OBJECTIVES OF STUDY Indian Oil & Gas Industry The Indian Oil & Gas Sector traces the

e trends that are most likely to emerge in this industry in the beginning of this new decade. With the Government gradually giving up control on the oil & gas sector in favor of market forces, Indian oil companies both upstream and downstream players are getting exposed to international price fluctuations. This is changing the ground realities for this vital sector of the Indian economy. Hence in order to realize the importance of Indian oil sector this project can be very useful as it highlights the most successive challenges faced by the Indian oil sector.

INTRODUCTION TO INDIAN OIL SECTOR The Global Scenario:Globally, the o il & g as secto r is d o min ated b y certain larg e p rivate co mp an ies who h av e a presence in almost all segments of the oil & gas value chain. Historically, oil price has been the single most important challenge facing the global oil industry. The problem is all the more acute as the large private companies account for only a small share of world oil production even as oil prices remain unpredictable and prone to wide fluctuations. Given this backdrop, global oil majors are now increasingly benchmarking their production costs against the oil production costs of the OPEC (Organization of Petroleum Exporting Countries), and increasingly relying on technological innovations and other cost cutting measures to lower their own production costs. The other factors influencing their decisions are the likely fall in oil prices after March 2000, rising demand for gas and lighter petroleum products, and the volatile and unpredictable nature of refining margins. The Indian Scenario: Un lik e their g lob al cou nterp arts, Indian o il & g as co mp an ies h ave so f ar been op erating in specific segments of the value chain. Oil & gas exploration, crude oil refining, distribution and marketing of petroleum products, and natural gas distribution are the key sub-sectors of the Indian oil & gas sector. The total sales turnover of this sector as a whole was around Rs. 1,500 billion as on March 31, 1999. The Indian oil & gas sector has historically been a regulated sector, do min ated b y Gov ern men t und ertak ings. The regu lation took th e f o rm o f the Ad min istered Pricing Mechanism (APM) under which the returns on investment were guaranteed. But now, with the APM being dismantled in phases and private players gaining a presence in the

Indian oil& gas sector, the existing public sector oil companies are getting exposed to market forces and competition. The Indian Upstream Sector: For the upstream players (the crude oil producers), the linkage to international crude oil prices implies volatility in earnings. While a rise in international crude oil prices would translate into a positive contribution to the bottom-line, a decline in the international prices, on the other hand, would exert pressure on the margins of all upstream companies. The national oil companies would, however, is protected from the downside risk by the floor price fixed by the government. But if the floor price is removed and the international oil prices drop to levels lower than the cost of production, even the national oil companies would require government intervention to protect their bottom-line. What aggravates the risk further is the fact that declining oil production and stagnating reserves dictate that the upstream companies venture into exploration areas that have a h igh risk -h igh retu rn p rof ile (lik e d eep water b locks). And this has imp lication s fo r futu re exploration & production (E&P) costs. Given the emerging scenario, expects the strategies of the upstream players to focus on: use of better recovery techniques; employment of cost cutting measures; entry into high-risk-highreturn areas (with the assumption that oil prices will not fall below the cost of production); integration into downstream areas; partnering; venturing into other geographical regions; and, undertaking organizational restructuring.

The Indian Downstream Sector: The phased dismantling of the APM has exposed the Indian downstream players (refiners and marketers of petroleum products) to market forces. The refining margins of the Indian refineries are now linked to the international refining margins. A fluctuation in the international prices of crude oil/ product translates into a variation in the domestic margins (although they are, to a large extent, protected by the positive net duty protection). In the first 18 months of decontrol (fiscal year 1999 and first half of fiscal year 2000), the profitability of Indian refineries has increased (and is exp ected to in crease fu rther) as their marg in s hav e increased fo llo wing hig her du ty protection and linkage of crude and product prices with international prices. However, on the flipside, the expected surplus in the domestic market may limit this margin expansion. The other factors influencing the profitability of Indian refineries in the deregulated scenario would be refinery configuration, operating costs, and refinery location. The ownership of marketing and distribution infrastructure would be of strategic importance and would enhance profitability as the marketing sector is decontrolled. While the profitability of the integrated players would be higher and more resilient to economic troughs, the pure refining companies would find it difficult to sustain profitability in a decontrolled scenario. Accordingly, the pure refining and marketing companies are expected to be merged with the oil maj ors. A full decontrol of the marketing sector is likely to lead to severe competition among the various players in the industry, and a greater focus on branding and product differentiation. Given the changes taking place, expects the strategies of downstream players to focus on: strengthening import infrastructure; enhancing scale of operations; upgrading processing facilities; implementing environmental projects strengthening marketing and

distribution infrastructure and promoting brands; entering into strategic alliances; venturing into other areas of the energy value chain for optimizing the risk-return profile; and restructuring the organization.