Upgrade tech, tap nearby markets, China & Japan

The importance of petroleum industry can be gauged from the fact that it contributes in a huge manner to the total energy requirement of the world. Over 55 percent of world primary energy consumption is met by oil and gas industry. A detailed study undertaken by Export Import Bank of India looks at the petroleum industry, the opportunities that it offers for global economic growth in general and India in particular, as well as the challenges that are built into its development. The study suggests that Indian oil refineries must plan to infuse new technology to upgrade their operations and explore possibilities of exporting petroleum products to neighbouring countries as well as China and Japan.

Petroleum is a natural mixture of hydrocarbons in gaseous, liquid or solid state. Petroleum products fall into three major categories; 1) Fuels such as motor gasoline and distillates fuel oil; 2) Finished non-fuel products such as solvents and lubricating oils; and
3) Feedstock for the petrochemical industry such as naphtha and various refinery gases.
The products are mainly used for transportation, agriculture, domestic and industrial purposes. The industry is mainly segmented into: 1) Upstream sector, which is involved in the process of exploring oil, developing oil fields, and producing oil from the oil fields;
2) Downstream sector, which encapsulates all of the linked businesses, which refine and market petroleum, including pipeline systems, refineries, gas distribution, and petrochemical companies.

Global Scenario
Globally the petroleum crude production is undertaken in oil-rich countries and the refining is mainly done in countries with high demand for petroleum products. A cartel of oil producing countries named OPEC (Organization of Petroleum Exporting Countries) holds 897 billion barrels of oil reserves, around 78 percent of the world's proven reserves of 1.14 trillion barrels. Saudi Arabia is top producer as well as top exporter of crude oil. The United States is the largest importer of oil with a share of 27 percent in world imports of oil.



As of 2003, over 90 percent of the world's 83 million barrels per day of refining capacity was located in non-OPEC countries. A type of correlation could be established between production of petroleum products and crude distillation capacity of a country. Out of top 10 countries in terms of refining capacity, eight are also in the list of top 10 producers. The US is the leading country in terms of both refining capacity and production of petroleum products. The US has 20 percent of the global refining capacity. Despite this position, the US is the largest importer of petroleum products also.
The high demand for petroleum products can be gauged from the fact that many large producers thereof are large importers also. Apart from the US, other major importers, which are also large producers, include China, Japan, Germany and Italy. India, though with a low refining capacity in comparison to world, is the sixth largest producer of petroleum products with 118 million tonnes production in 2004-05. There are several countries (e.g. Singapore) that are important to world trade in refined petroleum products despite very low (or non existent) level of crude oil production and low refining capacity.
The product pattern of refineries has undergone significant changes with additions and modernization of secondary processing facilities and the availability of light and sweet crude. At present, middle distillates account for more than 50 percent of refinery production by products.



The Indian Petroleum Industry
As of July 2005, there were a total of 18 refineries in India with an aggregate installed capacity of 127 million metric tonnes per annum. Provisional data for the production of petroleum products for the year 2004-05 was placed at 120.47 million tonnes, up from 115.78 million tones in the previous year. Middle distillates accounted for the largest chunk of total production followed by light distillates
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The petroleum products sector has seen upsurge in exports since 2001-02. In the year 2000-01, India was a net importer of petroleum products. However, since 2001-02, India has become a net exporter of petroleum products. This could happen mainly due to increase in refining capacity. Provisional figures of exports of petroleum products in 2004-05 stood at US $ 6.8 billion. The exports of petroleum products have risen by more than 90 percent in 2004-05, over the previous year.
The share of petroleum products in India's total exports has also increased over the five- year period 2001-05. From a level of 4.29 percent in 2000-01, the share has increased to 8.57 percent in 2004-05. As a result, petroleum products improved their ranking in India's exports from the eighth position in 2000-01 to fifth position in 2004-05.



Major destinations of India's exports of petroleum products include Singapore (25.5 percent), Iran (9.8 percent), UAE (7.4 percent), the Netherlands (5.1 percent), Sri Lanka (4.5 percent), Indonesia (4.4 percent), Brazil (4.3 percent), Nepal (3.1 percent), South Africa (3.1 percent), and Togo (3.0). These 10 countries together account for over 70 percent of India's total petroleum products exports. High-speed diesel (39.4 percent), light oils and preparations (19.5 percent), aviation turbine oil (13.8 percent) and fuel oil (8.0 percent) are the major petroleum products being exported from India.
India holds more than 1.0 percent share in major petroleum products import markets, such as Singapore, Japan, the United Kingdom, Belgium and Korea. The share of India in the Singapore market is high at 10 percent. Top three importers Indian petroleum products are Singapore, Iran and UAE. Of these three markets, India is the leading supplier in UAE and Iran. India ranks third in the Singapore market, next to Saudi Arabia and Kuwait. Another major competitor in the Singapore market is China. Pakistan is emerging as a major competitor in the UAE market, while Singapore and China are emerging as competitors in Iran. It appears that Singapore and Pakistan are largely re-exporting the petroleum imports, sourced from other countries, including India.



Challenges - Price Volatility
Crude oil prices touched a record high of US $ 70 per barrel in 2005. While the fall in oil prices would affect the viability of the projects in the upstream sector, the rise in oil prices would affect the viability of the projects in the downstream sector. In addition, post-APM, oil companies involved in the downstream marketing will have to deal with risks including price risk for crude oil, refining margins and foreign currency risks.

Supply disruptions
OPEC producers account for a major portion of world's crude oil production. India's dependence on these countries as primary source for crude oil imports is also very high.
Thus, any supply disruptions in the Middle East could lead to volatility in oil prices and more importantly, affect supply to India, adversely.

Technology
Most of the public sector refineries in India are more than two decades' old and need up-gradation and modernization. Commercial vehicles shifting from Bharat Stage (BS) I to BS II and BS II to BS III require specific quality products and refineries are already working out strategies to provide fuels conforming to these environmental measures. Refineries also have to meet product specifications in order to conform to international environment specifications, particularly the EURO III emission norms

Competition
Indian companies have had to pursue opportunities in various countries on the basis of global energy margins. However, tough competition exists in international markets, especially from China National Petroleum Corporation (CNPC), who is also securing exploration rights to improve China's energy security.

Prospects: Growing demand for petroleum Products
The last three years witnessed India converting itself into a product surplus nation, thanks to additional refining capacities created in this sector. In the domestic market, supply of petroleum products will be more than their demand in the coming years and hence refineries should resort to export markets.

Market potential in neighbouring countries
India needs to take advantage of its strategic leadership in refining and increase its refining capacity, as demand for petroleum products is high in Asia. India's close neighbours themselves are energy deficient countries and there is a huge potential for exports of petroleum products to Pakistan, Myanmar and China. Besides, the huge demand that exists in Japan could also be captured.

Integration of operations
Indian companies have realized the potential of integration (upstream and downstream) and are also planning to integrate themselves. While HPCL, IOC and BPCL plan to enter into exploration, ONGC plans to enter in the refining and marketing segment, and IOC is also planning to enter the petrochemicals segment.

Securing overseas energy resources
India is in the process of securing overseas energy resources, and is keen to secure more resources in order to meet its accelerating energy demands. As a result, Indian energy corporations have emerged as significant threats to established multinational energy.
Companies in the overseas oil and gas markets.

Suggestions: Strategic Reserves
India is a growing economy and thus needs to improve its oil security and avoid any supply disruptions. Creation of strategic reserve of crude oil and petroleum products is necessary to improve oil security in India.

Integration of refineries
Indian refineries have low integration with petrochemical sector. It is attractive, in refiners' interest, to move towards integration with petrochemicals to capture full
synergies with refineries. This will also help use the optimal refining capacities of respective refineries within the country.

Infrastructure creation
The demand for petroleum products in India is high in north and north-western region and coastal locations are appropriate for refinery construction because of effective supply and transportation facility. Strategic location of inland refineries with more effective supply and evacuation system through pipelines nearer to the consumer market would add strength to this sector.

Capacity addition through de-bottlenecking
De-bottlenecking in refinery means increasing the capacity of the refinery without much capital expenditure. De-bottlenecking is relatively a different concept than capacity expansion, where the capital expenditure and modifications in the plants are relatively high. De-bottlenecking of existing facilities always has been an attractive option to enhance a plant's capacity and profitability. Many Indian refineries, both public and private sector have increased the capacity through de-bottlenecking.

Research and Development
Typically, research and development (R&D) spend of oil and gas companies, as a percentage of sales, is relatively low in India. However, the enormous size of Indian oil and gas companies means that considerable sums are being spent in R&D. Such expenses have also paid dividends in the past. Research has provided the industry with tools to discover and produce oil and gas efficiently. Thus, thrust should be given for more R&D spends in the Indian petroleum sector. Industry players have proposed setting up of Petroleum Economic Zone, where international service providers could be encouraged to set up research and development centers, which would help India to become a major service provider in this sector.

Technology
Oil and gas industry is technology-intensive. Indeed, technology plays a key role in the entire value chain from exploration to refining to marketing and final consumption. New technologies such as 3-D seismic interpretation and advanced reservoir simulation techniques are taking the guesswork and risk out of exploration. Production and marketing of petroleum products in India should also be leveraged with new techniques and technologies.

Strengthening energy diplomacy
The solution for India's energy problems lies overseas and can only be tackled through energy diplomacy. India is a member of International Energy Forum (IEF), which provides a biennial meeting of the ministers from the energy producing and consuming nations. India, being a big consumer of oil, will have to ensure its oil security by strengthening the dialogue process in such meetings. Further, such forums do provide a plethora of opportunities to forge ahead with individual oil-surplus countries.

Future Outlook
With a large population base and currently very low per capita consumption of petroleum products, India is amongst the fast emerging markets for petroleum products. The liberalization and its effect of high growth in all economic sectors would increase the demand for petroleum products in India. The 10th Five-Year Plan has projected the demand for petroleum products to reach 135.9 million tonnes by 2006-07 in India. High Speed Diesel, one of the middle distillates, will dominate the projected demand and product availability.
The Indian automobile industry is witnessing an unprecedented growth in recent years. The arrival of new and variations in existing models, easy availability of finance at relatively low rate of interest and price discounts offered by dealers and manufacturers have stirred the demand for vehicles and a strong growth for the Indian automobile industry. It is estimated that the production of vehicles in India will exceed 10 million by 2006 from an estimated 8.5 million in 2004-05.
Furthermore, an increase in investment in the country's road transport facilities and rural, urban infrastructure will add to rapid growth of the automobile industry. India's three ambitious road projects, viz., Golden Quadrilateral (GQ), North-South East-West (N-S E-W) Corridors and connectivity of major ports, would spur roads traffic capacity and hence demand for petroleum products would also pick up.
Keeping in view the need for enhancing the refining capacity to meet the growing demand for petroleum products, a number of grass-root refineries as well as expansion of existing refineries are at various stages of implementation. About 28 million tonnes additional capacity is estimated to be required to meet the expected demand of 135.9 million tonnes by 2006-07.
The refineries in the country are also allowed with forward integration in the fields of petrochemicals, for better value-addition, which opens up another vast area for investment. India has a strong commitment to pursue an energy policy, which will take into consideration the issues of environmental safety. Accordingly, the country is adopting more environmentally benign measures with regard to usage and quality of fuels. Phasing-out of lead, benzene reduction in gasoline, sulphur reduction and cetane improvement of diesel are amongst the prominent measures that are under implementation. Such quality upgradation of fuels will call for adopting latest/state-of-the-art technology, requiring huge investments.
The prospects for export of petroleum products to our neighbours, viz. Pakistan, China, and Myanmar are very bright. Pakistan mainly imports petroleum products from Saudi Arabia, Kuwait and UAE. Diesel from India would definitely be cheaper in comparison to the current sources due to proximity. Indian refineries in the western and north-western region are suitable for this purpose. Some of the Indian refining companies have begun finalising both sea and land transport routes for export of diesel to Pakistan.