Published in: Proceedings of the 2nd Indian Mineral Congress on "Sustainable

Development to meet Socio-economic Expectation", 8-9 April, 2007 at ISMU, Dhanbad.

Peaking Oil Production- Facts and Challenges in Indian Context

Gurdeep Singh*, Tauseef.Z.Siddiqui**, Manab Das***
*Prof and Head
**Student (M.Tech Environmental Science & Engg)
E-mail: tauseef_ism@rediffmail.com
***Senior Research Fellow
Centre of Mining Environment
Indian School of Mines (ISM), Dhanbad

Abstract:
India has 17% of the world’s population and just 0.8% of the world’s known oil and
natural gas resources. Our annual requirement of oil is 114 million tonnes. India is
currently the fourth largest oil consumer in the Asia-Pacific region after Japan, China and
South Korea. Estimated to increase at rate of 7% a year, the demand for petroleum
products, in absolute terms, is expected to be 155 and 195 million tonnes respectively for
the year 2006-07 and 2011-2012. In other words global oil production will peak in near
future and it will be forever unless new oil discoveries are made that can be developed
very quickly. The “peak oil” will not impact energy supplies but will heavily impact
availability of liquid transportation fuels.
In the present paper an elaborate and in-depth analysis of “oil price hike” and policy-
related issues are highlighted in a lucid way. Firstly, the increase in domestic price of
petroleum products has not risen in line with or even kept pace with the recent
international oil price hike. Secondly, the choice of an energy fuel - particularly among
poor households is not always linked with price, issues of availability and accesses are
very important. In the Indian context, it must be noted that the prices of petroleum
products continue to be regulated by the government thereby limiting the extent of the
transmission of oil price increases from the international to the domestic market.
However, there have been relatively small changes in the administered prices of
petroleum products in India over the last few years, although these have been outweighed
considerably by price increases in parallel market.
Introduction
Oil is the lifeblood of modern civilization. It fuels the vast majority of the world’s
mechanized transportation equipment – Automobiles, trucks, airplanes, trains, ships, farm
equipment, the military, etc. Oil is also the primary feedstock for many of the chemicals
that are essential to modern life. Oil was formed by geological processes millions of
years ago and is typically found in underground reservoirs of dramatically different sizes,
at varying depths, and with widely varying characteristics. The largest oil reservoirs are
called “Super Giants,” many of which were discovered in the Middle East. Because of
their size and other characteristics, Super Giant reservoirs are generally the easiest to
find, the most economic to develop, and the longest-lived. The last Super Giant oil
reservoirs discovered worldwide were found in 1967 and 1968. Since then, smaller

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reservoirs of varying sizes have been discovered in what are called “oil prone” locations
worldwide -- oil is not found everywhere. Geologists understand that oil is a finite
resource in the earth’s crust, and at some future date, world oil production will reach a
maximum -- a peak – after which production will decline. This logic follows from the
well-established fact that the output of individual oil reservoirs rises after discovery,
reaches a peak and declines thereafter. Oil reservoirs have lifetimes typically measured in
decades, and peak production often occurs roughly a decade or so after discovery. It is
important to recognize that oil production peaking is not “running out.” Peaking is a
reservoir’s maximum oil production rate, which typically occurs after roughly half of the
recoverable oil in a reservoir has been produced. In many ways, what is likely to happen
on a world scale is similar to what happens to individual reservoirs, because world
production is the sum total of production from many different reservoirs. Because oil is
usually found thousands of feet below the surface and because oil reservoirs normally do
not have an obvious surface signature, oil is very difficult to find. Advancing technology
has greatly improved the discovery process and reduced exploration failures.
Nevertheless, oil exploration is still inexact and expensive.
Once oil has been discovered via an exploratory well, full-scale production requires many
more wells across the reservoir to provide multiple paths that facilitate the flow of oil to
the surface. This multitude of wells also helps to define the total recoverable oil in a
reservoir – its so-called “reserves.” The concept of reserves is generally not well
understood. “Reserves” is an estimate of the amount of oil in a reservoir that can be
extracted at an assumed cost. Thus, a higher oil price outlook often means that more oil
can be produced, but geology places an upper limit on price-dependent reserves growth;
in well managed oil fields, it is often 10-20 percent more than what is available at lower
prices. Reserves estimates are revised periodically as a reservoir is developed and new
information provides a basis for refinement. Reserves estimation is a matter of gauging
how much extractable oil resides in complex rock formations that exist typically one to
three miles below the surface of the ground, using inherently limited information.
Reserves estimation is a bit like a blindfolded person trying to judge what the whole
elephant looks like from touching it in just a few places. It is not like counting cars in a
parking lot, where all the cars are in full view. Specialists who estimate reserves use an
array of methodologies and a great deal of judgment. Thus, different estimators might
calculate different reserves from the same data. Sometimes politics or self-interest
influences reserves estimates, e.g., an oil reservoir owner may want a higher estimate in
order to attract outside investment or to influence other producers. Reserves and
production should not be confused. Reserves estimates are but one factor in estimating
future oil production from a given reservoir. Other factors include production history,
understanding of local geology, available technology, oil prices, etc. An oil field can have
large estimated reserves, but if the field is past its maximum production, the remaining
reserves will be produced at a declining rate. This concept is important because satisfying
increasing oil demand not only requires continuing to produce older oil reservoirs with
their declining production, it also requires finding new ones, capable of producing
sufficient quantities of oil to both compensate for shrinking production from older fields
and to provide the increases demanded by the market.

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Demand and Supply
The petroleum sector has registered a robust growth in domestic production and supply
over the years, though the country continues to depend heavily on crude oil imports. India
has 17 per cent of the world's population and just 0.8 per cent of the world's known oil
(Figure 1) and natural gas resources. Our annual requirement of oil is 114 million tunes.
Oil reserves (Million Metric Ton

900
Onshore Ofshore Total
800
700
600
500
400
300
200
100
0
1990 1995 2000 2001 2002 2003 2004 2005

Figure 1: Oil reserves in India (The Oil and Natural Gas reserves (proved and
indicated) data relate to 1 st January for the year 1990 and thereafter
1 April of each year (Source: http://petroleum.nic.in).
The transportation sector is the fastest growing energy consumer. It now consumes nearly
112 million tonnes of oil annually, and is critically important for our nation's economy
and security. We produce only about 25 per cent of our total requirement. The import
cost today of oil and natural gas is over Rs 120,000 crores. India is currently the fourth
largest oil consumer in the Asia-Pacific region after Japan, China and South Korea.
Estimated to increase at the rate of 7 % a year, the demand for petroleum products, in
absolute terms, is expected to be 155 and 195 million tonnes respectively for the year
2006-07 and 2011-12. The demand of crude oil has increased dramatically and country's
cost for import of crude oil has increased substantially (Table 1).
Table 1: Production and Import of Crude Oil in India

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Policy Context
Exploration
In India, prior to 1990s the hydrocarbon sector was dominated by the National Oil
Companies (NOCs), both in the upstream and downstream sub-sectors. Public sector
companies like Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL)
had a monopoly over exploration and production activities in the country. In 1997, the
government introduced a new licensing policy- New Exploration Licensing Policy
(NELP) which opened up the marketing of crude to the private sector. Subsequently,
private players such as Reliance and Crain have had significant oil discoveries.
Refining and marketing
In the initial years of development of the refining sub sector in India, it was dominated by
a number of international private players like Exxon, Shell, Caltex, Burmah Oil Company
etc. But after the first oil shock, Government of India (GoI) nationalized the oil industry
as a result of which these companies gradually exited from the country, by divesting their
stakes in favour of GoI. Consequently, there was a complete dominance of the National
Oil Companies (NOCs) in the Indian refining and marketing sub sector. The key NOCs
operating in the downstream sector are Indian Oil Corporation (IOCL), Hindustan
Petroleum Corporation Limited (HPCL), Bharat Petroleum Corporation Limited (BPCL)
and IBP. IBP is a pure marketing company, where as the rest are integrated refining and
marketing companies.
The Government took a U-turn in the 1990s and decided to again liberalise of this sub
sector. The first step in this case was the complete opening up of the lubricants segment
for private players, resulting in entry of international players in the market by forming
joint ventures with the NOCs. But, the defining event for private sector participation the
Indian downstream sub- sector was commissioning of the 27 MMTPA (Million Metric
Tonnes per Annum) refinery by Reliance in 2000. Later, the capacity of this refinery was
increased 30 MMTPA.
Marketing of petroleum products was also opened to private players in 2002. Private
players were allowed to set up their own marketing and distribution if they had a
minimum Rs 20 billion investment over a period of ten years in oil exploration and
production, refining, pipelines or terminals in India. After this notification there has been
an increase in number of private players in the country. GOI has permitted Reliance
Petroleum, ONGC, Numarligarh Refineries Limited (NRL), Essar Oil, Shell India, and
Mangalore Refineries Private Limited (MRPL) to set up their respective marketing and
distribution networks. In spite of private sector being allowed, this segment is still
dominated by the national companies, which have the strongest and the largest
distribution network in the country.
In spite of private sector being allowed, this segment is still dominated by the national
companies, which have the strongest and the largest distribution network in the country.
Pricing of crude petroleum products
Prior to the envisaged deregulation of the petroleum sector in April 1998, petroleum
pricing in the country was under the Administered Price Mechanism (APM). In the APM
era, various pools maintained by the government ensured that the ex-storage price of a

4
product remained the same all over the country. However, a major criticism of the system
was that it neither fostered innovation nor provided significant incentives for efficiency.
Also since the government controlled product prices, political forces exerted enormous
pressure on price levels. The Administered Price Mechanism in the Indian petroleum
sector was officially dismantled in April 2002. However, in practice the deregulation has
been limited in nature. On one hand, the price of indigenous crude has been linked to
international prices as envisaged. On the other hand, Oil Marketing Companies (OMCs)
are not free to fix prices of the petroleum products. In 2004, the government decided to
give the OMCs give more freedom for fixing prices, with the OMCs being free to fix
prices of MS and HSD within a band of 10% without consulting the government. For an
increase more than the band the OMCs were to approach the Ministry of Finance through
the MOP&NG to modulate the excise duty rates to ensure that the spiraling prices
prevailing in the international markets do not cause undue hardships to the consumers.
With crude oil touching unprecedented heights the price band was disbanded within a
fortnight. While the price of Indian basket of crude oil increased by 36 percent between
November 2004 and June 2005, the retail prices of both petrol and diesel remained static
and were revised only on June 20, 2005 after a gap of almost seven months. The last
price revision was made in September 2005. Serious discussions are now on to raise the
prices of petrol and diesel once again, keeping kerosene and LPG prices unchanged. But
the matter has evoke considerable political debate and decisions are pending.
Comparison of retails prices in India with international price of products such as diesel
and gasoline point to the following. Firstly, the price paid by Indian consumers is
significantly higher as compared to the corresponding prices in the international market.
Data from Petroleum Planning and Analysis Cell shows that India has highest retail
prices of both petrol and diesel in South Asia. This is due to high level of taxes and duties
levied on petroleum products in India. The sixth report of the Standing Committee of
Petroleum and Natural Gas presented to the Fourteenth Lok Sabha on 4th August 2005,
states that we have a build up of prices in which more than fifty per cent of the price is
taxes
Impact of oil price rise on Indian oil companies
Oil price increases impact the oil companies substantially however, the impact of oil
price rise differs from the segment in which an oil company functions. Table 2 points out
the presence of different corporate entities in the three segments of the petroleum
industries.
The price of indigenous crude has been linked to international prices. This acts to the
advantage to the domestic upstream companies. The cost of production for these
companies is much lesser than the international price of crude, whereas in case of import
parity prices these companies get the price equivalent to imported crude. For instance,
the domestic cost of production for crude for these companies is around 24- 27 dollar per
barrel while international oil prices have touched unprecedented levels of 55 -60 dollar
per barrel, resulting in substantial earnings for these companies.
Next in the petroleum supply chain are the refining companies, which procure crude from
both domestic and international sources. The refineries procure crude oil at international
prices. After processing the oil, petroleum products are sold to the marketing companies
at the import parity prices of the respective petroleum products. Import parity prices
equate the prices of domestically produced petroleum products to fully loaded cost of

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imported products. In the light of the fact that India is a net exporter of petroleum
products and imports only small quantities of LPG, these loaded components such as port
charges and wharfage are purely notional in nature.

Table 2: Areas of function of oil companies

Corporate Entity Upstream Downstream
ONGC √ Refining Marketing
OIL √
MRPL √
(Wholly owned subsidiary of ONGC)
NRL √ √
RIL √
IOCL √ √
HPCL √ √
BPCL √ √
IBP (Wholly owned subsidiary of IOCL) √

Petroleum sector subsidies and “under-recoveries”

Subsidies on Kerosene and LPG have not been reduced as envisaged in the reform
roadmap. In India, subsidies on both kerosene and LPG are universal in nature and do not
target a specific segment of the population. While earlier these subsidies were off budget,
with dismantling of APM these were made budgetary.
The residential sector is the major consumer of LPG and kerosene in the country.
Traditional fuels meet 90% of cooking needs in the rural areas. A mere 1.62% of the rural
households in the country use kerosene as the primary fuel for cooking. At the same time,
55% of rural households are dependent on Kerosene for meeting their lighting needs,
which is not only an inefficient source of lighting, but also has adverse health impacts.
Kerosene prices in the country are artificially set below the market price. In 2004-05, the
total subsidy on kerosene (including under-recoveries by oil companies) amounted to 100
billion rupees. A substantial part of this 100 billion is being borne by oil companies and it
has affected their financial health. The huge differential between kerosene and diesel
prices is an incentive for adulteration of other oil products. In Delhi for example, the
difference amounts to Rs. 21.40. It is thus not surprising that a large quantity of kerosene
finds its way in adulteration of diesel.
In the Indian context, the percentage change (1990 to 2005) in retail prices of petroleum
products (at the city of Delhi) have been provided in Table 3 and compared with
corresponding international prices for crude (average of Brent, WTI and OPEC Basket).
It is evident that prices of petroleum products in India have been on the rise since 1990,
but during the period of the recent oil price hike (post 2002), the hike has been ad hoc
and not in line with movements in international prices. Also the increase in domestic
petroleum product prices has not kept pace with the recent hike in oil price.
The group of Fuel, Power, Light and Lubricants recorded inflation rate of around 10.1 per
cent in early 2005, an increase over the previous year’s figure of 7.7 per cent. Petroleum
products, which have a weight of just 7% in the WPI (individual weights of major
petroleum products is given in Table 3.0), contributed to 30.8 percent of inflation in

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2004-05 (compared to 18.0 in the previous year). This group registered inflation at 14.9%
in 2004-05 compared to 11% in the previous year.
Table 3: Comparison of change in international price of crude with change in domestic
price of petroleum products
1990 2002 2005 %Change %Change
1990- 2002-
2002 2005
Crude 23.49 25.18 54.30 7.19 115.65
(international)
$/bl
Petrol – Delhi 9.84 26.54 43.49 169.72 63.87
– Rs/l
Diesel – 4.08 16.59 30.45 306.62 83.54
Delhi – Rs/l
Kerosene 2.25 8.98 9.05 299.11 0.78
(PDS)–
Delhi-Rs/l
LPG – Delhi 57.60 259.95 294.75 351.30 13.39
– Rs/cylinder

Table 4: Weights of major petroleum products in India’s wholesale price index

Products Weight (%)
LPG 1.83731
Petrol 0.88815
Naphtha 0.41885
Kerosene 0.68928
High speed diesel oil 2.02034
Source Office of the Economic Adviser, Ministry of Commerce & Industry as cited in MoPNG (2005a)
:
It is evident that India’s vulnerability to a rise in oil price rise stems from its oil intensity
and the dependence on crude imports. However, India’s refining capacity has reduced to
an extent the vulnerability related to import dependence. Additionally, the relatively low
dependence of very poor households on petroleum fuels mitigates somewhat the exposure
of these vulnerable populations to the vagaries of international oil prices. Additionally,
the government continues to shield the domestic consumer from the movements in the
international oil market through regulated petroleum product pricing. Subsidies are
rampant. Despite this, the ground reality is that the consumer is paying higher prices for
at least two reasons. The prices of transportation fuels are among the highest in the region
on account of heavy taxes. Household petroleum fuels are available at subsidised prices
through an official channel, where supplies are limited due to a variety of factors.
Consequently, the consumer is compelled to tap the “private” market where extortion is
rampant and prices charged and several times the official rate.
Consumption of crude and petroleum products
Moving by the established norms of demand relations, a rise in product prices brings
about a fall in product consumption. Oil, however, does not fall in the category of such

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normal goods, and being a necessity at all levels, has not revealed the established norm of
a negatively sloped demand function. In the context of India, Figure 2 tracks the
conjunctive movements of oil prices and consumption of crude and petroleum products.
It can be seen that over the time period of analysis, there has been a secular trend of
increase in the consumption of both crude and petroleum products in India. Even in the
post-hike phase of 2003-04 to 2005-06, the consumption of crude and products have
increased.

160

140
Oil Price/ Oil Consumption

120

100

80

60

40

20

0
1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Year
Consumption of Crude (in terms of refinery crude throughput)(million metric tonnes)
Consumption of Petroleum Products (million metric tonnes)
Import Prices (Rs/ 0.1 quintals)

Figure 2: Oil prices and consumption of crude and petroleum products

Source: Ministry of Statistics and Programme Implementation, Government of India;

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Oil price increase and GDP growth
There has been a spurt in GDP growth in India over the last few years, a trend that has
not been reversed during the recent oil price increase. Figure 3 reveals the conjunctive
movements of oil prices and GDP growth rates.
16
14
Oil prices, GDP growth

12
10
8
6
4
2
0
1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

GDP growth rate Import Price (Rs/kg)

Figure 3: Movement of growth rate of GDP and oil prices

source: Economic Survey of India (2005-06)
http://www.indiastat.com/india/ShowData.asp?secid=18072&ptid=25&level=2

Conclusion
There are several energy-related changes between the current period and a previous
period (3-4 years ago) which denotes the period just prior to the oil price hike. However,
in many cases these changes cannot be attributed entirely to the oil price rise for a
number of reasons. Firstly, the increase in domestic price of petroleum products has not
risen in line with or even kept pace with the recent international oil price hike. Secondly,
the choice of an energy fuel – particularly among poor households – is not always linked
with price, issues of availability and access are very important.
Importantly, in the Indian context, it must be noted that the prices of petroleum products
continue to be regulated by the government, thereby limiting the extent of the
transmission of oil price increases from the international to the domestic market in the
case of the fuels this study is focusing on: LPG, kerosene, petrol and diesel. There have
however been relatively small changes in the administered prices of petroleum products
in India over the last few years, although these have been outweighed considerably by
price increases in parallel market.

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