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Page 1: 1 Oil Industry Future Challenges by Shri. B.K. Bakhshi.

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Oil Industry Future Challenges

by

Shri. B.K. Bakhshi

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Oil - Price Peaks & Effect on Indian Economy

Sr No

Year GDP Growth (+/-)

Inflation Event

1. 1973 - 0.3 % 20 % Yom Kippur War oct 73

2. 1979 - 5.2 % 17 % Iranian Revolution

3. 1990 + 1.3 % 14 % 1st Gulf War

4. 2008 - From expected 9% to less than 8%

12 % + From Katrina Onwards

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CRUDE OIL PRICES(Indian Basket)

• Peak – July 08 - $142/BBL

Sr No. Year Price ($/BBL)

1. March 2003 23

2. 2005 52

3. 2006 63.35

4. 2007 70.06

5. 2008 (avg 1st 6 months) 110.52

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VERTICAL INTEGRATION HELPS OIL MAJORS

• Integrated International Majors profits go down when crude price go down and profits go up when crude price are up.

Examples:• The slump in crude prices to less than $15 per bbl in 1998 led

to mergers – such as Exxon Mobil, Philips Conoco, etc.

• When crude prices rose from $33 per bbl in April 2004 to 70.25 per bbl in Aug 2005 – 2 weeks after Katrina Hurricane. Gasoline prices in USA peaked to $3.06 per USG. The combined net income of Exxon Mobil, BP, Royal Dutch, Shell & Conoco Philips totaled $ 32.8 Billion during the quarter ending Sept 2005 on a revenue of $ 378 Billion.

* Source Black Gold by George Orwell, page 147

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Government’s liberalization drive hastened the pace of hydrocarbon market development in India.

Journey so far

1950 1990 2007-08 Comments

1 Population (bn) 0.36 0.84 1.13 2nd most populous country

2 GDP Growth Rate (%) 3.9@ 5.58$ Around 9 >8% for last four years

3Crude Production (MMT)

0.26 32.6 34 Almost stagnant since 1990

4 NG Prodn (MMSCMD) NA 49.3 91 Bulk production from Mumbai High field

5Refining Capacity (MMT)

0.25 51.85 149 6th largest refining capacity in world

6 Crude import (MMT) 3.05* 20.7 12229% & 44% of total import & export in value

7 Pipelines (kM) 37^ 9,945 31,061 World’s longest operating LPG pipeline

8Product Consumption (MMT)

3.3 55 129>11% growth in MS/HSD & 14% in ATF last yr

9 Product Export (MMT) 0 2.6 39.320.2% growth in POL export over 2006-07 (32.7 MMT)

10 Retail Outlets NA 14,264 34,696# Catering to more than 80 mn motor vehicles

*1955 figure @1950-60 Avg #As on 1.4.07 $1990-200 Avg ^Product pipeline

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Upstream sector in India is a relatively unexplored market with reserves estimated in only 15 of the 26 sedimentary basins.

• 26 sedimentary basins: 3.14 mn sq kM (44% onland and 56% offshore)

• Prognosticated Hydrocarbon reserves: 28 BTOE (<25% established) ~ 200 bn barrels

• Crude oil production - 34 MMT

• Upstream NOCs dominate production/acreage

• Directorate General of Hydrocarbons (DGH) vested with upstream regulatory functions

• New Exploration Licensing Policy (NELP)

Sectoral Overview – Upstream

Key Facts

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NELP rounds have opened up large sedimentary areas for exploration to private and JV companies leading to decrease in unexplored or poorly explored areas from 67 to less than 37%Out of total 205 bn bbl of prognosticated resources in 15 basins, 66 bn bbls have been established since 1947. 15 bn bbl in-place reserves were added during last 7 years

•Exploration Acreage – April ’96 •Exploration Acreage – April ‘07

Source: Directorate General of Hydrocarbon

Moderate to well

explored16%

Poorly Explored

18%

Exploration initiated

17%

Unexplored49%

Moderate to well

explored20%

Poorly Explored

21%

Exploration initiated

44%

Unexplored15%

Sedimentary Area

Yet to offer32%

Area under License

68%

Sectoral Overview – Upstream

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Overall Demand-Supply Gap (MMSCMD)Natural Gas

2008-09 2009-10 2010-11 2011-12

Supply

Domestic 120 140 147 170

LNG 34 52 70 70

Total 154 192 217 240

Demand 197 222 265 282

GAP MMSCMD 43 30 48 42

MMT 14.9 9.9 15.84 13.9

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LNG TerminalsRated Capacity

Company/Location 2008-09 2009-10 2010-11 2011-12

Petronet-Dahej 5.00 10.00 10.00 10.00

Shell-Hazira 2.50 3.50 3.50 3.50

RGPPL-Dabhol - 2.90 5.00 5.00

Total 7.50 16.40 18.50 18.50

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Expected Share of Natural Gas in the Energy Basket in India (Hydrocarbon Vision 2025)

Year 2006-07 2011-12 2024-25

Coal 50 53 50

Oil 32 30 25

Gas 15 14 20

Nuclear 1 1 3

Hydel 2 2 2

100 100 100

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India’s downstream sector is dominated by NOCs.

• 19 refineries with 149 MMTPA installed capacity

• 105% capacity utilization in 2007-08

• Refined product consumption – 129 MMT

• Refined product consumption: 7% annual growth

• Refined product net exports – 39 MMT, Gross exports $26.8 bn 07-08 (50% growth over 2006-07)

• Product pipelines stretch over 9,500 km

• New entrants in the oil marketing business include RIL, Shell, EOL, MRPL and NRL

• Domestic auto sales 14.1% CAGR (’06-07 over ’01-02); petroleum products consumption jumped by 7% from last year

• Over 34,000 retail outlets

Major Downstream Players as on April 1, 2008

Essar, 10.5, 7%

HPCL, 13.0, 9%

IOC, 60.2, 40%

RIL, 33.0, 22%

BPCL, 22.5, 15%

ONGC, 9.8, 7%

Pvt10%

HPCL19%

BPCL21%

IOC48%

Other (PSUs)

2%

Refining capacity (MMTPA)

Market Share of sale of Petroleum Products (in Vol sales excl. CNG & LNG)

Source: MoPNG

Source: Monthly IPR

Sectoral Overview – Downstream

Key Facts

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Refining industry in India is poised for rapid growth with additional investments planned over the next decade supported by GoI’s intention to promote India as an integrated refining and petrochemical export hub.

Developments

Investments

• 241 MMTPA refining capacity by 2012

• 38 MMTPA addition in the Pvt sector

• Private investments from Chevron/Mittal

• RIL/Essar/IOC venturing abroad (Kuwait, Africa, Turkey etc.)

• Crude import and product exports expected to jump

• Investment of over $22 bn estimated for creating new refining capacity

• Refinery upgradation projects to require investments of the order of $2.5 bn

148.9

194.7

210.21

225.88 240.96

170.41

150.51

120.37107.27

195.49

2008 2009 2010 2011 2012

Refining Capacity Vs. Crude Import in MMT as on April 1

Source: XI FYP, MoPNG

Sectoral Overview – Downstream

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Oil Companies Under Recoveries 2007-08 – On price controlled products

Sr. No.

2007-08 Under-Recovery (Rs Crs)

1. LPG 15,000

2. MS 7,000

3. SKO 19,000

4. HSD 35,000

Total 77,000

This is BORNE BySr. No.

Agency (Rs Crs)

1 Upstream Companies

26,000

2. OIL Bonds 35,000

3. OIL Companies

16,000

Total 77,000

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High Taxes on Transport Fuel

Sr. No

Item MS Percentage HSD Percentage

1. Basic Price

(Rs/KL)23,149.33 50.9% 23,241.11 73.18%

2. Custom/Exchange

Sales/Other Taxes (Rs/KL)

22,370.67 49.1% 8518.89 26.82%

3. Total Retail Price

Rs/KL45,520.00 100% 31760.00 100%

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SHARE OF OIL REVENUE IN TOTAL REVENUE IN 2002-05

Year Accrued to Oil Revenue (Rs. Crs)

Total Revenue (Rs. Crs.)*

Share of Oil Revenue in Total Revenue (%)

2002-03 Centre 64595 236936 27.3

States 32156 178001 18.1

Total 96751 414937 23.3

2003-04 Centre 69195 263027 26.3

States 35180 203746 17.3

Total 104375 466773 22.4

2004-05 Centre 77692 300904 25.8

States 43254 235283 18.4

Total 120946 536187 22.6*Centre’s revenue is taken as net of transfers to States. States’ revenue is the total receipts of own tax and non-tax revenue.Source: Report of the Standing Committee on Petroleum & Natural Gas in Parliament, Government of India; State Finances, A study of Budget of 2004-05, RBI, Government of India; Budget documents, Government of India.

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Renewable Energy Sources PotentialSource/ Technology

Units Potential/ Availability

Potential Exploited

Units Percentage

Biogas Plants Million 12 3.2 26.8

Biomass-based Power.

MW 19,500 384 1.9

Efficient wood stoves.

Million 120 33.9 28.2

Solar Energy. MW/Sq. Km 20 1.7 8.7

Small Hydro MW 15,000 1,398 9.3

Wind Energy. MW 45,000 1,367 3.0

Energy Recovery from Wastes.

MW 1,700 16.2 0.9

Hydel. MW 148,700 16,083 10.8

* Table 7.3.3/7.3.16 10th plan document

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Biofuels Activities

• JV under formation with Chhattisgarh Government to produce 30,000 MTPA Biodiesel

• 2000 ha revenue wasteland allotted by Government of M.P. In Jhabua district for energy crop plantation. Investment approval being obtained

• 10% ethanol blends in MS by 2012 (The end of the 11th plan)

• Discussions with U.P. and Rajasthan Government for creating Biodiesel units.

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Status - Hydrogen Activities of IOC

IOC R&D had set up the India’s first Hydrogen Dispensing Station in October, 2005 which is being used for fueling test vehicles.

A similar Hydrogen-CNG Dispensing Station is being set up at Delhi in Dwarka by IndianOil which will be commissioned by end of 2008.

IOC R&D working closely with SIAM members under an MNRE project for optimisation of various vehicles to Hydrogen-CNG.

IOC R&D planning further projects related to Hydrogen production, development of codes & standards etc.

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Planning Cycle – Key Corporate Activity

VisionPerspective

PlanLong Term

Plan

5 Year PlanAnnual Plan

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Knowledge Explosion

• Knowledge Doubling

itself every 5-7 years

• The importance of R&D escalating exponentially

Rate of Change of Everything is Hyperbolic

Years

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Formula for Organisational Perpetuity

1. Creativity – Without which no new Technologies products goods & services can emerge.

2. Continuity – Without which in a changing environment the sense of purpose and/or directions may get lost and develop aberrations.

3. Discontinuity – The essence of discontinuity / change is to discard the irrelevant / obsolete on a continuous basis. Without it no forward progress can take place.