Pergamon Nciiuml &wiirw$ F k m . Vol. 22, No I. pp 15-25, 1998 0 1998 Uniled Nation* Puhli\hcd hy Elwvicr Science Lld

Printed in Great Britain

PII: SO165-0203(97)00033-0 OlhS-I)21)7/YX %19.00+0 00

Policy issues pertaining to the oil and gas sector in India

Raghavendra D. Rao

This article distwses the various phases in petroleum product cfinsumption in India from I960 to 1996, and analyses the chunges in consumption patterns. Consumption is growing rapidly although the intensity of petroleum use und the proportion of petroleum in the overall secondary energy consumption is actually on the decline. especiully since the mid-1980s. The proportion of middle distillates in total consumption, especially HSD (High Speed Diesel) which accounts f o r 45%. is very high main1.v because of distortions caused by Government subsidies. The article ulso analyses expected demand,for petroleum product.7 up till the year 2010, emphasizing the need to address the particularly fast growing demandfor middle distillates. Further, the urtide discusses vurious policy issues pertaining to upstream and downstream activities of oil trnd gas .supply, tmd emphusizes the need fo r increased investment in exploration and development. better munagement of existing reserves, rationalizution of pricing policies and the creation of modern infra- .structure to meet growing nee&. 0 1998 United Nations Published by Elsevier Science Ltd

India has about 0.04% of the world’s proven reserves of hydrocarbons. The prognosticated geological resources of hydrocarbon in the country are estimated at 2 1.3 1 billion tonnes, of which 61% are offshore and 39% onshore. How- ever, established geological reserves are only 5.32 billion tonnes. It is believed that half the prognosticated resource represents natural gas, of which 12% has so far been proven.

In 1993- 1994, indigenous crude oil production in India could meet only 47% of the country’s domestic require- ment. In that year, the value of net crude oil and petroleum product imports constituted 26% of total export earnings for the year, despite subdued prices on the international oil market. Over the following two years, domestic production increased and in the year 1995- 1996,56.3% of the crude oil consumed was met through indigenous production. For the year 1996-1997, revised estimates again show a sharp decline in domestic crude production because of the bad management of existing reservoirs. The last 25 years have seen a steep increase in the consumption of petroleum products with a compounded annual rate of growth (CARG) of 5 % . In the early 1990s, CARG was reduced to 2.7% caused by a slowing down of industrial activity. However, the liberalization of the Indian economy in recent years promises a faster rate of economic growth in the years to come. This might, in turn, result in increased consumption of petroleum products. The issue of managing the growing demand for petroleum products is a critical aspect of India’s future energy policy.

The entire range of petroleum supply activities, including exploration, extraction and refining, and a large portion of

The author IS currently Energy Economist at Reliance Petroleum Limited. Bombay. India. This article was written during his tenure at the Indira Gandhi Institute of Development Research. Mumhai, India.

the transportation of crude oil, petroleum products and gas in India is currently being handled by government con- trolled organizations. In the now liberalized scenario, investment from the private sector is encouraged in the form of joint ventures between private and government con- trolled organizations. Investment needs to be distributed among the various upstream and downstream activities. For upstream activities (exploration and extraction), invest- ment needs to be spread among various potentially produc- tive basins. Investment in downstream activities is required to establish new refineries to ensure adequate expansion of refining capacity required to meet the growing demand. Decisions have to be taken regarding the time-path of joint production of oil and gas from existing reserves, in various reservoirs. The process configuration of existing refineries need to be geared to meet the emerging pattern of demand in India. Here, there is a need to invest in sec- ondary conversion process units, such as Fluid Catalytic Cracking (FCC) and Hydrocracking (HC) units, to meet the growing demand for middle distillates. For a complete picture of current supply issues, the dependence on imports to meet demand and the relative costs of importing crude oil and petroleum products vis a vis domestic production and refining, also need to be given due consideration.

Consumption of petroleum products - 1960-1996 The consumption of petroleum products in India (Figure 1) over the last 35 years, can be classified into distinct time periods. Plotting petroleum consumDtion against the Gross Domestic ProZult (GDP) across’ time ywill trajectory of intensity of petroleum use (IPE), in Figure 2. The growth of consumption of compared with growth in consumption of

yield the illustrated petroleum secondary

16 Policy issues pertaining to the oil and gas sector: R. D. Rao

Petroleum consumpt ion

50 - 1.

0 c = 40 - E C 0 .- = 30 E

- .-

20 -

l o -/

60 - Petroleum consumpt ion

50 -

1.

0 c = 40 - E C 0 .- = 30 E

- .-

20 -

10 -

Year

Figure 1 Consumption of mineral oils in India.

energy as a whole, indicates a faster rate of growth for commercial energy sources other than petroleum (Figure 3). However, the consumption of petroleum products in abso- lute terms grew at a very high rate. The ratio of total secondary energy consumption to the GDP is defined as the Intensity of Energy Use (IE). Figure 4 illustrates IE across years for India.

During the first time period from 196011961 to 1966/ 1967, and the second time period from 1967/1968 to 1971/1972, the consumption of petroleum grew at a very high rate with an average annual growth of 20.68% and 18.94% (Table 1). The corresponding figures for the overall secondary energy were 7.14% and 6.35%. However, the effects causing the growth were different. In the first phase, the growth can be attributed to the increasing proportion of consumption of petroleum products in the overall secondary energy consumption, the growth of the economy and the

increasing intensity of energy use (IE), with all these factors contributing evenly towards the growth in consumption. In the second phase, the growth in consumption was fueled by increased incremental growth in GDP and increased propor- tion of petroleum in the overall energy consumption, while the intensity of energy use increased at a lower rate as compared to the first phase. The year 197211973 experi- enced the effect of the first oil shock, with a dip in petroleum consumption, caused by the reduced supply of oil. The third phase from 1973/1974 to 1979/1980, marked the beginning of a period of substitution of oil by other energy sources. The increased consumption of petroleum in this phase was mainly due to a brisk growth of the economy. The year 1980/1981 experienced the effect of the second oil price shock, again caused by an increased international price of oil. The slump in petroleum consumption was caused by reduced proportion of petroleum consumption in the overall

I 0.025

IY : I a x 0.020

Petroleum conaumpt ion IGDP -

-

-

Figure 2 Intensity of petroleum use.

Policy issues perruining io the nil and gus sector: R. D. Rao 17

w 0

5

Ptxroleum consumption

Total energy .......... 2 0 0

t

... SO - .. . . ... ...

0 1 1 1 1 1 1 1 1 1 1 1 1

... .

0 1 1 1 1 1 1 1 1 1 1 1 1

Years

Figure 3 Petroleum and total secondary energy consumption.

secondary energy consumption, though the economy was buoyant. The fourth phase from 1981/1982 to 1984/1985 saw the continuation of the trend of a higher level of increase in the usage of secondary energy sources other than petroleum. However, a healthy growth in the economy and an increase in the IE, brought about an increased consumption of petroleum products. The year 1985/1986 experienced the effect of a slump in the international oil prices which increased the proportion of petroleum in the overall energy consumption. This, along with a good growth in the economy and the IE, saw a huge spurt in petroleum consumption. The fifth phase from 1986/1987 to 199411995 shows a trend of decreasing average rate of growth in the Intensity of Petroleum Use. The average growth of Intensity of Energy use however, showed a marginal increase during this period. Thus, the growth in

petroleum consumption during this phase can be attrib- uted mainly to the growth in the economy and was considerably dampened by decreasing proportion of petroleum consumption in the total energy consumption. With the liberalization of the economy, a high growth in the economy can be expected in the years to come. Some products like HSD and Kerosene are heavily subsidized leading to massive consumption, especially of HSD, and the price of certain products like MS (Petrol) were fixed at a relatively high level, distorting the pattern of con- sumption (Figure 5). The planned decontrol of prices and decanalisation of imports of all petroleum products might show an increase in consumption of petroleum products keeping pace with, and probably exceeding, the rate of growth of consumption of the other secondary sources of energy.

Year

Figure 4 Intensity of total commercial energy u\e

18

Table 1

Years Petcon Totene GDP Petconmotene Totene/GDP (IE) PetcodGDP (IPE)

Policy issues pertaining to the oil and gas sector: R. D. Rao

Average annual percentage growth of the salient factors affecting petroleum consumption

1960/1961 to 1966/1967 1967/1968 to 197111972 1972/ 1973 1973/1974 to 1979/1980 1980/198 1 1981/1982 to 1984/1985 1985/1986 1986/1987 to 1994/1995

20.68 18.94

-4.15 5.35

-4.05 7.96

23.87 3.27

7.14 6.35 1.79 4.84 5.47 7.87

10.97 5.57

2.99 4.98

3.26 6.65 5.36 5.46 5.06

-0.62

11.13 11.61

-5.84 0.6

0.03 11.62

-9.03

-2.17

4.24 1.33 2.43 1.68

-1.11 2.39 5.23 0.52

17.41 13.28

-3.55 2.23

- 10.04 2.44

17.46 - 1.68

Projected pattern of demand for petroleum pro- ducts in india 1995-2010 The forecasts of demand for petroleum products have important policy implications for the overall supply. A sum- mary of demand forecasts (Rao and Parikh, 1996) for the various products is given in Table 2 and described below.

Petrol (motor spirit = gasoline) The automobile industry in India is growing fast, with many multi-national car and two-wheeler manufacturers expanding their operations or planning to enter the Indian market in the near future. As a result, demand for petrol can be expected to grow at a faster rate in the future. In forecasts, demand is projected to grow at a rate of about 8% per annum during the latter part of the 1990s, gradually increasing to an average annual growth rate of 12%-13% by the end of the period (2010-201 1). This high rate of growth in demand for petrol can be attributed to the expected rapid increase in personalized transport, in turn resuIting from increasing income levels.

HSD (high speed diesel) HSD is a subsidized commodity in India, since an increase in its price would have an impact on inflation. The consumption

1 .0

0.8 '

0.6

0.4

0.2

n

of HSD almost doubled during the decade ending 1993- 1994. In forecasts for the future, the demand for HSD is estimated to grow at an average annual rate ranging from around 7%-8% in the late 1990s to about I I % by 2010- 201 1. Demand is expected to grow from 29.59 million tonnes in 1995-1996 to 108.2 million tonnes in 2010- 201 1. Thus, HSD is likely to hold its position as the most consumed petroleum product in India. Manufacturers of personal transport vehicles (motor cars, etc.) have begun manufacturing HSD driven vehicles to take advantage of its subsidized price, thus raising questions on the rationale in retaining the subsidies. Moreover, the very high quantity of import of HSD by India has been having an impact on the international price. This in turn has resulted in a vicious cycle of subsidy-driven increase in domestic demand lead- ing to increased imports, leading to a higher international price mark-up caused by the increased imports.

Fuel oils The consumption of fuel oils has in the past shown a linear, low rate of growth over the years. Future projections indicate a continuation of this trend, with the demand showing a marginal increase from 9.68 million tonnes in 1995-1996 to 11.88 million tonnes in 2010-2011. This

1981-82 1983-84 1985-86 1987-88 1989-90 1991-92 1993-94 1995-96

Year

Light 0 HSD

Middle (SANS HSD) Heavy

Figure 5 Proportion of various distillates in overall petroleum consumption.

Policy issues pertaining to the oil und gas sector: R. D. Rao 19

Table 2 Summary of demand forecasts for selected years ~~ ~

Product Demand in million tonnes Percentage average annual rate of growth

Year 1995- I996 2000-2001 2005-2006 2010-2,01 I 1995- 1996 to 2000-01 to 2005-2006 to 2000-2001 2005-2006 2010-201 I

Petrol 4.52 (4.77) 7.12 (6.84) 12.22 (10.77) 23.24 (19.00) 9.54 (7.48) 1 I .40 (9.50) 13.7 I ( I 2.0) HSD 29.59 (31.25) 43.02 (41.30) 65.88 (58.06) 108.2 (58.43) 7.77 (5.74) 8.90 (7.05) 10.43 (8.78) Kerosene +LPG 14.96 (15.80) 22.89 (21.98) 34.68 (30.56) 51.96 (42.47) 8.89 (6.83) 8.66 (6.81) 8.42 (6.80) ATF 1.90 (2.01) 2.60 (2.50) 3.61 (3.18) 5.05 (4.13) 6.50 (4.46) 6.76 (4.93) 6.97 (5.37) Fuel oils 9.68 (10.22) 10.43 (10.01) 11.14 (9.82) 11.88 (9.71) 1.50 (-0.41) 1.32 (-0.38) 1.30 (-0.23) LDO 1.41 (1.49) I .53 (1.47) I .66 ( I .46) I .80 ( I .47) 1.54 (-0.27) 1.63 (-0.14) 1.75 (0.14) Naphtha +LUBE 4.44 (4.69) 4.75 (4.56) 5.04 (4.44) 5.33 (4.36) I .34 (-0.56) I .22 (-0.53) 1 . I4 (-0.36)

Note: Figures in brackets denote per-capita share of demand (in kilograms).

trend indicates a decreasing reliance on these fuels in the industries, mainly caused by technological advances.

Other petroleum fuels Demand for Aviation Turbine Fuel (ATF) is predicted to grow at a rate of about 6% to 7.5% during the period 1995- 1996 to 2010-201 1, from a level of 1.9 million tonnes in 1995- 1996 to 5.05 million tonnes in 20 10-201 1.

The forecasts for Light Diesel Oil (LDO), indicate that its importance as a fuel in electric utilities, shipping and indus- tries is on the decline mainly owing to the availability of cheaper substitutes. Demand for LDO is expected to grow from 1.41 million tonnes in 1995-1996 to 1.80 million tonnes in 2010-201 I .

The demand forecasts for naphtha and lube oils com- bined, show a trend of stagnation. A marginal increase from 4.44 million tonnes in 1995-1996 to 5.33 million tonnes in 2010-201 1 is predicted. This can be attributed mainly to the shrinking importance of naphtha in the fertilizer and petrochemical sector, where gas is coming up as an alternative fuel.

The change in Government policy to allow private operators to import and market kerosene and LPG on the Indian market is expected to increase supply, which in turn will better satisfy the suppressed demand for these fuels in the domestic sector as cooking and lighting fuels. The demand is expected to grow from 14.96 million tonnes in 1995-1996 to 51.96 million tonnes in 2010-201 1. Thus, according to these predictions, kerosene and LPG will con- tinue to be very prominent among petroleum products in India in the near future.

Thus, the demand for petroleum products: motor gaso- line, HSD, kerosene, LPG and ATF is expected to grow at a very rapid rate during the forecast period, whereas demand for fuel oils, LDO, naphtha and lube oils is expected to grow at a relatively lower rate. This pattern of demand, along with other factors such as the quality of crude oil and the expected relative international prices of crude oil and pet- roleum products, will determine the plan for an appropriate refinery and processing configuration in India. The variation in capital costs for alternative process configurations is very large. Thus, to arrive at an optimal process configuration, an analysis of alternative means of satisfying the demand, which includes product import options and domestic refin- ing with alternative process configurations, needs to be undertaken. This requires a thorough study of likely market

developments and possible changes in Government policy in the future, which might affect the prices of crude oil and petroleum products, and the capital and operating costs of refining. In India, the Government plans to de-control the currently administered consumer prices of petrol in the near future. The procedure and timing of the planned deregula- tion may also have a considerable impact on the future demand pattern of petroleum products.

Issues in the supply of oil and gas Exploration: increased investment needed The prognosticated geological resources of hydrocarbon in the country are estimated at 2 1.3 I billion tonnes, of which, 61% are offshore and 39% onshore. Of this, proven geo- logical reserves however, are only 5.32 billion tonnes. The reserves are distributed in 26 sedimentary basins, of which 13 are considered more prospective. These basins are clas- sified into four categories, of which Category I basins are those currently producing, while Category 11, I11 and IV basins have declining levels of prospectivity. It is believed that half the prognosticated resources represent natural gas, of which only 12% has been proven so far.

The Oil and Natural Gas Corporation (ONGC) and the Oil India Limited (OIL) handle most of the exploration and production of hydrocarbons in the country. The two compa- nies expanded exploration activities in the early 1980s in an effort to augment reserves, concentrating on previously unexplored areas with increased emphasis on offshore areas, consistent with the greater proportion of prognosti- cated resources in offshore areas. The 1980s also saw increased exploration activities in the Category 11 and 111 basins. This was because geological surveys indicated several large structures in Category I1 and 111 basins favour- able for hydrocarbon accumulation. Some Category 11 basins such as the Krishna-Godavari and Cauvery basins yielded good results and have now been upgraded to Category I .

Certain Category I basins, like the Dahej and Gandhar (onshore) and Neelam (offshore) fields also produced encouraging results during the late 1980s (TERI, 1995), contradicting beliefs that exploration had reached maturity in Category I basins. Figure 6 shows metreage drilled in onshore and offshore basins since 1980. As can be seen, there had been a steady increase in the magnitude of metreage drilled, especially in onshore basins, where there

20

r Policy issues pertaining to the oil and gus sector: R. D. Rao

I I I I I I I 1 I I I I

Year

Figure 6 Metreage drilled for exploration

was a quantum leap in drilling activity in 1985, with a peak in 1989 after which there has been a downslide. Offshore basins have also faced recent stagnation in the levels of metreage drilled. The availability of recoverable reserves got a boost with the discovery of Bombay High offshore reserves in 1975-1976. From then on, the reserves from offshore basins have been accruing at a steadily increasing rate (Figure 7) to peak at 491 Million Metric Tonnes (MMT) in 1991, with a subsequent leveling off. For onshore basins, the availability was in the range of 125-145 MMT during the period 197 1 to 1982, after which there had been a steady increase in the reserves available. However, the quantity has stagnated during the 1990s.

Thus, capital constraints have limited exploration activity in India, leading to low reserve accretions in the past few years. With the widening gap between indigenous production

and demand, there is a need for exploration activities to be stepped up. Involvement of the private sector in E and P (exploration and production) activities by bringing in technology and finance, the two most critically required inputs, could step up the accretion of reserves and increase domestic production of crude oil. In order to attract foreign investment, eight rounds of bids were held between 1980 and 1994. In these rounds acreage was offered in a produc- tion sharing contractual system wherein private companies enter into production sharing arrangements with the public sector oil companies. The response to these bidding rounds was not very encouraging owing to factors such as inordinate delays in finalizing contracts and lack of ade- quate seismic field data. These difficulties were com- pounded by the perception that the oil fields offered were of limited productivity, especially in comparison to those

Onshore .-._ ...

, -. Offshore ..........

.... 400

0 C C 0

t

Year

Figure 7 Availability of recoverable reserves of crude oil.

Policy issues pertuining to the oil and gas sector: R. D. Rao 21

offered by other countries in the region, e.g. the People's Republic of China, the Commonwealth of Independent States and Vietnam. In order to improve participation, the Government is now offering small and medium oil fields to the private sector, allowing companies to conduct their own seismic surveys and also encouraging joint ventures with ONGC/OIL for exploration. Further, the Ministry of Petro- leum has recommended that all exploration companies, including the ONGC and OIL, be given the right to market the extracted crude to any buyer, national or international, without reserving for the government the first option to purchase the entire output. The government will however have the right to match the best offered price. The Ministry is planning an amendment to the bid evaluation criteria for the award of discovered fields since current criteria do not attach a penalty for not achieving the projected recoverable reserves. This gives room for the possibility of inflated pro- jections of recoverable reserves by the bidders to project a better Net Present Value.

The Ministry has also set up a committee to draft a relinquishment policy of petroleum exploration licenses for acreage leased out to the public sector companies. Guidelines would be set up by which the PSUs would have to give up acreage if no exploration is carried out within the specified period. Hopefully, all these measures will bear fruit in ameliorating the trend of declining explora- tion activity and depletion of recoverable reserves.

Extraction: need f o r better management of hydrocarbon resources With the recent spurt in international prices of crude oil, the oil import bill is an increasing burden on the economy. Thus, the issue of proper management of India's indigenous resources has occupied center stage.

Figures 8 and 9 depict the production and import of crude oil from 1970 to 1995. The discovery of Bombay high basin and commencement of production from 1976 brought about an increase in overall production of crude oil. Since its

Production

Import ..........

H

discovery, there has been severe dependence on this basin alone, which currently accounts for two thirds of the total domestic production. In the first half of the decade of the 1980s, production from Bombay high increased at a rate of 33% every year, and then stagnated during the latter half. The flogging of oil fields for many years in succession without timely water injection inputs led to extensive damage, closure of several oil fields and a subsequent decline in production. Thus, after attaining a peak value of 34.0 MMT in 1989- 1990, production declined for three consecutive years. In 1994-1995. a well rectification pro- gram for the Bombay High field and some new field development projects arrested the downward trend to increase overall production by 19%, and a further 12% increase in production from Bombay high in 1995-1996 brought about a 7% increase in national production.

Budget estimates of 35.65 MMT of crude oil to be produced in 1996-1997 have had to be scaled down to 30.85 MMT. This gap of about 4.8 MMT between earlier projections and current estimates will cost the exchequer an additional 27.8 billion of Rupees (at US$22 per barrel of crude). The shortfall is mainly caused by improper manage- ment of extraction at the Bombay High basin, and at the Neelam and Heera western offshore fields. A shortfall is also expected from the Assam and the Gujarat onshore basins. Oil producing companies have admitted that the estimated shortfall is mainly caused by flogging of wells causing heavy damage. This has compelled the Ministry of Petroleum and Natural Gas to question the "intrinsic technical and managerial capability" of the oil producing companies.

The import of crude oil declined during the early 1980s because of increased domestic production (Figure 8). However, since the mid-l980s, imports have been rising steadily and peaked at 30.8 MMT in 1993-1994, account- ing for 53.3% of total availability for the year. In 1995- 1996, the share of imports declined in terms of quantity to 43.7%, but actually increased by 12% in terms of value over the previous year because of an increase in oil prices.

..

I I I I I I I I I I I I

Year

Figure 8 Production and import of crude oil.

22

70 r Policy issues pertaining to the oil and gas sector: R. D. Rao

Year

Figure 9 Production and import of crude oil

Given the ever-growing domestic demand for petroleum and a volatile international market, proper management of domestic resources can cushion India’s import liabilities to a certain extent. Application of suitable EOR (Enhanced Oil Recovery) techniques can extend the productive life of old and depleted fields over a greater time span. Some positive action seems to be in the offing in this respect with pilot tests for chemical flooding, miscible gas injection and thermal methods of EOR being conducted in various fields. These techniques might replace water flooding and gas injection techniques wherever applicable. The Oil and Natural Gas Corporation, the main oil producing company in India, has appointed a leading international management consultancy company to look into their organizational structure and recommend changes.

Refining: need to regulate proposed capacity expansion In contrast to the E and P activity in the country, the down- stream refining sector has seen brisk growth in recent years. The first refinery in India was set up at Digboi, Assam, in 1901 and is now being operated by the public sector Indian Oil Corporation (IOC), which currently has the largest market share.

From the early days of this century, India’s domestic refining capacity has been growing steadily over the years. It was stagnant at 51.85 MMT between 1988-1989 and 1992-1993. In 1993-1994, the capacity of the Guwahati refinery was expanded by 0.15 MMT, a new refinery com- missioned at Narimanam, Tamil Nadu, and a streamlining project commissioned at Madras Refineries Ltd. to yield another 0.9 MMT, increasing the overall capacity to 53.4 MMT. In 1994-1995, the Cochin refinery was expanded by 3 MMT bringing the overall capacity to 56.4 MMT. Mangalore refinery with a capacity of 3 MMT started trial production in March 1996 and the first quarter of 1996- 1997 saw the expansion of Bongaigaon refinery by 1 MMT. Thus, India currently has a refining capacity of 60.40 MMT.

The refining sector was opened to private sector partici- pation. According to a recent CMIE (Center for Monitoring

Indian Economy) survey, 14 new refineries and 5 capacity expansion projects are envisaged. Five of the new refineries, totalling 39 MMT of additional capacity, are currently in various stages of implementation, and three of the expan- sion projects, providing an additional capacity of 7 MMT, are now being implemented. India’s total refinery capacity is expected to reach around 131 MMT by 2001-2002. Utilization of existing refinery capacity has been consis- tently above 100% during recent years.

In refining, secondary conversion processes are used to convert vacuum gas oil (middle to heavy distillates) and other heavy fuel components into lighter distillates like LPG, gasoline, HSD and kerosene. Since the forecasts for India show an increasing demand for the lighter distillates relative to heavy fuels, future refinery configuration needs to put increased emphasis on investment in secondary con- version processes. The technology to be adopted for the projected expansion of capacity, either by establishing new plants or by expanding capacity in the existing ones, should cater to the emerging pattern of demand for petroleum products in the future. A policy needs to be evolved to match the process configuration of the new added refinery capacity to projected future requirements for various petroleum products.

Infrastructure: need to remove bottlenecks In recent times, import of certain products like kerosene, LPG, LSHS, and aviation turbine fuel, have been decanalised and private agencies have been allowed to import and distribute these commodities at market prices. This has put a massive strain on the existing infrastmctural facilities for storage and handling. Imports have been constrained by insufficient storage and handling facilities at the ports. Certain short term measures are being taken by which four ports on the east coast and twelve on the west coast have been identified for setting up facilities to receive imported LPG. The efficiency of the pipeline network carrying crude oil and petroleum products directly affects refining costs and petroleum product prices. In the long run, considerable investment will be needed

Policy issues pertuining t o the oil und gas sector: R. D. Ruo 23

towards establishing sufficient and modern infrastructural facilities.

Pricing of petroleum products: need for rationali- zation In India, the Government controls the price of all oil pro- ducts, which are set to what is called an Administered Pri- cing Mechanism (APM). These prices are revised only periodically. In order to ensure that refineries, oil producers and traders get adequate returns in spite of "administered prices", an Oil Coordination Committee, set up by the Gov- ernment, operates an Oil Pool Account. The purpose of this account is to provide crude oil to refineries at a fixed price; provide assured cost plus prices to refineries for their pro- ducts; ensure margins to the marketing companies; and enable cross-subsidization of products.

The Administered Pricing Mechanism (APM), which allows for a huge subsidy notably to Kerosene, LPG and High Speed Diesel (HSD) has had a tremendous impact on the petroleum sector. Consumption has grown by staggering amounts, especially of HSD, forcing the import of this fuel in huge quantities, which in turn has affected the international price. While the recent hike in the domestic price of HSD brought it closer to international prices, the huge subsidies on kerosene and LPG continue to burden the Oil Pool Account beyond reasonable limits. The very large subsidy on LPG has dampened private sector participation in LPG marketing, which has been further exacerbated by the fact that FOB contract prices of LPG have been rising sharply. Moreover, an additional 2% duty has been imposed on LPG imports in the 1996-1997 budget, and infrastructural bottlenecks of handling at ports and storage facilities persist. This situation has caused some major pri- vate sector companies to withdraw from parallel marketing. The distortions caused by these pricing policies ultimately affect the consumer with an inevitable rise in petroleum product prices.

'(' I R e w r v c s in ten MTOE

Production in MTOE .......... h0 i t

To address the situation, however, the Ministry of Petro- leum and Natural Gas recently tabulated some suggestions for approval with the Cabinet Committee on Economic Affairs (CCEA). These include

Introduction of adjusted import parity pricing for the pet- roleum products:kerosene, motor spirit, HSD, LPG and aviation turbine fuel at the refinery gate instead of APM, for all refineries from 1997-98; Indigenous crude oil to be received by refineries at international prices and imported crude at import parity prices; Dismantling the pricing mechanism in the oil sector in phases as per the R-Group's (a committee set up to review the policies of the oil and gas sector in India) recommen- dations; and Treating the hydrocarbon sector on par with other infrastructure sectors for fiscal incentives.

Hopefully, the implementation of these steps will rationalize petroleum pricing and help improve the manage- ment and utilization of India's domestic oil resources and scarce capital.

Natural gas: fuel of the future There has been growing concern over the deleterious effects of the use of fossil fuels on the environment. In this context, natural gas has come to be recognized as the cleanest form of energy. It produces 40% less carbon dioxide (C02) com- pared to coal and 30% less C02 compared to oil, for the same amount of heat generated. Natural gas is thus capable of being an important factor in the attempt to reduce CO? emissions.

The accrual of recoverable reserves of gas has been quite rapid since the mid-1970s (Figure lo), increasing from 75.1 MTOE in 1974-1975 to 605.8 MTOE in 1993-1994. Production was stagnant at around 2 MTOE till the 1980s.

Figure 10

Year

Available recoverable reserves and production of nalural gas.

24 Policy issues pertuining to the oil and gus sector: R. D. Ruo

after which it was stepped up, and increased from 2 MTOE in 1980-1981 to 19.2 MTOE in 1995-1996.

All post-production activity related to gas is controlled by the Gas Authority of India Ltd (GAIL). During the 1980s, the Government had earmarked gas to be utilized primarily by the fertilizer sector. Moreover, production of crude oil was not curtailed to avoid gas flaring, which led to 28%- 42% of released gas being flared. Once the Government allowed gas to be utilized by the power sector in the late 1980s, the demand for gas soared and flaring declined. In 1995-1996, only 7% was flared. The policy of allocating gas in predetermined quotas and controlled prices, led to the wastage and sub-optimal use of this resource. The policy objective for gas utilization should be to support use of the resource in as many ways as possible, rather than restricting gas utilization to one particular purpose. Use of gas should be encouraged especially as a substitute for oil products, such as diesel, which is currently being imported in huge quantities, and fuel oils.

Current demand for gas by units for which gas is allocated is 23.46 MTOE per year. Apart from the allocations made, there exists a registered demand of 81.31 MTOE a year. The natural gas availability from indigenous sources in 1994- 1995 was about 16.28 MTOE leaving a huge shortfall in supply. It is estimated (CMIE, 1996), that the registered demand for gas in 2001 -2002 will be 82.25 MTOE as against an availability of 54 to 60 MTOE after taking into account the likely availability through two sub-sea pipelines from Oman and Iran each delivering about 17 MTOE annually.

To distribute gas, the Hazira-Bijapur-Jagdishpur pipeline project has been operational since August 1987, covering a distance of 1700 km, and supplies gas primarily to fertilizer plants in the states of Madhya Pradesh, Rajasthan and Uttar Pradesh. The capacity of this network is being expanded to transport 10.45 MTOE of gas per year as against 5.7 MTOE currently. A 22 billion rupee project to extend the southern gas grid is envisaged to connect the southern states. This is expected to carry 3.13 MTOE of natural gas annually. Efficient and economic distribution of natural gas would go a long way in optimal utilization of this precious fuel.

Summary During the period I960/196 1 to 197 1/1972, consumption of petroleum products grew at a very high rate, with an average annual rate of about 20%. The year 1972/1973 showed decreasing consumption, mainly as a consequence of the oil price shock in that year. The years 1973/1974 to 1979/ 1980 saw the beginning of a period of substitution of pet- roleum by other forms of energy, and consumption grew at a lower annual rate of 5.35% supported mainly by a brisk growth in the economy. The year 1980/1981 saw the influ- ence of the second price shock. During the 1980s and to date, there has been a pronounced decline in the share of petroleum in the overall secondary energy consumption, though the consumption of petroleum per se has been rising steadily. This period has also seen a pattern of very high consumption of middle distillates, such as HSD and kero- sene, mainly because of a Government policy of subsidizing these products.

The demand for petroleum products: motor gasoline, HSD, kerosene, LPG and ATF is expected to grow very rapidly from 1995/1996 to 2010/201 I , whereas the demand

for fuel oils, LDO, naphtha and lube oils is expected to grow at a relatively lower rate. This pattern of demand along with other factors like quality of crude oil and expected relative international prices of crude oil and products, will determine the plan for appropriate refinery processing configuration in India. The government plans to de-control the currently administered consumer prices of petrol, in the near future. The procedure and timing of the planned de-control may also have a considerable impact on the future demand pattern of petroleum products.

The availability of recoverable reserves of petroleum got a boost with the discovery of Bombay High offshore reserves in the year 1975-1976. With a stepping up in the drilling activity especially since the mid- 1980s, there has been a steady increase in the reserves available. However, capital constraints have limited exploration activity in India leading to low reserve accretions in the past few years. With the widening gap between indigenous production and demand, there is a need for exploration activities to be stepped up. Involvement of the private sector in the E and P (Exploration and Production) activities by bringing in technology and finance, the two most critically required inputs, could step up the accretion of reserves and increase domestic production of crude oil.

Indigenous production of crude oil grew rapidly during the eighties mainly because of increasing production from the Bombay High fields. However, flogging of oil fields for many years in succession led to extensive damage and closure of several fields impeding production. A well recti- fication program and development of new fields improved the situation during the years 199411995 and 1995/1996. However, the situation in the year 1996/1997 is expected to be adverse with a down-scaling of earlier production estimates. Given the ever growing domestic demand for petroleum and a volatile international market, proper management of our own resources can cushion India’s import liabilities to a certain extent.

The downstream refining sector has seen brisk growth in recent years. According to a recent CMIE survey, fourteen new refineries and five capacity expansion projects are envisaged. Of the new refineries, five of them amounting to 39 MMT of capacity addition are under various stages of implementation, and among expansion projects, three of them amounting to 7 MMT of additional capacity are under implementation. The refinery capacity is expected to reach around 131 MMT capacity by 2001-2002. The capacity utilization in the existing refineries has been con- sistently above 100% during recent years. The efficiency of the pipeline network carrying crude oil and petroleum products have a bearing on the refining costs and prices of petroleum products. In the long run, a lot of investments need to go into establishing sufficient and modern infrastruc- tural facilities. A rational pricing policy for petroleum pro- ducts will go a long way in removing the current distortions.

The accrual of recoverable reserves of gas in India has been quite rapid since the mid-1970s. It has increased from 75. I MTOE in 1974- 1975 to 605.8 MTOE in 1993- 1994. The production was stagnant at around 2 MTOE till the 1980s after which it was stepped up. It increased from 2 MTOE in 1980- 198 1 to 19.2 MTOE in 1995- 1996. With the government allowing gas utilization by the power sector during the late 1980s, the demand for gas soared and the flaring was reduced. In 1995-1996, 7% of the gas was

Policy issues pertuining to the oil and gas sector: R. D. Run 25

flared. The policy of allocating gas in predetermined quotas and the control of its price has led to its wastage and sub- optimal use. The objective of gas utilization policy should be towards not restricting gas to any particular use but to encourage its use in as many possible ways and especially as a substitute for oil products like diesel, which is imported in huge quantities, and fuel oils.

Acknowledgements The author is grateful to Dr. Jyoti Parikh for the many useful discussions and suggestions.

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for Monitoring Indian Economy. September. Furtado, Andre T. and Suslick. Saul B. ( 1993). Forecasting of petroleum

consumption in Brazil using the intensity of energy technique. Energy Policy, 21, (9), 958-968.

Rao. Raghavendra D. and Parikh, Jyoti K . (1996). Forecast and analysis of demand for petroleum products in India. Energy Policy, 24, (6). 583- 593.

TERI (1995) TERI Energy Dutu Direcrov und Yeur hook (TEDDY), 1 9 W 1996, TERI, New Delhi, India.