1

CHAPTER-1
INTRODUCTION
LNG stands for Liquefied natural gas. It is natural gas that has been cooled to the
point that it condenses to a liquid, which occurs at a temperature of approximately 161C and at atmospheric pressure.
1.1 Importance of Natural Gas
The demand for primary energy is ever growing.
As the world struggles to find new sources of energy it is clear that the Fossil fuels
will continue to play a dominant role in the foreseeable future .Within the
hydrocarbon family the fastest growing hydrocarbon is Natural gas. Most estimates
put the average rate of growth of 1.5-2.0%.
Let us examine the reasons why Natural Gas is so popular.
Many environmentalists view natural gas as a natural bridge fuel between the
dominant fossil fuels of today and the renewable fuels of tomorrow. For a given
amount of heat energy, burning natural gas produces about half as much carbon
dioxide, the main cause of global warming, as burning coal. Since one of the primary
consumption of natural gas is as a source for electrical generation & it is increasingly
becoming popular because it burns cleaner than oil and coal and produces less
greenhouse gases. This ability of natural gas raises the possibility that it could emerge
as a critical transition fuel that could help to battle global warming.
In nature Natural gas is much more in abundance than Oil. Most oil economists put
the Natural gas reserves at least 50% higher than Oil reserves at the current
consumption rates. At present Natural gas reserves are estimated to last in excess of
60 yrs. whereas Oil reserves are estimated at 40 odd years. In the US, over the last
few years approximately 1800Tcf of Natural gas reserves have been discovered,
bringing the total reserves to approximately 3000Tcf. Even for the US, which is the
worlds biggest gas market this represents almost 100 years of supply. The discovery
of unconventional gas and, in particular, Shale Gas is perceived by many to be a
game changer.
At one point in the past, Natural Gas used to be a regionally based fuel,
frequently flared off in oil fields because it was of little use, but now with the creation
of pipelines and LNG, it is now fast becoming a major international commodity.
LNG has two major benefits compared to natural gas:
Transport: Liquefaction of natural gas reduces the volume by approximately 600
times, making it more economical to transport between continents in specially
designed ocean vessels. Over long distances, traditional pipeline transportation
systems would be less attractive economically. Often, due to geo political
compulsions pipelines are not feasible. LNG technology makes natural gas available
in places where natural gas is not available in great quantities and pipelines are not
feasible.
Storage: Liquefaction also provides the opportunity to store natural gas for use during
high demand periods in areas where geologic conditions are not suitable for
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developing underground storage facilities. In regions where pipeline capacity from
supply areas can be very expensive and use is highly seasonal, liquefaction and
storage of LNG occurs during off-peak periods in order to reduce expensive pipeline
capacity commitments during peak periods.
1.2 The LNG Value Chain
The LNG value chain (excluding pipeline operations) typically consists of
exploration and production, liquefaction, shipping, re-gasification and storage. The
components of the LNG value chain have been elaborated below in the following
paragraphs.
Exploration and Production ("E&P"): Exploring for natural gas deposits is a highrisk and high cost endeavor. Typically, natural gas is discovered during the search for
oil. The activities under E&P extend from exploring, drilling and assessing new
sources for hydrocarbon reserves; executing projects for development of those
reserves; planning and running production operations to ultimately decommissioning
when the operation has run its course.
Liquefaction: Feed gas comes to the liquefaction plant from the production field. The
contaminants found in produced natural gas are removed to avoid freezing up and
damaging equipment when the gas is cooled to a temperature -161C. The feed gas is
also filtered of all impurities and is ready to meet pipeline specifications at the
delivery point. The liquefaction process can be designed to purify the LNG to almost
100 per cent methane. The liquefaction process entails cooling the clean feed gas by
using refrigerants.
The liquefaction plant may consist of several parallel units arranged in a
sequential manner (which is why they are called LNG trains). The natural gas is
liquefied for shipping at a temperature of approximately -161C. By liquefying the
gas, its volume is reduced by a factor of 600, which means that LNG at -161C uses
1/600th of the space required for a comparable amount of gas at room temperature
and atmospheric pressure.
Shipping: LNG tankers are double-hulled ships specially designed and insulated to
prevent leakage or rupture in an accident. LNG is stored in a special containment
system within the inner hull where it is kept at atmospheric pressure and -161C.
Storage and re-gasification: In order to return LNG to a gaseous state, LNG is
received at re-gasification plant. LNG is pumped first to a double-walled storage tank,
at atmospheric pressure, and then pumped at high pressure through various terminal
components where it is warmed in a controlled environment. The LNG is warmed by
passing it through a heat exchanger using seawater to warm up the gas. The vaporized
gas is then regulated for pressure and enters the pipeline system as natural gas.
Finally, residential and commercial consumers receive natural gas for daily use from
local gas utilities or in the form of electricity.

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Fig.1.1 Gladstone LNG plant: schematic diagram

Source: http://www.lngworldnews.com/australia-lng-limited-wins-gas-pipeline-licenceapproval-for-gladstone-lng-project/

Fig.1.2 Process flow diagram of LNG

Source: http://chandra28288.wordpress.com/2009/12/17/largest-tokyo-gas-lng-terminal-sodegaura/

1.3 The LNG Market

The share of LNG in global gas production is increasing. In recent years the share of
LNG in worldwide gas production has grown to 9 %.
The global LNG market is characterized by excess demand relative to
available supplies. This situation is only expected to aggravate as several countries
have made high investments in LNG trains in the past and now wants to wait before
increasing investment or they have put a stop on export development as domestic
demand is increasing.

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The global LNG market is characterized by an overcapacity of regasification
compared to liquefaction. The average utilization load-factor of a liquefaction plant is
approximately 90% whereas for regasification terminals this is around 40%
Traditionally, LNG-production was sold in long-term contracts. However, as more
LNG comes on stream and demand for LNG increases, there is a tendency to sell
some LNG in contracts of intermediate or short-term duration.
In the recent past LNG producers contract less of the output in fixed long term
Contracts in order to profit from market opportunities. In this way much of the new
supplies becoming operational worldwide can be considered as 'flexible'.
As LNG markets develop, short-term trading is also developing. In addition, if
the arbitrage opportunities taken by integrated companies that can divert flows within
their overall portfolio are included, the flexibility of LNG trading are enhanced.
LNG markets can largely be divided into Asia, Europe and the US. Within
Asia the biggest importers of LNG are Japan and South Korea. Since both countries
have no natural sources of energy and very little prospects of pipelines, LNG is vital
for their economies. Typically these markets are able to pay the highest price for LNG
as they value security of supply the highest. The fastest growing markets within
Asia are India and China propelled by rising standards of living and concerns for the
environment.
Europe has a number of sources of natural gas which include Russia, the North
Sea and other sources .In Europe, Spain and France are the biggest consumers of LNG
although the UK is one of the fastest growing consumers in recent times.
The US is the worlds biggest consumer of energy. It consumes approximately
a quarter of all natural gas produced across the world. It has an extensive network of
pipelines all across the country and natural gas is traded in a transparent manner.
However LNG constitutes a minuscule per cent of the natural gas consumption .The
main reason is production of natural gas from unconventional sources such as Shale
gas. A large percentage of LNG available today was originally meant for the US but
with the increase in volumes of Shale gas, this LNG is now being diverted to other
profitable markets such as Asia and Europe.

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Table1.1

Sources: <http://www.eei.org/magazine/editorial_content/nonav_stories/2002-03-01-tide.htm>,
LNG Evolution&
Development Wall Chart, Petroleum Economist 2004
<http://www.eia.doe.gov/oiaf/analysispaper/global/pdf/eia_0637.pdf>.

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1.4 HYDROCARBON VISION 2025
1.4.1 Salient features:
i. A ministerial group set up by the Prime Minister to give focus on long-term energy
security for India has developed the following vision for the next 25 years.
ii. To assure energy security by achieving self-reliance through increased indigenous
production and investment in equity oil abroad.
iii. To enhance quality of life by progressively improving product standards to ensure
a cleaner and greener India.
iv. To develop hydrocarbon sector as a globally competitive industry which could be
benchmarked against the best in the world through technology up gradation and
capacity building in all facets of the industry.
v. To have a free market and promote healthy competition among players and
customer service.
vi. To ensure oil security for the country keeping in view strategic and defense
considerations.
vii. Focus on oil security through intensification of exploration efforts and
achievement of 100% coverage of unexplored basins in a time bound manner to
enhance domestic availability of oil and gas.
viii. Secure acreages in identified countries having high attractiveness for ensuring
sustainable long-term supplies.
ix. Pursue projects to meet the deficit in demand and supply of natural gas, and
facilitate availability of LNG.
x. Maintain adequate levels of self-sufficiency in refining (90% of consumption of
middle distillates).
xi. Establish adequate strategic storage of crude and petroleum products in different
locations. Create additional infrastructure for distribution and marketing of oil and
gas.
xii. Open up hydrocarbon market so that there is free and fair competition between
public sector enterprises, private companies and other international players.
xiii. Create a policy framework for cleaner and greener fuels.
xiv. Have a rational tariff and pricing policy, which would ensure the consumer
getting the petroleum products at the most reasonable prices and requisite quality,
eliminating adulteration.

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1.4.2 Recommendations and summary of sub groups:
Exploration & Production
1. Create a policy environment for developing a vibrant, thriving and world class E&P
industry which can mobilize and infuse technology and capital and can stand on its
own in the process of globalization for energy security to the country.
2. Continue intensive exploration efforts in the producing basins for establishing
extension and revaluation of existing reservoirs and discovery Of new resources in
subtle traps with appropriate technology.
3. Aggressively pursue extensive exploration in non-producing and frontier
basins including deep-water areas within EEZ for knowledge building, examining
possibility of upgrading the risk-reward category and for finding new oil/gas
resources within a definite time frame.
4. Maximize recovery from currently producing fields/ future discoveries through
technology support, improved reservoir engineering and production practices and
EOR.
5. Develop low cost production systems for marginal fields and take up
development of all discovered fields.
6. Identify technology gap and introduce state-of-the-art E&P technology,
specific to the requirement of each basin and production process and systems.
7. Continue the supportive role of the government in exploration,
particularly for high-risk ventures.
Technology
1. Program continuous technology acquisition and absorption for competitive edge
and for phasing out obsolete technology in a time bound fashion.
2. Pursue new worklines to remain contemporary and take advantage of global
technological advances.
3. Identify business and operational demand and translate them into technological
demand.
4. Integrate a wide range of leading edge technologies.
5. Develop indigenous R&D with multi-enterprise funding in a suitable setup.
6. Impart technology investment planning in individual E&P companies.
7. Adopt alternate energy sources like fuel cells, solar cells etc. in E&P operations.
8. Aim technology input through business alliances with technology driven
international companies.
Environment
1. Manage E&P business with diligence with the goal of controlling emissions and
waste to international standards and design, operate and maintain facilities to this end.
2. Support R&D efforts to improve understanding of the environment around
operations and for environmental protection.
3. Render operations and productions compatible with the environment within the
framework of sustainable development.
4. Enforce appropriate abandonment practices for restoring the original base line and
decommissioning and restoring to IMO standards.
5. Reduce consumption of resources.
6. Use energy efficient fuels and adopt clean technology in all oil field operations.
7. Continue to promote environmental education and awareness at all levels.
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8. Interact with and involve local and global interest groups while exploring
environmentally sensitive areas for preserving bio-diversity and sustainable
development.
9. Provide fiscal incentives in R&D programs aimed at induction of new technologies
for environmental protection.

1.4.3 ROAD MAP TO TRANSIT TO VISION-2025

A. Through Mission Mode
1. Establish a National Energy Modelling System (NEMS).
2. Plan and execute time bound program for upgrading the knowledge of
unexplored/poorly explored domestic basins.
3. Implement an accelerated Exploration Plan based on new knowledge, new concepts
and new technologies and enhance exploration budget for intensive and extensive
exploration in producing and non-producing basins for addition and discovery of new
reserves.
4. Program immediately for higher ultimate recovery, EOR, cost reduction and
development of all discovered fields.
5. Introduce good archival practices for data collection, management and processing
and re-evaluate the data with latest developments in imaging, interpretation and
computing techniques.
B. With a supportive role of Government
1. Make arrangement of resources, including earmarking annual OID cess collection
for upgrading the knowledge of unexplored/poorly explored domestic basins for
promotion of such acreages.
2. Evolve and maintain a globally competitive fiscal regime for investment in E&P
activities.
3. Offer special fiscal incentives for EOR processes such as full or partial exemption
from OID cess and Royalty and higher depreciation benefits.
4. Provide a level playing field to public and private sector.
1.4.4 Refining
1. Based on considerations of national oil security and stability of supply and
development of the economy, it is desirable that India set up refining capacity to meet
at least 90% of its middle distillate demand.
2. In order to promote the development of the sector, the Government should
formulate a stable, long-term policy for the domestic refining sector and take concrete
steps to ensure its implementation. Over the short term this would imply providing
adequate duty protection and granting infrastructure
status to the sector. However, from a long term perspective the Government would
need to enunciate a stable fiscal and taxation policy for the refining industry.
The Government should also evolve a long-term policy on product quality and
environmental norms applicable for petroleum products. A sufficient lead time should
be given to the industry players for conforming to the norms.
3. In a free market scenario, the decision to invest in a project, expansion or grass
root, coastal or inland, should be best left to the sponsors and the investors. However,
the Government should extend the tax benefits available for grass root refineries
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under Section 80IA for capacity additions, as well as, for addition of downstream
processing units for modernisation and for meeting environmental norms.
4. The Government would need to allow every refinery the flexibility to source its
own crude, as also the ability to manage the business risk by using commodity hedges
and other risk management techniques. Indian refinery companies should explore the
possibility of investing in crude production
assets overseas.
5. To encourage foreign participation in the sector, the Government could also
consider increasing the ceiling on foreign direct investment in the refinery sector to
74% from the present level of 49%.
6. In order to provide a level playing field for the PSU refineries, they should be given
the flexibility in taking decisions on all commercial aspects without the risk of
external scrutiny as per the prevailing norms of corporate governance as applicable to
any private enterprise.
7. An apex body for R&D could be set up which would co-ordinate the efforts of
various companies in the sector. This could be along the lines of the Centre for High
Technology (CHT) which is an existing body under the M/PNG. However, such a
body would need to be set up as an independent,
industry funded entity and its roles and powers clearly defined. The Government
should provide further incentives for investment in R&D in the petroleum sector.
8. A comprehensive package of incentives for continued operation of North- East
refineries is required to be put in place to ensure their economic viability as these
refineries cannot compete in a free market because of size, age, inadequate
infrastructure and deficient demand in the region.
1.4.5 Marketing
1. As the objective of dismantling of APM is to remove the existing controls and
usher in a free market in this sector, it is recommended that this should be done at the
earliest to encourage internal competition.
2. Any company investing Rs.20.00 billion in the exploration and production sector,
the refining sector or a combination thereof should be allowed marketing rights for
transportation fuels. In this context, it is felt that in order to ensure the commitment of
a foreign company to the sector, such funds should be towards additionality of assets
and should be in the form of equity, equity-like instruments or foreign debt with
recourse to the company. In addition, in order to ensure incremental investment in
building the much needed marketing infrastructure, all new entrants would be
required to set up their own distribution network for marketing and not encroach on
the infrastructure of the existing marketing companies.
3. The existing PSUs should be given full operating freedom in establishing and
maintaining their marketing networks.
4. After the dismantling of the APM, the products would be priced in line with
international prices and determined by the level of supply and demand. In certain hilly
and remote areas, the Government could recommend a maximum retail price for the
products, involving some amount of subsidy from the central budget.
5. The policy of subsidy should be time bound and should encourage competition in
the remote markets by providing incentives to companies to enter these remote
markets.
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6. While the ownership of the existing pipelines should remain with the present
owners, a regulatory authority would need to be set up which would regulate the
access to others, as also the tariffs for the pipelines. Though the owner will have right
of first use to the extent required, the regulatory
authority would enforce expansion of capacity for the use of the pipeline by other
players if necessary.
7. The Government should protect the domestic refiners against dumping by MNCs
by suitable duty protection and anti-dumping duties.
8. The Government should take the steps required to minimise the price distortions,
including removal / reduction of subsidies and maintaining a flat duty structure on
products.
9. The Central Government should develop a package on state level taxation of
petroleum products including that on ATF for international airlines in consultation
with the states that would consider the interests of individual states and marry these
objectives with the larger interest of the Union and
the economy as a whole. This solution should be a long-term and sustainable one in
order to deal with the setting up of large refining capacities to meet future demand in
the country.
Marketing Infrastructure
1. Though the choice of carrier would be determined on the basis of competitiveness,
for strategic reasons it is desirable to develop Indian shipping tonnage. For this
purpose, domestic oil companies could be encouraged to enter into joint venture
agreements with shipping companies to promote this sector.
2. When the refineries themselves provide the port facilities, port authorities should
levy concessional port charges.
3. Independent investors should also be allowed to take up construction of pipelines
after a pipeline regulator is in place.
4. The pipeline sector should be given infrastructure status to treat it on par with the
other modes of transport.
5. The regulator would regulate the pipeline tariff. The basis for tariff should be
competitive with alternate modes of transport i.e. rail, road or coastal.
6. A single window clearance (within a pre-specified time frame for environmental
approvals) for pipeline projects should be developed for smoother development of this
mode of transportation.
7. Government could develop a suitable cess mechanism for strategic storage of crude
and products.
1.4.6 Development & Utilisation of Natural Gas & LNG etc.
1. Given the significant decline in reserves over the last few years, it is clear that
unless reserves in existing fields are significantly upgraded or new fields are
discovered and brought on stream, gas production is set to decline from its current
level. This calls for concerted exploratory efforts to
establish reserves.
2. To develop scenarios of gas demand and update them at appropriate and timely
intervals. A core group, constituting representatives from the relevant Ministries and
associations, and energy experts could undertake this activity at regular intervals. This
activity should be housed at an institution with
continuity of expertise and an extensive database.
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3. The declining production profile coupled with the projection of rising demand
shows a widening demand-supply gap. The implications of this gap are that
exploration efforts need to be stepped up and the feasibility of importing gas from the
neighbouring countries examined seriously.
4. The various proposals for importing gas through pipelines or as LNG should be
examined in a judicious manner, taking into account economic and political
considerations, including those related to energy security.
5. Various proposals for importing piped gas from neighbouring countries such as
Bangladesh and Mynamar, need to be pursued vigorously, as this will be a cheaper
option compared to LNG. In this context, emphasis should be laid on regional
cooperation involving SAARC, BIMSTEC and other
regional bodies such as ASEAN, Gulf Cooperation Council in developing regional
gas trade.
6. The LNG option should be examined closely especially in light of the large
irreversible investments involved, high outflows of hard currency, and the likely
impact of devaluation of the rupee on the landed price of LNG. LNG, should at best
constitute 20-30% of total gas imports into the country.
7. The requirement of major gas sector infrastructure as well as other facilities would
depend upon the mix of modes of gas imports i.e., LNG and pipeline gas. Since, gas
would be predominantly used by power and fertilizer sectors, the delivered price of
gas would strongly influence the cost per unit of
power generation and cost per tonne of urea production. It is therefore proposed that
major projects in the gas sector (LNG terminals, cross-country pipeline etc.) be
granted status of "Infrastructure Sector Projects".
Similarly, Government should permit oil sector PSUs to undertake
investments in the gas/LNG supply chain including upstream development,
liquefaction and transnational gas pipelines on merit.
8. The government is expected to continue the deregulation of the sector to allow
private sector participation at all levels of the gas value chain. With the entry of
private parties, government would need to acquire statutory powers. A Gas Act has
been under discussion and should be passed soon. It
is likely that an independent regulator will be set up under the Act. The regulator is
likely to allow gas prices to be set by the market while regulating the pipeline tariff.
There is a need for the regulator to facilitate an environment that stimulates
investment in the necessary pipeline structure.
9. The regulatory body has to be sensitive to the needs of the pipeline operators who
have to be motivated to set up a network of pipelines. It has also to encourage
exploration and production of gas in the country. There will be conflicts in the
interests of producers and transporters and these have
to be resolved. Issues like unbundling of marketing and transport and third party
access to pipelines need to be resolved at the earliest.
10. Meeting India's fast expanding need for oil and gas would call for a number of
alliances at the company level as well as at the level of governments. The objectives
behind such alliances would be the acquisition of latest technologies, which may not
be available commercially for years to come
and also to mobilize the necessary finances for developing the hydrocarbon industry.
In addition, we have to forge linkages with large investors especially in Europe who
can mobilize resources even into projects that attract sanctions under US laws.
Exploration and production of oil and gas would increasingly take place in difficult
areas including deep waters. Subsea pipelines would have to be laid at water depths
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exceeding 3000 metres to bring gas from the Middle East. Unconventional gas
sources like CBM and Hydrates will need to be tapped for the next century. The
technologies in these areas would be available to us only to the extent that we
participate in their development and this we have to do in partnerships with the
leading countries/companies. The partnership of GAIL and IOC with BP and Amoco
for the production of DME is an example of such alliances.
11. It is only by bringing together a large number of companies, research institutes,
universities and consultants that we may succeed in this program, which involves high
risks and large outlays. It is therefore necessary to revive the organisational structure
for the National Gas Hydrate Program as recommended by the Ninth Plan working
group. That would also ensure the necessary continuity in policy making and
implementation.
12. An alliance between the major consumers would help in making the LNG market
more user friendly. Collaboration is also possible in reducing the incidence of take-orpay obligations through exchange of shipments. The consortium may also encourage
research in the development of technology. India should take the lead in forming this
forum.
13. The increasing dependence of Asian countries on imported oil from the Middle
East exposes them to sudden disruptions in the oil supply as was seen during the Gulf
war in 1990-91. These countries have to meet this challenge through short term and
long term measures. To meet short and long term objectives in the energy sector,
Asian countries need to set up a regional co-operation forum for: Sharing of information on energy policy, demand, demand forecasts
and supply strategies;
Stockpiling and stock draw, holding of bilateral stocks;
Regular reviews of emergency preparedness;
Co-ordination with the IEA;
Short term demand restraint measures including taxation;
Long term demand containment measures, such as improving energy
Efficiency;
Regional gas trade;
Development of renewable energy sources;
Defence strategies in protecting sea lanes;
Diplomatic initiatives vis--vis the Middle Eastern oil producers.
14. There is an urgent need to build a co-ordinating agency on the lines of the IEA to
look after these tasks. India should take the initiative to secure the co-operation of
Japan and China to form this agency.
15. It is being increasingly apparent that natural gas will necessarily be the preferred
fuel in the future. Extensive research and development is needed to increase the
availability of this fuel and to develop new products and services that can meet the
emerging trends and challenges in the various facets of this industry.
Agenda for immediate action
Accelerated exploration for gas
Expedition of gas regulatory framework
Diplomatic initiatives for pipeline projects
Infrastructure status for LNG and gas pipelines "Green" incentives for clean
fuels
Removal of customs duty on LNG

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1.4.7 Restructuring
1. The core objective of industrial restructuring is to maintain long-term profitability
and strengthen competitive edge of the concerned companies in the context of
changes in market forces. The restructuring can be internal and external.
Internal Restructuring :
2. Internal Restructuring has been undertaken with varying intensity by oil PSUs
already with a view to achieve greater cost effective. This is sought to be achieved
through intensive skill and capability development and greater application of
Information Technology (IT) and revamping organisation structure for better
customer focus.
External Restructuring:
3. External Restructuring involving mergers and alliances between companies is
increasing resorted to worldwide. Cost cutting strategy continues to be the prime
move of mega merger of Exxon-Mobil, BP-Amoco-Arco and Total-Petrofina.
Additionally, globalisation of oil markets and progressive removal of trade and
investment barriers by countries have led to mergers among oil companies to protect
and expand business jurisdictions.
Recommendations on Restructuring:
4. On careful consideration of the Governments explicit policy in the oil sector and
the national and global situation in the oils PSUs, it is recommended that Government
should re-examine the Restructuring Exercises with the objective of maximising
shareholder value and enabling the national oil PSUs to become real world class
players in size and success. In the restructure framework for the oil industry,
establishment of commodity exchanges and future markets needs to be pursued
vigorously even from now.
Disinvestment
5. The philosophy of the New Economic Policy is that the State should gradually
leave industries and commerce to the private sector and concentrate in those areas
where it had unique or special responsibility.
Privatisation of PSUs will constitute the cornerstone of the Second Generation
Reforms that Government needs to undertake. The rationale for the cautioned
Government presence in oil PSUs can be : To provide sustained energy security,
To enable the pursuit of some social objectives (provision of
Subsidized products),
To ensure availability of products in remote areas, and
To minimise the loss of dividend income, (which is substantial from
oil PSUs)
Other country experiences have shown that the energy security is not
contingent upon Government ownership.
6. It is therefore recommended :In view of the concerns for energy security and product availability in remote
areas, Government can retain ownership in one upstream PSU (say ONGC) and one
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downstream PSU (say IOC) and GAIL till such time the market is fully tuned to the
deregulated scenario and the private ownership.
7. To send correct market signals and ensure better valuation of shares of PSUs : Government should make an immediate policy announcement regarding
phased withdrawal from the ownership of oil companies.
Reduction of Government equity in at least one company below 51% as soon
as possible after the presentation of the next Union Budget 2000-01.
Disinvestment should be made in trenches of say 10% so that at every level,
Government is able to secure progressively higher value for the shares
divested, it may be necessary to retain Government holding of 26% in all
disinvested PSU for a short, interim period to address
concerns regarding possible asset stripping by any new management.
1.4.8 Regulation
8. Though oil industry will be deregulated, there are still areas where regulation has to
be continued ironically. Even for ensuring that the regulated sector functions
effectively through the market mechanism. The need for regulation can be
summarised as follows:
Ensuring fair competition among all players
Monitoring of the availability and price of petroleum and gas products in
different regions of the country especially remote areas
Managing the strategic minimum reserve of oil products
Establishing quality specifications and monitoring compliance
Ensuring equitable access to the pipelines and monitoring of the tariff
Establishing environmental standards and targets for technological
Achievements.
9. It is recommended that, though there are close linkages in the structure and
technology of the upstream and downstream activities, there will be need to retain the
powers of licensing areas for explanation and production with the Government for
some time. The oil well extraction rules and safety, it is purely a technical matter and
can be retained separately rest of all the activities relating to oil and gas as well as
related products like distillates, gas hydrates, coal bed methane, etc. should be under
one single regulatory body. This could consist of 3 5 technical members
representing different
disciplines relevant for regulation. It should be independent, totally accountable to the
consumer and industry and should decide all its decisions after a open public enquiry.
10. The sub-group also suggested an action plan as follows:- Short term (within one year)
- Announcement of the revised oil policy
- Reiterating and implementing deregulation programme on or before April 2002.
- Affirming withdrawal from majority ownership of oil and gas companies before
2005 (except ONGC, IOC and GAIL)
- Assuring that to address concerns for adequacy of supplies to remote areas and
stability in prices, majority holding in one upstream company (say ONGC) and
downstream company (say IOC for
distribution and GAIL for transportation) would be retained. Only when the market
system stabilises the majority in these companies will be brought down.
- Setting up immediately single regulatory authority for hydrocarbon sector.
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LONG-PAPER: PGPIDM
NICMAR-SODE

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11. Medium term (within 3 years)
- Internal restructuring of oil PSUs to be completed making full use of IT.
- Implementing proposals of mergers and alliances of oil PSUs with the objective of
enhancing shareholder value.
- Phased disinvestment in all oil PSUs (except ONGC, IOC and GAIL) down to 26%
to realise best shareholder value.
- Finalise arrangements for oil security through the oil companies.
Long term (beyond 3 years)
- Bring down the Government holding in all oil companies other than ONGC, IOC
and GAIL to near zero.
- Determine the long term level of Government holding in ONGC, IOC and GAIL.

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LONG-PAPER: PGPIDM
NICMAR-SODE