speculative bets. Since domestic availability is only about 20%-25% of the requirement, India is basically a price taker as far as crude is concerned. For the petroleum products, given the surplus capacity in the country the bargaining power is low.
Bargaining power of customers
Despite oil prices being on the cheaper side throughout the year, the price of petroleum products has not declined by the same extent due to Government's interference with regards to hike in excise duties etc. With PSUs controlling most of the market, bargaining power of customers is not very strong. However, this may change as private players gain a higher share in the market.
The Government of India (GoI) has enacted various policies such as new exploration licensing policy [NELP] and coal bed methane [CBM] policy to encourage investments and competition across the industry's value chain. The government, in March 2016 announced the adoption of the new hydrocarbon exploration licensing policy (HELP) to replace the erstwhile NELP. This change is touted to bring a fresh change in the licensing framework and bring about a greater degree of transparency, thus spurring investments.
In the downstream segment, companies are going for upgradation of refineries and adding capacities which is likely to lead to more competition. With new reforms announced in energy sector, more private players are likely to enter oil and gas sector thus increasing the competition.
Crude oil production in India stood at 36.9 MMT in 2015-16 (versus 37.5 MMT last year), while consumption of Petroleum Products stood at 183.5 MMT, up 10.9% YoY. Production of Petroleum products in 2015-16 stood at 230.7 MMT, an increase of 4.7% on a year on year basis.
Domestic refinery capacity as on April 2016 stood at 230.1 MMT
Gross production of natural gas stood at 32,249 mmscm in 2015-16 (P), while imports for the same duration stood at 21,110 mmscm.
Total under recoveries in 2015-16 stood at Rs 276 bn, down 64% YoY. Of the total under recovery burden, upstream shared 4.7%, Government shared 95% while oil marketing companies shared less than 1% of the burden.
Volume wise, the consumption of petroleum products grew by 9.3% YoY for sensitive products (SKO & LPG), 15.3% YoY for major decontrolled products and 33.8% YoY for minor decontrolled (petroleum coke) products. As on March 2016, Motor spirit/MS has grown by 21.5% YoY and a cumulative growth of 14.5% from April 2015 – March 2016, driven by auto sector. High speed diesel (HSD) consumption for the year grew by 15.1% YoY in March 2016 and cumulatively by 7.5% for the period April 2015 – March 2016. LPG consumption in March 2016 grew by 14.2% YoY and 8.6% cumulatively for the previous year.
The cumulative gas consumption grew by only 0.30% for the period April 2015 – March 2016, mainly on account of reduction in domestic gas production and lower off take of gas in core sectors. Reduced production due to compensatory consumption of gas volumes by power and fertilizer sector under the pooling mechanism have contributed to the flat growth. CGD consumption in April 2015 – March 2016 grew by 3.3%. The cumulative gas production for the current year till march declined 4.2% compared to the previous year, while cumulative imports for the period were higher by 13.9% YoY.
After being a victim of regressive policies such as regulated price regime for Petroleum products, the oil and gas sector has seen some relief on this front with moves such as deregulation of diesel, direct benefit transfer and so on.
Decline in the crude oil price has further helped in reducing the import bill and under recoveries.
Subdued oil prices however, could put oil exploration and production companies in a tough spot as revenue realization and net profits could go down significantly. As a result, these companies could face challenges of investing in new projects and developing the current infrastructure.
That said, lower oil prices may make oil production unviable in some areas and hence can impact production plan and balance sheet health of some of the oil exploration and production companies.
In the downstream segment, there is likely to be a lot of competition from the private players. One must also be cautious about capacity addition in refining space. The same is likely to lead to over supply, thus putting pressure on product cracks and margins.
The government's recently approved Hydrocarbon Exploration and Licensing Policy (HELP)-2016 will prove to be beneficial for the sector as a whole and afford a host of advantages including: single license for exploration and production of all forms of hydrocarbon; an open acreage policy; easy to administer revenue sharing model; marketing and pricing freedom for the crude oil and natural gas, and reduced royalty rates for offshore areas. This is likely to help attract investments.
The impact of HELP on the upstream sector is yet to be seen, however it would be visible from 2017.
The sector is quite vulnerable to global threats like slowdown in the US/Europe, tensions between Iran and US region etc. Going forward, higher domestic production, regulatory reforms across the value chain and pipeline, refining and gas infrastructure will be the driving factors for the sector.
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