MDSO 821D Petro Economics e Book

UNIT 20: Case Study
MDSO-821D
(c)
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Petro
Economics
UP
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EMBA (Oil & Gas Management)
Petro Economics
Course Design
UP
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Advisory Council
Chairman
Dr Parag Diwan
Members
Dr Kamal Bansal
Dean
Dr Anirban Sengupta
Dean
Dr Ashish Bhardwaj
CIO
Dr S R Das
VP Academic Affairs
Dr Sanjay Mittal
Professor IIT Kanpur
Prof V K Nangia
IIT Roorkee
SLM Development Team

Wg Cdr P K Gupta
Dr Joji Rao
Dr K K Pandey
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Dr Neeraj Anand
Print Production
Mr Kapil Mehra
Manager Material
Author
S K Agarwala
Mr A N Sinha
Sr Manager Printing
(c)
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means,
without permission in writing from MPower Applied Learning Enterprise.
Course Code: MDSO-821D
Course Name: Petro Economics

Version: July 2013
MPower Applied Learning Enterprise
UNIT 20: Case Study
UP
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Contents
Block-I
Unit 1
Introduction to Petro Economics.................................................................................... 3
Unit 2
Global Trends in Oil Industry...................................................................................... 15
Unit 3
Indian Oil Industry Exploration and Production ....................................................... 39
Unit 4
New Exploration and Licencing Policy........................................................................ 61
Unit 5
Case Study .................................................................................................................... 69

Block-II
Indian Oil Refining....................................................................................................... 77
Unit 7
Deregulation (Oil and Natural Gas) .......................................................................... 101
Unit 8
Unit 9
Unit 10
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Unit 6
Indian Oil Industry Marketing .................................................................................. 113

Growth and Deregulation of Indian Oil Sector ......................................................... 131
Case Study .................................................................................................................. 173
Block-III
Unit 11
Unit 12
Unit 13
Unit 14
Unit 15
Structure of Oil Industry............................................................................................ 179

Logistics and Transportation of Oil in India............................................................. 193
Strategy for Petroleum and Natural Gas Trading.................................................... 203
Petro Retailing............................................................................................................ 225
Case Study .................................................................................................................. 247
Block-IV
Indian Experience in Petro Retailing ........................................................................ 255
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Unit 16
Unit 17
Economics of Crude Oil .............................................................................................. 275
Unit 18
Trade and Transport .................................................................................................. 299
Unit 19
Geopolitics in Oil and Natural Gas Trading ............................................................. 311
Unit 20
Case Study .................................................................................................................. 335
Block-V
Petro Economics
iv
International Hydrocarbon Economic Environment ................................................ 347
Unit 22
Trend and Structure of Oil and Gas Economy .......................................................... 357
Unit 23
Globalisation and Oil Security for Indian Oil Industry............................................ 377
Unit 24
E-commerce Application in Oil and Natural Gas Industry...................................... 389
Unit 25
Case Study .................................................................................................................. 415
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Unit 21
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Glossary ............................................................................................................................................ 425
UNIT 1: Introduction to Petro Economics
Notes
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BLOCK-I
Detailed Contents
Petro Economics
Notes
UNIT
2: GLOBAL TRENDS IN OIL INDUSTRY
___________________
z
Introduction
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Global Oil Demand

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Global Oil Supply
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Introduction
Highly Regulated Industry
Crude Oil Reserves
UNIT 4: NEW EXPLORATION AND LICENCING

POLICY
z
Introduction
Potentials of Indian Hydrocarbon Sector
UNIT 5: CASE STUDY
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UNIT 3: INDIAN OIL INDUSTRY EXPLORATION

AND PRODUCTION
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UNIT
1: INTRODUCTION TO PETRO ECONOMICS
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z
Introduction
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z
Industry Structure
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z
Liberalisation in the Marketing Sector
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Unit 1
PE
S
Introduction to Petro Economics

Objectives
After completion of this unit, the students will be aware of the following
topics:
Industry Structure
Notes
Activity
Research
and prepare a
___________________
report on the development
and ___________________
classification
of
sedimentary basins of India.
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Introduction
The search for oil in the country began way back in 1866 when Mr
Goodenough of Mckillop, Stewart & Company drilled a well near
Jaypore in upper Assam and struck oil. However, he could not
commercially exploit this discovery. In 1899, the Assam Railway
and Trading Company (ARTC) which had obtained exploration
rights in the same area, struck oil at Digboi making the beginning
of oil production in India. Subsequently, the Assam oil company (a
wholly owned company of ARTC) sold its rights to the Burmah Oil
Company. But the exploration and production activities confined to
the North East until the middle of the 20th century.
Exploration for oil in the upper Assam shelf was recommenced

after the Second World War and large-size oilfields were
discovered at Nahorkatiya and Moran in 1953 and 1956,
respectively. At the same time, the Government sought advice, aid
and collaboration from a number of foreign experts. Technical
assistance was also obtained during this period for carrying out
aeromagnetic surveys over Rajasthan, Punjab, UP and Bihar.
Industry Structure
(c)
The Oil Sector has two major activities exploration and production
of crude oil and gas (E and P) and is an upstream activity while
refining, distribution and marketing are classified as downstream
activities. In India, the operations of oil companies are in upstream or
downstream or both. The oil companies can be grouped into:
Exploration and production,
Refining and marketing.
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Petro Economics
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In India, the E and P companies are Oil and Natural Gas

Corporation Ltd, (ONGC) and Oil India Ltd., (OIL) both
government-controlled and companies in JV with NOCs. The
primary producers of oil and gas, ONGC and OIL, conduct
exploration activities across the country and in their territorial
waters. On the other hand, the downstream oil companies include
Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd.,
(BPCL), Indo-Burma Petroleum (IBP) and Hindustan Petroleum
Corporation (HPCL). Of these, IBP is a pure marketing
organisationnow a subsidiary of IOCwhile the other three have
their own refineries and also market petroleum products. Standalone refining companies like Kochi Refineries Ltd., (KRL)a
subsidiary of BPCLChennai Petroleum Corporation Ltd. (CPCL),
and Bongaigaon Refinery and Petrochemicals Ltd. (BRPL), both
subsidiaries of IOC do not have any marketing rights and their
products are marketed by marketing companies. Mangalore
Refinery and Petrochemicals Ltd. (MRPL), the first joint sector
refinery of the Aditya Birla Group and HPCLnow a subsidiary of
ONGC.
Notes
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Exploration and Production
The domain of ONGC and OIL, upstream E and P is a high risk

and high return capital intensive business. ONGC explores oil
across the country and accounts for about 80 per cent of the crude
produced while OIL operates mostly in the North-eastern parts of
India. In E and P, there is high uncertainty with regard to striking
of oil in commercial quantities. The companies need to invest
significant risk capital and have to accept high ratio of failures
before discovery.
It was because of the exploratory efforts of ONGC and OIL that a
number of oil and gas bearing structures were discovered in
Gujarat and Assam. Of these, the important ones were in Assam.
The Government made the search for foreign firms to join hands
(c)
with ONGC. The contract was signed with the USSR for offshore
seismic survey in the Gulf of Cambay, Arabian Sea and on the East
Coast. OIL, on the other hand, further developed their existing
fields and opened two new areas for exploration. Indias crude oil
production during this period rose from about 0.5 million tonnes to
5.66 million tonnes per annum. With recovery of the national
economy, exploration for oil was intensified. ONGC increased the
it to the offshore areas. Discovery of oil in large quantities at

Bombay High in February, 1974 opened up a new prospect of oil
exploration in offshore areas. In order to develop the Bombay High
Notes
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field quickly, ONGC adopted the concept of phased development.
speed of exploration in not only the inland basins but also extended
Production from Bombay High was started initially from two
___________________
platforms at the rate of 40,000 barrels of oil per day. Later, the oil
___________________
production from other platforms was also added to reach a
___________________
production rate exceeding 60,000 barrels of oil per day by October,

1977.
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OIL, meanwhile, continued exploratory efforts in their licences in

upper
Assam
and
increased
their
reserves
by
additional
___________________
discoveries. They had started exploration in Arunachal Pradesh in
___________________
1961 and struck oil in the Kharsang areas in 1976. During the
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decade (1967-77), the production of crude oil increased from 5.66
MTPA to 8.9 MTPA. Next decade (1977-87) began on a note of deep

concern due to the escalating import bill. The demand for
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petroleum products was rising and international prices were also
high. The augmentation of indigenous resources became the key

demand of strategy. Both ONGC and OIL took up the challenge
and
formulated
ambitious
exploration
programmes.
The
exploratory efforts yielded results in the form of discoveries of oil

and gas in a number of structures in the Mumbai offshore areas.
Exploration was extended to other offshore areas like the East
Coast by ONGC and in the offshore of the Andaman by the OIL
with varying degrees of success.
Both the ONGC and the OIL continued their efforts to make the
discoveries, though of small size. OIL discovered a few other small
pools in the nearby areas which were taken up for development. In
its newly acquired areas in Rajasthan, OIL has completed its first
phase of seismic survey. It is to start exploratory drilling in this
basin.
In the year 2009-10, the production of Petroleum Products in the
(c)
country was 149.65 MTs as against 150.52 MTs during 2008-09, a

decline of about 0.6%. Out of the total domestic production of
149.65 MTs of all types of petroleum products, high speed diesel oil
accounted for the maximum share (41%), followed by Fuel Oil
(12%), Motor Gasoline (11%), Naphtha (10%), Kerosene (6%) and
Aviation Turbine Fuel (5%). During the current financial year
Petro Economics
(2010-11), production of crude oil is estimated at 37.96 million
Notes
metric ton (MMT), which is about 12.67 per cent higher than the
___________________
crude oil production of 33.69 MMT during 2009-10. The projected
___________________
production for natural gas, including coal bed methane (CBM), for
2010-11 is 53.59 billion cubic metres (BCM) which is 12.80 per cent
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higher than the production of 47.51 BCM in 2009-10. The increase
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in natural gas production is primarily from the KG deepwater block.
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The upstream oil and gas sector is characterised by high

commercial risks, upfront financing exposure and commitments
necessitating high premium on stable relationships with
Government and partners. In the context of domestic upstream
sector, some other typical constraints are:
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Stagnant production level,
Rapidly rising oil import bill,
Increasing maturity of production acreage,
A large unexplored/less explored terrain,
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Requirements of large investments.
(c)
One way of meeting the deficit is what the government has decided
at present to provide more openings for the private sector in
exploration. If it is accepted by the private sector, then, at least,
technology and finance two critical inputs would be made
available. The chances of new discoveries are enhanced. Oil
production from old and depleting fields may be sustained over
longer periods by applying suitable enhanced oil recovery
techniques. Large investments need to be made to commence
production on a large scale. Production levels from existing wells
cannot be increased beyond a certain point.
The process of deregulation will benefit ONGC and OIL. The price
realisation of these two companies is at international rates,
thereby, boosting profitability. While the costs for these companies
would remain the same, the total turnover will increase creating a
higher surplus which would enable them to invest more in
exploration. The following salient features in the future strategy in
the upstream sector in India are emerging:
Shift to new potential areas such as:
Mesozoic exploration in Kutch region and Saurashtra

offshore.
Andaman offshore basin as a possible outcome of

speculative survey activity.
Gas potential of central inland basins.
Notes
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Consolidate the initiatives taken and seek greater private
___________________
participation through joint ventures to increase the inflow of
___________________
capital for exploration in the country which would be mutually
___________________
beneficial to all parties.
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Greater
thrust
on
acquiring
opportunities.
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Deepwater exploration.
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foreign
acreages/farm-in
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Increase the number of players in exploration and production
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sector.
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According to one estimate about US$60 billion will be required in

exploration, drilling and development activities over the next 10
years. The Indian acreages have the capacity of absorbing this
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order of investment and the government is encouraging private

sector participation with attractive fiscal and contract terms in the
exploration and production sectors. The Government of India has

also offered private companies the opportunity to participate in the
development of discovered medium and small-sized fields. The
estimated oil production from these fields is over 360 million
barrels and gas production is about 50 billion cubic metres.
The most visible change in the environment of the oil industry is

happening in the downstream public sector companies. The Indian
Oil Corporation, Hindustan Petroleum Corporation and Bharat
Petroleum Corporation, which were hitherto engaged only in
refining and marketing, have decided to enter the upstream
activities. These oil companies are also looking for strategic
alliances for exploration and production of oil and gas abroad and
in India.
Presently, there is a need to mobilise huge venture capital (to the
(c)
tune of $ 60 billion) which is mostly in the form of risk capital. The

upstream sector has always been a high-risk and high-return
business. So the government is encouraging private capital, both
domestic and foreign, and to this end has started simplifying
procedures and also providing fiscal incentives which are given in
the New Exploration Licencing Policy.
Petro Economics
The government has expressed due concern for:

z
The need to accelerate the pace of absorption of new cost

effective technology because any increase in recovery level
from existing fields is tantamount to adding new oil fields.
The need to conserve oil and natural gas, petroleum products,

etc., rather than just meeting gap with increase in production
or imports.
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With the acceleration of exploration activity in India, increased

opportunities will be available to foreign and domestic companies
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in the area of oilfields goods and services. Domestic capability
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exists with ONGC and certain other private sector and public
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sector companies in India to carry out geophysical surveys,
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drilling, well logging, stimulation cementing and many other

oilfield services. Capacity also exists for fabrication of offshore
platforms, pipeline construction, coating and laying of pipelines,
etc. However, the existing facilities will be grossly inadequate to
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meet many times higher demand, in future. Opportunities are

available to foreign companies to form joint ventures with domestic
companies to provide oil field equipment and services to the
national oil companies as well as to private companies operating in
India.
New Exploration Licencing Policy (NELP)
One of the most important results of the GoIs reform efforts has
been the introduction of competition in E&P through the New
Exploration and Licencing Policy (NELP). The NELP has certainly
weakened ONGCs monopoly status in the upstream sector. By
bringing more competition to the sector, the NELP has also
enabled the greater use of benchmarks and industry standards for
monitoring ONGCs performance.
Significant Success under NELP
(c)
India has an estimated sedimentary area of 3.14 million

square kilometres, comprising 26 sedimentary basins. Before
implementing the New Exploration Licencing Policy (NELP), only
11% of Indian sedimentary basins were under exploration. Under
NELP, which was approved by the Government in 1997 and
operationalised since January 1999, Government of India has
awarded an area of 47.3% of Indian sedimentary basin area to
basin area under exploration. 87 oil and gas discoveries have been
made by private/joint venture (JV) companies in 26 blocks. Under
NELP, about 640 million metric tons of oil equivalent hydrocarbon
Notes
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reserves have been added. As on 01.10.2010, investments made by
E&P companies, making a total of 58% of Indian sedimentary
Indian and foreign companies was of the order of US $ 14.8 billion.
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At present, after concluding eight rounds of NELP, 235 production
___________________
sharing contracts have been signed. The number of NELP blocks
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awarded in previous eight rounds is given below:
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Source: Ministry of Petroleum and Natural Gas
The ninth round of NELP (NELPIX) was launched on 15 October

2010 and 34 exploration blocks including 8 deepwater, 7 shallow
water, 11 on-lands, and 8 Type-S on-lands were offered. On-land
blocks are spread over six states namely Assam (2), Gujarat (11),
Madhya Pradesh (2), Rajasthan (2), Tripura (1), and Uttar
Pradesh (1).
Refining and Marketing
(c)
Refining, distribution and marketing, the downstream activities

are dominated by the four public sector oil companies IOC,
HPCL, BPCL and IBP. Players like CPCL, KRL, BRPL, NRL and
MRPL are pure refining companies and are subsidiaries of IOC,
BPL & ONGC. As compared to the upstream sector, the
downstream sector has received a higher measure of privatisation.
When the countrys first refinery at Digboi, Assam, was
commissioned in India it had a capacity of just 0.25 million tonnes
per annum. Since then, the Indian refinery has witnessed rapid
growth. To meet the growing demand of petroleum products, the
refining capacity in the country has gradually increased over the
years by setting up of new refineries in the country as well as by
Petro Economics
___________________
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___________________
___________________
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expanding the refining capacity of the existing refineries. As of

June, 2011 there are a total of 21 refineries in the country
comprising 17 (seventeen) in the Public Sector, 3 (three) in the
Private Sector and 1 (one) as a joint venture of BPCL & Oman Oil
Company. The country is not only self-sufficient in refining
capacity for its domestic consumption but also exports petroleum
products substantially. The total refining capacity in the country
as on 1.6.2011 stands at 193.386 MMTPA. The company-wise
location and capacity of the refineries as on 1.6.2011 is given in
Table 1.1.
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Notes
Table 1.1: Total Capacity and Location of Refineries in India

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S.
No.
Location of the
Refinery
Name of the Company
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(c)
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Capacity,
MMTPA*
1.
Indian Oil Corporation Limited (IOCL)
Guwahati, Assam
1.00
2.
Barauni, Bihar
6.00
3.
Koyali, Vadodara,
Gujarat
13.70
4.
Haldia, West Bengal
7.50
5.
Mathura, Uttar Pradesh
8.00
6.
Digboi, Assam
0.65
7.
Panipat, Haryana
15.00
8.
Bongaigaon, Assam
2.35
9.
Hindustan Petroleum Corporation

Limited (HPCL)
Mumbai, Maharashtra
6.50
10.

Limited (HPCL), Visakh
Visakhapatnam, Andhra
Pradesh
8.30
11.
Bharat Petroleum Corporation Limited

(BPCL)
Mumbai, Maharashtra
12.00
12.

(BPCL)
Kochi, Kerala
9.50
13.
Chennai Petroleum Corporation

Limited (CPCL)
Manali, Tamil Nadu
10.50
14.

Limited (CPCL)
Nagapattnam, Tamil
Nadu
1.00
15.
Numaligarh Refinery Ltd. (NRL)
Numaligarh, Assam
3.00
16.
Mangalore Refinery & Petrochemicals

Ltd. (MRPL)
Mangalore, Karnataka
11.82
17.
Tatipaka Refinery (ONGC)
Tatipaka, Andhra
Pradesh
0.066
18.

& Oman Oil Company, Joint venture,
Bina
Bina, Madhya Pradesh
6.00
Contd

Reliance Industries Ltd. (RIL); Private
Sector
Jamnagar, Gujarat
33.00
20.
Reliance Petroleum Limited (SEZ);

Private Sector
Jamnagar, Gujarat
27.00
Essar Oil Limited (EOL); Private Sector
Jamnagar, Gujarat
Notes
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Total
* Million Metric Tons per Annum
10.50
193.386
Some of the key areas to enhance efficiency as well as value

addition would be:
z
Optimisation of crude processing,
Process control devises,
Energy conversion and optimisation,
Optimisation of refinery configuration.
Additions of value chains would be in the areas of:

Utilising residue for setting up power plants,
Conversion of naphtha to paraxylene/PTA,
Set up naphtha hydro-crackers for maximising yield of LPG.
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In a decontrolled environment, what is more significant is how fast

refineries adapt to the new kind of life. Public sector companies
have a strong infrastructural base. Though new players are better
equipped in terms of technology and freedom in operations new
entrants would benefit from the latest technology. The refineries
which are comfortably placed under APM are now vulnerable to
any adverse changes. Private refineries may find the deregulated
scenario very challenging.
So far as the marketing of petroleum products is concerned, the
nations four oil marketing companies have developed an extensive
infrastructure which can meet the needs of consumers across the
country. At the dawn of independence, marketing of petroleum
products was in the hands of the private companies. Later, public
sector companies were assigned the responsibility to manage the
marketing. We find that the growth of marketing and distribution
system for petroleum products in India has passed through three
different phases, which are as follows:
(c)
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21.
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19.
Phase of dominance of the multinational companies.
Phase of advent of public sector, its growth in co-existence

with transnational companies.
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Petro Economics
Notes
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Marketing by Government-owned companies and fulfilment of

socio-economic objectives.
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The development during the second phase started with actions

taken in the Industrial Policy Resolutions, 1956, to promote the
___________________
growth of petroleum sector under the Government Control. In
___________________
1959, the Indian Oil Company was formed for marketing of
___________________
petroleum products. The IOC geared up to face the competition
___________________
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of transnational oil companies and by 1965 it had reached at

24% market participation. By 1975, it was meeting 65% of the
___________________
nations demand of petroleum products. The decline in the share
___________________
of foreign oil companies during this period had made it
___________________
necessary for them to sell some of the unremunerative assets to
___________________
IOC at negotiated prices.
During the third phase the process of acquiring the assets of

multinationals was completed. In 1981, the entire oil industry was
in fact in the control of the Government. The assets of all oil
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companies were now the nations assets. The Government was

however concerned about the optimum utilisation of assets.

Keeping its promise of decontrolling pricing and control over
marketing structures, the GoI on April 1, 2002, opened up retail
marketing of automotive transportation fuels (petrol, diesel) to
private and foreign companies. This marked the end of an era in
which only state owned HPCL, BPCL, IOC and IBP were allowed
to undertake retail marketing in automotive fuels. The players
who satisfy the entry criterion (i.e. investment of at least ` 20
billion in oil exploration and production, refining, pipelines or
terminals) were allowed to set up retail network for marketing
petrol and diesel with immediate effect. The notification

dismantling the APM provided for appointment of a petroleum
(c)
regulator, who was expected to oversee the functioning of the

industry post-total decontrol. The Petroleum Regulatory Board
Bill 2002 has not been legislated yet and the petroleum regulator
not appointed. It was expected that post dismantling of APM, the
marketing companies would be free to price their products and
that prices of automotive fuels would differ from one fuel station
to another. However, the West Asian crisis and the resultant
in
crude
oil
compulsions
made
the
prices
coupled
petroleum
with
ministry
socio-political
direct
the
oil
companies not to pass the surge in fuel prices to customers. Thus,

theoretically though the marketing sector is decontrolled, the GoI
Notes
___________________
___________________
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still plays a dominant role in guiding the prices. Having said that
13
upsurge
it is unrealistic to expect from a country which has been subject
___________________
to regulation for decades would suddenly move towards a
___________________
deregulated oil industry. The desired free market regime and
___________________
market determined pricing of oil products can emerge only in a

phased manner and in the meantime aspects such as cost control,
___________________
increase in productivity, strategic disinvestments, etc. should be
___________________
concentrated upon.
___________________
Check Your Progress

Fill in the blanks:
1. The has certainly weakened ONGCs
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monopoly status in the upstream sector.
2. The oil and gas sector is characterised

by high commercial risks, upfront financing exposure
and commitments necessitating high premium on stable

relationships with Government and partners.
Summary
The present unit is an attempt towards the analysis of

deregulation in upstream and downstream sectors of oil industry.
It is imperative to study the changes and impact of oil-sector
reforms on the growth and restructuring of Indian Oil Companies
during the post-reform period.
Lesson End Activity
(c)
Make a comparison between the growth in production activities of

private and public sector companies in India.
Keywords
PEL: Petroleum Exploration Licence

NELP: New Exploration Licencing Policy
___________________
___________________
14
Questions for Discussion
Notes
___________________
___________________
___________________
___________________
1. Write a note on oil and gas industry sector in India.
2. What are the recent exploration and production activity of

petroleum products?
3. Write a note on New Exploration and Licencing Policy (NELP).
4. Discuss the recent development in refining and marketing

activities of petroleum products in India.
___________________
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Further Readings
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Petro Economics
Books
Jackson, M.P., The Future of Natural Gas in India: A Study of

Major Consuming Sectors, Stanford University, Stanford.
KPMG (2009), The Oil and Gas Sector Overview in India 2009,
KPMG, Mumbai.
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Dash R.K., Sain, K. and Thakur, N.K., Overpressure detection from

seismic AVO response: An application to gas-hydrates, Current
Science, v. 86, p. 985-990.
Ginsburg, G.D. and Soloviev, V.A., Submarine Gashydrates, VNIIO

Keangeologia, St. Petersburg.
Web Readings
http://petroleum.nic.in/
http://www.eia.gov
(c)
http://www.bp.com
UNIT 2: Global Trends in Oil Industry
Unit 2
Notes
Activity
topics:
\
Global Oil Demand
Global Oil Supply
Future Oil Prices
List ___________________
down the latest trends in
demand for global oil.
___________________
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Global Trends in Oil Industry

Objectives
15
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___________________
___________________
___________________
___________________
___________________
___________________
Introduction
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Recently, macro-trends are occurring in the world petroleum

industry especially: oil, natural gas and refining. Other notable
changes are also taking place in restructuring, reform and
introduction of compilation and consolidation.
Global Oil Demand
The economic growth in the major OECD (Organisation for

Economic Cooperation and Development) industrial countries
economies in Asia (excluding Japan) will be the key factor in
deciding global demand for oil for the next decade. The economies
of the industrialised countries are expanding and the economies of
many developing countries are growing rapidly.
Preserving the environment now appears to be a key objective in a
large number of countries. Concern for the adverse changes in the
environment is now global and pacific regional concerns about the
impact of environmental changes now influence economic
decisions. This has a direct influence on the demand for crude oil.
(c)
Worldwide petroleum demand has been one of the major

determinants of trends in all activity in the oil and gas industry.
Economic forces generally determine the level of petroleum
demand but from time to time political considerations also have a
great deal of influence in the oil market. An extreme example of
this was the conflict in the Persian Gulf. Political events greatly
influence the oil markets before and after those hostilities.
___________________
Petro Economics
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
CC
EU
___________________
The level of worldwide economic activity is still a major factor in

determining demand for oil and oil products. Energy is an essential
input for all types of economic activity. Therefore, there is a close
relationship between economic activity and energy consumption.
Although the relationship has changed over time, as long as there
is economic activity, large quantities of energy will be consumed.
In todays modern economic system with high level of economic
activity, vast quantities of energy are consumed in a wide variety
of forms and from many sources. Out of several basic energy
sources two of the most important sources are oil and natural gas.
Oil products and natural gas are consumed throughout the world
in all geographic areas, with differing levels and types of economic
activity. Oil products are consumed in the industrial economies,
the developing economies and in the rapidly changing economies of
the former communist countries.
PE
S
Notes
___________________
The initial focus will be on the recent trends in petroleum demand

for the industry, worldwide. These trends provide the background
information needed to grasp the relationship between the many
factors that influence worldwide oil demand. Throughout the
world, there are regional differences in oil industry activity. But, to
a great extent the oil industry is a global rather than regional
industry. Recent trends and events in the industry will be related
and then extrapolated into a global outlook.
Table 2.1: Proved Reserves
At end
2000
At end 2009
Thousand
million
barrels
Thousand
million
barrels
Thousand
million
barrels
At end 2010
Thousand
million
tonnes
Thousand
million
barrels
Share
of total
R/P
ratio
US
33.8
30.4
30.9
3.7
30.9
2.2%
11.3
Canada
11.2
18.3
32.1
5.0
32.1
2.3%
26.3
Mexico
51.3
20.2
11.7
1.6
11.4
0.8%
10.6
Total North America
96.3
68.9
74.6
10.3
74.3
5.4%
14.8
Argentina
1.6
3.0
2.5
0.3
2.5
0.2%
10.6
Brazil
4.5
8.5
12.9
2.0
14.2
1.0%
18.3
Colombia
2.0
2.0
1.4
0.3
1.9
0.1%
6.5
Ecuador
1.4
4.6
6.3
0.9
6.2
0.4%
34.1
Peru
0.8
0.9
1.1
0.2
1.2
0.1%
21.6
Trinidad & Tobago
0.6
0.9
0.8
0.1
0.8
0.1%
15.6
60.1
76.8
211.2
30.4
211.2
15.3%
Other S. & Cent.

America
0.6
1.3
1.4
0.2
1.4
0.1%
28.9
Total S. & Cent.

America
71.5
97.9
237.6
34.3
239.4
17.3%
93.9
Azerbaijan
n/a
1.2
7.0
1.0
7.0
0.5%
18.5
Denmark
0.6
1.1
0.9
0.1
0.9
0.1%
9.9
Italy
0.8
0.9
1.0
0.1
1.0
0.1%
25.0
Kazakhstan
n/a
25.0
39.8
5.5
39.8
2.9%
62.1
Norway
8.6
11.4
7.1
0.8
6.7
0.5%
Venezuela
(c)
At end
1990
8.5
Contd

1.5
1.2
0.5
0.1
0.5
Russian Federation
n/a
59.0
76.7
10.6
77.4
Turkmenistan
n/a
0.5
0.6
0.1
0.6
United Kingdom
4.0
4.7
2.8
0.4
2.8
Uzbekistan
n/a
0.6
0.6
0.1
0.6
Other Europe &

Eurasia
65.3
2.3
2.3
0.3
2.4
Total Europe &

Eurasia
80.8
107.9
139.2
19.0
139.7
Iran
92.9
99.5
137.0
18.8
137.0
Iraq
100.0
112.5
115.0
15.5
115.0
97.0
96.5
101.5
14.0
101.5
Oman
4.4
5.8
5.5
0.7
5.5
Qatar
3.0
16.9
25.9
2.7
25.9
260.3
262.8
264.6
36.3
264.5
1.9
2.3
2.5
0.3
2.5
Saudi Arabia
Syria
United Arab Emirates
98.1
97.8
97.8
13.0
97.8
Yemen
2.0
2.4
2.7
0.3
2.7
Other Middle East
0.1
0.2
0.1
Total Middle East
0.1
696.7
752.6
101.8
752.5
9.2
11.3
12.2
1.5
12.2
Angola
1.6
6.0
13.5
1.8
13.5
Egypt
Equatorial Guinea
Gabon
Libya
Nigeria
Sudan
Tunisia
Other Africa
Total Africa
Australia
Brunei
China
India
Indonesia
Malaysia
Thailand
Vietnam
Other Asia Pacific
Total Asia Pacific
Total World
of which: OECD
OPEC
Non-OPEC
European Union
Former Soviet
Union
Canadian oil
sands
20.6
7.6
0.2%
Notes
5.8
18.7
0.2%
17.5
10.1%
21.7
9.9%
88.4
8.3%
___________________
Proved reserves and

oil sands
0.4%
17.4
1.9%
45.2
19.1%
72.4
0.2%
17.8
7.1%
94.1
0.2%
27.7
9.3
54.4%
81.9
0.9%
18.5
1.0%
20.0
0.9
1.5
0.2
1.5
0.1%
33.7
0.8
1.7
1.9
0.3
1.9
0.1%
18.2
3.5
3.6
4.4
0.6
4.5
0.3%
16.7
0.8
1.7
0.2
1.7
0.1%
17.1
0.9
2.4
3.7
0.5
3.7
0.3%
41.2
22.8
36.0
46.4
6.0
46.4
3.4%
76.7
17.1
29.0
37.2
5.0
37.2
2.7%
42.4
0.3
0.6
6.7
0.9
6.7
0.5%
37.8
1.7
0.4
0.4
0.1
0.4
0.9
0.7
0.7
0.2
2.3
0.2%
44.2
58.7
93.4
130.3
17.4
132.1
9.5%
35.8
3.2
4.9
4.1
0.4
4.1
0.3%
19.9
1.1
1.2
1.1
0.1
1.1
0.1%
17.5
16.0
15.2
14.8
2.0
14.8
1.1%
9.9
5.6
5.3
5.8
1.2
9.0
0.7%
30.0
5.4
5.1
4.3
0.6
4.2
0.3%
11.8
3.6
4.5
5.8
0.8
5.8
0.4%
22.2
0.3
0.5
0.4
0.1
0.4
0.2
2.0
4.5
0.6
4.4
0.3%
32.6
14.6
3.6
1.0
1.3
1.3
0.2
1.3
0.1%
11.3
36.3
40.1
42.2
6.0
45.2
3.3%
14.8
1003.2
1104.9
1376.6
188.8
1383.2
100.0%
46.2
115.4
93.3
92.0
12.4
91.4
6.6%
13.5
763.4
849.7
1068.6
146.0
1068.4
77.2%
85.3
176.5
168.2
182.6
25.5
188.7
13.6%
15.1
8.1
8.8
6.2
0.8
6.3
0.5%
8.8
63.3
87.1
125.4
17.3
126.1
9.1%
25.6
n/a
163.3
143.1
23.3
143.1
n/a
1268.2
1519.6
212.0
1526.3
Notes: Proved reserves of oil - Generally taken to be those quantities that geological and
engineering information indicates with reasonable certainty can be recovered in the future from
known reservoirs under existing economic and operating conditions. Reserves-to-production (R/P)
ratio - If the reserves remaining at the end of any year are divided by the production in that year,
the result is the length of time that those remaining reserves would last if production were to
continue at that rate. Source of data - The estimates in this table have been compiled using a
combination of primary official sources, third-party data from the OPEC Secretariat, Oil & Gas
Journal and an independent estimate of Russian reserves based on information in the public
(c)
___________________
___________________
7.3%
CC
EU
659.6
Algeria
Republic of Congo
(Brazzaville)
5.6%
___________________
Kuwait
Chad
14.8
PE
S
Romania
___________________
___________________
___________________
___________________
___________________
___________________
Petro Economics
18
domain. Canadian proved reserves include an official 26.5 billion barrels for oil sands 'under active
development'. Venezuelan reserves are taken from the OPEC Annual Statistical Bulletin noted in
2008 and the figure included 'proven reserves of the Magna Reserve Project in the Orinoco Belt,
which amounted to 94,168mb'.
Reserves include gas condensate and natural gas liquids (NGLs) as well as crude oil.
Annual changes and shares of total are calculated using thousand million barrels figures.
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
2010
share
of total
8.7%
Million tonnes
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
US
352.6
349.2
346.8
338.4
329.2
313.3
310.2
309.8
304.9
328.6
339.1
3.2%
Canada
126.9
126.1
135.0
142.6
147.6
144.9
153.4
158.3
156.8
156.1
162.8
4.3%
4.2%
Mexico
171.2
176.6
178.4
188.8
190.7
187.1
183.1
172.7
157.7
147.5
146.3
-0.8%
3.7%
Total North
America
Argentina
650.8
651.8
660.2
669.8
667.4
645.3
646.7
640.8
619.5
632.2
648.2
2.5%
16.6%
40.4
41.5
40.9
40.2
37.8
36.2
35.8
34.9
34.1
33.8
32.5
-3.8%
0.8%
Brazil
63.2
66.3
74.4
77.0
76.5
84.6
89.2
90.4
93.9
100.4
105.7
5.3%
2.7%
Colombia
35.3
31.0
29.7
27.9
27.3
27.3
27.5
27.6
30.5
34.1
39.9
16.9%
1.0%
Ecuador
20.9
21.2
20.4
21.7
27.3
27.6
27.7
26.5
26.2
25.2
25.2
0.6%
4.9
4.8
4.8
4.5
4.4
5.0
5.1
5.1
5.3
6.4
6.9
8.2%
0.2%
0.2%
Trinidad &
Tobago
Venezuela
Other S. &
Cent. America
Total S. &
Cent. America
Azerbaijan
Denmark
Italy
6.8
6.5
7.5
7.9
7.3
8.3
8.3
7.2
6.9
6.8
6.5
-4.3%
167.3
161.6
148.8
131.4
150.0
151.0
144.2
133.9
131.5
124.8
126.6
1.4%
3.2%
6.6
6.9
7.8
7.8
7.3
7.2
7.0
7.1
7.0
6.7
6.6
-1.6%
0.2%
345.3
339.9
334.2
318.3
337.9
347.1
344.9
332.7
335.5
338.2
350.0
3.5%
8.9%
14.1
15.0
15.4
15.5
15.6
22.4
32.5
42.8
44.7
50.6
50.9
0.5%
1.3%
17.7
17.0
18.1
17.9
19.1
18.4
16.7
15.2
14.0
12.9
12.2
-5.8%
0.3%
0.1%
4.6
4.1
5.5
5.6
5.5
6.1
5.8
5.9
5.2
4.6
5.1
11.7%
35.3
40.1
48.2
52.4
60.6
62.6
66.1
68.4
72.0
78.2
81.6
4.4%
2.1%
128.7
118.6
114.2
108.8
98.6
-9.4%
2.5%
CC
E-
Kazakhstan
Norway
Romania
160.2
162.0
157.3
153.0
149.9
138.2
6.3
6.2
6.1
5.9
5.7
5.4
5.0
4.7
4.7
4.5
4.3
-4.7%
0.1%
Russian
Federation
Turkmenistan
323.3
348.1
379.6
421.4
458.8
470.0
480.5
491.3
488.5
494.2
505.1
2.2%
12.9%
7.2
8.0
9.0
10.0
9.6
9.5
9.2
9.8
10.3
10.4
10.7
2.8%
0.3%
United
Kingdom
Uzbekistan
126.2
116.7
115.9
106.1
95.4
84.7
76.6
76.8
71.7
68.2
63.0
-7.7%
1.6%
7.5
7.2
7.2
7.1
6.6
5.4
5.4
4.9
4.8
4.5
3.7
-17.8%
0.1%
22.4
22.2
23.6
24.0
23.5
22.0
21.7
21.6
20.6
19.6
18.2
-7.0%
0.5%
850.8
856.5
853.3
-0.4%
21.8%
209.9
201.5
203.2
0.9%
5.2%
119.5
119.8
120.4
0.6%
3.1%
129.9
137.2
121.7
122.5
0.6%
3.1%
35.7
34.5
35.9
38.7
41.0
5.9%
1.0%
47.3
50.9
53.6
60.8
57.9
65.7
13.5%
1.7%
506.0
526.8
514.3
494.2
515.3
464.7
467.8
0.7%
12.0%
24.7
22.4
21.6
20.6
19.8
18.6
19.1
2.7%
0.5%
124.5
131.7
137.3
145.5
140.7
142.9
126.3
130.8
3.5%
3.3%
21.5
21.1
19.9
19.6
17.9
16.3
14.4
13.5
12.5
-7.9%
0.3%
2.2
2.2
2.2
2.2
1.6
1.4
1.6
1.5
1.7
1.7
0.6%
1140.9
1114.1
1048.3
1124.3
1198.9
1217.9
1226.4
1206.4
1257.2
1164.4
1184.6
1.7%
30.3%
66.8
65.8
70.9
79.0
83.6
86.4
86.2
86.5
85.6
77.9
77.7
-0.3%
2.0%
36.9
36.6
44.6
42.8
54.5
69.0
69.6
82.5
92.2
87.4
90.7
3.8%
2.3%
1.2
8.8
9.1
8.0
7.5
6.7
6.2
6.4
3.5%
0.2%
13.1
12.1
12.3
11.2
11.6
12.6
14.3
11.7
12.4
13.9
15.1
8.1%
0.4%
38.8
37.3
37.0
36.8
35.4
33.9
33.7
34.1
34.6
35.3
35.0
-0.6%
0.9%
4.5
8.8
11.4
13.2
17.4
17.7
16.9
17.3
17.2
15.2
13.6
-10.8%
0.3%
16.4
15.0
14.7
12.0
11.8
11.7
11.7
11.5
11.8
11.5
12.2
6.5%
0.3%
Other Europe
& Eurasia
Total Europe
& Eurasia
Iran
724.7
746.6
785.9
818.9
850.2
844.8
848.1
860.0
191.3
191.4
180.9
203.7
207.8
206.3
208.2
209.7
Iraq
128.8
123.9
104.0
66.1
100.0
90.0
98.1
105.2
Kuwait
109.1
105.8
98.2
114.8
122.3
129.3
132.7
Oman
46.4
46.1
43.4
39.6
38.1
37.4
Qatar
36.1
35.7
35.2
40.8
46.0
456.3
440.6
425.3
485.1
27.3
28.9
27.2
26.2
122.1
118.0
110.2
21.3
21.5
2.2
Saudi Arabia
Syria
United Arab
Emirates
Yemen
Other Middle
East
Total Middle
East
Algeria
Angola
Chad
Republic of
Congo
(Brazzaville)
Egypt
(c)
Change
2010
over
2009
Peru
___________________
UP
E
Table 2.2: Globally Oil Production
___________________
Equatorial
Guinea
Gabon
Libya
69.5
67.1
64.6
69.8
76.5
81.9
84.9
85.0
85.3
77.1
77.5
0.5%
2.0%
105.4
110.8
102.3
109.3
119.0
122.1
117.8
112.1
103.0
99.1
115.2
16.2%
2.9%
Sudan
8.6
10.7
11.9
13.1
14.9
15.0
16.3
23.1
23.7
23.6
23.9
1.5%
0.6%
Tunisia
3.7
3.4
3.5
3.2
3.4
3.4
3.3
4.6
4.2
4.0
3.8
-4.7%
0.1%
Nigeria
Other Africa
7.2
6.6
6.7
6.8
8.1
7.7
7.6
8.3
8.1
7.7
7.1
-8.0%
0.2%
Total Africa
370.9
374.1
379.8
398.4
444.9
470.7
470.4
484.4
484.9
458.9
478.2
4.2%
12.2%
35.3
31.8
31.5
26.6
24.8
24.5
23.2
23.5
23.7
21.9
23.8
8.9%
Australia
0.6%
Contd

9.9
10.2
10.5
10.3
10.1
10.8
9.5
8.5
8.2
8.4
2.5%
0.2%
162.6
164.8
166.9
169.6
174.1
181.4
184.8
186.3
190.4
189.5
203.0
7.1%
5.2%
India
34.2
34.1
35.2
35.4
36.3
34.6
35.8
36.1
36.1
35.4
38.9
9.8%
1.0%
Indonesia
71.5
67.9
63.0
57.3
55.2
53.1
48.9
47.5
49.0
47.9
47.8
-0.3%
1.2%
Malaysia
33.7
32.9
34.5
35.6
36.5
34.4
33.5
34.2
34.6
33.1
32.1
-3.1%
0.8%
Thailand
7.0
7.5
8.2
9.6
9.1
10.8
11.8
12.5
13.3
13.7
13.8
0.9%
0.4%
Vietnam
16.2
17.1
17.3
17.7
20.8
19.4
17.8
16.4
15.4
16.8
18.0
6.9%
0.5%
9.4
9.1
9.0
9.1
10.5
12.5
13.2
13.9
14.7
14.3
13.6
-4.7%
0.3%
Other Asia
Pacific
Total Asia
Pacific
Total World
379.2
375.1
375.8
371.4
377.7
380.8
379.7
380.1
385.9
3611.8
3601.6
3584.2
3701.1
3877.0
3906.6
3916.2
3904.3
3933.7
of which:
OECD
Non-OECD
1011.5
1000.0
1005.8
996.0
978.2
932.2
912.2
896.2
864.0
2600.3
2601.6
2578.5
2705.1
2898.8
2974.4
3004.1
3008.0
3069.8
OPEC
1510.3
1478.3
1405.4
1489.1
1624.9
1675.0
1680.2
1660.0
1709.4
Non-OPEC
1708.0
1698.7
1712.6
1698.4
1693.6
1654.4
1635.3
1620.2
1597.3
166.3
155.6
158.2
148.2
137.7
125.7
114.6
113.1
105.4
393.4
424.6
466.2
513.6
558.5
577.1
600.7
624.1
627.1
European
Union
Former Soviet
Union
380.8
399.4
4.9%
10.2%
3831.0
3913.7
2.2%
100.0%
863.3
864.7
0.2%
22.1%
2967.7
3049.0
2.7%
77.9%
1583.5
1623.3
2.5%
41.5%
1603.2
1632.9
1.9%
41.7%
99.0
92.6
-6.5%
2.4%
644.3
657.5
2.0%
16.8%
Table 2.3: Globally Oil Consumption
2010
2010
over
share
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2009
of total
US
884.1
884.1
884.9
900.7
936.5
939.8
930.7
928.8
875.8
833.2
850.0
2.0%
21.1%
88.1
90.5
92.2
95.9
100.6
100.3
100.5
103.8
102.5
97.1
102.3
5.4%
2.5%
Mexico
Total North
America
87.3
86.6
82.8
85.0
88.6
90.9
89.8
92.1
91.7
88.5
87.4
-1.2%
2.2%
1059.5
1061.2
1059.9
1081.6
1125.8
1131.0
1120.9
1124.7
1070.0
1018.8
1039.7
2.1%
25.8%
0.6%
20.5
19.8
17.9
18.4
19.3
20.6
21.5
24.2
25.9
23.7
25.7
8.5%
Brazil
91.5
93.3
92.0
90.9
91.3
94.0
95.1
100.6
107.1
107.0
116.9
9.3%
2.9%
Chile
10.8
10.5
10.4
10.5
11.1
11.8
12.3
16.2
16.8
15.6
14.7
-6.0%
0.4%
Colombia
10.7
Ecuador
5.8
Peru
7.4
Trinidad &
Tobago
1.8
Venezuela
25.8
Other S. &
Cent. America
52.3
Total S. &
Cent. America
226.6
Azerbaijan
Belarus
Belgium &
Luxembourg
11.8
6.3
7.0
33.9
Bulgaria
4.1
Czech Republic
7.9
Denmark
10.4
Finland
10.7
France
94.9
CC
E-
Argentina
Austria
9.9
9.7
9.7
9.9
10.5
11.0
10.7
10.6
10.5
11.0
4.1%
0.3%
5.9
5.9
6.2
6.3
7.5
8.2
8.9
9.4
10.1
10.6
5.0%
0.3%
7.0
6.9
6.5
7.3
7.1
6.9
7.1
8.0
8.1
8.4
3.6%
0.2%
1.4
1.7
1.6
1.8
2.1
2.4
2.4
2.2
2.1
2.1
4.4%
0.1%
28.8
30.3
24.9
27.2
29.1
30.5
31.5
32.9
33.7
35.2
4.7%
0.9%
55.0
55.1
56.2
56.8
57.1
58.1
59.9
58.6
57.9
57.3
-1.0%
1.4%
231.7
229.9
224.9
231.1
239.9
246.0
261.5
271.4
268.6
282.0
5.0%
7.0%
12.8
13.1
14.2
13.8
14.2
14.2
13.4
13.5
13.0
13.0
0.2%
0.3%
4.0
3.7
4.3
4.6
5.3
4.8
4.5
3.5
3.2
3.3
4.0%
0.1%
7.3
7.1
7.2
7.4
7.1
8.0
7.3
8.1
9.3
6.6
-29.3%
0.2%
32.2
33.5
36.4
37.6
37.7
37.4
37.7
40.8
33.4
35.0
4.8%
0.9%
0.1%
4.2
4.4
5.1
4.7
5.0
5.3
5.1
5.4
5.6
4.2
-25.6%
8.4
8.1
8.7
9.5
9.9
9.8
9.7
9.9
9.7
9.2
-5.0%
0.2%
9.8
9.6
9.2
9.1
9.3
9.6
9.7
9.5
8.5
8.7
2.0%
0.2%
10.5
10.9
11.4
10.6
11.0
10.6
10.6
10.5
9.9
10.4
4.9%
0.3%
95.5
92.9
93.1
94.0
93.1
93.0
91.4
90.8
87.5
83.4
-4.7%
2.1%
131.6
127.4
125.1
124.0
122.4
123.6
112.5
118.9
113.9
115.1
1.1%
2.9%
20.1
20.3
19.7
21.4
21.2
22.2
21.7
21.4
20.2
18.5
-8.7%
0.5%
6.7
6.4
6.3
6.5
7.5
7.8
7.7
7.5
7.1
6.7
-5.2%
0.2%
9.0
8.8
8.5
8.9
9.3
9.3
9.4
9.0
8.0
7.6
-5.0%
0.2%
92.8
92.9
92.1
89.7
86.7
86.7
84.0
80.4
75.1
73.1
-2.7%
1.8%
8.7
9.3
10.1
10.7
11.3
11.6
11.8
12.8
12.1
12.5
3.2%
0.3%
2.7
2.5
2.4
2.6
2.8
2.8
2.8
3.1
2.6
2.7
3.0%
0.1%
42.5
44.6
44.6
44.9
47.1
50.6
52.0
53.5
51.1
49.4
49.8
0.9%
1.2%
9.5
9.8
9.6
10.2
9.9
10.0
10.3
10.5
10.2
10.3
10.7
3.5%
0.3%
Poland
20.0
19.5
19.9
20.2
21.6
22.4
23.3
24.2
25.3
25.3
26.3
3.9%
0.7%
Portugal
15.5
15.8
16.2
15.2
15.4
16.0
14.4
14.4
13.6
12.8
12.6
-1.6%
0.3%
Romania
10.0
10.6
10.6
9.4
10.9
10.5
10.3
10.3
10.4
9.2
9.1
-1.4%
0.2%
129.7
128.6
129.9
130.1
130.6
129.9
135.8
135.7
141.4
135.2
147.6
9.2%
3.7%
3.4
3.2
3.5
3.3
3.2
3.8
3.4
3.6
3.9
3.7
3.7
-0.3%
0.1%
Spain
70.0
72.4
72.8
75.8
79.3
80.4
79.7
80.7
79.0
75.7
74.5
-1.6%
1.8%
Sweden
16.2
16.5
16.7
17.2
16.5
16.5
16.9
16.1
15.7
14.6
14.5
-0.1%
0.4%
Switzerland
12.2
13.1
12.4
12.1
12.0
12.2
12.6
11.3
12.1
12.3
11.4
-7.1%
0.3%
Germany
Greece
129.8
19.9
Hungary
6.8
Republic of
Ireland
8.2
Italy
93.5
Kazakhstan
7.8
Lithuania
2.4
Netherlands
(c)
Norway
Russian
Federation
Slovakia
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Change
Million tonnes
Canada
19
9.4
China
UP
E
Brunei
Contd
___________________
___________________
Petro Economics
31.1
29.9
30.6
31.0
31.0
30.2
29.5
30.5
30.9
28.2
28.7
1.7%
0.7%
3.6
3.7
3.8
4.2
4.3
4.5
4.7
5.1
5.3
5.4
5.6
3.6%
0.1%
Ukraine
12.0
13.4
13.2
13.5
14.2
13.5
14.1
15.5
14.8
13.3
11.6
-13.2%
0.3%
United
Kingdom
78.6
78.4
78.0
79.0
81.7
83.0
82.3
79.2
77.9
74.4
73.7
-1.0%
1.8%
Turkmenistan
Notes
___________________
___________________
___________________
___________________
Uzbekistan
Other Europe
& Eurasia
Total Europe &
Eurasia
___________________
___________________
___________________
___________________
___________________
7.1
7.0
7.5
7.0
5.3
5.3
4.9
22.9
23.9
25.2
26.1
27.3
27.8
29.6
943.8
952.6
966.0
970.1
978.9
964.4
938.6
945.6
Iran
62.7
63.0
Israel
13.5
12.5
Kuwait
11.3
11.5
2.0
2.4
Saudi Arabia
73.0
74.7
United Arab
Emirates
20.1
19.9
Qatar
___________________
7.5
21.4
Other Middle
East
56.3
59.2
Total Middle
East
239.0
243.2
Algeria
Egypt
8.5
8.8
27.2
26.1
South Africa
22.0
22.5
Other Africa
59.2
60.9
Total Africa
116.9
118.2
37.7
38.1
3.2
3.9
224.2
228.4
9.7
11.8
106.1
107.0
54.5
55.3
255.0
247.4
21.3
22.0
6.1
Pakistan
Philippines
Australia
Bangladesh
China
China Hong
Kong SAR
India
Indonesia
Malaysia
New Zealand
Singapore
South Korea
4.8
4.8
5.0
2.8%
0.1%
29.9
28.5
28.3
-0.7%
0.7%
971.5
922.2
922.9
0.1%
22.9%
67.5
71.4
74.5
78.4
82.4
82.5
87.4
85.1
86.0
1.0%
2.1%
12.4
12.8
12.0
12.2
11.9
12.4
12.2
11.5
11.2
-2.2%
0.3%
12.5
13.6
15.2
16.7
15.2
15.3
16.3
17.2
17.7
2.8%
0.4%
3.0
3.1
3.4
4.0
4.6
5.4
6.2
6.2
7.4
18.1%
0.2%
76.6
81.7
88.3
88.1
92.3
98.2
107.2
117.2
125.5
7.1%
3.1%
20.7
23.2
24.8
26.7
28.3
30.0
32.0
29.8
32.3
8.4%
0.8%
59.7
57.3
60.9
62.3
67.4
70.2
73.6
77.3
80.2
3.8%
2.0%
252.5
263.1
279.0
288.5
302.3
314.1
334.9
344.3
360.2
4.6%
8.9%
9.7
10.1
10.6
11.0
11.5
12.9
14.0
14.9
14.9
-0.1%
0.4%
25.2
25.9
26.8
29.8
28.7
30.6
32.6
34.4
36.3
5.4%
0.9%
23.1
23.9
24.7
24.6
25.3
26.2
25.3
24.7
25.3
2.7%
0.6%
62.6
63.7
66.4
69.1
68.2
71.1
74.8
77.0
79.0
2.6%
2.0%
120.6
123.6
128.5
134.5
133.7
140.8
146.8
150.9
155.5
3.0%
3.9%
38.0
38.3
39.1
40.2
41.5
41.8
42.5
42.2
42.6
0.8%
1.1%
3.9
4.0
4.0
4.6
4.5
4.6
4.7
4.8
4.8
0.4%
0.1%
247.5
271.7
318.9
327.8
351.2
369.3
376.0
388.2
428.6
10.4%
10.6%
12.9
13.0
15.4
13.8
15.0
16.1
14.6
14.0
16.1
15.2%
0.4%
111.3
113.1
120.2
119.6
120.4
133.4
144.1
151.0
155.5
2.9%
3.9%
57.5
58.5
62.0
61.2
58.3
59.5
59.1
59.2
59.6
0.7%
1.5%
243.5
248.7
241.0
244.8
238.0
229.7
222.1
198.7
201.6
1.5%
5.0%
23.9
23.6
24.5
23.9
23.4
24.8
24.8
24.5
25.3
3.3%
0.6%
6.1
6.4
6.9
6.9
7.1
7.2
7.2
7.3
6.8
6.9
0.1%
0.2%
18.8
18.3
17.9
15.8
16.0
15.3
17.6
19.2
19.3
20.6
20.5
-0.6%
0.5%
16.6
16.5
15.5
15.5
16.0
14.9
13.3
14.0
12.3
13.1
13.1
0.1%
0.3%
CC
E-
Japan
Turkey
UP
E
20
33.4
36.4
35.5
33.9
38.1
42.3
45.1
49.0
52.0
56.1
62.2
10.9%
1.5%
103.2
103.1
104.7
105.6
103.9
104.4
104.5
107.1
101.9
103.0
105.6
2.5%
2.6%
Taiwan
42.6
44.0
44.8
46.5
48.7
49.1
48.4
50.2
45.0
44.1
46.2
4.7%
1.1%
Thailand
38.7
38.0
40.8
43.9
48.4
50.6
50.1
49.2
49.0
49.9
50.2
0.5%
1.2%
Vietnam
Other Asia
Pacific
Total Asia
Pacific
8.3
9.0
9.8
10.5
12.5
12.2
12.0
13.3
14.1
14.1
15.6
10.4%
0.4%
11.6
12.0
12.0
12.1
12.7
12.8
12.8
13.5
13.0
13.4
13.5
0.9%
0.3%
991.1
997.3
1025.5
1061.6
1128.3
1144.5
1163.5
1201.9
1201.9
1203.8
1267.8
5.3%
31.5%
Total World
3571.6
3597.2
3632.3
3707.4
3858.7
3908.5
3945.3
4007.3
3996.5
3908.7
4028.1
3.1%
100.0%
of which:
OECD
2217.1
2215.7
2207.9
2242.2
2287.2
2303.6
2289.7
2276.3
2210.5
2094.8
2113.8
0.9%
52.5%
Non-OECD
1354.5
1381.5
1424.4
1465.3
1571.6
1604.9
1655.6
1731.0
1786.0
1813.9
1914.3
5.5%
47.5%
699.3
706.2
702.3
706.6
717.7
723.1
724.6
708.4
709.0
670.2
662.5
-1.1%
16.4%
180.4
179.9
181.2
184.1
186.6
185.4
193.0
194.3
200.8
192.7
201.5
4.6%
5.0%
European
Union
Former Soviet
Union
Note: Differences between these world consumption figures and world production statistics are accounted
for by stock changes, consumption of non-petroleum additivesand substitute fuels, and unavoidable
disparities in the definition, measurement or conversion of oil supply and demand data.
(c)
Table 2.4: Regional Consumption by Product Group
Thousand barrels
daily
Change
2010
2010
over
share
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2009
of total
North America
Light distillates
10090
10194
10505
10657
10972
11012
11133
11206
10860
10839
10949
1.0%
46.8%
Middle distillates
6809
6810
6653
6858
7131
7248
7297
7318
6936
6284
6548
4.2%
28.0%
Fuel oil
1491
1385
1186
1251
1338
1394
1055
1081
941
801
826
3.1%
3.5%
Others
5184
5207
5332
5291
5506
5410
5470
5467
5105
5022
5095
1.5%
21.8%
23574
23595
23676
24058
24947
25063
24955
25073
23841
22946
23418
2.1%
100.0%
8813
8890
9167
9275
9518
9548
9599
9597
9253
9257
9305
0.5%
Total North
America
of which: US
Light distillates
48.6%
Contd
Fuel oil
Others
5852
5884
5735
5886
6116
6198
6226
6199
5801
5241
5449
4.0%
28.5%
893
794
686
763
859
914
683
718
618
508
547
7.7%
2.9%
4143
4082
4172
4109
4239
4143
4178
4166
3826
3766
3848
2.2%
20.1%
19701
19649
19761
20033
20732
20802
20687
20680
19498
18771
19148
2.0%
100.0%
Light distillates
1443
1411
1418
1421
1381
1467
1508
1608
1697
1749
1835
4.9%
30.1%
Middle distillates
1628
1669
1656
1648
1759
1802
1847
2017
2091
2045
2203
7.7%
36.1%
728
762
740
692
712
717
729
774
770
770
757
-1.7%
12.4%
Total US
S. & Cent.
America
21
Middle distillates
Notes
___________________
Others
1056
1114
1127
1063
1094
1158
1187
1224
1277
1264
1309
3.5%
21.4%
Total S. & Cent.

America
4855
4956
4941
4825
4946
5144
5271
5622
5835
5827
6104
4.7%
100.0%
4309
4192
4097
4039
4023
3921
3781
3725
3521
3447
3401
-1.3%
22.4%
Middle distillates
6760
7021
6968
7170
7364
7579
7746
7630
7855
7543
7663
1.6%
50.5%
Fuel oil
1843
1862
1870
1829
1781
1746
1705
1615
1565
1352
1230
-9.0%
8.1%
Others
Total Europe
2927
2939
3016
3039
3088
3165
3171
3145
3126
2953
2867
-2.9%
18.9%
15838
16015
15951
16077
16257
16411
16403
16115
16066
15295
15161
-0.9%
100.0%
942
1000
1041
1077
1078
1094
1136
1205
1260
1234
1287
4.3%
29.6%
Middle distillates
Fuel oil
1003
1029
1040
1085
1111
1144
1182
1253
1334
1211
1293
6.8%
29.7%
726
659
630
598
537
516
571
461
428
399
390
-2.3%
9.0%
Others
1072
1067
1088
1131
1216
1191
1205
1236
1269
1309
1379
5.3%
31.7%
Total Former
Soviet Union
3743
3754
3799
3889
3942
3946
4095
4156
4291
4153
4349
4.7%
100.0%
949
1032
1132
1190
1293
1373
1458
1457
1587
1686
1783
5.8%
22.8%
1640
1682
1737
1810
1894
1979
2107
2150
2275
2314
2387
3.2%
30.5%
Fuel oil
1397
1385
1365
1369
1459
1541
1585
1727
1867
1932
2035
5.3%
26.0%
Others
1036
1049
1140
1246
1299
1331
1348
1402
1423
1501
1616
7.7%
20.7%
Total Middle East
5021
5148
5374
5615
5946
6225
6497
6736
7153
7433
7821
5.2%
100.0%
Light distillates
Middle distillates
CC
E-
Middle distillates
Africa
576
590
603
627
666
680
670
695
742
773
802
3.8%
24.4%
1030
1060
1095
1140
1155
1194
1224
1320
1389
1433
1486
3.8%
45.2%
Fuel oil
403
383
367
365
380
428
407
413
418
430
447
4.1%
13.6%
Others
430
448
475
478
506
533
523
546
549
559
555
-0.7%
16.9%
2439
2481
2540
2611
2708
2835
2824
2974
3097
3195
3291
3.0%
100.0%
Total Africa
Asia Pacific
Light distillates
5842
5990
6269
6532
6890
7091
7180
7540
7616
7875
8326
5.7%
30.6%
Middle distillates
7795
7948
8070
8225
8766
9005
9058
9205
9312
9262
9836
6.2%
36.1%
Fuel oil
3571
3421
3338
3475
3505
3493
3573
3605
3437
3101
3163
2.0%
11.6%
Others
3927
3994
4310
4517
4920
4914
5103
5404
5351
5627
5912
5.1%
21.7%
21135
21353
21987
22750
24081
24503
24914
25753
25715
25866
27237
5.3%
100.0%
Total Asia Pacific

of which: China
Light distillates
1277
1260
1359
1498
1681
1787
1900
2036
2125
2211
2454
11.0%
27.1%
Middle distillates
1592
1673
1785
1938
2277
2518
2713
2869
3079
3178
3577
12.6%
39.5%
Fuel oil
766
771
783
869
943
893
929
899
776
662
671
1.3%
7.4%
Others
1131
1155
1335
1467
1837
1745
1896
2013
1957
2150
2355
9.5%
26.0%
Total China
4766
4859
5262
5771
6738
6944
7437
7817
7937
8201
9057
10.4%
100.0%
of which: Japan
Light distillates
1706
1689
1727
1757
1760
1823
1814
1791
1676
1678
1742
3.8%
39.1%
Middle distillates
1971
1970
1944
1918
1869
1878
1760
1621
1502
1380
1385
0.4%
31.1%
Fuel oil
783
676
635
753
657
680
661
661
710
453
443
-2.2%
10.0%
Others
1071
1058
1014
986
951
953
969
956
948
880
880
19.8%
Total Japan
5530
5394
5320
5413
5238
5334
5203
5029
4836
4391
4451
1.4%
100.0%
World
24150
24409
25065
25543
26303
26639
26866
27436
27281
27602
28383
2.8%
32.5%
Middle distillates
26665
27219
27219
27936
29182
29951
30460
30892
31192
30091
31417
4.4%
36.0%
Fuel oil
10159
9858
9497
9579
9713
9836
9625
9676
9426
8786
8849
0.7%
10.1%
Others
15631
15818
16487
16765
17630
17701
18008
18425
18101
18235
18734
2.7%
21.4%
Total World
76605
77304
78268
79823
82827
84126
84958
86428
85999
84714
87382
3.1%
100.0%
(c)
Light distillates
OECD
Light distillates
17312
17291
17588
17738
18009
18059
18068
18167
17480
17440
17622
1.0%
37.9%
Middle distillates
16535
16785
16568
16954
17360
17722
17832
17660
17366
16240
16669
2.6%
35.9%
Fuel oil
4562
4328
4081
4218
4156
4192
3782
3713
3518
2875
2753
-4.2%
5.9%
Others
9719
9734
9870
9824
10041
10023
10112
10070
9689
9408
9395
-0.1%
20.2%
48128
48139
48106
48734
49566
49996
49794
49611
48053
45963
46438
1.0%
100.0%
6838
7118
7477
7805
8294
8580
8798
9268
9801
10162
10761
5.9%
Total OECD
Non-OECD
Light distillates
___________________
___________________
___________________
___________________
Middle East
Light distillates
___________________
___________________
Former Soviet
Union
Light distillates
___________________
___________________
Europe
Light distillates
___________________
UP
E
Fuel oil
26.3%
Contd
Petro Economics
10130
10434
10651
10983
11823
12229
12628
13232
13826
13851
14748
6.5%
36.0%
Fuel oil
5597
5530
5416
5361
5556
5643
5844
5962
5908
5911
6096
3.1%
14.9%
Others
5912
6083
6618
6941
7589
7678
7895
8354
8412
8827
9339
5.8%
22.8%
28477
29165
30162
31090
33262
34130
35164
36817
37946
38751
40944
5.7%
100.0%
Total Non-OECD
___________________
___________________
___________________
___________________
European Union
Light distillates
4037
3934
3836
3790
3776
3687
3549
3502
Middle distillates
6261
6495
6440
6626
6814
6981
7116
6978
Fuel oil
1665
1675
1672
1626
1600
1599
1584
1503
Others
2622
2651
2731
2727
2763
2834
2853
2818
14754
14679
14769
14953
15101
15103
14801
Total European
Union
14585
Notes
Middle distillates
3317
3223
3183
-1.2%
22.9%
7166
6857
6964
1.6%
50.1%
1460
1284
1173
-8.6%
8.4%
2814
2652
2570
-3.1%
18.5%
14757
14016
13890
-0.9%
100.0%
UP
E
22
___________________
Notes: Annual changes and shares of total are calculated using thousand barrels daily figures.
'Light distillates' consists of aviation and motor gasoline's and light distillate feedstock (LDF).
'Middle distillates' consists of jet and heating kerosene's, and gas and diesel oils (including marine
bunkers).
'Fuel oil' includes marine bunkers and crude oil used directly as fuel.
'Others' consists of refinery gas, liquefied petroleum gas (LPG), solvents, petroleum coke, lubricants,
bitumen, wax, other refined products and refinery fuel and loss.
___________________
Table 2.5: Spot Crude Prices
___________________
___________________
___________________
___________________
US dollars per barrel

1973
1974
1975
Nigerian
West Texas
Dubai
Brent
Forcados
Intermediate
$/bbl
$/bbl
$/bbl
$/bbl
2.83
10.41
10.70
11.63
12.80
12.87
12.23
1977
12.38
13.92
14.21
14.22
1978
13.03
14.02
13.65
14.55
1979
29.75
31.61
29.25
25.08
1980
35.69
36.83
36.98
37.96
1981
34.32
35.93
36.18
36.08
1982
31.80
32.97
33.29
33.65
1983
28.78
29.55
29.54
30.30
1984
28.06
28.78
28.14
29.39
1985
27.53
27.56
27.75
27.98
(c)
CC
E-
1976
1986
13.10
14.43
14.46
15.10
1987
16.95
18.44
18.39
19.18
1988
13.27
14.92
15.00
15.97
1989
15.62
18.23
18.30
19.68
1990
20.45
23.73
23.85
24.50
1991
16.63
20.00
20.11
21.54
1992
17.17
19.32
19.61
20.57
1993
14.93
16.97
17.41
18.45
1994
14.74
15.82
16.25
17.21
1995
16.10
17.02
17.26
18.42
1996
18.52
20.67
21.16
22.16
1997
18.23
19.09
19.33
20.61
1998
12.21
12.72
12.62
14.39
1999
17.25
17.97
18.00
19.31
2000
26.20
28.50
28.42
30.37
2001
22.81
24.44
24.23
25.93
Contd..
2002
23.74
25.02
25.04
26.16
2003
26.78
28.83
28.66
31.07
2004
33.64
38.27
38.13
41.49
2005
49.35
54.52
55.69
56.59
___________________
___________________
23
Notes
61.50
65.14
67.07
66.02
2007
68.19
72.39
74.48
72.20
2008
94.34
97.26
101.43
100.06
___________________
___________________
UP
E
2006
2009
61.39
61.67
63.35
61.92
2010
78.06
79.50
81.05
79.45
Source: Platts.
Because of technological advances, the world oil demand-supply

picture has undergone a transformation. Global oil reserves rose by
6.6 billion bbls to 1,383 billion bbls in 2010 (Table 2.1) that
represents an increase of 25% over the 2000 figure of 1,105 billion
bbls, despite an estimated cumulative production of 318 billion bbls
during the intervening ten years. Thus global reserves additions
amounted to around 596 billion bbls between 2000 and 2010.
CC
E-
The technological advances made by the oil industry in the last

three decades, have been effective investment in terms of an
appreciable reduction in production costs and improved
exploration, development and production efficiencies. Yet, despite
these great achievements, technology cannot breathe new life into
commercially depleted reserves. Projections based on rising global
demand and declining discovery rates indicate that the present age
of conventional crude oil will soon be approaching stagnancy and
probably by the mid of century there may not be enough oil to
supply motor fuel to the ever widening private transportation
sector around the world (Salameh, 1999). The future trend points
towards declining production with a confining increase in demand,
a situation that cannot be sustained for long.
(c)
According to BP statistical review in 2010, world oil production

grew by 1.8 Mb/d and surpassed the level reached in 2008. Growth
was the largest since 2004 and was divided evenly between OPEC
and non-OPEC. The largest increases in OPEC were in Nigeria
(+340,000 b/d) and Qatar (+220,000 b/d). Non-OPEC output
increased by 0.9 Mb/d, the highest since 2002, and was led by
China (+271 Kb/d) - which recorded its largest increase ever-, the
US (+242 Kb/d), and Russia (+236 Kb/d). The oil consumption in
Non-OECD rose by 2.2 Mb/d the highest annual growth on record
in volumetric terms just slightly outpacing the growth seen in
2004. Growth remained robust in China and the Middle East with
Chinese consumption growing by 860,000 b/d or 10.4%. OECD oil
consumption rose by 480 Kb/d making 2010 the first year of
___________________
___________________
___________________
___________________
___________________
___________________
Petro Economics
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
After two consecutive declines, global oil trade grew by 2.2%, or 1.2
million b/d, with net Asia Pacific imports accounting for nearly
90% of the growth. Net imports grew robustly in China (+14.6%,
680,000 b/d) and Japan (+7.1%, 280,000 b/d). Net export growth
was largely from the Former Soviet Union (+7.2%, 570,000 b/d) and
the Middle East (+2.6%, 470,000 b/d). The growth in global trade
was roughly split between crude and refined products, though
crude still accounts for 70% of global oil trade.
Table 2.6: Global Oil Demand (2009-2011)
(million barrels per day)
CC
E-
___________________
annual OECD growth since 2005. Despite the increase,

consumption in 2010 was still 3.6 Mb/d below the peak in 2005.
Notes
UP
E
24
Source: Energy Information Administration (EIA)
Consumption of petroleum and other liquid fuels increases from

85.7 million barrels per day in 2008 to 112.2 million barrels per
day in 2035 in the IEO2011 Reference case. Although world liquids
consumption actually declined in 2009 to 83.9 million barrels per
day, it recovered in 2010 to an estimated 86.0 million barrels per
day and is expected to continue increasing in 2011 and beyond as
economic growth strengthens, especially among the developing
non-OECD nations. In the long term, world liquids consumption
increases despite world oil prices that rise to $125 per barrel (real
2009 dollars) by 2035. More than 75 per cent of the increase in
total liquids consumption is projected for the nations of non-OECD
Asia and the Middle East, where strong economic growth and, in
the case of the Middle East, access to ample and relatively
inexpensive domestic resources drive the increase in demand.
(c)
Check Your Progress

Fill in the blanks:
1. is an essential input for all types of economic
activity.
2. The level of worldwide economic activity is still a major
factor in determining for oil and oil products.
Global Oil Supply
Notes
Activity
Research
on the challenges
___________________
for future prices of oil.
___________________
CC
E-
UP
E
If we look back over the past few years we notice several factors
affecting the worldwide crude oil supply. There was the Persian
Gulf War, which removed oil production capacity from the market
by eliminating output from Iraq and temporarily eliminating
output from Kuwait. The worldwide crude oil supply situation
changed markedly following the conflict in the Persian Gulf. After
a brief period of uncertainty that drove up the price of crude oil in
late 1990 and early 1991, the market experienced an extended
period of price stability. The war and subsequent outcome resulted
in a substantial volume of crude oil capacity being removed from
the market. The removal of this capacity contributed greatly to the
period of price stability. For a substantial number of years there
was excess production capacity in the world, which put downward
pressure on prices. Most of that excess capacity was in the OPEC
countries. With the loss of the production capacity of Kuwait and
Iraq a substantial portion of the excess capacity was eliminated.
There was even some danger of temporary supply shortages when
demand moved up late in 1990, during the winter heating season.
25
To satisfy the increase in world liquids demand in the Reference

case, liquids production increases by 26.6 million barrels per day
from 2008 to 2035, including the production of both conventional
liquid supplies (crude oil and lease condensate, natural gas plant
liquids, and refinery gain) and unconventional supplies (biofuels, oil
sands, extra-heavy oil, coal-to-liquids (CTL), gas-to-liquids (GTL),
and shale oil). In the Reference case, sustained high world oil prices
allow for the economic development of unconventional resources and
the use of Enhanced Oil Recovery (EOR) technologies to increase
production of conventional resources. High world oil prices also
incentivise the development of additional conventional resources
through technically difficult, high-risk, and very expensive projects,
including wells in ultra-deep water and the Arctic.
(c)
The most significant non-OPEC contributors to production growth

are Russia, the United States, Brazil, and Canada. Total nonOPEC liquids production in 2035 is 15.3 million barrels per day
higher than in 2008, representing 57 per cent of the total world
increase. OPEC producers are assumed to restrict investment in
incremental production capacity in the Reference case, below the
levels justified by high prices. As a result, OPEC provides roughly
42 per cent of the worlds total liquids supply over the 2008-2035
period and consistent with its share over the past 15 years.
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Notes
Table 2.7: World liquid fuels production in the Reference case, 2008-2035
___________________
___________________
Source
2008
___________________
___________________
OPEC
___________________
Conventional liquidsa
35.0
___________________
Extra-heavy crude oil
0.7
Oil sands (upgraded)
0.0
Coal-to-liquids
0.0
Gas-to-liquids
0.0
Shale oil
0.0
___________________
___________________
2015
2020
2025
2030
2035
Average
annual
percentage
growth,
2008-2035
37.6
39.5
41.7
43.4
45.2
1.0
0.8
1.1
1.2
1.3
1.4
3.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.2
0.2
0.3
0.3
0.3
16.0
0.0
0.0
0.0
0.0
0.0
CC
EU
___________________
PE
S
Petro Economics
___________________
Biofuels (physical
volume)
0.0
0.0
0.0
0.0
0.0
0.0
OPEC total
35.7
38.6
40.8
43.2
45.0
46.9
1.0
46.8
49.6
50.3
51.9
53.1
53.9
0.5
0.0
0.0
0.0
0.1
0.1
0.1
8.5
1.5
2.3
2.9
3.5
4.1
4.8
4.4
Coal-to-liquids
0.2
0.3
0.5
0.8
1.3
1.7
9.0
Gas-to-liquids
0.0
0.1
0.1
0.1
0.1
0.1
1.3
Shale oil
0.0
0.0
0.0
0.0
0.1
0.1
12.1
Biofuels (physical
volume)
1.5
2.4
3.0
3.8
4.4
4.7
4.3
Non-OPEC totalb
50.0
54.7
56.8
60.2
63.2
65.4
1.0
81.7
87.2
89.8
93.6
96.5
99.1
0.7
0.7
0.8
1.1
1.2
1.4
1.5
3.1
1.5
2.3
2.9
3.5
4.1
4.8
4.4
Coal-to-liquids
0.2
0.3
0.5
0.8
1.3
1.7
9.0
Gas-to-liquids
0.1
0.3
0.3
0.3
0.3
0.3
7.4
Shale oil
0.0
0.0
0.0
0.0
0.1
0.1
12.1
Biofuels (physical
volume)
1.5
2.4
3.0
3.8
4.4
4.7
4.3
World total
85.7
93.3
97.6
103.2
108.1
112.2
1.0
Non-OPEC
(c)
World
Include conventional crude oil and lease condensate, natural gas plant liquids
(NGPL), and refinery gain.
Include some U.S. petroleum product stock withdrawals, domestic source of blending
components, other hydrocarbons and others.
Source: Energy Information Administration (EIA)
Non-OPEC Supply
Notes
___________________
___________________
UP
E
The return to sustained high oil prices projected in the IEO2011

Reference case encourages producers in non-OPEC nations to
continue investment in conventional liquids production capacity
and increase investment in EOR projects and unconventional
liquids production. Non-OPEC production increases steadily in the
projection, from 50.0 million barrels per day in 2008 to 65.3 million
barrels per day in 2035, as high prices attract investment in areas
previously considered uneconomical, and fears of supply
restrictions encourage some net consuming nations to expand
unconventional liquids production from domestic resources, such
as coal and crops.
27
CC
E-
In the Reference case, unconventional liquids production from nonOPEC suppliers rises to 6.5 million barrels per day in 2020 and
11.4 million barrels per day in 2035. In both the High Oil Price and
Traditional High Oil Price cases, non-OPEC unconventional
liquids production rises to about 17.4 million barrels per day in
2035, as significantly higher prices encourage the development of
alternative fuel sources to the limits imposed by expected
environmental protection measures and industry expansion in
general. In contrast, in the Low Oil Price and Traditional Low Oil
Price cases, fewer unconventional resources become economically
competitive, and non-OPEC production of unconventional liquids
rises to only about 7.0 million barrels per day in 2035 in each low
price case
OPEC Supply
In the IEO2011 Reference case, total liquid production from OPEC

nations increases from the 2008 level of 35.6 million barrels per
day at an average annual rate of 1.0 per cent, resulting in the
production of 46.9 million barrels of liquids per day in 2035. Of the
total OPEC increase, 11.0 million barrels per day originates in the
Middle East.
Throughout the projection period, Saudi Arabia remains the
(c)
largest liquids producer in OPEC, with total production increasing

from 10.7 million barrels per day in 2008 to 15.4 million barrels
per day in 2035, as prices stabilise at historically high levels and
world consumption continues to grow. Seventeen per cent of the
increase (0.8 million barrels per day) is expected to be NGPL

production related to expansion of natural gas production. The
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Petro Economics
___________________
___________________
total production increase equates to an average annual growth rate

of 1.4 per cent, based on the assumption that Saudi Arabia will
continue with its current plan to maintain spare production
capacity at levels between 1.5 and 2.0 million barrels per day.
Table 2.8: World Oil Supply and Demand
___________________
___________________
___________________
___________________
___________________
2007
2008 1Q09 2Q09 3Q09 4Q09
2009 1Q10 2Q10 3Q10 4Q10
2010 1Q11 2Q11 3Q11 4Q11
2011
North America
25.5
24.2
23.4
22.9
23.3
23.5
23.3
23.6
23.8
24.3
24.0
23.9
23.9
23.7
24.0
23.8
23.8
Europe
15.4
15.3
15.1
14.4
14.6
14.5
14.6
14.2
14.1
14.8
14.7
14.4
14.0
13.8
14.6
14.5
14.3
Pacific
8.4
8.0
8.1
7.3
7.2
8.0
7.7
8.2
7.3
7.6
8.0
7.8
8.3
7.3
7.6
8.1
7.8
49.3
47.6
46.6
44.6
45.1
46.0
45.6
45.9
45.2
46.7
46.8
46.1
46.2
44.8
46.2
46.5
45.9
FSU
4.2
4.2
3.8
3.9
4.1
4.1
4.0
4.2
4.1
4.4
4.4
4.3
4.3
4.2
4.5
4.5
4.3
Europe
0.8
0.8
0.7
0.7
0.7
0.7
0.7
0.7
0.7
0.7
0.7
0.7
0.7
0.7
0.7
0.7
0.7
China
7.6
7.7
7.2
8.2
8.4
8.5
8.1
8.6
9.1
8.9
9.7
9.1
9.5
9.7
9.7
9.9
9.7
OECD DEMAND
Total OECD
NON-OECD DEMAND
___________________
CC
EU
___________________
PE
S
Notes
___________________
Other Asia
9.6
9.7
9.9
10.2
10.0
10.4
10.1
10.4
10.6
10.2
10.6
10.4
10.7
10.9
10.5
10.9
10.8
Latin America
5.7
6.0
5.8
6.0
6.1
6.1
6.0
6.0
6.3
6.4
6.4
6.3
6.3
6.5
6.7
6.6
6.5
Middle East
6.8
7.2
7.0
7.5
8.0
7.4
7.5
7.4
7.8
8.2
7.7
7.8
7.6
7.9
8.5
7.8
7.9
Africa
3.1
3.3
3.4
3.4
3.3
3.2
3.3
3.3
3.4
3.4
3.4
3.4
3.4
3.4
3.4
3.4
3.4
Total Non-OECD
37.8
38.9
37.8
39.8
40.6
40.3
39.7
40.6
41.9
42.2
42.8
41.9
42.5
43.3
43.8
43.8
43.4
Total Demand1
87.1
86.4
84.5
84.4
85.7
86.4
85.3
86.5
87.1
88.8
89.6
88.0
88.7
88.1
90.0
90.3
89.3
OECD SUPPLY
North America4
13.8
13.3
13.5
13.5
13.7
13.7
13.6
13.9
14.1
14.1
14.4
14.1
14.4
14.0
14.0
14.3
14.2
Europe
5.0
4.8
4.9
4.5
4.3
4.6
4.6
4.5
4.2
3.8
4.2
4.2
4.1
4.0
4.0
4.3
4.1
Pacific
0.6
0.6
0.7
0.6
0.7
0.6
0.7
0.6
0.6
0.6
0.6
0.6
0.5
0.6
0.7
0.7
0.6
19.5
18.8
19.1
18.6
18.6
18.9
18.8
19.1
18.9
18.5
19.2
18.9
19.0
18.6
18.6
19.3
18.9
Total OECD
NON-OECD SUPPLY
FSU
12.8
12.8
13.0
13.3
13.4
13.5
13.3
13.5
13.5
13.5
13.7
13.6
13.7
13.7
13.6
13.7
13.7
Europe
0.2
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
China
3.7
3.8
3.8
3.9
3.9
3.9
3.9
4.0
4.1
4.1
4.2
4.1
4.2
4.1
4.3
4.3
4.2
Other Asia2
3.7
3.7
3.7
3.6
3.7
3.7
3.7
3.7
3.7
3.8
3.7
3.7
3.7
3.7
3.6
3.6
3.6
Latin America2,4
3.6
3.7
3.8
3.9
3.9
4.0
3.9
4.0
4.1
4.1
4.1
4.1
4.2
4.2
4.4
4.5
4.3
Middle East
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.6
1.7
1.8
1.7
Africa2
2.6
2.6
2.6
2.6
2.6
2.6
2.6
2.6
2.6
2.6
2.6
2.6
2.6
2.6
2.6
2.6
2.6
28.2
28.4
28.8
29.1
29.3
29.5
29.2
29.7
29.8
30.0
30.1
29.9
30.2
30.0
30.4
30.6
30.3
Processing Gains3
2.0
2.0
1.9
2.0
2.1
2.1
2.0
2.0
2.1
2.1
2.1
2.1
2.2
2.1
2.1
2.2
2.2
Global Biofuels4
1.1
1.4
1.2
1.7
1.8
1.8
1.6
1.4
2.0
2.1
1.8
1.8
1.5
1.9
2.2
2.0
1.9
Total Non-OPEC2
50.8
50.7
50.9
51.3
51.8
52.3
51.6
52.2
52.7
52.7
53.2
52.7
52.9
52.6
53.4
54.2
53.3
Non-OPEC: Historical
Composition2
50.3
49.7
50.9
51.3
51.8
52.3
51.6
52.2
52.7
52.7
53.2
52.7
52.9
52.6
53.4
54.2
53.3
30.7
31.6
29.2
29.1
29.1
29.1
29.3
29.3
29.3
29.7
29.6
29.5
29.9
4.3
4.5
4.8
4.8
5.0
5.1
4.9
5.2
5.2
5.5
5.6
5.3
5.8
5.8
5.9
6.0
5.9
Total OPEC2
35.0
36.2
34.0
33.9
34.1
34.2
34.1
34.5
34.5
35.1
35.2
34.8
35.7
OPEC: Historical
Composition2
35.5
37.2
34.0
33.9
34.1
34.2
34.1
34.5
34.5
35.1
35.2
34.8
35.7
Total Supply6
85.8
86.8
84.9
85.3
85.9
86.5
85.7
86.7
87.2
87.8
88.4
87.5
88.6
0.3
Total Non-OECD
OPEC
Crude5
NGLs
(c)
STOCK CHANGES AND MISCELLANEOUS

Reported OECD
Industry
0.3
0.3
0.6
0.1
0.2
1.3
0.1
0.2
1.0
0.1
0.9
0.1
0.1
0.0
0.2
0.2
0.0
0.0
0.1
0.0
0.1
0.1
0.1
0.0
0.0
0.2
0.3
0.8
0.3
0.2
1.3
0.0
0.2
1.0
0.2
0.8
0.1
0.4
0.0
0.0
0.6
0.2
0.0
0.5
0.3
0.2
0.0
0.2
0.3
0.2
0.2
Miscellaneous to balance7
1.1
0.0
0.9
0.3
0.1
1.0
0.1
0.1
0.9
0.6
0.0
0.4
0.1
Total Stock Ch. & Misc
1.3
0.4
0.4
0.8
0.2
0.2
0.4
0.1
0.1
1.0
1.1
0.5
0.1
Government
Total
Floating Storage/Oil in
Transit
Contd
Call on OPEC crude + Stock

ch.8
31.9
31.2
28.8
28.3
28.9
29.0
28.7
29.2
29.2
30.7
30.7
30.0
30.0
29.7
30.7
30.1
30.1
Adjusted Call on OPEC +

Stock ch.9
30.9
31.3
27.8
28.6
28.9
30.0
28.8
29.3
28.3
30.1
30.7
29.6
30.1
29.7
30.7
30.1
30.1
2.
3.
4.
5.
6.
7.
8.
9.
Notes
Measured as deliveries from refineries and primary stocks, comprises inland deliveries,
international marine bunkers, refinery fuel, crude for direct burning, oil from non-conventional
sources and other sources of supply.
Other Asia includes Indonesia throughout. Latin America excludes Ecuador throughout. Africa
excludes Angola throughout.
Total Non-OPEC excludes all countries that were members of OPEC at 1 January 2009. NonOPEC Historical Composition excludes countries that were OPEC members at that point in time.
Total OPEC comprises all countries which were OPEC members at 1 January 2009. OPEC
Historical Composition comprises countries which were OPEC members at that point in time.
Net volumetric gains and losses in the refining process (excludes net gain/loss in China and nonOECD Europe) and marine transportation losses.
As of the July 2010 OMR, Global Biofuels comprise all world biofuel production including fuel
ethanol from the US and Brazil.
As of the March 2006 OMR, Venezuelan Orinoco heavy crude production is included within
Venezuelan crude estimates. Orimulsion fuel remains within the OPEC NGL and nonconventional category, but Orimulsion production reportedly ceased from January 2007.
Comprises crude oil, condensates, NGLs, oil from non-conventional sources and other sources of
supply.
Includes changes in non-reported stocks in OECD and non-OECD areas.
Equals the arithmetic difference between total demands minus total non-OPEC supply minus
OPEC NGLs.
Equals the "Call on OPEC + Stock Ch." with "Miscellaneous to balance" added for historical
periods and with an average of "Miscellaneous to balance" for the most recent 8 quarters added for
forecast periods.
CC
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Global Oil Prices
The price of crude oil is the most important international price

quoted globally. Crude oil is the most conveniently and widely
traded form of energy and therefore the swing element in the
energy mix (Tempest, 1993). It has a market influence on global
energy consumption as well as on overall economic growth and
inflation. The price of oil is the basic litmus test for measuring the
state of the world. Political crisis aggravates it and sometimes the
crisis goes beyond control.
Prices during 1980s: Between 1978 and 1981, the world price
of oil jumped by 152%. Responding to this rapid increase in
prices, the demand for oil in the non-communist world peaked
in 1979 and dropped 12.3% by 1983. Over this 4-year period
the worldwide demand response to the price increase was a
0.9% drop in demand for every 10% increase in price relatively
inelastic demand. But, it does not show that there was a
demand response to price change that must be considered
when estimating demand for oil products. The drop in oil
demand and the worldwide economic slowdown put downward
pressure on crude prices in the early 1980s. When demand fell
sharply a massive crude oil production capacity surplus
developed. The surplus led to intense price competition in the
oil market. The result of these factors was a peaking of crude
oil prices in 1981.
(c)
___________________
___________________
UP
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1.
29
Memo itmes:
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Petro Economics
30
One of the most significant recent pricing events occurred in
Notes
late 1985. Saudi Arabia had adopted the role of swing producer
to help support prices during this period of declining demand
___________________
for OPEC oil. They cut their production to help tighten the
___________________
market. But Saudi Arabia became alarmed when their
UP
E
___________________
production fell below 2 million barrel per day. They did not get
___________________
cooperation from other OPEC countries in cutting production
___________________
to support prices. So Saudi Arabia abandoned their role of
___________________
crude exporter of last resort and decided to concentrate on
___________________
maintaining a fair share of the oil market.
___________________
Prices during 1990s: This period was characterised by

relative stability in the world oil market in comparison with
___________________
early period of shock years. The new eras price system was
___________________
underpinned by a balance mechanism that kept the oil price

within a finite range set at around $15 per barrel and a
ceiling placed at around $20 per barrel. Above $20 per barrel,
CC
E-
massive investment in fuel substitution and renewable energy

were not deemed economically feasible. For most of the period
1987-97, the average monthly price of Iranian Light fell within
the $15-20 per barrel range and all yearly averages were
either within or just outside these limits.
There were four major exceptions to the $15-20 per barrel

consensus during the decade:
1.
The slump below $15 per barrel during the second half of
1988 with a $10 per barrel low.
2.
The sharp peak of 1990, consequent to the outbreak of Middle

East hostilities.
3.
The extended decline during the winter of 1993/94.
4.
The unexpected surge over $20 per barrel in the last quarter of
1996 as Iraqi oil was making its comeback to the world
(c)
markets.
The last one has had three major causes:
1.
The delayed Iraqi oil sales.
2.
Lean (US) refiner stocks, encouraging backwardation.
3.
The contest between commercials and non-commercials for the

control of spot pricing (Emerson, 1997).
Table 2.9: Spot Crude Prices

Nigerian
West Texas
Dubai
Brent
Forcados
Intermediate
$/bbl*
$/bbl
$/bbl
$/bbl
US dollars per
barrel
31
Notes
___________________
___________________
2.83
1974
10.41
___________________
1975
10.70
1976
11.63
12.80
___________________
12.87
12.23
1977
12.38
13.92
14.21
14.22
___________________
1978
13.03
14.02
13.65
14.55
___________________
1979
29.75
31.61
29.25
25.08
1980
35.69
36.83
36.98
37.96
___________________
___________________
UP
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1973
34.32
35.93
36.18
36.08
1982
31.80
32.97
33.29
33.65
1983
28.78
29.55
29.54
30.30
1984
28.06
28.78
28.14
29.39
1985
27.53
27.56
27.75
27.98
1986
13.10
14.43
14.46
15.10
1987
16.95
18.44
18.39
19.18
1988
13.27
14.92
15.00
15.97
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
CC
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1981
15.62
18.23
18.30
19.68
20.45
23.73
23.85
24.50
16.63
20.00
20.11
21.54
17.17
19.32
19.61
20.57
14.93
16.97
17.41
18.45
14.74
15.82
16.25
17.21
16.10
17.02
17.26
18.42
18.52
20.67
21.16
22.16
18.23
19.09
19.33
20.61
12.21
12.72
12.62
14.39
17.25
17.97
18.00
19.31
26.20
28.50
28.42
30.37
22.81
24.44
24.23
25.93
23.74
25.02
25.04
26.16
26.78
28.83
28.66
31.07
33.64
38.27
38.13
41.49
49.35
54.52
55.69
56.59
61.50
65.14
67.07
66.02
2007
68.19
72.39
74.48
72.20
2008
94.34
97.26
101.43
100.06
(c)
2006
2009
61.39
61.67
63.35
61.92
2010
78.06
79.50
81.05
79.45
*
1972-1985 Arabian Light, 1986-2010 Dubai dated.
1976-1983 Forties, 1984-2010 Brent dated.
1976-1983 Posted WTI prices, 1984-2010 Spot WTI (Cushing) prices.

Source: Platts.
___________________
___________________
Petro Economics
32
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
UP
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___________________
Figure 2.1: Trends in Crude Oil Prices
Future Oil Prices
(c)
CC
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The impacts of world oil prices on energy demand are a

considerable source of uncertainty in the IEO2011 projections.
Prices have been exceptionally volatile over the past several years,
reaching a high of $145 in July 2008 (daily spot price in nominal
dollars) and a low of $30 in December 2008, as the global recession
substantially dampened demand and thus prices. Improving
economic circumstances, especially in the developing economies,
strengthened liquids demand, and prices rose in 2009 and 2010.
More recently, growing demand and unrest in many oil-supplying
nations of the Middle East and North Africa have supported price
increases into 2011. Prices rose from an average $62 per barrel in
2009 to $79 per barrel in 2010, and they are expected to average
about $100 per barrel in 2011. In the IEO2011 Reference case,
world oil prices continue increasing, to $108 per barrel in 2020 and
$125 per barrel in 2035.
In addition to the Reference case prices, IEO2011 includes

analyses of high and low world oil price paths. The three
alternative price paths, which are consistent with those presented
in EIAs Annual Energy Outlook 2011, are used to develop five
price scenarios that can be used to illustrate the range of
uncertainty associated with prices in world liquids markets (Figure
2.2 and Table 2.10). The high and low oil price paths and resulting
scenarios illustrate price uncertainty, but they do not span the
complete range of possible price paths.
33
Notes
___________________
UP
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___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Figure 2.2: World oil prices in three cases, 1990-2035

(2009 dollars per barrel)
CC
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Table 2.10: World oil prices in four cases, 2009-2035

(2009 dollars per barrel)
Issues for Future
The challenge of developing successful oil and gas activities have

been made considerably more complex by recent political and
economic changes in the developing countries and in the
international oil and gas industry. The global oil sector has felt the
effects of a number of profound issues, which will be affecting the
future growth.
(c)
Future Supply vs. Demand of Conventional Oil

There is uncertainty in estimates of future supply vs. demand of
conventional oil and the scope for replacing cheap oil with other
alternative energy sources. The oil shocks of 1970s made the entire
world quite conscious of depleting resources. Most oil explored and
produced by the world so far and will be produced over the next 20
___________________
Petro Economics
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Global Reserves of Oil
As of January 1, 2011, proved world oil reserves, as reported by the

Oil & Gas Journal, 21 were estimated at 1,471 billion barrels115
billion barrels (about 9 per cent) higher than the estimate for 2010
[64]. According to the Oil & Gas Journal, 51 per cent of the worlds
proved oil reserves are located in the Middle East (Figure 2.3). Just
less than 79 per cent of the worlds proved reserves are
concentrated in eight countries, of which only Canada (with oil
sands included) and Russia are not OPEC members (Table 2.11).
CC
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___________________
years is termed conventional oil, which flows at high rates from

giant oilfields. There is also non-conventional oil, viz. heavy oil,
tar, sand oil and shale oil, oil obtained by enhanced recovery. But,
such oil represents a small and relatively expensive fraction of
total production and can be produced only at slow rates.
(Petroleum Review, Dec.1997, p.559).
Notes
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34
Source: Oil & Gas Journal.
Figure 2.3: World proved oil reserves by geographic region as of January

1, 2011 (billion barrels)
(c)
Table 2.11: World oil reserves by country as of January 1, 2011

(billion barrels)
Contd
PE
S
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
CC
EU
___________________
Source: Oil & Gas Journal.
Depleting Global Reserves
World demand in the last decade has grown at 1.4 per cent an
year. It is predicted that the worlds mid-point of depletion will
come when 900-1,000 bn b have been produced (half the ultimate
reserves of 1,800-2,000 bn b) which with 811 bn b already produced
will exist for 4-7 years. The anticipation of shortages is bound to
lead to a radical increase in demand so that actual shortages could
be delayed for a few years and this will depend upon the behaviour
of Middle East producers. However, according to IEA projections
they will be supplying 50 per cent of the worlds needs and by 2013
will be close to the mid-point of their own depletion. It is essential
to note here that 90 per cent of current oil production comes from
fields more than 2025 years old and 70 per cent from fields more
than 30 years old. It means that Middle East producers with 65
per cent of worlds proven oil reserves will lead in the supply side
of world oil market.
(c)
Major OPEC oil producing countries are keeping the gap between
output and capacity smaller so that they can continue to execute
competitive sale price for their oil.
Issue of Non-conventional Oil

Oil supply from outside Middle East OPEC countries is expected to
decline. Oil supply from Middle East producers in projected to peak
___________________
Petro Economics
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Non-Conventional oil is expected to contribute to just over 8% to

total oil supplies by 2030. This represents production of 9.9 million
barrels per day a sharp increase over the 1.1 million barrels per
day availability of 2000. The increase results mainly from
technological improvements that reduce the cost of extracting and
upgrading non-conventional resources. Gas-to-liquid (GTL) plants
will make growing contribution to non-conventional oil supplies.
GTL production is projected to rise from 43 K barrels per day to
300 K barrels per day by 2030. The greater part of future nonconventional oil will come from Canadian Oil sands and
Venezuelan extra heavy bituminous crude. It is estimated that
these two regions contains 580 billion barrels of recoverable
reserves more than the entire reserves of conventional crude oil
in the Middle East.
CC
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___________________
at around 2013. Since the total conventional oil supply will not be
able to fully match demand, additional supplies of liquid fuels are
expected to become available from non-conventional sources. The
share of OECD is expected to increase to about 54% in the overall
supply.
Notes
UP
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36
Check Your Progress
Fill in the blanks:
1. . oil is expected to contribute to just

over 8% to total oil supplies by 2030.
2. Major OPEC oil producing countries are keeping the gap
between output and . smaller so that they
can continue to execute competitive sale price for their
oil.
(c)
Summary
Worldwide petroleum demand has been one of the major

determinants of trends in all activity in the oil and gas industry.
Economic forces determine the level of petroleum demand.
Sometimes political considerations make a deep imprint on the
scenario. Because of technological advances the world oil demand
and supply picture has undergone a transformation. Yet, despite
these advances, technology cannot breathe new life into declining
reserves of oil. The future trend points towards declining
production with a continuing increase in demand, a situation that
cannot be sustained for long. OPEC members with large reserves
PE
S
and relatively low production capacity expansion costs can

accommodate sizeable increases in petroleum demand. OPEC
capacity utilisation is expected to increase sharply, reaching 95 per
cent by 2010. So, the rising global oil demand and declining reserve
and recovery rates could lead to a situation of rising oil-prices in
near future when and by how much will depend on such
unknowns as the growth in global oil demand, the timing and
speed of production declines and the availability of suitable
substitutes.
Notes
___________________
___________________
___________________
___________________
___________________
___________________
Lesson End Activity
Keywords
CC
EU
Make a comparison between the oil prices in India and other Asian
countries in 2011.
EIA: Energy Information Administration
Conventional: Most oil explored and produced by the world so

far and will be produced over the next 20 years is termed
conventional oil, which flows at high rates from giant oilfields.
Non-conventional Oil: It includes heavy oil, tar, sand oil and
shale oil, oil obtained by enhanced recovery.
1. Write a note on trends in oil demand of the world.
2. What are the key forecasts of oil demand made by EIA?
3. Make a comparison between the oil supply by OPEC and NonOPEC countries.
4. Discuss the rising trends of global oil prices.
5. Write a note on global reserves of oil.
(c)
Further Readings
Books
KPMG, Mumbai.
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Petro Economics
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seismic AVO response: an application to gas-hydrates: Current
Science, v. 86, p. 985-990.
Notes

UP
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38
Ghosh, R., Ojha, M., Sain, K. and Thakur, N.K., Physical

parameters of hydrated sediments estimated from marine seismic
reflection data: a case study Current Science, v. 90, p. 1421-1430.
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Web Readings
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http://www.eia.gov
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http://www.bp.com
(c)
CC
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www.business.gov.in
UNIT 3: Indian Oil Industry Exploration and Production
Unit 3
39
Notes
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UP
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Indian Oil Industry Exploration

and Production
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___________________
Objectives
topics:
\
Crude Oil Reserves
Problems and Areas of Concern
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Introduction
(c)
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India's energy use is mostly based on fossil fuels. Although the

country has significant coal and hydro resource potential, it is
relatively poor in oil and gas resources. As a result it has to depend
on imports to meet its energy supplies. The geographical
distribution of available primary commercial energy sources in the
country is quite skewed, with 77 per cent of the hydro potential
located in the northern and north-eastern region of the country.
Similarly, about 70 per cent of the total coal reserves are located in
the eastern region while most of the hydrocarbon reserves lie in
the west. India has to satisfy about 16 per cent of worlds
population. Coal, oil and gas are important sources of energy. The
Reserves/Production (R/P) ratio indicates the length of time the
reserves would last if production is to continue at the current level.
The R/P ratio for natural gas has declined over the years, but is
still higher than that of crude oil, which implies that the
production of natural gas would be higher than at present. For
crude oil the ratio has remained same over the last few years. The
increase in production of crude oil would come from raising the
rate of accretion.
The share of petroleum products and natural gas in the total
energy consumption has been increasing over the years and was 45
per cent in 2001-02. The country is heavily dependent on imports
of crude oil and this dependence will increase in the years to come.
This underscores the need for increasing indigenous production.
Petro Economics
Prepare
an assignment on the
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principal activities involved in
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E and
P activity.
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The national oil companies have made efforts to discover oil and
gas to meet the ever rising demand. Recently natural gas, being
environment-friendly and clean, has gained an importance as a
fuel/feed stock for power plants, fertiliser industries, iron, steel
plants and transport sectors. The options are being examined to
maximise the share of gas in energy through domestic and
imported sources to meet the energy demand.
Notes
Activity
UP
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40
In this unit, an attempt has been made to analyse and discuss the
growth and development of oil industry in India in the area of
exploration and production. The major aspects which have been
analysed are exploration process, crude oil reserves, oil demand
and production, problems and areas of concern, review of policy
options and new exploration and licencing policy.
(c)
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The oil industry in India has been thoroughly regulated until very
recent past. All business decisions needed government sanction
and improving efficiency of refineries and marketing functions
were the only avenues that companies had to improve for returns.
But like many industries the controls on oil industry have been
easing and have been completely deregulated by 1.4.2002. Indias
oil industry was greatly insulated from international movement in
oil prices beginning September, 1997; several of these regulations
began to be rolled back. Prices were decontrolled and administered
price mechanism was dismantled. The coming period will witness
the Indias oil industry moving from regulated to competitive one.
Tariffs will decline, government intervention will be withdrawn
and the entry of private players will be encouraged (IRIS study,
1999).
Exploration and Production Exploration and Production
encompasses discovery and production of oil and gas by
undertaking geological and geophysical surveys like remote
sensing, airborne magnetic and field gravity to identify the
principal areas of adequate sediment cover. The areas thus
identified are assessed for the most likely hydrocarbon potential
through various methods of resource appraisal. Depending on the
resource estimated, available technology and the current economic
factors, each basin is ranked in terms of risk and reward and
exploration priorities assigned. Basins/areas of low to medium risk
and high to moderate reward are taken up first for systematic
41
Notes
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exploration which begins with detailed geological and regional

seismic surveys. The results of such surveys highlight area of cost
intensive exploratory inputs like seismic surveys on adequate grid
and structural/parametric/information drilling. Favourable results
of these inputs lead to the next stage of exploration during which
targets are decided and prospects identified. Each prospect thus
demarcated is evaluated, techno-economically (Singh L., 1996).
CC
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The exploratory test-well is generally located on the most viable

prospects and in the event of a discovery is followed immediately
by a quick assessment of prospects based on updated geological
analysis and prevailing economic factors. In case the test-well fails
to strike hydrocarbons, the other rated prospects are evaluated
immediately as a part of dynamic exploration process. Once a
discovery is delineated the field is re-appraised technoeconomically and its commercial viability assessed before
formulation of any development plan. A technological scheme of
development is adopted and executed after careful selection of
optional variants related to well-spacing and maximum production
based on sound reservoir management principle and economic
evaluation (Mahapatra, et al., 1996).
The principal activities involved in E and P activity are
undertaking seismic surveys, drilling and exploratory well,
economic evaluation of the project, entering into agreements with
the state, formulation of field development and production plan
and decommissioning of the well. The upstream oil sector is a
typical case of a very high risk and high return industry. The
process of oil exploration and production can be broadly classified
under the following heads:
(c)
Exploratory Surveys: Seismic survey is the first stage of oil

exploration wherein the companies study the area and attempt to
identify locations with potential. The signals obtained are studied
and the formations that exit are interpreted. On this basis further
exploration is initiated. Surveys are undertaken to find out the
presence of a hydrocarbon structure and then decide whether an
exploratory well can be drilled. Cost of surveys would depend on
the total area that is explored. It has been found that offshore
seismic costs are lower than onshore costs. Onshore exploration in
remote areas can be expensive compared to desert. Two
dimensional (2D) surveys cost much less than the three
dimensional (3D) surveys. As compared with 2D, 3D surveys
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Petro Economics
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provide more correct information, though costs are high in this

case.
Notes
Exploratory Drilling: An exploratory well is required to confirm

the existence of oil and gas in a terrain and extract required
information from the geological history and the nature and
organisational aspects of reservoir. The surveys whether 2D or 3D
can give us the signals of structure containing oil or not. It is the
exploratory drilling which can ascertain whether the oil is there or
not. The costs involved in exploratory drilling are very high and
also require huge amount of capital. The costs may escalate if
exploratory activities are further stepped up. In this way it would
put a pressure on the resources of the Oil Company. On the
contrary, if oil is actually found under the identified structure the
whole costs involved in exploration could be capitalised. Otherwise,
in case of dry well the entire costs would be written-off by the
concerned company.
UP
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42
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Development Drilling: It is the phase in which oil which has

been explored can be commercially extracted. Development of
drilling is meant for commercial extraction of oil but it is highly
capital intensive and requires a long gestation period. In most
Asian countries the governments have managed to extract between
80 to 90 per cent of the total revenue in the form of various
royalties, levies, duties and taxes.
(c)
Commercial Production: Commercial exploitation commences in

accordance with the available infrastructure. Initially the reservoir
pressure would be adequate to push oil and gas to the surface but
pressure decreases with increase in production. The natural drive
mechanism can be scientifically used to maintain the rate of
production. However, secondary recovery methods, like injection of
additional energy will be needed only if there is a fall in production
with poor recovery rates. Enhanced Oil Recovery (EOR) techniques
involving injection of hot water, steam or addition of solvents could
also be used to increase production though, at current oil prices,
use of EOR may not be commercially viable.
Contracts and Licences: Commercial extraction of reservoirs can
begin after obtaining licences or contracts from the State
Governments. Such agreements are in the form of either licences
or what is called as production sharing contracts. In case of
licences, the states interest is restricted to royalties and taxes and
licences will be free to produce and sell oil and gas without any
43
Notes
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limitations. In the case of production sharing contract(s), the

National Oil Company is made a partner in the venture and initial
exploration costs would have to be borne by the contractor.
Revenues earned on production of oil and gas shall first set off the
costs incurred by the contractor and the balance amount shall be
shared in a pre-determined ratio.
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Exploration and Development in the Ninth Plan: With

evolving geological concepts and experience in other parts of the
world it is seen that the less explored basins in India, e.g.,
Gondwana basins could be more prospective and need to be
accorded top priority for exploration. Exploration efforts should
spread over all the basins including unexplored/less explored
having favourable geological formations. This requires a change in
exploration strategy. 3D technology has been identified as a major
seismic input for the development of the field as well as for
monitoring EOR processes. The focus of 2D surveys in Assam and
Arunachal Pradesh areas would be on the North Bank of
Brahmaputra River, the belt of Schuppen and further detailing of
Eocene prospects in this region. The 2D surveys would also be
carried out in Ganga Valley, Rajasthan and Saurashtra offshore
areas. In view of the rapidly increasing demand for oil in the
coming years there is an urgent need to step up the level of
indigenous oil production which has remained more or less
stagnant during the last 5-6 years. This will call for enlarging
exploration coverage of the different sedimentary basins in the
country. A new thrust needs to be given for exploration in deep
waters, in the North Bank of Brahmaputra. A certain minimum
level of exploration by the National Oil Companies may be
necessary for upgrading the hydrocarbon resources and attracting
private investments in this area. The Ninth Plan focussed on
strategies required for achieving the above objectives (Planning
Commission, 1997 & 2002).
Tools for Measuring Exploration Efficiency
(c)
The most commonly used parameter for measuring exploration

efficiency is the finding cost. The index is a good indicator of how
successful a petroleum firm is in finding and developing new
reserves at reasonable costs. Finding cost provides the cost per
barrel of finding and developing new reserves depending upon
what parameters have been used in deriving it. International E
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Petro Economics
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and P companies use three different definitions of finding costs,

which are:
z
Exploration expenses and leasehold costs divided by the

reserve addition from exploratory efforts.
Exploration expenses and leasehold costs divided by reserve

addition and revision.
Exploration, leasehold and development costs divided by

reserve additions, revision and enhanced recovery or reserve
purchase.
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If exploration efficiency of a company is measured, one should

consider reserves accreted through exploration activities in the
basin and the expenditure incurred on it. All other reserves which
may be added into the companys account through reserve
purchase technology upgradation or developmental activities
should be excluded. It may be significant to note that reserves
accreted through procurement of property signify the business
efficiency of the company and not the exploration efficiency.
Similarly, upgradation of technology may increase the reserves for
the company but it is due to advanced and improved production
technology which has helped in increasing the recoverable
component of reserves accreted much earlier.
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Notes
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44
(c)
Another parameter used by the companies is their reserve

replacement ratios. This is the ratio of barrels of reserves accreted
to barrels of reserves produced. In other words, it depicts how
many produced hydrocarbons have been replaced. Exploration
Discovery Index (EDI) another parameter gives the amount of
hydrocarbon added (in tons) to the inventory by every exploratory
metre drilled by the company. Another method is the reserve
accretion value which indicates the net value of the reserves
accreted as on date. By comparing it with the corresponding
exploration investments, an idea of whether the exploration efforts
are giving some returns or not, can be obtained. In case the
expenditure on exploratory efforts is exceeding the reserve
accretion value, it is better to call it a day.
Different index characterises each area by virtue of its unique
geographic and geologic nature. It shows a need for properly
balanced exploration budget. Company maintaining the highest
ratio is the most successful which means that the company has
found most oil for lesser investments on exploratory inputs
(Loomba, et al., 1999).
Historical Perspective
Notes
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The history of oil exploration in India is more than 100 years old.
The systematic exploration activity in India started in 1866, in the
north-eastern state of Assam. After the independence of India the
activities of Assam Oil Company and that of Burma Oil Company
operating under the aegis of Shell Oil were merged to form a semigovernment and private equity partnership company known as Oil
India Limited. The activities of this company were extended to the
Assam plains and, as a consequence of which large accumulations,
first at Nahorkatiya and then at Moran, were located by
systematic exploration efforts. These discoveries represent some of
the best known oil and gas accumulations in the north-eastern
sector which continue to contribute significantly to the countrys oil
production till date.
45
CC
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With the demand for petroleum products growing, the Government

of India recognised the urgency of exploring hydrocarbon resources
and hence constituted Oil and Natural Gas Commission (ONGC) in
1956. ONGC undertook systematic geoscientific surveys in most
areas considered prospective on the basis of global analogies.
Initially, the exploratory activities by ONGC were restricted to
Himalayan foothills and adjoining Ganga plains. Later on,
exploratory activities were extended to Gujarat, Upper Assam and
West Bengal. The first step towards offshore exploration was taken
in 1964-67, when regional seismic surveys in selected parts of
western offshore were conducted. As a result, a large structure at
Mumbai offshore was identified and taken up subsequently for
drilling in 1974 leading to Indias biggest commercial discovery.
Later on, more giant discoveries like Neelam and Bassein in
Western offshore and Ravva in Eastern offshore were made due to
massive exploratory efforts by ONGC.
(c)
Table 3.1: Exploratory and Development Drilling
Note: *: Provisional
Source: Public Sector Undertakings
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Petro Economics
46
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Fill in the blanks:
Research
and prepare a
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presentation on the strategies
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identified
for E&P activities
th
under
11
plan.
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Check Your Progress
1. The most commonly used parameter for measuring

. efficiency is the finding cost.
UP
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Notes
Activity
2. . surveys is the first stage of oil

exploration wherein the companies study the area and
attempt to identify locations with potential.
Crude Oil Reserves
The definitions of reserves are given in several reports of the

international oil companies. The definitions given by Mobil
Corporation are technically and practically more useful than any
other ones. It provides a good framework within which industry
can further evolve a set of industry accepted practices for the
understanding of hydrocarbon assets.
(c)
CC
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Mobils recoverable hydrocarbon volume system has three main

classifications: the discovered classifications are reserves and
contingent resources while the undiscovered classification is
designated speculative potential. This schematic is shown in
Figure 3.1 below (Nangea & Hunt, 1999).
Figure 3.1: Classification Scheme
47
Notes
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UP
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Reserves are quantities of hydrocarbons in known reservoirs that

are estimated to be recoverable in future years under existing
economic and operating conditions. Contingent resources are
significant quantities of resources estimated to be recoverable but
are not currently producible because of existing economic, political
environmental or technical conditions. Included in this category
are resources that are not producible because there are no
development plans and major capital commitments are required
for facilities such as offshore platforms, pipelines, or production
licence. Both reserves and contingent reserves are technically
categorised as proved, probable or possible, based on the relative
degree of certainty as to the presence, recovery, ability and
economic viability considering all physical technical, political,
economic and regulatory factors. The Mobil categories of proved,
probable and possible are very similar to the recently approved
joint spe/wpc definition, with a few minor exceptions. Of these, the
chief difference is that currently uneconomic probable and possible
volumes are categorised as contingent resources (P5 and P6), while
they could be considered reserves (P2 and P3) under the SPE/WPC
criteria.
(c)
Speculative potential is the quantity of hydrocarbons located in

unproved traps, in undrilled provinces or deeper reservoirs
underlying productive fields where geological conditions are
believed to be favourable for the accumulation of hydrocarbons.
Speculative potential provides estimates of the quantities which
may eventually be recovered. This potential forms the basis for
exploration ventures. Probability of geological success (Pg) is the
probability of finding measurable hydrocarbons. It is based on the
technical assessment of geologic variables, i.e., trap reservoir,
source and timing of migration. A further business overlay is
defined for Mobile volumes that involve future movement in
addition to the current classification. These define the inventory in
terms of the timing for the P2 P6 volumes to become proved,
developed, producing hydrocarbons, i.e. to the monetised. The
categories are transferable and static. The transferable volumes
are sub-divided into planned and unplanned. The static volumes
while they are discovered, recoverable hydrocarbons are not
expected to be monetised in the next ten years.
Mobil utilises a unique methodology for reserve and resource
evaluation. The approach integrates both deterministic and
probabilistic methods to evaluate and establish the full
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hydrocarbon potential of fields/prospects. Both methods have valid

justification for utilisation. When used jointly, they can provide
even greater insight into the recoverable hydrocarbon volumes and
the probability of recovering those volumes (Nanga, et al., 1999).
Notes
In India, out of total land area of 3.2 million km, sedimentary

basins account for 1.78 million km within the 200 m isobaths line,
of which 1.46 million km is on onshore and the remaining is on
offshore. These basins are classified into four categories:
UP
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48
Category I: Petroliferous basins with proven production of

hydrocarbons namely, Cambay basin, Upper Assam Shelf, Mumbai
Offshore basin, and the Cauvery, Krishna and Godavari basins.
Category II: Basins with known occurrences of hydrocarbons but
where no commercial production on a significant scale has been
started, e.g. Rajasthan, Kutch, Andaman, West Bengal, Himalayan
Foothills, Ganga Valley, Tripura and Nagaland-fold belt.
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Category III: Basins where significant amount of hydrocarbons

have not been found. However, on general geological grounds,
these basins are considered prospective, e.g. Kerala, Konkan and
Mahanadi.
(c)
Category IV: Basins which are prospective on the basis of analogy

with similar hydrocarbon-producing basins in the world. These
include the Vindhya basin, Deccan Syneclise, Narmada, Bastar
and Chhattisgarh.
India has an estimated sedimentary area of 3.14 million sq. km,
comprising 26 sedimentary basins. Prior to the adoption of the
New Exploration Licencing Policy (NELP), only 11 per cent of
India's sedimentary basin was under exploration. Since
operationalisation of the NELP in 1999, the Government of India
has awarded 47.3 per cent of it for exploration. So far 87 oil and
gas discoveries have been made by private/joint venture (JV)
companies in 26 blocks and more than 640 MMT of oil-equivalent
hydrocarbon reserves have been added. As on 1 October 2010,
investment made by Indian and foreign companies was of the order
of US $ 14.8 billion, of which, US $ 7.5 billion was in hydrocarbon
exploration and US$ 7.3 billion in development of discoveries.
As per the statistics published Indias share of reserves is thus less
than 0.5 per cent even though its share of world oil consumption is
about 2.8 per cent. ONGC and OIL were known as good finders.
49
However, as they faced the challenge of exploring more difficult

areas and the deep waters the technology gap has become critical.
Notes
According to some experts this gap between the best globally

available technology and that used by ONGC is serious and could
grow larger due to the dilatory procurement methods (Das Gupta,
1997). At the beginning of the X Plan period, the oil and gas sector
was deregulated with the dismantling of Administered Pricing
Mechanism (APM). Earlier, the exploration and development
activities were dominated by the NOCs, mainly ONGC and OIL.
However, Private/JV companies were provided an equal
opportunity to get into E&P business after implementation of
NELP.
___________________
The estimated reserves of crude oil and natural gas in India as on

31.03.2010 stood at 1206 million metric tons (MMT) and 1453
billion cubic metres (BCM), respectively (Table 3.2). Geographical
distribution of Crude oil indicates that the maximum reserves are
in the Western Offshore (46%) followed by Assam (23%), whereas
the maximum reserves of Natural Gas are in the Western Offshore
(40%) followed by Eastern offshore (29%). The increase in the
estimated reserve of crude oil during 2009-10 was 56%, with
Tamilnadu accounting for the highest increase of 85.3% followed
by Gujarat (73.3%). In case of Natural Gas, the increase in the
estimated reserves over the last year was 30%. The maximum
contribution to this increase has been from Tamilnadu (139%),
followed by Andhra Pradesh (75%) (Table 3.3)
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Table 3.2: Statewise Estimated Reserves@ of Crude Oil and Natural Gas
in India as on in 31.03.2009 and 31.03.2010
(c)
(In billion tonnes)
CBM: Coal Bed Methane

@ Proved and indicated Balance Recoverable Reserves.
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1.
2.
Includes JVC/Pvt. Parties for Crude Oil and includes West Bengal for Natural Gas
Includes Bombay High offshore, Rajasthan and JVC for Crude Oil and Bombay High offshore,
Rajasthan and Madhya Pradesh (Coal Bed Methane) for Natural Gas
Source: Ministry of Petroleum & Natural Gas
Production of Crude oil and Natural Gas
Notes
During the current financial year (2010-11), actual production of

crude oil in first half (April September) of 2010-11 was 18.277
Million Metric Tons (MMT), which is 10% higher than the crude oil
production of 16.601 MMT in the corresponding period of 2009-10.
The increase in crude oil production is mainly due to increase in
production from Rajasthan and KG deepwater. The production for
natural gas [including Coal Bed Methane (CBM)] in first half of
2010-11 is 26.663 Billion Cubic Metre (BCM), which is 25% higher
than the actual production of 21.324 BCM in the corresponding
period of 2009-10. The increase in natural gas production is from
KG deepwater block.
UP
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50
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The balance recoverable crude oil and natural gas reserves in the
country are 777.6 million metric ton (MMT) and 1148.7 billion
cubic metres (BCM) respectively. New oil and gas reserves found
by Private/JV companies in Krishna Godavari deepwater and
Rajasthan are on production.
The following tables give estimates of crude oil and natural gas
production:
(c)
Table 3.3: Crude Oil Production
* Provisional
(Thousand Metric Tons)
Table 3.4: Natural Gas Production
51
(Million Cubic Metres)
Notes
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* Provisional
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Source: ONGC, OIL and DGH.
(c)
The upstream oil industry in India has achieved remarkable

breakthroughs only in the recent past. The success story revolves
round the discovery of Bombay High oilfields in the seventies
which was the turning point both for the industry and ONGC.
Because of this single discovery ONGC attained the status of one of
the giant oil companies in the world. If we glance, the figures we
notice that the growth in oil production in the country over the last
two decades has been quite satisfactory. In 1980-81 oil production
was 10.5 million tonnes out of which 5.5 million tonnes was from
onshore drilling and another 5 million tonnes was from offshore
areas. The situation changed dramatically in the last five years
with the production increasing to 30 million tonnes in 1985-86,
20.8 million tonnes of this was from the offshore wells namely
Bombay High fields of ONGC. Production reached peak level
around 34.5 million tonnes in 1995-96. The oil industry made rapid
strides in the early 1980s, but, subsequently failed to keep pace
due to inadequate investments on the one hand and rising demand
on the other. The domestic demand for petroleum production has
Petro Economics
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Domestic production has shown a healthy growth of 9 per cent over

the last fifteen years but again bulk of this growth came during
1980s. The production has been more or less stagnant at around
33 MMT for the last five years. Bombay High is by far the largest
of this lot and accounts for as much as 65 per cent of the total
production in the country. Other areas that have contributed to
this production are Gujarat, Assam, Arunachal Pradesh segment
and Tamilnadu. The private-sector contributed about 12% during
2002-03.
Based on the above analysis the demand of petroleum products
have been estimated in two scenarios Base Case and Upper Case.
In Base Case, the consumption in the terminal year of the XI Plan,
i.e. in 2011-12 is estimated at 132 MMT indicating a growth of 2.9
per cent per annum. The year wise details are given below.
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been growing at 8 per cent per annum over the last few years. The
demand for 1998-99 was at around 91 MMT as compared with
84 MMT in 1997-98. The demand has gone up to 104 MMT in
2002-03.
Notes
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52
Table 3.5: Year-wise Demand of Petroleum Products for

XI Plan Base Case (MMT)
X Plan
XI Plan
2006-07
2007-08
2008-09
2009-10
201011
201112
CARG
114.034
116.089
119.098
121.987
126.973
131.767
2.93%
In the Upper case, the demand is estimated to grow by 4.45 per

cent to 142 MMT. The demand under upper case scenario is as
follows:
Table 3.6: Year-wise Demand of Petroleum Products for
XI Plan Upper Case (MMT)
(c)
End of X
Plan
End of XI Plan
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
CAR
G
114.034
117.555
121.951
127.789
136.593
141.793
4.45%
The demand supply gap in oil industry has been rising for the last
one or more decades. The demand for petro-products has been
higher than the crude production. As a result the self-reliance
which was 50 per cent in 1991-92 declined to 39 per cent in 1996-
CC
EU
PE
S
97 and declined further to 31 per cent in 2002-03. Domestic

production has been stagnant since 1994-95 at around 33 million
tonnes while imports have risen from 27 million tonne in 1994-95
to 40 million tonnes in 1998-99 and 82 million next year. The main
reason for this situation is that there have been no major oil finds
since the discovery of the Neelam oil fields in the late 1980s.
According to the September 1996, R group report, India is an
under-explored country. While Indias sedimentary basins are
estimated to contain hydrocarbon resources equivalent to 29
million tonnes of oil, the National Oil Companies have so far
succeeded in finding oil in only six of Indias 27 sedimentary basins
and have discovered six billion tonnes around 29 per cent of the
oil and oil equivalent suspected to exist. Around 1.6 million square
kilometre of sedimentary basin still remain either poorly explored
or whose exploration initiated.
The demand of petroleum products considered is as given by SubGroup on demand estimation. The total demand for the XI and XII
Plan period is as given below.
Table 3.7: Demand of Petroleum Products (MMT)
Case
2007-08
2008-09
2009-10
2010-11
2011-12
2016-17
Base
116.1
119.1
122.0
127.0
131.8
160.2
Upper
117.6
122.0
127.8
136.6
141.8
179.3
For estimating the petroleum product availability, the data

obtained from various refineries have been taken into
consideration. Product availability estimated (including nonrefinery sources1) is as under:
Table 3.8: Petroleum Product availability during XI Plan MMT
Product
2007-08
2008-09
2009-10
2010-11
2011-12
9.1
9.7
9.3
11.0
12.8
15.0
14.8
15.0
17.5
18.8
MS
13.7
17.5
27.7
28.9
30.5
ATF
6.8
7.4
9.3
10.6
11.0
SKO
10.6
11.3
10.7
10.3
11.3
LPG
(c)
Naphtha
About 4.2 MMT is expected from non-refinery sources, of which about 2 MMT is LPG.
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Petro Economics
Notes
___________________
___________________
Projections indicate that domestic production of petroleum

products would exceed the upper case demand of the XII Plan by
end of XI plan itself by a large margin. By the end of XII Plan
production of petroleum products is slated to increase to 286 MMT.
54
___________________
1.
Major thrust on exploration in the new frontier areas like deep

water and other geologically and logistically difficult areas and
also ensuring continuation of exploration in the existing and
unexplored areas.
2.
Development of new fields and additional development of the

existing fields through implementation of Improved Oil
Recovery (IOR) and Enhanced Oil Recovery (EOR) projects in
major fields and medium size fields. These projects are under
implementation in fields of ONGC & OIL.
3.
Implementation of specialised technologies like extended reach

drilling, horizontal drilling and drain-hole drilling.
___________________
___________________
___________________
___________________
CC
E-
___________________
UP
E
___________________
Several measures were taken to enhance hydrocarbon reserves and

increase production. These are as follows:
___________________
4.
Obtaining the services of international experts, whenever

considered necessary.
5.
Maintenance of reservoir health through work over operations

and pressure maintenance methods.
6.
Better reservoir delineation through 3D seismic survey of old

fields.
7.
Optimisation and redistribution of water injection.
8.
Infill drilling in the upswept areas of the reservoirs.
(c)
Consequent upon liberalisation in petroleum sector, Government of

India is encouraging participation of foreign and Indian companies
in the exploration and development activities to supplement the
efforts of NOCs to narrow the gap between supply and demand. A
number of contracts have been awarded to both foreign and Indian
companies for
Strategy of 11th Plan (2007-12)

During the 11th Plan, the strategy identified for E&P activities
includes:
z
Level playing field to public sector and private sector players

including foreign players and provision of comparable
incentives to all E&P companies.
Pursue extensive exploration in non-producing and frontier

basins for knowledge building and new discoveries, including
55
Notes
___________________
Establishment of a Knowledge Hub in India.
___________________
Strengthening of DGH and upstream oil and gas regulations.
UP
E
in deep-sea offshore areas.
___________________
___________________
Convergence of nomination regime into NELP Regime.
Faster development of oil and gas discoveries.
___________________
Development of isolated and marginal fields and creation of
___________________
surface facilities.
z
Provide
infrastructure
___________________
___________________
status
to
E&P
companies
and
competitive fiscal terms to attract significant investments in

the sector.
Optimise recovery from ageing oil and gas fields.
Continue to offer more CBM exploration blocks.
100 per cent speculative survey to carve out exploration blocks.
Efforts to get methane gas through in-situ gasification of coal.
Continuation of R&D efforts to exploit the potential of gas
CC
E-
hydrates.
z
R&D efforts and feasibility to understand the potential of oil

shale.
Availability of trained manpower and expertise in E&P sector.
Continue technology acquisition and absorption along with

development of indigenous R&D and to ensure adequacy of
finances
for
R&D
required
for
building
knowledge
infrastructure.
z
Make E&P operations compatible with the environment and
(c)
reduce discharges and emissions.

z
Continue to acquire acreages abroad for exploration as well as

production.
___________________
___________________
Petro Economics
Exploration programme has been given as under:
PE
S
Notes
Table 3.9: Summary of XI Plan Exploration Programme
___________________
___________________
Activity
Unit
___________________
Seismic surveys 2D
Km
___________________
Seismic surveys 3D
Sq. Km
___________________
Exploratory drilling
(metre age)
Km
Exploratory wells
Nos.
Reserves accretion
IIH
MMTOE
___________________
___________________
ONGC
Private/
JV
Oil
Total
54,359
10,865
63,200
128,424
76,398
6,350
67,825
150,573
1,817.83
572.95
832
3,222.78
651
149
300
1,100
1,000.7
153.74
975
2,129.44
___________________
Based on the established reserves, present status of different

fields, input implementation schedules and health of reservoirs,
the crude oil and gas production profiles for XI Plan is prepared as
given below:
CC
EU
___________________
___________________
Table 3.10: Proposed Crude Oil and Natural Gas production

during XI Plan
Crude Oil Production (MMT)
2007-08
ONGC
2008-09
2009-10
2010-11
2011-12
Total
27.16
28.00
29.00
28.53
27.37
140.06
3.50
3.55
3.73
3.91
4.30
18.99
Pvt./JV
10.57
10.78
9.76
8.75
7.85
47.71
Total
41.23
42.33
42.49
41.19
39.51
206.76
OIL
Natural Gas Production (BCM)
2007-08
ONGC
2008-09
2009-10
2010-11
2011-12
Total
22.10
22.53
22.77
22.99
22.00
112.39
OIL
3.13
3.21
3.25
3.28
3.56
16.43
Pvt./JV
8.55
22.55
22.11
21.47
21.07
95.74
33.78
48.29
48.13
47.73
46.63
224.56
Total
(c)
Crude oil production of 206.76 MMT during XI Plan period is about

23 per cent higher than the X Plan likely achievement of 167.70
MMT. The increase in crude oil production will be mainly due to
contribution by private company, Cairn Energy Pty Ltd., which
will produce about 5-6 MMT per annum from Rajasthan.
Natural gas production during XI Plan will be about 224.56 BCM,
which is about 41 per cent increase as against likely natural gas
production of about 158.79 BCM in X Plan period. This increase in
gas production is mainly from K-G basin production of 40
MMSCMD by RIL. The gas production may further increase by
57
development of GSPC discoveries and other RILs discoveries in

KG basin.
Notes
___________________
A number of problems exist in the present set up that had

prompted the requirement of a change in policy and introduction of
NELP. The primary ones among them are:
___________________
UP
E
Problems and Areas of Concern
A stagnant oil production level: Domestic production has

not seen any significant improvements in the decade.
A rapidly rising oil import bill: The domestic production

has not kept pace with the domestic demand for petroproducts.
As a result, oil import bill has been constantly rising leading to
heavy forex outflows.
A falling rate of exploration and discovery.
CC
E-
The exploration and discovery achievements have been slipping in

the last few years. The reserve-accretion has been quite low and
dropping over the last few years:
z
A vast unexplored terrain,
Large investment requirements,
A lack of interest among the private sector and
Energy Security.
The government policy of restricting bids to a few blocks and a few

small and marginal fields has resulted in the lack of interest.
Check Your Progress
Fill in the blanks:
1. are quantities of hydrocarbons in known

reservoirs that are estimated to be recoverable in future
years under existing economic and operating conditions.
(c)
2. The average recovery factor in India is about ..

per cent of the initial oil in-place reserves.
Summary
We have ONGC and OIL as the two giant

engaged in exploration and production
predominant share with about 90 per
respectively. Since 1981-82 there has
National Oil Companies

of crude oil and have
cent and 10 per cent
been massive increase
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Petro Economics
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
in drilling activities in the offshore areas representing a

rationalisation of exploratory activities in line with prognostication
of reserves. But, the current reserve accretion continues to be low
and is a major concern for the Government.
Notes
ONGC and OIL were known as good finders. However, as they

faced the challenge of exploring more difficult areas and the deep
water, the technology gap has become critical. According to some
experts this gap between the best globally available technology and
that used by ONGC is serious.
UP
E
58
The average recovery factor in India is about 28 per cent of the

initial oil in-place reserves. This is low by international standards.
Improvement in recovery factor would yield additional oil and gas
without any corresponding additionality in the reserves accretion.
Several steps are required to be taken up for enhancing the
reserves accretion.
CC
E-
The demand-supply gap in oil sector has been rising for the last
one or more decades. The demand for petroproducts has been
higher than the crude production. As a result the self-reliance has
declined to 31 per cent. Domestic production has been stagnant.
The exploration and discovery achievements have been slipping in
the last few years. Most production fields are either on the
declining phase or are facing technical problems. ONGCs onshore
production has remained steady in the last eight years.
Lesson End Activity
Research on the impact of globalisation on Indian oil sector.
Keywords
(c)
Development Drilling: It is the phase in which oil which has

been explored can be commercially extracted.
Crude Oil Reserves: It provides a good framework within which
industry can further evolve a set of industry accepted practices
for the understanding of hydrocarbon assets.

1. Discuss the nature of Indian oil industry.
2. What are the principle activities involved in E and P?
4. What are the tools of measuring exploration efficiency?
59
3. Write a note on exploration and development in Ninth Plan.
Notes
___________________
6. Write a note on crude oil reserves in India.
___________________
UP
E
5. Discuss the history of oil exploration in India.

7. Discuss the trends in production of crude oil and gas in India.
___________________
___________________
Further Readings
___________________
___________________
Books
Natural Gas in India by IEA
___________________

___________________
KPMG, Mumbai.
___________________
CC
E-

Web Readings
http://www.eia.gov
(c)
http://www.bp.com
___________________
Petro Economics
60
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
(c)
CC
E-
___________________
UP
E
___________________
UNIT 4: New Exploration and Licencing Policy
Unit 4
61
Notes
___________________
___________________
UP
E
New Exploration and Licencing

Policy
___________________
___________________
Objectives
topics:
\
NELP Terms Beneficial to National Oil Companies
___________________
___________________
___________________
___________________
___________________
Introduction
(c)
CC
E-
The oil industry in India is considered the wheel of the economy as

it is inevitably linked with all others sectors. It is common
knowledge that any hike in prices of petroproducts and petrol has
pushed up the rate of inflation. Oil is important for industry,
infrastructure and the economy as a whole. The growing demandsupply gap in oil sector has been exerting pressure on the
government to develop the strategies for further exploration in
hydrocarbon sector. Success in oil exploration in our country has
come in different phases. Bombay High was the brilliant discovery
in Western offshore fields but, since then no appreciable results
were found. By and large, exploration has been in the hands of
ONGC and OIL. These two have concentrated their business in
areas of high prospects near producing fields. But, the exploration
and production is a very high risk and capital intensive business.
The national oil companies do not have sufficient amount of risk
capital required to invest in exploration business. It is precisely in
this perspective that the Government of India has embarked upon
the process of inviting the private investment into the oil sector.
The remarkable development in this context has been the
promulgation of New Exploration Licencing Policy (NELP) in the
1997-98 fiscal. With it, the Government hopes to eliminate the
countrys demand-supply gap and build up pressure on import of
crude and petroleum products.
So far, attempts to induct the private sector have borne, at best,
mixed results. There have been nine bidding rounds for awarding
___________________
Petro Economics
Research
on the reason for
___________________
the development of New
___________________
Exploration
Licencing Policy
(NELP).
___________________
___________________
___________________
___________________
___________________
___________________
___________________
India is endowed with large sedimentary basins that can be tapped

for oil and natural gas. Out of 28 billion tonnes of hydrocarbon
resources, only about 6.8 billion tonnes have been converted to
reserves. Based on recent analysis carried out by Directorate
General of Hydrocarbons (DGH) and analogy with other producing
sedimentary areas of the world it is felt that, so far, in India, we
have upgraded less than half of possible production reserves
(Chandra, 1999). India is in a position to produce/establish at least
as much more oil and gas reserves as has been done so far without
any major success.
(c)
CC
E-
___________________
blocks for exploration. They have not attracted foreign direct

investment in a desired manner. The very expectation that the
prospective investors should participate in biddings seems to have
not been achieved. Indian oilfields are perceived to be of low
prospectivity and also, there is poor coverage of seismic data.
There is, therefore, a case for revising the NELP in the interest of
getting a larger number of international majors involved even if, in
the process, a larger proportion of the resultant crude production
has to be shared with the companies concerned.
Notes
Activity
UP
E
62
Studies reveal that major parts of the sedimentary areas of the

country are still unexplored. As per the data of the total 3.14
million square kilometre of sedimentary areas about 1.02 million
square kilometre, i.e. 34 per cent remains totally unexplored and
another 1.58 million square kilometre, i.e. 50.32 per cent remains
inadequate or poorly explored. Deep water areas also remain
almost completely unexplored. Deep water potential of Indian
waters is estimated to be in the range of 5 to 9 billion tonnes of
hydrocarbon resources. DGH has recently carried out satellite
gravity, 2D seismic and gravity, magnetic surveys of the Eastern
offshore and Andaman seas and these deep water areas have now
been opened up for exploration. It appears that resources of deep
waters are likely to be several times higher than what was
anticipated earlier. Along the East Coast alone, about 30 new
geological plays/structures have been mapped with limited data
collected by DGH. Structures mapped fall under large to medium
size category and average size is close to 500 sq. km. Several
structures exhibit direct seismic indicators for the presence of gas
deposits. Latest interpretations carried out by DGH suggest that
63
some of these prolific oil and gas producing fields are on the west
coast of Africa, deep water areas of Gabon, Nigeria and Campos
basin in Brazil. Several large international companies have shown
interest in deep water areas surveyed by DGH (Chandra, 2002).
Notes
___________________
Salient Features of NELP
UP
E
___________________
In order to increase the quantum of investments into this sector

and to achieve a greater level of self-sufficiency in Oil Production
the government recently announced the NELP. This is now
expected to offer a level playing field to all the companies entering
this sector and thus would address the major grouse of many of the
private sector companies. The policy is expected to be set into
motion and in the first phase nine blocks in the Western, Eastern
and the Andaman Offshore areas are being offered for open
bidding. The national oil companies too will have to compete in this
process if they want to carry out operations in these areas.
The salient features of NELP are elaborated below:
There will be no mandatory state participation through

ONGC/OIL nor will there be any carried interest of the state.
ONGC and OIL to compete for obtaining the petroleum

exploration licences on competitive basis instead of the
existing system of granting them PELs on nomination basis.
At the same time, ONGC and OIL will also get some fiscal and
contract terms available to private companies.
Open availability of exploration acreages to provide a

continuous window of opportunities to oil companies. The
acreages will be demarcated on a grid system and pending
preparation of the grid, blocks will be carved out for offer.
Companies will be able to choose and propose acreages.
Freedom to the contractors for marketing of crude oil and gas

in the domestic market.
Royalty payments for crude oil at the rate of 12.5% for the
inland areas and 10% for offshore areas and 10% royalty on
natural gas both for inland and offshore; half of the royalty
from the offshore area will be credited to a hydrocarbon
development fund to promote and fund exploration related
activities such as acquisition of geological data on poorly
explored basins, promotion of investment opportunities in the
upstream sector, institution building, etc.
(c)
CC
E-
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Petro Economics
To encourage exploration in deep water and frontier areas

royalty will be changed at half the prevailing rate for normal
offshore area for deep water offshore areas beyond 400m
bathymetry for the first 7 years after commencement of
commercial production.
Cess which was earlier levied on crude production has been

abolished for the blocks offered under NELP and there will be
no signature, discovery and production bonuses.
Companies will be exempted from payments of import duty on

the goods imported for petroleum operations.
A seven-year tax-holiday from the date of commencement of

commercial production available for north-east region.
Contractor will be provided fiscal stability during the entire

period of contracts.
A separate petroleum tax code will be put in place to facilitate

investors.
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
CC
E-
___________________
Notes
UP
E
64
A revised model contract will be prepared and will be made

available to the companies.
(c)
The New Exploration Licencing Policy:
National oil companies to compete with private sector for

licences.
Exploration blocks to be allotted on open acreage system.
Freedom to choose and propose with companies.
No compulsory state participation or carried interest.
Freedom to contractors to market crude and gas discovered.
No payments of signature, discovery or production.
Royalty: 12.5% for inland, 10% for offshore, 5% for deep

offshore for first 7 years.
Infrastructure status to E and P sector.
Tax holiday for 7 years for production in North East Regions.
International prices to national oil companies under NELP.
Cess on crude oil produced under NELP abolished.
As on 01.10.2010, investments made by Indian and foreign

companies was of the order of US$ 14.8 billion. At present, after
65
concluding eight rounds of NELP, 235 production sharing contracts

have been signed. The number of NELP blocks awarded in
previous eight rounds is given below:
Notes
___________________
UP
E
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Offering of Blocks under NELP-IX
CC
E-
With a view to bring more area under exploration, the Ninth bid
round of New Exploration Licencing Policy (NELP-IX) has been
launched on 15th October, 2010 at Delhi and first road-show was
held at Mumbai on 18.10.2010. Under NELP-IX, 34 exploration
blocks including 8 deepwater blocks, 7 shallow water blocks, 11
inland blocks and 8 Type-S on-land blocks have been offered.
Inland blocks are spread over six states namely, Assam (2),
Gujarat (11), Madhya Pradesh (2), Rajasthan (2), Tripura (1) and
Uttar Pradesh (1).
The NELP terms are widely regarded as the best in the world for
attracting greater investment in the upstream oil and gas sector.
The NELP terms are far superior to earlier terms offered by the
government as can be seen from the following comparative Table.
The main difference between earlier rounds of bidding for
exploration blocks and NELP are shown in Table 4.1.
Table 4.1: New Exploration Licencing Policy
Terms
Companies were exempted

from payment of royalty
and cess. ONGC/OIL to
bear Royalty/Cess on behalf
of private companies as per
the fiscal package approved
by government.
(c)
Royalty/Cess
Payment
Earlier Rounds
NELP
Companies to bear
royalty, cess has been
exempted.
Contd
Petro Economics
Notes
Participating
Interest by NOCs
0-40% participating interest

NOCs at their option
(except for JVEP, where
NOCs had to take 25-40%
participating interest from
beginning of contract.
Carried interest of
NOCs
NOCs had 30% carried

interest (except for JVEP,
where they have working
interest from the
beginning), which is
exercisable on commercial
discovery.
___________________
___________________
___________________
___________________
___________________
___________________
___________________
NELP Terms Beneficial to National Oil Companies

z
NOCs are exempted from payment of cess under NELP (a

concession of almost US$ 3.0/bbl).
The maximum royalty rate under NELP is 12.5% of

international price as against 20% of the administered price in
non-NELP areas.
Incentive for deep water exploration with only half of the

royalty payable in the initial seven years from the
commencement of commercial production.
___________________
CC
E-
___________________
No carried interest by
NOCs.
UP
E
___________________
No participation by
NOCs as Government
nominee.
66
Exemption from customs duty.
NOCs to get international price on their production of oil and

gas.
Seven years tax holidays from the date of commencement of

commercial production.
Liberal depreciation provision will make companies eligible for

further tax adjustments.
Contribution made to site restoration fund scheme is

deductible in the year of contribution as against in the year of
Site Restoration as per the earlier provision of the Income Tax.
(c)
NELP Terms Beneficial to Private Investors

All the above benefits are applicable to private investors also. In
addition, following benefits will also apply:
z
Carried interests of NOCs at 30% have been abolished.
Companies are free to have 100% participating interest as

earlier upto 40% participating interest was to be held by
A true level playing field established as a block reserved for

NOCs.
Notes
___________________
___________________
UP
E
India imported 69% of her crude oil requirement of 115 million

tonnes in the year 2002-03; 88.7 million tonnes of crude oil and
products were imported at a cost of ` 84,400 crore (US$ 18 billion).
To reduce the dependence on import, the Government has given
impetus to exploration in the country and discovery of more oil and
gas. Ninety-one blocks have been awarded under the New
Exploration Licencing Policy (NELP) in the last four years in
comparison to 22 blocks in the previous 10 years.
67
NOCs. This will also provide operational flexibility to the

companies in selecting partners of their choice.
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Check Your Progress

Fill in the blanks:
CC
E-
1. The terms are widely regarded as

the best in the world for attracting greater investment
in the upstream oil and gas sector.
2. To reduce the dependence on import, the Government

has given impetus to exploration in the country and
discovery of more . and ...
Summary
(c)
The industry witness a distinct transformation in the near future

and this calls for massive investment with long gestation gaps. The
Government is encouraging private capital both domestic and
foreign and for this, procedures are being simplified and more
fiscal incentives are given under the NELP. The NELP terms are
widely regarded as the best in the world for attracting greater
investment in the upstream oil and gas sector. These terms are
beneficial both to the National Oil Companies as well as to the
Private investors. However, earlier rounds of bids failed in the
sense that they were not able to make the activity commercially as
attractive as elsewhere especially for foreign oil companies. Recent
closure of the first round of bids under NELP has been important
due to two reasons. Firstly, it marks the consolidated entry of the
private sector both domestic and foreign into this area and,
secondly, the policy has still a long way to go before it really
becomes attractive for world oil majors to explore in India.
___________________
68
Lesson End Activity
Notes
___________________
Petro Economics
Research on the benefits of NELP to the private investors and the

national oil companies.
___________________
Keywords
___________________
New Exploration Licencing Policy (NELP): It provide an equal

platform to both Public and Private sector companies in exploration
and production of hydrocarbons with Directorate General of
Hydrocarbons (DGH) as a nodal agency for its implementation.
___________________
___________________
___________________
___________________
___________________
___________________
UP
E
___________________
Speculative Potential: Speculative potential is the quantity of

hydrocarbons located in unproved traps, in undrilled provinces or
deeper reservoirs underlying productive fields where geological
conditions are believed to be favourable for the accumulation of
hydrocarbons.
CC
E-
1. Discuss the nature and scope of New Exploration and Licencing

Policy.
2. Discuss the NELP terms beneficial to private investors.
3. What are the salient features of NELP?
Further Readings
Books
Natural Gas in India by IEA.

KPMG, Mumbai.
(c)

Web Readings
http://pib.nic.in/feature/feyr2001/fsep2001/f110920011.html
http://articles.economictimes.indiatimes.com/keyword/newexploration-licencing-policy
http://articles.economictimes.indiatimes.com/2013-0401/news/38189589_1_blocks-nelp-x-nelp-vii
Unit 5
Case Study
PE
S
UNIT 5: Case Study
Notes
___________________
___________________
___________________
Objectives
___________________
After analysing this case, the student will have an appreciation of the
concept of topics studied in this Block.
___________________
___________________
Case Study: Whether drilling be allowed in ANWR?
___________________
CC
EU
The dramatic fluctuations in crude oil prices over the past two
years have sparked renewed interest in U.S. oil exploration and
development. Some politicians and commentators argue that an
increase in exploration could have a marked impact on oil prices.
Others say the price impact would be small.
The policy debate currently focusses on allowing drilling in a
small part of Alaska's Arctic National Wildlife Refuge (ANWR).
Drilling has been banned in ANWR due to various environmental
concerns.
The ANWR is a national wildlife refuge in north-eastern Alaska,

United States. It consists of 19,286,722 acres (78,050.59 km) in
the Alaska North Slope region. The coastal plain in the ANWR
(often referred to as the "1002" area) is jointly owned by the
federal government, the State of Alaska and Native American
corporations [Energy Information Administration (EIA), 2008a].
This region is thought to contain a relatively large amount of oil
that would be relatively cheap to develop. Environmentalists and
others have opposed drilling in this area because it is a pristine
(but inhabited) area that they believe is ecologically unique. In
particular, they are concerned that a spill or pipeline leak would
endanger a key wildlife habitat.
History
(c)
The Trans-Alaska pipeline system got virtually completed in

1977. The Alaska National Interest Lands Conservation Act,
signed by President Jimmy Carter in December 1980, created
more than 104,000,000 acres (420,000 km) of national parks and
wilderness areas from federal holdings in that state and also
allowed drilling in ANWR but not without prior approval from
Congress. Section 1002 of the act allowed the evaluation of
potential petroleum reserves in the 1002 area from surface
Contd
___________________
___________________
___________________
Petro Economics
___________________
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geological studies and seismic exploration surveys. However, no

exploratory drilling was allowed.
Notes
In November 1986, a draft report by the United States Fish and

Wildlife Service recommended that oil and gas development be
allowed in all of the 1002 Area of ANWR. The report argued
that the oil and gas potentials of the coastal plain were needed for
the country's economy and national security. Conservatives,
however, expressed concerns that oil operations would harm the
ecological systems that support wildlife.
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No major developments took place within the next decade. In

1996 the Republican-majority House and Senate voted in favour
of allowing drilling in ANWR, but this legislation was vetoed and
turned down by President Bill Clinton.
In 2000, President George W. Bush pushed to perform exploratory
drilling for crude oil and natural gas in and around the refuge
after the USGS estimation of reserves in 1997. The House of
Representatives voted in mid-2000 to allow drilling. In April 2002
the Senate rejected it.
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On June 18, 2008 President George W. Bush forced Congress to

reverse the ban on offshore drilling in the ANWR in addition to
approving the extraction of oil from shale on federal lands.
President Bush cited the growing energy crisis as a major factor
for reversing the presidential executive order issued by President
George H.W. Bush in 1990, which banned coastal oil exploration
and oil and gas leasing on most of the outer continental shelf.
Estimated Oil Reserves
(c)
Technically recoverable oil within the ANWR 1002 area

(excluding State and Native areas), as estimated but the United
States Geological Survey in 1998, lies between 4.3 and 11.8
billion barrel of oil (BBO) (95% and 5% certainties respectively),
with a mean value of 7.7 BBO.
As estimated by USGS, this quantity of technically recoverable oil
is not distributed uniformly. The un-deformed area is estimated
to contain between 3.4 and 10.2 BBO (95% and 5% certainties
respectively), with a mean of 6.4 BBO. The deformed is estimated
to contain between 0 and 3.2 BBO (95% and 5% certainties
respectively), with a mean of 1.2 BBO. The oil is expected to occur
in a number of accumulations rather than a single large
accumulation.
Commercial viability of a discovery depends on factors like oil
price, accumulation size, recovery technology, and proximity to
existing infrastructure (pipelines, markets, etc.).
Contd
UNIT 5: Case Study
71
Notes
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Economic analysis of oil reserves of the 1002 area includes the

costs of finding, developing, producing, and transporting oil to
market (lower 48 West Coast) based on a 12 per cent after-tax
return on investment, all calculated in constant 1996 dollars.
Estimates of economically recoverable oil, expressed by
probability curves, shows a directly proportionate relation
between quantity of oil and its price. It was found that at a
market price of $24/barrel, there is a 95% probability of at least
2.0 BB of economically recoverable oil and a 5% probability of at
least 9.4 BB with a mean or expected value of 5.2 BB. At prices
less than $13/barrel, no commercial oil is estimated, but at a price
of $30/barrel, between 3 and 10.4 BB are estimated.
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It is interesting to note that the best estimate of 7.7 BBO in

ANWR is very close to domestic consumption in 2005 in the U.S.
But still the recovery of the first barrel of crude oil would take
many years. In 2025, it is forecasted that 0.9 million barrels of oil
per day (MBD) would be recovered and the domestic production is
forecasted to be 4.6 MBD (EIA 2004). Thus, at its high, ANWR is
forecasted to account for 20% of domestic production. Finally,
total supply in 2025, including imports, is forecasted to be 28.3
MBD, so ANWR at its peak is predicted to account for
approximately 3.2 per cent of domestic oil consumption.
Benefits of Drilling
According to Hahn and Passell (2010), net benefits are estimated

for a price scenario of $50/barrel. It is estimated that at
$ 50/barrel, 7 billion barrels are economically recoverable. The
benefits include the revenue generated, price-reduction benefit
and the reduced-disruption-cost benefit.
The per barrel price-reduction benefit is generated by reduced
world demand for imported oil. It is calculated as the reduction
in the import bill divided by the decline in the number of barrels
of oil imported by the U.S. Leiby (2007) estimated it to be
$ 10/barrel. The reduced-disruption-cost associated with reducing
oil imports is estimated to be $5/barrel.
(c)
These values are applied to the net decrease in total U.S. imports,
which is equal to the increase in U.S. oil production less the
increase in U.S. oil consumption caused by the lower price.
Seven categories of costs are considered. These are:
1. Direct costs that producers incur in extracting the oil and

bringing it to the market. Estimated average direct costs:
$19/barrel.
Contd
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3. Cost of valuing a resource but never intending to use it or

Non-use Value. It is estimated roughly to be $11 billion
(Carson et al. 2003).
4. Global air pollution or greenhouse gas damage. It is assigned
a value 0 as share of ANWR drillings to the global air
pollution is negligible.
5. Local air pollution. It is estimated to be $ 22 billion (Parry

2005).
6. Traffic congestion. It is estimated to be $ 18 billion (Parry

2005).
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2. Cost of not being able to use the affected resource for other
purposes if drilling occurred or Use Value. Kotchen and
Burger (2007) estimate it to be 0/barrel.
PE
S
Notes
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7. Traffic accidents. It is estimated to be $ 23 billion (Parry

2005).
Thus, Total Benefit= $455 billion.
Total Costs= $203 billion.
Net Benefit= $252 billion.
Under the current tax policy, this would generate social benefits
as industry rents of $90 billion, state of Alaska tax revenues of
$36 billion, and federal tax revenues of $125 billion.
Challenges to Drilling
(c)
Drilling in ANWR would lead to several environmental concerns.

Potential adverse effects on the environment would result from
two principal sources: transportation as part of seismic analyses,
and infrastructure for extracting and transporting oil. The US
Fish and Wildlife Service (2001) reports that drilling in ANWR
will have major effects on Porcupine caribou herd and musk
oxen as well as moderate effects on wolves, polar bears, seabirds
and coastal fish. Aside from direct effects on animal populations,
oil spills are a serious concern.
Finally, another environmental concern that is usually debated is
that ANWR oil will promote air-pollution and greenhouse-gas
emissions. The argument is that oil consumption will increase,
causing increased emissions with adverse effects on
environmental quality, human health, and climate change.
To allow drilling in ANWR, the most common technique is
contingent valuation, which asks people willingness to pay (WTP)
or willingness to accept (WTA) for a proposed policy or change in
environmental quality. While it is natural to think about
Contd
UNIT 5: Case Study
Notes
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In order to calculate the minimum amount that the individuals

will be willing to accept to allow drilling, i.e. breakeven WTA, the
relevant population of the US aged 18 or older in 2005 is
considered, which the US Census estimates as 220,377,406
people. Dividing our best estimate of the oil benefits as calculated
above, $252 billion, by this population yields an average WTA of
$1,141/person. These estimates represent a onetime payment. We
can, however, pay this WTA annually for 30 years, which is the
duration over which ANWR oil is expected to flow. This would
yield a present value WTA of $38 per year.
73
economic value in terms of WTP, the conceptually correct

measure for the question of drilling in ANWR is WTA.
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With the best estimate we can make the following statement: If

the average WTA for a onetime payment to permit drilling and
development in ANWR is $1,141 (or $38 per year for 30 years),
then the social costs will exactly equal the estimated benefits. If
the true WTA falls short of this estimate, then economic efficiency
recommends drilling. Alternatively, if the true WTA exceeds the
estimate, then economic efficiency does not recommend drilling.
The question, then, is whether the estimate falls within the
reasonable expectation of what US citizens would be willing to
accept in order to allow drilling in ANWR.
Questions:
1. Present your views on whether drilling be allowed or not in

the ANWR elaborately.
2. Now you are the Chief Operating Officer (COO) of the

company which has been allotted the drilling project in
ANWR, from the managements perspective suggest suitable
steps that you would take to ensure no oil spill or oil leakage
takes place. Also estimate the economics related to it.
(c)
Source: http://greatstep.in/petro.pdf
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74
Notes
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(c)
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UNIT 6: Indian Oil Refining
75
Notes
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(c)
BLOCK-II
Detailed Contents
Petro Economics
Notes
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UNIT 7: DEREGULATION (OIL AND NATURAL
GAS)___________________
z
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Introduction
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Recommendation of Sundararajan Committee
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UNIT 8: INDIAN OIL INDUSTRY MARKETING

z
Introduction
LPG Marketing by PSUs
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UNIT
6: INDIAN OIL REFINING
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z
Introduction
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z
Industry Structure
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z
Administered Pricing Mechanism (APM): Structure
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and Working
Marketing and Distribution Facilities
UNIT 9: GROWTH AND DEREGULATION OF

INDIAN OIL SECTOR
z
Introduction
Restructuring: Theoretical Concepts
ONGC and Deregulation
IOC and Deregulation
BPCL and Deregulation
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UNIT 10: CASE STUDY
(c)
76
Unit 6
77
Notes
Activity
List ___________________
down
the
Refining
Capacity Additions during
___________________
eleventh
Plan.
Objectives
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Indian Oil Refining

topics:
\
Industry Structure
Administered Pricing Mechanism (APM): Structure and Working
Issues of Royalty and Cess
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Introduction
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The process of deregulation of oil and gas sector initiated by the

Government has rejuvenated the oil and gas industry in the
country. The Public sector oil companies have hitherto stood the
country in good stead. They have imbibed astute management,
capability, technological expertise and competitiveness.
Oil is crucial for the growth of industry and infrastructure. In the

face of the growing supply-demand gap in petroleum products, oil
security in India is a matter of prime concern. Oil security implies
a regulated balance between supply and demand and affordable
prices within stable macro-economic prices. The deregulation and
restructuring of oil and gas industry in India is a sequel to the
macro-economic reforms initiated in the areas of industry, finance
and trade in 1991-92. The restructuring process of the public sector
oil companies had begun even before the announcement of the
policy reforms in November, 1997.
Industry Structure
(c)
In the last over 50 years the country witnessed a remarkable

growth in refining facilities, from one to eighteen in number,
throughput increasing from 0.25 MTPA to 110 MTPA. As of June,
2011 there are a total of 21 refineries in the country comprising 17
(seventeen) in the Public Sector, 3 (three) in the Private Sector and
1 (one) as a joint venture of BPCL & Oman Oil Company. The
country is not only self-sufficient in refining capacity for its
domestic consumption but also exports petroleum products
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Petro Economics
78
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Table 6.1: Location and Capacity of Refineries in India
___________________
substantially. The total refining capacity in the country as on

1.6.2011 stands at 193.386 MMTPA. The company-wise location
and capacity of the refineries as on 1.6.2011 is given in Table 6.1.
Notes
S.
No.
___________________
1.
Guwahati, Assam
1.00
___________________
2.
Barauni, Bihar
6.00
3.
Koyali, Vadodara,
Gujarat
13.70
4.
Haldia, West Bengal
7.50
5.
Mathura, Uttar Pradesh
8.00
6.
Digboi, Assam
0.65
7.
Panipat, Haryana
15.00
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Name of the Company
Bongaigaon, Assam
2.35
9.

Limited (HPCL)
Mumbai, Maharashtra
6.50
10.

Limited (HPCL), Visak
Visakhapatnam, Andhra
Pradesh
8.30
11.

(BPCL)
Mumbai, Maharashtra
12.00
12.

(BPCL)
Kochi, Kerala
9.50
13.

Limited (CPCL)
Manali, Tamil Nadu
10.50
14.

Limited (CPCL)
Nagapattnam, Tamil
Nadu
1.00
15.
Numaligarh Refinery Ltd. (NRL)
Numaligarh, Assam
3.00
16.
Mangalore Refinery & Petrochemicals

Ltd. (MRPL)
Mangalore, Karnataka
11.82
17.
Tatipaka Refinery (ONGC)
Tatipaka, Andhra
Pradesh
0.066
18.

& Oman Oil Company, Joint venture,
Bina
Bina, Madhya Pradesh
6.00
19.
Reliance Industries Ltd. (RIL); Private

Sector
Jamnagar, Gujarat
33.00
20.
Reliance Petroleum Limited (SEZ);

Private Sector
Jamnagar, Gujarat
27.00
21.
Essar Oil Limited (EOL); Private Sector
Jamnagar, Gujarat
Total
(c)
Capacity,
MMTPA*
8.
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Location of the
Refinery
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10.50
193.386
* Million Metric Tons per Annum
The first decade of independence (1947-57) was the establishment

of three coastal refineries by multinational oil companies operating
in India at that time, viz. Burmah Shell, Stanvac and Caltex; the
first two at Mumbai and the last at Visakhapatnam. These were
79
set up primarily to refine imported crude and raise the indigenous

throughput capacity to about 4.8 MTPA.
Notes
The second decade (1957-67), witnessed the commissioning of three

fully owned public sector oil refineries. The development of a close
co-operation between Romania and Soviet Union with India Ltd,
inter-alia, to the selling up of three refineries at Guwahati
(Assam), Barauni (Bihar) and Koyali (Gujarat) in the public sector.
These three inland refineries were set up essentially to process the
indigenous crude; Guwahati and Barauni for Assam crude and
Koyali for Gujarat crude. The refinery throughput capacity
reached about 12.7 MTPA by the end of the decade.
___________________
The next ten-year period (1967-77), witnessed establishment of two

refineries, one with equity participation from the American and
Iranian companies at Chennai, and another in the public sector at
Haldia set up by IOC with assistance from Romania and France.
The refining throughput capacity by the end of third decade had
reached about 22.9 MTPA.
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The period 1987-97 saw the commissioning of two more refineries

in the public sector. The refinery at Bongaigaon was the first
experiment in having an integrated petroleum refinery-cumpetrochemical unit. The other refinery, at Mathura, was set up in
1982 utilising Soviet assistance but, to a considerable extent,
utilising indigenously developed know-how and equipment. With
the commissioning of this refinery, the throughput capacity
reached about 35 MTPA. Major expansion of the coastal refineries
at Mumbai, Cochin, Chennai and Visakhapatnam were also
completed during this period taking the refining capacity to about
47 million tonnes per annum.
(c)
The refining capacity at the beginning of the X Plan was 114.67

MMTPA. X Plan document placed capacity in the range of 138
MMTPA (under Scenario I: Keeping in view the competitive
environment in the deregulated scenario, current low refining
margins, the slowdown of the product demand and the fact that
the companies would need to make substantial investments in
quality upgradation projects, only expansion projects under
implementation may fructify during the X Plan) to 155 MMTPA
(under Scenario II: If the product demand grows at a higher rate,
then in addition to the capacity expansion projects under
implementation, one or two new grass-root projects may also get
completed during the X Plan) by the end of the Plan. Accordingly,
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Refining Capacity Additions During Tenth Plan
Refinery sector is de-licenced and, as such, it is not possible to

correctly assess the plans of refining capacity additions in future.
The actual capacity additions would depend upon several factors
including domestic demand, duty structure which would impact
import and export possibilities, refining margin, and export
potential for the products.
The approved capacity expansion of PSU refineries alone works out

to about 22.0 MMTPA. As many of these revamps are also linked
to fuel quality upgradation programmes it is likely that these
companies would go ahead with the expansion plans. The work of
RPL expansion by 6 MMTPA is also almost complete. Considering
all expansion programmes alone, the refining capacity at the end of
Tenth plan period would be about 143.1 MMTPA. PSU companies
are actively pursuing three new grass-root projects, i.e. Bhatinda
refinery of HPCL and Paradip refinery of IOC in the public sector,
Bina refinery of BPCL in the joint sector, with an aggregate new
capacity of 24 MMTPA. Also, work on two private sector refineries,
i.e. Essar and Nagarjuna, are in progress with a planned capacity
of 16.5 MMTPA. Thus, there is likelihood of at least some of these
projects getting commissioned in Tenth Plan period. However, in
view of the likely surplus scenario, many of the projected capacity
additions may be reviewed by the concerned companies and
deferred if the project economics are not found favourable.
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increase in capacity was expected to be in the range of 23.33

MMTPA to 40.33 MMTPA.
Notes
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Compared to the above projections, the likely achievement in refinery

capacity at the end of the X Plan will be 148.97 MMTPA or an
increase of 34.30 MMTPA. Clearly, the targets have been adequately
met. The details of refinery capacity addition are as under:
Table 6.2: Refining capacity by the end of X Plan (MMT)
S.
No.
Refinery
Beginning
of X Plan
Additions
during X Plan
Beginning of XI
Plan
(c)
Public Sector
1.
IOC, Digboi
0.65
0.65
2.
IOC, Guwahati
1.00
1.00
3.
IOC, Koyali
13.70
13.70
4.
IOC, Barauni
4.20
1.80
6.00
5.
IOC, Haldia
4.60
1.40
6.00
Contd
IOC, Mathura
8.00
7.
IOC, Panipat
6.00
6.00
12.00
8.
CPCL, Chennai
6.50
3.00
9.50
___________________
9.
CPCL,
Nagapattinam
0.50
0.50
1.00
___________________
10.
BRPL,
Bongaigaon
2.35
11.
HPC, Mumbai
5.50
12.
HPC, Visakh
7.50
13.
BPC, Mumbai
6.90
14.
KRL, Kochi
7.50
15.
NRL,
Numaligarh
3.00
16.
ONGC, Tatipaka
0.08
17.
MRPL,
Mangalore
9.69
Total Public
Sector
87.67
5.10
17.80
Private Sector
RIL, Jamnagar
19.
EOL, Jamnagar
27.0
6.00
10.50
2.35
___________________
5.50
___________________
7.50
___________________
12.00
7.50
___________________
3.00
___________________
0.08
___________________
9.69
___________________
105.47
___________________
33.00
10.50
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18.
Total Private
Sector
27.00
16.50
43.50
Grand Total
114.67
34.30
148.97
Refining Capacity Addition During the Eleventh/Twelfth Plan

(2007-2012 / 2012-2017)
During the Eleventh Plan period, capacity addition of 40.05

MMTPA (comprising of 34.05 MMTPA in the public sector and 6.0
MMTPA in the private sector) is expected to be added. With this
capacity addition, the total refilling capacity in the country is
expected to go up to 260.80 MMTPA. In view of estimated surplus
scenario many of the projected capacity additions may be reviewed
by the concerned companies and likely to be deferred to Twelfth
Plan period if the economics are not favourable.
Capacity expansion planned during XIth Five Year Plan has been
indicated in Table 6.3.
Table 6.3: Capacity Expansion during 11th Plan
(c)
Notes
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81
6.
Petro Economics
Table 6.4: Year-wise & Company-wise Refining Capacity during XI Plan
Notes
Capacity Additions During XI Plan
___________________
___________________
Year
2007-08
Refinery
Indian Oil Corporation Limited, Panipat
82
MMTPA
3.00
2.40
___________________
Hindustan Petroleum Corporation Limited, Visakh
0.83
___________________
Essar Oil Limited, Jamnagar
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Hindustan Petroleum Corporation Limited, Mumbai
Sub Total
___________________
2008-09
___________________
___________________
___________________
Chennai Petroleum Corporation Limited, Chennai
1.00
Reliance Petroleum Limited, Jamnagar (New)
29.00
Nagarjuna Oil Corporation Limited
6.00
Sub Total
2009-10
___________________
___________________
Indian Oil Corporation Limited, Haldia
1.50
6.00
Chennai Petroleum Corporation Limited, Chennai
0.70
Kochi Refineries Limited, Kochi
2.00
Mangalore Refinery & Petrochemicals Limited,

Mangalore
5.31
Hindustan Petroleum Corporation Limited, Bhatinda
9.00
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6.67
15.67
Indian Oil Corporation Limited, Paradip
15.00
Oil & Natural Gas Corporation Ltd. Tatipaka
0.08
Sub Total
2007-12
15.51
Hindustan Petroleum Corporation Limited, Visakh

Sub Total
2011-12
36.00
Bharat Petroleum Corporation Limited, Bina
Sub Total
2010-11
3.50
9.73
TOTAL XI PLAN
15.08
91.99
The following table shows undertaking-wise performance of

Refinery Sector:
(c)
Table 6.5: Throughput of Refineries

(000 Metric Tons)
Contd
83
Notes
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* Provisional @: Not reported by the refinery #: Merged with IOCL
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Oil Pricing
___________________
The country has traditionally operated under an Administered

Pricing Mechanism for petroleum products for over 4 decades. This
system was based on the retention price concept under which the
oil refineries, oil marketing companies and the pipelines are
compensated for operating costs and are assured a return of 12%
post-tax on net-worth. Under this concept, a fixed level of
profitability for the oil companies is ensured subject to their
achieving their specified capacity utilisation. Upstream companies,
namely ONGC, oil and GAIL, are also under retention price
concept and are assured a fixed return (Rao JSN, 1992).
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The administered pricing policy of petroleum products ensures that

products used by the vulnerable sections of the society, like
kerosene, or products used as feedstock for production of fertiliser,
like naphtha, may be sold at subsidised prices.
Gradually, the GoI moved away from the administered pricing

regime to market-determined, tariff-based pricing. Free imports
are permitted for almost all petroleum products. Free marketing of
imported kerosene, LPG and lubricant by private parties is
permitted. In a phased manner, all administered price products
has been taken out of the administered pricing regime and the
system is being replaced by a progressive tariff regime in order to
provide a level playing field for new investments in a free and
competitive market.
Check Your Progress
Fill in the blanks:
(c)
1. The policy of petroleum products

ensures that products used by the vulnerable sections of
the society, like kerosene, or products used as feedstock
for production of fertiliser, like naphtha, may be sold at
subsidised prices.
2. Under concept, a fixed level of
profitability for the oil companies is ensured subject to
their achieving their specified capacity utilisation.
___________________
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Petro Economics
Illustrate
the calculation of oil
___________________
price under APM.
___________________
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___________________
___________________
___________________
___________________
___________________
___________________
The evolution of Administered Pricing Mechanism (APM) goes back

to the year 1976 when the Oil Pricing Committee (OPC)
recommended the discontinuance of the import parity principle and
suggested that the domestic cost of production should be the
determining factor for pricing of petroleum products. The present day
APM was evolved on the recommendation of the OPC and came into
existence on December 16, 1977. One of the limitations of the import
parity pricing was that the indigenous cost of production was totally
overlooked while determining producer prices. This problem was
addressed by Retention Pricing Mechanism, by which refiners were
allowed to retain out of the sale proceeds, cost of crude, and refining
cost, reasonable return on investment. The same procedure was
followed in case of marketing and distribution companies. The
Government of India also fixed the pricing of finished products and
the returns of oil companies were de-linked from the price at which
the goods were finally sold. As per the administration of pricing of
products by the government, the retention mechanism also called as
the administered pricing mechanism or APM. The basic objectives of
APM were:
(c)
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Administered Pricing Mechanism (APM): Structure

and Working
Notes
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To optimise the utilisation of refining and marketing

infrastructure by treating the facilities of all the oil companies
as common industry infrastructure, the access of which will be
available to all oil companies thus eliminating wasteful
duplication of investment.
To make available all products at uniform price ex-all

refineries so as to minimise cross haulage of products and
associated energy costs.
To ensure continuous availability of products/crude to refiners

by recognising import needs where ever there are deficit in
indigenous production.
To ensure that the returns to oil companies are reasonable in

line with operational efficiencies as also generation of
sufficient resources to enable industry to set up facilities to
meet the growing needs.
To ensure stable prices by insulating domestic marketing from

the volatility of prices in the international market.
To achieve socio-economic objective of the government by

ensuring availability of certain products at subsidised rates for
Objectives of Petroleum Products Pricing
Efficiency
Pricing policy should promote
Social Equity
Efficient resource allocation.
Inter fuel substitution.
Affordable prices to all citizens
Subsidies.
Cross-subsidies of fuel.
Financial Viability
Need to earn a fair rate of return on investment.
Aim to demand management and supply management.
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The APM is a complex, self-balancing system of a number of oil

pool accounts. The mechanism is based on the fact that all the
subsidies being offered on the petroleum products such as
Kerosene, Diesel, LPG, Naphtha for fertilisers, etc. would be
compensated through higher realisations from products such as
Petrol, Aviation, Turbine Fuel, Naphtha for non-fertiliser uses, etc.
(c)
Notes
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85
weaker sections of the society and priority sectors in the

industry through cross-subsidisation of products.
Source: Report of the Controller and Auditor General of India No. 7.
Figure 6.1: APM for Refining Company
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Petro Economics
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Thus, this is a process of cross-subsidisation wherein the burden of

subsidies to priority sectors is borne by the other users. This
ensured that the governments twin objectives of subsidisation and
fiscal management were both achieved. These accounts are
managed by the Oil Coordination Committee (OCC). The
mechanism which came into existence in 1974 had worked quite
well till the early years of 1990s before going into large deficits.
Notes
UP
E
86
The working of APM largely started when GoI introduced the

retention pricing mechanism. Starting with a stylised model,
assuming that for the refining industry as a whole, the average
FOB cost of crude (domestic as well as imported) was ` 60/t, and
other refining costs and margins, ` 40/t, the retention price per
tonne of crude would be ` 100. Adjusting for a 6 per cent fuel and
loss, the retention price per tonne of product would be ` 106.
Table 6.6: Stylised Oil Pricing Model
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FOB cost of crude oil
Other costs and returns
` (tonne)
60
40
Crude retention price
100
Product price (adj. for fuel and loss)
106
Table 6.7
Product price
Marketing costs and margins

Total price built-up
Product Price Adjustment (PPA)
(c)
Final product price
Product A
Product A
Kerosene
Petrol
106
106
20
20
126
126
26
26
100
152
Assuming further, that the refineries produced only two products

in equal volumes (in practice it would be over a dozen) - kerosene
and petrol - both these products could be priced at the same
product retention price of ` 106/t, adding ` 20/t for marketing costs
and margins, the total built-up cost would be ` 126/t, at which
price all the refining and marketing costs and margins would be
covered and the oil pool deficit would be zero.
However, since GoI wanted to subsidise the price of kerosene, it
introduced the Product Price Adjustment (PPA) Account, which
Notes
___________________
___________________
UP
E
As the actual costs kept rising above the budgeted levels, GoI took
the easy way out of increasing product price by merely increasing
the PPA figure. For example, if the crude and refining costs
increased by ` 100/t, the PPA of petrol moved to ` 126/t and the
final product price, to ` 226/t. Thus, over a period of time, the PPA
account represented not only the extent of cross-subsidisation, but
also the recovery of all additional costs to the oil pool.
87
reduced the price of kerosene (by ` 26/t), and recovered this loss by
increasing the price of petrol by an equivalent amount. While the
system remained self-balancing, the gap between product prices of
kerosene (` 100/t) and petrol (` 152/t) had widened.
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Figure 6.2: Oil Flow Chart
(c)
During APM there were 14 refineries (1996) with different crude

retention prices and consequently the product retention price was
based on an average for all the refineries. Furthermore, there were
over a dozen petroleum products, and the refinery costs were
spread over these products based on specific indices, resulting in
substantially different product retention prices.
Petro Economics
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___________________
Marketing costs and margins also varied substantially across

products. The actual price increases across products were
determined largely on political considerations. Since products such
as kerosene, diesel, LPG, as well as inputs for the fertiliser
industry needed to be kept relatively cheap, there were abnormal
increases in the prices of petrol, naphtha (other than fertiliser) and
ATF (domestic).
Notes
UP
E
88
Source: Research Analyst Report on Oil & Gas Sector.

Product consumption = sales by PSUs + private imports
Figure 6.3: IO Flow Chart
(c)
The FOB cost of crude built into the current pricing system
(` 1700/t) was the average crude cost in 1986. The ex-refinery
prices of products vary (products are sold either by volume or
weight) as do the marketing margins.
The other items in the marketing chain (filling charges, FSP
surcharge, C&F surcharge) were kept uniform and were meant to
cover specific costs including freight, import duties, refining
incentives, etc. Since petrol was the now accounts for a whopping
84 per cent of the ex-refinery price the government levies in the
form of central excise duties and state sales and local taxes were
added to arrive at the final retail consumer price.
Basic
Price
Royalty
upto 13.7.75
on import
parity
basis `
713.04/MT
Cess
4
Basic
Rate
5
Notes
S. Tax
on
Basic
Rate
Total
___________________
___________________
___________________
14.07.75
270.04
270.04
270.04
08.09.76
245.42
60.00
305.42
305.42
16.12.77
203.42
42.00
60.00
305.42
305.42
01.04.81
203.42
61.00
60.00
324.42
324.42
(B) Offshore Crude

331.65
42.00
60.00
433.65
433.65
01.04.81
331.65
61.00
60.00
452.65
452.65
1021.00
61.00
100.00
1182.00
1182.00
1021.00
61.00
300.00
1382.00
1382.00
1021.00
192.00
300.00
1513.00
5.24
1518.24
1021.00
192.00
600.00
1813.00
17.24
1830.24
1021.00
314.00
600.00
1935.00
22.12
1957.12
1021.00
314.00
900.00
2235.00
34.12
2269.12
1021.00
481.00
900.00
2402.00
40.80
2442.80
1506.00
481.00
900.00
2887.00
115.48
3002.48
1796.00
**539.80
900.00
3235.00
129.43
3365.23
**2094.00
**578.00
900.00
3572.00
142.88
3714.88
01.03.87
01.04.87
01.02.89
01.04.90
16.09.92
01.04.93
01.04.96
1.4.1998
w.e.f. 1.4.98, price of indigenous crude has been linked to weighted

average FOB price of actual import of crude with the floor price of
` 1991/MT for the basic price payable to ONGC/OIL exclusive of cess of
` 900/MT and royalty as per methodology given below. The price is fixed
on monthly basis. Upper ceiling of ` 5570/MT has also been fixed by the
Government w.e.f. January 2000. Royalty for the period April'98 -May99
was payable at the rate of ` 578/MT.
Effective June 1999, royalty is being paid based on the revised formula.
The methodology for arriving at the well head-value is as under:
(i)
Royalty amount may be deducted from the selling price after

applying 8% debit on this amount to arrive at the well-head
value.
(ii)
Cess for the time being may not be deducted from the selling
price to arrive at the well-head value of the crude oil.
(c)
Jun-99
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(C) Offshore & Onshore Crude*
01.04.84
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16.12.77
15.02.83
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(A) Onshore Crude (on Long Run Social Marginal Cost Basis Adopted)
11.07.81
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UP
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Effective
Date
89
Table 6.8: Price Built-up for Crude
Petro Economics
(iii)
Notes
___________________
20% of well-head value would be considered for working out

the royalty subject to an upper ceiling of ` 850/MT w.e.f.
1.12.99.
90
For the period 1.6.99 to 30.11.99 upper ceiling of royalty was ` 750/MT.
1.4.2002
As per Govt. notification No. 79 dated March 28, 2002 the price of
indigenous crude oil of ONGC and Oil will be market determined w.e.f.
1.4.2002.
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* Long run social marginal cost basis given up.

Source: MoP&NG.
Table 6.9: Price Build-up for Major Petroleum Products
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___________________
Petrol
(`/KL)
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UP
E
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Ex-refinery
price
Diesel
(`/KL)
Kerosene
(Domestic)
(`/KL)
LPG
(Domestic)
(`/t)
1694.89
1980.93
1956.45
2889.08
158.89
116.15
119.14
834.23
40.00
40.00
40.00
40.00
640.00
640.00
640.00
640.00
Product price
adjustment
13521.65
3511.93
754.19
1578.64
Sub Total
16055.43
6289.01
2001.40
6901.95
3211.09
943.35
200.14
690.20
Marketing
margin
Filing charges
FSP surcharge
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C&F surcharge
Excise Duty
920.00
Excise Duty (%)
20%
15%
10%
10%
Ex-storage price
19266.52
7232.36
2201.54
7592.15
523.22
167.78
19789.74
7400.14
4155.84
1554.03
80.00
40.00
24025.58
8994.17
24.03
9.00
Mumbai retail
price
Add. State local

taxes
Sub Total
Sales Tax @ 21%

Dealer
Commission
Total
(c)
Consumer Price
(`/Litre)
How does it work for companies? The system was designed in such
a way that the accounts balance for the industry as a whole.
However, since most of the cost recovery comes through the PPA
account, the cash flow impact on individual companies was quite
different.
All refineries sell their products to marketing companies at the
retention price, which would roughly work out to ` 2,817/t of crude
would be recovered from the oil pool. For example, in FY 96 if the

refinery processed only imported crude at the average FY 96 FOB
` 1700) would come from the pool.
Notes
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UP
E
crude cost of ` 4,212/t, the additional cost of ` 2,512/t (` 4212-
91
processed. The difference between actual costs and standard costs
Since the actual FOB crude costs have always been way above
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refiners
___________________
(BRPL/CRL/MRL/MRPL) end up having to claim substantial
___________________
amounts regularly from the pool and face a cash flow problem if
___________________
the oil pool coffers dry up
___________________
1,700/t
over
the
past
few
years,
all
pure
On the other hand, the marketing company ends up collecting all
the surplus (through the PPA for the industry) and is always in a
position of net surrender to the pool. An integrated company like
BPCL/HPCL can net off the surrender from PPA against the
higher crude recovery.
Since these companies product sales were substantially above
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their crude throughput (in FY96, BPCL sold 14.78 mt. against a
crude throughput of 7.35 mt.), they were always in a net surrender
position and consequently remain relatively unaffected if the oil
pool is in deficit (normally the amounts due to these two companies

represent other items such as claims for cost recovery and profit
margins).
Why does IOC bear the brunt? IOC was in the same position as
BPCL/HPCL. It is an integrated company whose product sales are
much higher than refinery production, and logically would be in a
net surrender position. However, its role as the sole oil-importing
agency changed the entire picture.
Whenever IOC purchased crude on behalf of other refiner, it

recovered the actual crude price paid, from the concerned refiner.
But in case of product imports, it recovered only the ex-refinery
price of the product (say ` 1980.93/kl for diesel) from players such
as BPCL/HPCL/IBP and the balance cost from the pool account.
(c)
With an increasing level of product imports (at rising prices), the

quantum of pool claims on this account had ballooned, and
consequently IOC ended up having the largest dues from the pool.
For instance, out of the pool deficit of ` 57 billion as on 31 March,
1996, IOC accounted for nearly ` 35 bn.
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Notes
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Review of APM
The experience of existing PSUs showed that providing returns on

a cost-plus formula does not always encourage efficiency in
operations. Since all investments and costs were reimbursed, there
was no incentive to make profitable investment decisions and to
run the refinery in a cost-effective manner. In the upstream sector,
PSUs have inadequate incentive to invest in risky but potentially
rewarding ventures to develop future oil and gas reserves. It also
led to inefficient exploitation of the countrys exhaustible
resources. Moreover, so long as the players in this sector were
PSUs, it was possible for the Government to effectively control the
investment and costs. With the entry of the private sector,
however, the cost-plus formula was expected to encourage gold
plating of the plant and inflate costs which the consumer would
have to bear.
UP
E
92
Petro Economics
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As the number of players in the oil industry increased, it was

difficult to continue APM and regulate crude runs of the Refineries
and controlling marketing operations and distribution of products
by all the players in an efficient and cost effective manner.
(c)
Under APM, a degree of insulation of the domestic prices against

the volatile nature of international oil and product prices has been
achieved by pooling of the lower-cost indigenous crude and the
higher-cost imported crude. However, the advantage of the lower
pooled crude oil cost has not been passed on to the consumers on a
uniform basis for all products. A system of cross subsidy among
different products has resulted in uneven increases in price of
different products over the years. Thus, kerosene prices have
hardly increased in the APM. Naphtha and furnace oil prices for
non-fertiliser use are about 80% higher than the corresponding
prices for fertiliser use. The price of MS was more than double the
HSD price.
The regulated price for natural gas is less than the international
price of a close substitute, namely, liquid hydrocarbons. This has
resulted in sub-optimal inter-fuel substitution, artificial excess
demand for natural gas, and under-development of the gas market.
Mounting Outstanding Claims of Oil Companies

The efficiency of APM depends entirely on the ability of the system
to keep the oil industry pool account inflows and outflows in
balance. Till 1989, the pool account was operating satisfactorily
Decline of the share of domestic crude in total crude

requirement.
Rapid growth in demand for petroleum products.
The Gulf War and the consequent price rise in global crude oil
and petroleum products.
Devaluation of the Indian rupee.
Increased costs due to increases in input prices that were not

fully passed on to the consumers of POL products.
Increased subsidies on petroleum products namely, SKO

(public distribution system), LPG (domestic) HSD, input for
fertilisers, etc.
Impact of all the above factors has not been fully passed on to
the consumers, as APM has no flexibility for automatic price
adjustments.
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Consequently the outstanding claims of the oil companies have

shot up to ` 5070 crore as on 1 April, 1996. It is essential that an
immediate action plan be drawn up to generate surplus in the oil
pool account to clear the outstanding within a specified time frame
of one or two years. The current levels of outstanding are
increasing. A steep increase in the consumer price across the board
will have a spiralling effect on all other consumer prices to increase
the inflationary pressure. Other alternative will be to provide
revenue budget support by apportioning a part of the cess and
other oil revenues to the oil pool account. In any case, decisive
action is required to be initiated to neutralise outstanding claims
of oil companies. Otherwise, oil PSUs will become non-viable and
the countrys economic security will be at stake.
(c)
93
Notes
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UP
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and had a cumulative surplus, which could be used as a cushion

against international price fluctuations and to maintain price
stability. This was possible because of a higher level of self-reliance
in terms of the Bombay High crude production level and nominal
imports. The situation altered drastically from 1989-90 as the
deficit in oil pool account started accumulating, for the following
reasons:
Parallel Marketing
The Government introduced parallel marketing scheme to

supplement consumption of subsidised products as LPG and
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Petro Economics
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kerosene by imported products at market determined price.

Although the two-tier pricing prima facie starts the process of
demand management through pricing, it cannot offer a durable
solution to the problem of containing kerosene subsidy. To
maintain a two-tier pricing system over a period of time for the
same product is a difficult task, requiring enormous policing costs.
Hence, it is essential to move towards uniform pricing.
Notes
UP
E
94
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Inefficient Use of Subsidised Products
___________________
Subsidies on petroleum products have led to a distortion in product

prices adulteration, diversion of a subsidised product (e.g., SKO)
for unintended use (e.g. mixing the MS and HSD) and air
pollution/environmental hazards in cities such as Delhi and the
consequent inefficient use of energy. Similarly, subsidies on
naphtha and furnace oil used by the fertiliser industry have
resulted in sub-optimal inter-fuel substitution.
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Impact of Administered Pricing Mechanism on Cost, Quality

and Resource Generation
(c)
The pricing system allows reimbursement of the retention costs to

the individual oil companies, while recovery through consumer
prices by the oil companies brings in industry-weighted average
costs. Thus, there is no incentive for PSUs to reduce costs.
Moreover, since yield pattern and product-mix are determined by
the standard product pattern concept of OCC, there is no incentive
for individual public sector refining companies to optimise net
realisation (value addition) through upgradation of technology.
Capacity utilisation factor is the only factor which provides
incentive for improving on stream factor.
The difference between such weighted average cost elements and
the individual company retention cost elements is adjusted in a
centrally administered funding stream known as the industry
pooling mechanism. For the purpose, various pool accounts are
maintained and administered by OCC. Each pool account is funded
by a levy of surcharge included in the consumer price. The oil
companies are to recover the surcharges and surrender to the pool
account. Since market shares of PSUs are determined by supply
plan entitlement, there is no competition among PSUs to penetrate
regional markets with better, environment-friendly, and quality
products and services.
95
Notes
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UP
E
The current pricing policy adopted for petroleum products appears

to offer less incentive for internal resource generation by the
enterprises involved in the field. There is also no incentive for oil
companies to make huge investments in laying trunk pipelines.
Moreover, resource generation for replacement of capacity plant
and equipment has been inadequate in the current decade. This
is due to the time lag between the actual incidence of cost
escalations and the reimbursement of the same in pricing
methodology.
CC
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Within the umbrella of public sector management, the trust on

investment has been on exploration and extraction in deep
offshore, frontier areas, where rights are to be shared with private
entrepreneurs on mutually beneficial terms. The existing cost-plus
a pre-determined margin on net worth formula does not encourage
such oil products as ONGC and OIL to invest their internal
resources on high-risk high-reward sedimentary basins, including
frontier areas, to develop oil and gas reserves from marginal fields
or to introduce enhanced oil recovery techniques that will
maximise the countrys hydrocarbon wealth.
Pricing of Natural Gas
(c)
The present pricing principle of natural gas is essentially on a costplus basis, which does not reward efficient operation as all costs
are reimbursed. Since natural gas is close substitute to liquid
hydrocarbon, there is a clear case for developing the natural gas
market at a competitive price to the consumer at the burner-tip
vis--vis alternative fuels. In a market-determined pricing system,
natural gas has the potential to compete with alternative fuels in
fertiliser, petrochemical, and power-sector including some other
industries that use furnace oil and naphtha as primary inputs. As
the government is planning to import 30-35 MTOE of gas from
Iran and Oman, it is desirable to have our domestic, regulated
natural gas price related to international prices of liquid
hydrocarbons in line with international practice in the trade of
natural gas.
Issues of Royalty and Cess

The amount of royalty and cess, included in the present price of
crude oil, works out of 45% of the total price. In other words, the
present price shared between crude oil producers (ONGC, OIL) and
the Central and State Government is the ratio of 55:45. In keeping
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Petro Economics
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
with the principle of free pricing, the price for crude oil would be
determined by the international market. Given the freedom to
negotiate with crude oil producers, it is expected that the prices of
domestic crude oil may be negotiated with reference to import
parity prices of comparable quality of crude oil. In the deregulated
scenario, royalty and cess may either be recovered from the prices
realised by the crude oil producers or be paid by companies
entering into Production Sharing Contract (PSC) with the
Government of India. Given the need to promote domestic
production of hydrocarbons, it may be necessary to keep royalty
and cess at modest levels and on an ad valorem basis instead of
specific values.
Notes
UP
E
96
Impact of Duty Structure
___________________
The current tariff rates contradict the rational tariff structure of

keeping import duty on raw materials lower than that on final
products. In the case of petroleum sector, the import duty on crude
is 27% ad valorem while the import duties on finished product are
a maximum of 32% on MS, HSD, and ATF; nil on naphtha and
SKO; and only 10% on LPG. Such a duty structure is somewhat
perverse in the sense that it provides a negative rate of protection
to refining sector PSUs while giving a high rate of effective
protection to private sector petrochemical companies. Naphtha is a
clear example of this practice. Consequently, the present duty
structure favours imports, discriminates against even efficient
indigenous producers and is not attractive to those who wish to
invest in the refinery sector. Further, distortions are taking place
in imports, particularly in the case of naphtha. Naphtha
production is surplus to our requirements and approximately two
million tonnes of naphtha is exported. In view of the heavy
subsidies given the naphtha for consumption in the fertiliser
industry, naphtha for petrochemicals had to be priced at a higher
level. In view of the decanalisation of naphtha, the petrochemical
industries are taking advantage of the nil import duty on naphtha
and other benefits on sales tax and are importing large quantities
of naphtha resulting in precious foreign exchange drainage,
financial loss to the oil companies, and an unnecessary burden on
the congested port facilities; in other words, the social costs are
considerably high than the private costs.
(c)
CC
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___________________
In case of lubricating oils, the import duty on base oils as well as

finished lubricants is 32%. After freeing the lubricating market, it
97
is observed that imports of finished lubricants have increased

substantially because it is cheaper to import finished product,
resulting in surplus base oil stocks produced in indigenous
refineries.
Notes
___________________
___________________
UP
E
Measures to correct the anomalous situation described above

cannot be taken by the oil companies in view of the strict price
regulations of all products. This is adversely affecting the
profitability of the oil companies and increasing the deficits in the
oil pool account.
While the administrative price structure has worked satisfactorily

until recently and helped the public sector oil companies to grow
under a protected environment, it is apparent that APM has
become a serious handicap in securing the oil supplies for the
future. The main drawbacks of the APM are as follows:
APM cannot generate sufficient financial resources required

for investments in the upstream and the downstream sectors.
Private capital as well as foreign direct investment would not

be forthcoming in view of the inherent regulatory controls
imposed by the government.
APM does not provide strong incentives for investments in

technological upgradations or for cost minimisation.
APM has not been completely successful in achieving the

primary objective of ensuring a consumer-friendly and
internationally competitive vibrant petroleum sector capable of
global presence to provide energy security to the country.
The subsidies and cross-subsidies have resulted in wide

distortions in the consumer prices and do not reflect the
economic cost of petroleum products, which are not being
passed on to consumers automatically. This in turn has led to
inefficient use of precious fuels and large-scale misuse of
highly subsidised products.
Perverse duty structure gives a negative rate of protection to

refineries.
(c)
CC
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The continued mounting deficit in the oil industry pool account

has become unsustainable, resulting in non-viability of PSUs if
the accumulated outstanding are not settled quickly. This will
only lead to further domestic supply bottlenecks, increased
import dependency, likely increased import prices and
___________________
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___________________
___________________
___________________
___________________
___________________
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Petro Economics
98
___________________
___________________
z
APM does not encourage optimal exploration, development,

and exploitation of the hydrocarbon reserves in the country.
Indigenous producers prices for crude are too low to attract

risk capital essential for augmenting domestic production and
reserve of crude and natural gas.
Royalty and cess levels are unrealistically high which should

be brought down.
___________________
___________________
___________________
___________________
___________________
___________________
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UP
E
___________________
insecure supply, and wrong investment signals to prospective

investments in upstream and downstream segments of our
energy sector, thus triggering a major balance of payments
crisis.
Notes
In order to achieve the primary objective of securing oil supplies to

meet the future growing demand, it would be absolutely necessary
to move towards a market-driven price mechanism and to free the
petroleum sector from APM.
CC
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Check Your Progress
Fill in the blanks:
1. . is a process of cross-subsidisation wherein

the burden of subsidies to priority sectors is borne by
the other users.
2. The working of APM largely started when GoI
introduced the pricing mechanism.
Summary
(c)
The refining sector is still dominated by the public sector

companies, as 16 of the 18 refineries are owned by the public sector
companies. The public sector dominance is set to continue for a
long-time due to the massive market shares, large number of
projects planned and the complete control over the marketing
infrastructure.
The consumption of petroleum products in the country has been
increasing in the early 1990s at an annual growth rate of 8%. The
current demand of petroleum products in the country stands at
about 103.64 MMTPA. It is projected to reach 120 MMTPA by the
end of Tenth Plan (2006-07) and 147 MMTPA by the end of
Eleventh Plan (2011-12).
99
Notes
___________________
___________________
UP
E
The first impact of deregulation has been the reduction of the exstorage point prices of petroleum products, namely, fuel oil,
naphtha, LSHS, bitumen and LDO used mainly the industrial
sector. A part of the reduction will be offset by the transportation
costs depending on how far the consumer is from the storage
points. Even though the price cuts are not very hefty, the
consumers would get full benefit of the reduction.
___________________
___________________
___________________
Lesson End Activity

Research on refining activities during 2012.
___________________
___________________
___________________
Keywords
___________________
Administered Pricing Mechanism (APM): The APM is a

complex, self-balancing system of a number of oil pool accounts.
PPA: Price Adjustment Account
CC
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MDPM: Market Determined Pricing Mechanism
1. Discuss the growth of refining facilities in India.
2. What are the key expansion strategies during the current plan?
3. Write a note on structure and working of APM.
4. Evaluate the effectiveness of APM.
5. What is the current procedure of computing the petroleum

prices?
Further Readings
Books
(c)

KPMG, Mumbai.
seismic AVO response: An application to gas-hydrates: Current
Science, v. 86, p. 985-990.
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Petro Economics
Notes

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Web Readings
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http://www.eia.gov
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http://www.bp.com
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(c)
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100
UNIT 7: Deregulation (Oil and Natural Gas)
Unit 7
101
Notes
Activity
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Deregulation (Oil and Natural

Gas)
Give___________________
a tabular representation
for the computation of crude
___________________
oil surcharge.
___________________
___________________
Objectives
topics:
\
Restructuring/Disinvestment
___________________
___________________
___________________
___________________
___________________
Introduction
The APM constituted a cost-plus pricing system for the producers

and a cross-subsidisation scheme for the end users. The Oil Pool
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Account an extra budgetary account reconciled the interests of

the consumers and the producers.
The severe liquidity crunch faced by the oil companies has been a
matter of grave concern as it has a direct bearing on the smooth
implementation of project necessary for enhancing oil security. The
liquidity crisis was further aggravated by the burgeoning subsidy
on a number of products. The GoI, thus decided to resolve the
problem with a comprehensive package of measures to provide
long-term solutions. The package intends to reform the system by
introducing greater transparency in subsidies, moving prices
towards their economic costs, giving producer the right market
signals, while protecting the weaker sections of the society.
The consumption of petroleum products is likely to increase to
(c)
149 mmt by the year 2010. The indigenous production is however

declining and by the year 2010, only about 27% of the total demand
will be met out of indigenous production giving rise to large
imports resulting in serious repercussions on balance of payments
and energy security.
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102
Notes
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___________________
Suitable policy measures would therefore be:
Petro Economics
Enhanced recovery of oil from existing fields, accelerate

exploration efforts to find new fields and acquire equity capital
abroad.
___________________
Augment port facilities and pipeline capacities.
___________________
Promote foreign and domestic investments in the hydrocarbon

sector.
___________________
___________________
___________________
___________________
refining
capacities
and
marketing
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Create additional
infrastructure.
___________________
Promote efficient use of oil.
To achieve this, the sector should be completely opened up by:

Introduction of Market Determined Pricing Mechanism
(MDPM) in place of Administered Pricing Mechanism (APM).
Removing all restriction on exports and imports.
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Removing restrictions on sourcing and type of crude and the

product pattern.
Allowing oil companies to decide on development of
infrastructure, mode of transportation, the selection of
marketing areas, appointment of dealers / distributors, the
amount of commission payable to intermediaries and the sales
volumes, purely on commercial considerations.
Ensuring fair competition by setting up a regulatory body to
control the market in a transparent manner. Pipelines that are
natural monopolies should be treated as utilities and the
common carrier principle should be adopted.
Setting up of an oil commodity exchange to provide an
institutional market for exchange of crude and petroleum
products at market related prices.
(c)
The regulatory body should be established under a statute and

shall perform the following functions:
Crisis management in times of product constraints and
maintenance of strategic reserves of the major petroleum
products to ensure energy security.
Framing rules for access to pipelines and top-off points
together with fixation of fee for its usage.
Monitoring selling prices and market positions of the
companies.
Ensuring adequate supplies to remote and ecologically

sensitive areas.
Notes
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Establishing product quality and specification.
103
Maintenance of a price stability fund to avoid frequent

fluctuation in prices of retail products.
The hydrocarbon sector should be totally deregulated at one go:
By evolving suitable tariff structure to promote investment in

the sector without diluting the revenues of the government.
By removing subsidies, wherever products are to be
subsidised-central/state government to directly disburse
subsidies and oil companies to be permitted to sell all products
at market related rates.
It may be noted that in practice, the actual costs recovered by oil

companies may not match with the estimated costs considered in
the cost updation because of the following reasons:
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The actual costs are dynamic and not static over the pricing
period.
Not all expenses are fully reimbursed by OCC.
The actual performance may be different from the standards.

The actual costs may not be in line with the norms.
Obviously, such unavoidable variations in cost actually incurred

and the cost recovered/reimbursed would have a direct bearing on
the Profit and Loss account of the oil companies.
The following expenses are not reimbursed under APM:
Bonus ex-gratia in excess of the statutory limit.
Donations and charities.
Bad debts provision for doubtful debts.

Loss gain on disposal of assets.
The major heads of expenditure of refineries and marketing

companies are:
(c)
Chemicals and catalysts.

Consumables, power and utilities.
Repairs and maintenance.
Depreciation.
Salaries and wages.
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Notes
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Product losses.
Overheads.
Depreciation is worked out at the rates prescribed by the

Companies Act, 1956 on straight-line basis for assets
commissioned after April 1, 1983 and on WDV basis for assets
commissioned prior to April 1, 1983. Depreciation is computed on
pro-rata basis for assets commissioned during the year. However,
while working out the margins large capitalisation involving
substantial charges in product pattern, standard throughput, etc.
are considered only as and when these projects are commissioned.
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It may also be noted that bonus / ex-gratia paid to employees is not

considered as a part of cost but as a part of the return and
reimbursed along with return on capital employed at a ceiling of
8.33% of the annual wages.
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With the help of the Expert Technical Group, the government

decided the details of dismantling the APM and the duty structure
for the transition period 1998-2001. The dismantling of APM came
into force on 1st April, 1998. An abstract of the gazette notification
gives the phased programme of reforms.
Highlights of the phased programme for dismantling the APM in
the oil sector:
Cost-plus formula is withdrawn for indigenous crude oil
producers; the price receivable by oil producers will be
increased to international levels in a phased manner.
The system of retention prices is being abolished for all
existing and new refineries and pricing of petroleum products
at the refinery gate level will move towards import parity.
Consumer prices of major petroleum products will be moved to
market prices.
(c)
The transition period will be utilised for servicing and

amortising the Oil Bonds issued by the government to the oil
companies.
Imports and exports of all petroleum products, except crude
(slop crude and crude condensate), Natural Gas Liquids
(NGL), Aviation Turbine Fuel (ATF), MS and HSD will be
decanalised during the transition period.
Investments in the refining sector will be encouraged by
providing reasonable tariff protection and making marketing
Cost-plus formula for shipping of crude oil is withdrawn and

the rates will move towards market related rates.
Notes
___________________
___________________
___________________
___________________
Freight subsidies on supplies to far-flung places will be met

through the fiscal budget.
___________________
To establish a regulatory framework to oversee the functioning

and enforcement of a competitive framework in the
hydrocarbon sector.
___________________
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rights for transportation fuels, namely, MS, HSD, and ATF

conditional on owning and operating refineries with an
investment of at least ` 2000 crore or oil exploration and
production companies producing at least 3 mt of crude oil
annually.
The price of crude and petroleum products as mentioned above

will be fixed by the Oil Coordination Committee (OCC) with
enhanced autonomous powers.
According to a study by NCAER, the dismantling of APM would

result in an overall Wholesale Price Index (WPI) inflation of 1.57%
in 5 years on a cumulative basis.
The first impact of deregulation has been the reduction of the exstorage point prices of petroleum products, namely, fuel oil,
naphtha, LSHS, bitumen, and LDO used mainly by the industrial
sector. A part of the reduction will be offset by the transportation
costs depending on how far the consumer is from the storage
points. Even though the price cuts are not very hefty, the
consumers would get full benefit of the reduction.
For the future demand-supply perspective, it would be important
to take the domestic gas pricing closer to the inter market
determined pricing regime, the deregulation of natural gas pricing
needs to be undertaken currently with the dismantling of APM for
crude oil and petroleum products so as to establish a national
market related pricing framework for the end users.
(c)
With effect from 1 October 1997 upto 3 March 2000, the consumer
price of gas at landfall points would be linked to the price of a
basket of LSHO/FOs (table-natural gas pricing).
The government reduced the price of natural gas by 4.94%-8.4% for
the first-quarter of the year 1998-99 following the fall in
international prices of low and high sulphur FOs. The producer
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106
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Table 7.1: Phased Programme for Dismantling the APM

Year 1: 1998-99
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price was reduced by about 8.48% while the general consumer

price was reduced by 5.8% in states other than those in the
northeast.
Notes
75%
___________________
Removal of cost-plus formula and

payment to crude producers as
percentage of weighted average
free-on-board (FOB) prices of
actual imports.
___________________
Producers to be controlled during

transition period.
MS, HSD, kerosene, ATF, LPG.
Withdrawal of retention margin

concept for refineries and refinery
gate prices for controlled products.
Adjusted import parity prices to

existing refineries and tariff adjusted
import parity prices to new
refineries.
Product to be decontrolled.
Naphtha, FO, LSHS, bitumen, and

paraffin.
Exim policy
Decanalisation of imports/exports of
all products except crude, NGL, ATF,
MS, HSD.
___________________
___________________
___________________
___________________
Sourcing of crude
To be liberalised and import to be

allowed for joint and private sector
refineries under actual user licence.
Customer duty
Rationalisation done in phased

manner.
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Increase in prices of:

Kerosene
30% of existing ex-storage point

price.
LPG
33% of subsidy passed on.
Freight and other under

recoveries.
33% to be passed on in an equated

manner.
Shipping of crude oil.
Withdrawal of cost-plus formula for

shipping of crude oil and move
towards market related prices.
Year 2: 1999-2000
Payment to crude products

percentage of weighted average of
FOB.
77.5%
(c)

Kerosene
30% of revised ex-storage point price

at the end of year 1.
LPG
A further 33% subsidy to be passed

on.

recoveries.
A further 33% subsidy to be passed

on in an equated manner.
Rationalisation of duties.
To continue
Contd
Payment to crude products

percentage of weighted average of
FOB price.
80%
ATF
Deregulation of imports and pricing.
Notes
___________________
20% of the revised ex-storage point

price at the beginning of the year.
LPG
Suitable adjustments in prices to

reach subsidy level at 15% of import
parity.

recoveries.
Balance subsidy to be passed on in

an equated manner.
Year 4: 2001-2002
82.5%
Increase in prices of kerosene.
Suitable adjustments in prices of

reach subsidy level at 33.33% of
import parity.
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Full deregulation.
Transfer of subsidy on superior
kerosene oil (SKO), Public
Distribution System (PDS) and LPG
to the fiscal budget of the
government.
(c)
Exhibit 7.1: Current Price Built-up for LPG*
The price build-up for LPG has been illustrated as an example for other controlled products which
will generally follow the same pattern.
Allocation of crude to various refineries is done by the OCC. Each refinery is charged the average
price irrespective of the proportion of domestic or imported crude used.
The indices are fixed by the government.
Source: MoPNG (18 September, 1997).
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___________________
___________________
Payment to crude producers as

percentage of weighted average
FOB price.
2002 onwards
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Kerosene
107
Year 3: 2000-2001
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Petro Economics
108
Exhibit 7.2: Price Built-up of LPG during the Period of Phased Reform
Notes
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___________________
___________________
___________________
___________________
___________________
___________________
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*
1
2
3
4
5
6
The price build-up for LPG has been illustrated as an example for other controlled product, which
will follow the same pattern.
FOB prices are taken on the basis of actual for the month.
This charges have been taken here nationally as one per cent of the FOB price.
The ex-refinery gate prices are to be calculated every month.
Margin at present allowed on marketing infrastructure is 12% of net worth. This may be charged
from year to year as notified by the OCC.
See figure for calculation of crude oil surcharge.
This is the current selling price.
Although the refinery gate prices are determined monthly, the customer price for the product
would be charged as and when required. For subsequent years, the same computation may be
repeated by taking up-to-date values for the FOB prices, etc.
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Exhibit 7.3: Computation of Crude Oil Surcharge
(c)
2
3
4
A crude oil surcharge is being levied on all petroleum products to the extent of the different
between the landed cost of imported crude and crude price paid to ONGC/OIL. This will be credited
to the pool to service the accumulated deficit.
To be taken on the basis of actuals.
The percentage of customs duty may change from year to year.
These prices will vary from 75% to 82.5% of FOB prices of weighted average basket of crude oil
over the transition period. However, in the computation, the old price paid to ONGC/OIL is being
taken.
The way crude oil surcharge will be distributed over the various products is not specified. We have
assumed that it will be distributed over various products in proportion to the percentage
production per unit volume.
Restructuring/Disinvestment
Notes
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The Group on Hydrocarbon Vision-2025 recommended that the oil

PSUs be restructured to have the required strength to compete
with the private sector firms, including multinational companies.
In line with these recommendations, integration of stand-alone
refining companies with the marketing companies was completed
by 31 March, 2001 in the following manner:
109
Chennai Petroleum Corporation Ltd. (CPCL), and Bongaigaon

Refineries and Petrochemicals Ltd. (BRPL) were made
subsidiaries of Indian Oil Corporation Ltd. (IOC).
Kochi Refineries Ltd. (KRL) and Numaligarh Refinery Ltd.
(NRL) were made subsidiaries of Bharat Petroleum
Corporation Ltd. (BPCL).
The entire Government shareholding in CPCL, BRPL and

KRL, were divested in favour of IOC and BPCL respectively.
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In the case of NRL, the 19 per cent equity holding by IBP Co.
Ltd. was divested to BPCL, Oil Industry Development Board
(OIDB) and Oil India Limited (OIL) each acquiring to 10 per
cent.
The Government completed the strategic sales of 33.58% of

equity in IBP Co. Ltd. to IOC.
Emission Norms Focus on Fuel Quality
(c)
The Government has announced a phased programme for

introducing Euro-IV vehicular emission norms in the country by
2010. The policy will seek to improve fuel quality and vehicular
engine specifications. The Bharat Stage-II (equivalent to Euro-II
norms) will be applicable to all automobiles throughout the country
from 1.4.05. These norms are currently in place in 11 cities: Delhi,
Mumbai, Kolkata, Chennai, Bangalore, Hyderabad, Ahmedabad,
Pune, Surat, Kanpur and Agra. All automobiles and fuel will have
to meet Euro-III emission specifications in the above 11 cities from
1.4.05 and Euro-IV norms by 1.4.2010. The rest of the country will
have Euro-III emission norm compliant automobiles and fuels by
2010.
The domestic oil refineries, which have already invested ` 100

billion to achieve Euro-I auto fuel specifications, would need to
incur an additional investment of around ` 180 billion by 2005 and
another ` 120 billion by 2010, according to the estimates of
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Petro Economics
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Ministry of Petroleum and Natural Gas. The investment

requirement of the automobile industry is estimated at around
` 250 billion over this period.
Notes
Source: India in Perspective by ITC Welcomgroup and Dun and Bradstreet dated October 2003.
Check Your Progress
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Fill in the blanks:
1. The Group on Hydrocarbon Vision-2025 recommended

that the oil PSUs be restructured to have the required
strength to compete with the private sector firms,
including ...
2. The first impact of deregulation has been the reduction
of the ex-storage point prices of petroleum products,
namely, fuel oil, naphtha, LSHS, bitumen, and LDO
used mainly by the sector.
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Summary
On total decontrol, the oil companies have been exposed to wide

fluctuations in earnings. The restructuring process has begun. As a
first step towards financial restructuring of companies disinvestment
of certain proportion of government holdings in the equity to the oil
companies has been carried out since 1991-92. The PSUs have
already initiated comprehensive analysis of the existing corporate
structures, of the threats and opportunities for business in the new
environment and of the strategies to develop and strengthen their
competitive advantage. The government identified certain national oil
companies as Navratnas of the Indian industry. The boards of
management of these companies have been restructured with
induction of professionals. The strategies to remain ahead of
competitors would require continuous adoption of innovative
techniques to nurture customers needs and expectations.
(c)
Lesson End Activity
Prepare a research based paper on the deregulation of oil and gas

and its implications.
Keywords
Administered Price Mechanism: The price of a good or service
as dictated by governmental or other governing agencies.
111
Deregulation: The removal of government controls from an

industry or sector, to allow for a free and efficient marketplace.
Notes
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key
recommendations
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1. What are the

Committee?
___________________
of
Sundararajan
___________________
___________________
2. Write a brief note on Euro-IV vehicular emission norms.
___________________
3. Discuss the step wise integration of stand-alone refining

companies with the marketing companies.
___________________
Further Readings
Books
___________________
___________________
___________________
___________________
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Science, v. 86, p. 985-990.

KPMG, Mumbai.
Web Readings
http://businesstoday.intoday.in/story/rangarajan-committeenatural-gas-pricing-policy-report/1/190995.html
http://bookstore.teriin.org/docs/books/Oil&gasBackground%20paper.pdf
(c)
http://www.naturalgas.org/regulation/history.asp
Petro Economics
112
Notes
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(c)
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UNIT 8: Indian Oil Industry Marketing
Unit 8
Notes
topics:
\
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Objectives
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Introduction
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The nations four oil marketing companies have developed an

extensive infrastructure which can meet the requirements, timely
and continuously despite vast differences in terrain, climate and
demand pattern. At the time of independence the marketing of
petroleum products was in the hands of the private companies.
Later, the government gradually exercised control through public
sector companies. The development of marketing and distribution
system for petroleum products in India has witnessed 3 distinct
phases:
z
Period of dominance of the multinational companies,
Advent of public sector, its growth in co-existence with these

transnational companies,
Marketing by the wholly government-owned companies and

the fulfilment of socio-economic objectives.
(c)
The second phase started with actions taken in pursuance of the

Industrial Policy Resolution, 1956 to promote growth of the vital
petroleum sector under the state control. In the third phase, the
experience gained by the government during the second phase and
the socioeconomic factors encouraged them to start negotiations
with the multinationals for acquiring their assets.
A new era of planned development in consonance with national
priorities under the overall direction of the government thus began
in the oil sector. From the state of cut-throat competition in
marketing and distribution they had to quickly adapt to the
changed scenario. The assets of all oil companies in terms of
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List___________________
down the growth trends of
LPG marketing in India.
___________________
___________________
___________________
___________________
___________________
___________________
___________________
infrastructure facilities were now the nations assets. The

important area of concern was their optimum utilisation.
Notes
Activity
The deregulation of the marketing sector has led to the grant of

marketing rights to Reliance Industries (5,849), Essar Oil (1,700),
ONGC (1,100), Numaligarh Refinery (510) and Shell (2,000). These
11,159 Retail Outlets (ROs) will lead to addition of 55% to the
existing strength of about 20,000 ROs. Of these ONGC and
Numaligarh Refinery are Public Sector Undertakings while
Reliance Industries and Essar Oil are Indian private companies
and Shell is a transnational company. Around 500 outlets would be
established by April, 2004.
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LPG was introduced in mid-fifties as a cooking fuel by

multinational oil companies. IOC began marketing the product in
1965. In 1986-87, there were 123.7 lakh LPG consumers as against
33.3 lakh in 1980-81. They were served by 3071 distributors and
consumed 15 lakh tonnes of LPG.
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(c)
The government had approved the release of 40 lakh new

connections/DBCs during 1997-98. Against this target, the oil
companies have actually released 41 lakh new LPG connections
and 38 lakh DBCs during the period April97- March98. During
the year 1997-98, 4.2 lakh new connections under Tatkal Scheme
were released. To make LPG accessible in the rural areas, the
prototype of Mobile LPG Filling Truck mounted with a bullet and
calsin, housing cylinder filling/correction facilities was developed
and introduced in May 1997 in some districts in Tamilnadu on an
experimental basis. Oil companies have released 5042 LPG
connections (provisional) in the districts of Tanjore, Nellai and
Thiruvarur in Tamilnadu in 1997-98.
The government has also decided to allow the use of LPG as
automotive fuel. For this purpose, the Ministry of Petroleum has
requested the other concerned ministries and organisations to
implement an identified action plan for allowing use of LPG as
automotive fuel at the earliest. During 1997-98, the total
production and import of LPG was about 3.45 MMT and 1.1 MMT,
respectively. During the period of 1997-98 the total sale of LPG by
the Government Oil Companies was about 4.61 MMT. This has
gone up to 8.2 MMT in 2002-03.
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Notes
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In February 1993, the government introduced a parallel marketing

of LPG and kerosene by private parties in order to increase the
availability of these two products with the common man.
Cumulatively upto 31.3.1998, 117 parties for kerosene and 18
parties for LPG had signed MOUs for importing these products by
using Oil Companies facilities at port locations. So far, 88 private
parties have imported about 3011.4 kerosene and 18 parties have
imported 343.6 TMT of LPG under the Parallel Marketing Scheme.
Government's drive to expand use of domestic LPG to provide
smoke-free kitchens for the women and protect the environment
from cutting of trees have resulted an addition of over 6 million
consumers in the year 2003. This takes the total LPG customers to
over 73 million in the country out of which over 38 million were
added in the last 4 years alone which means that more customers
have been enrolled in the last 4 years than in the previous 40
years. The LPG customer population in India is now second largest
in the world, only after China. The coverage of population at 37.5%
is about the same in both countries.
Table 8.1: Growth in LPG Marketing in India
(c)
Notes: *: Provisional @: Year-end position.

Source: Public Sector Undertakings.
There has been substantial expansion of LPG in the country. As of

01.09.2010 there are 4692 LPG markets and 9858 distributors. The
total LPG bottling capacity is 11637 TMT and 1207.4 lakh
customers (domestic & non-domestic) with 592.3 lakh of double
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___________________
___________________
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Petro Economics
barrel connections (DBC). OMCs are in the process of setting up
Notes
1340 new LPG distributorship mainly in rural locations under
___________________
Industry Marketing Plan 2004-07 (including against termination
___________________
and previous pending), out of which 509 have already been
___________________
commissioned. Also under Industry Marketing Plan 2008-10

(including
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116
against
termination
and
previous
pending),
advertisement for setting up of 299 LPG distributorship was
___________________
released; out of which 14 have already been commissioned.
___________________
The setting up of LPG distributorships is a continuous process and
___________________
involves identifying of a suitable location, arranging land for
___________________
setting up of godown and other statutory clearances.
___________________
As per the Vision-2015 adopted for the LPG sector, a target has
___________________
been given to the OMCs to raise the overall LPG population

coverage to 75% in the country by releasing 5.5. crore new LPG
connections by 2015, especially in rural areas and under-covered
areas. As the urban centres are more or less, covered by LPG
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network, future growth envisaged under Vision 2015 will be

concentrated in the rural/under-covered areas. As a step towards
this direction, the Rajiv Gandhi Gramin LPG Vitran Yojana
(RGGLVY) for small size LPG distribution agencies has been
launched on 16.10.2009. To ensure that growth of LPG usage is
evenly spread, OMCs are assessing/identifying locations in a
phased
manner
under
RGGLVY.
Advertisements
inviting
applications for distributors under the scheme have been released

in 13 States namely, Andhra Pradesh, Bihar, Chhattisgarh,
Jharkhand, Karnataka, Madhya Pradesh, Maharashtra, Orissa,
Rajasthan, Puducherry, Tamilnadu, Uttar Pradesh and West
Bengal covering 2029 locations, out of which 30 distributors have
already been commissioned. The selection of the same is in
progress as per policy. The setting up of LPG distributors under
this scheme will now be a continuous process till all parts of the
(c)
country deficient in LPG are covered by LPG network. Apart from

existing 14.2 Kg cylinder for domestic customers, industry has
introduced 5 Kg cylinders for low-income group customers. About
3.6 lakh customers have been enrolled in the category as on
01.09.2010. As on 01.09.2010, LPG customer population covers
approximately 61.7% of countrys total population as per Census of
India, 2001.
('000' Number)
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Table 8.2: State-wise and Company-wise LPG Domestic Consumers
Notes
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Source: Ministry of Petroleum & Natural Gas.
(c)
Indias oil markets are expected to grow, albeit relatively slow, in

future. Large investments are required to meet the demand for oil
products. The level of investments required is quite high and in the
current circumstances where the oil PSUs equitably share the
burden of high oil prices, the public sector companies would be
stretched to meet the investment requirements through their
internal and extra budgetary resources. It is estimated that the
Petro Economics
Notes
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___________________
refining and marketing companies in the public sector would

require an investment of about ` 92,000 crore in refining,
marketing and associated infrastructure under their Plan
expenditure. The LPG demand, both for base case and upper case,
are the same.
118
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Table 8.3: LPG Demand Estimates
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___________________
___________________
___________________
___________________
Years
Demand (TMTPA)
2007-08
10,853
2008-09
11,246
2009-10
11,683
2010-11
12,183
2011-12
12,770
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The indigenous LPG production by the terminal year of the XI

Plan period i.e. 2011-12 would be about 12,762 TMTPA, out of
which availability from RIL would be about 1,600 TMTPA. The
indigenous availability projections include availability to the tune
of about 1,740 TMTPA from the three grassroots refineries at
Paradip, Bina and Bhatinda proposed under the XI Plan period.
Therefore, the overall availability of LPG in the country by the end
of XI plan is projected to be almost equal to the projected demand.
However, in a market driven economy, RIL and other private
companies may have their own strategy for marketing of LPG and
the possibility of the same not being available to OMCs cannot be
ruled out. Under such a scenario, it may become pertinent to
analyse the LPG import infrastructure and to assess whether it is
adequate to support the increased import requirement during the
XI Plan period and beyond.
Considering the Regional balance of supply demand during the
terminal year of the XI plan, following scenario emerges:
Table 8.4: Demand-Supply of LPG in XIth Plan
Demand (TMT)
Availability
(TMT)
Variance
North West
7532
7689
(+) 157
East
1567
2072
(+) 505
South
3671
3001
(-) 670
Total
12770
12762
(-) 8
(c)
Region
Notes
Activity
Fill in the blanks:
2. The LPG customer population in India is now .

largest in the world
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As on 1st April 2010 the country has a network of 28 product

pipelines with a length of 11037 kilometres & capacity to carry
67.21 MMT of products. Also there are 3 LPG pipelines with a
length of 2197 kilometres & capacity to carry 4.50 MMT of LPG.
Over and above this, there are 17 crude oil pipelines of 7425
kilometres, with capacity of transporting 105.55 MMT. The details
are as follows:
Table 8.5: Pipelines Network as on 1st April 2010- Length & Capacity
For about three decades the country had adopted the APM for
petroleum products in order to encourage investment in the
refining and marketing sector, while at the same time, keeping the
public-at-large income from the large savings and fluctuations in
the price of crude and petroleum products in the International
market. As long as the price of imported crude, which was taken to
(c)
Prepare
a presentation to
___________________
show the APM for a Marketing
___________________
Company
with figure.
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1. The setting up of LPG . is a continuous

process and involves identifying of a suitable location,
arranging land for setting up of godown and other
statutory clearances.
119
Check Your Progress
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Petro Economics
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work out the pooled FOB price, remained constant in the

International market, the Pool Mechanism Account of the OCC
remained neutral. This was because a cross-subsidisation of
product pricing was resorted with this.
Notes
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Source: Report of the Comptroller and Auditor General of India No. 7 (Commercial) of 1989.
(c)
Figure 8.1: APM for a Marketing Company
However, GoI did not increase the price of petroleum products

(increase in the pooled FOB price of crude) for over 4 to 5 years
while consistently international price of crude continued to
increase and simultaneously rupee started to depreciate. This
resulted in a huge deficit in the pool accounts resulting in large
outstanding dues payable to the public sector oil companies. While
the government has thrown open the refining sector to the private
sector resulting in at least two major players namely Reliance and
Essar entering this sector, there is a tremendous justification to
simultaneously declare the marketing sector also to be made free,
121
Notes
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so that this vital sector also targets huge investments. The

Government of India, Ministry of Petroleum and Natural Gas vide
Resolution No. P-20012/29/97-PP dated 21st November 1997 had
notified the details of the phased programme of dismantling of
Administered Pricing Mechanism (APM). As a result, the
consumer prices of all products except Motor Spirit (MS), High
Speed Diesel (HSD), Aviation Turbine Fuel (ATF), kerosene for
Public Distribution (PDS kerosene) and LPG used for domestic
cooking (domestic LPG) were later decontrolled. As a follow-up of
the aforesaid decision, the Government vide Ministry of Petroleum
and Natural Gas Resolution No. 20018/2/2000-PP dated 30th
March 2001 decontrolled the pricing of Aviation Turbine Fuel
(ATF) with effect from 1st April 2001.
Pursuant to the decisions contained in the aforesaid Resolution of
November 1997, the Government decided to dismantle the APM in
the hydrocarbon sector with effect from 1st April 2002. The details
of the decisions are given below:
Consumer prices of Motor Spirit (MS) and High Speed Diesel
(HSD) will be market-determined with effect from 1st April
2002. Consequently the pricing of petroleum products, except
for PDS kerosene and domestic, LPG will be marketdetermined with effect from 1st April 2002.
2.
The subsidies on PDS Kerosene and domestic LPG will be

borne by the Consolidated Fund of India from 1st April 2002.
These subsidies will be on a specified flat rate basis, the
scheme for which will be notified separately. These subsidies
will be phased out in the next 3 to 5 years.
3.
Freight subsidy will continue to be provided for supplies of

PDS Kerosene and domestic LPG to far flung areas. The
freight subsidy will be borne by the Consolidated Fund of India
with effect from 1st April 2002.
4.
The price of indigenous crude oil of Oil and Natural Gas

Corporation Ltd. and Oil India Ltd. will be market-determined
with effect from 1st April 2002.
5.
The oil pool accounts will be wound up with effect from 1st
April 2002. The cumulative outstanding of the oil companies
against the pool account will be liquidated in the following
manner:
(c)
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1.
The Government will issue bonds to the extent of 80% of

the amount equivalent to the provisional amount of the
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The pending claims relating to the APM period, including

the updation of cost and margins for the fiscal year 200102, will be finalised as expeditiously as possible. The
C&AG will be requested to do a special audit of the oil pool
accounts. The whole of the balance amount due to the oil
companies will be liquidated by issuing bonds for the
remaining amount after the audit.
The contingent liabilities under the pending litigations,

pertaining to the APM period, will be settled from the
Government budget as and when such litigations are
finally decided.
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6.
The Oil Coordination Committee wound up with effect from

1st April 2002.
7.
A cell, by the name "Petroleum Planning and Analysis Cell",

was created under the Ministry of Petroleum & Natural Gas,
effective 1st April 2002 to assist the Ministry. The expenditure
on this cell is to be borne by the Oil Industry Development
Board (OIDB).
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settled outstanding of the oil companies upto 31st March

2002.
Notes
8.
The new entrants, including private sector, were allowed to

market transportation fuels namely, motor spirit, high speed
diesel and aviation turbine fuel as per the guidelines contained
in the Ministry of Petroleum and Natural Gas Resolution No.
P-23015/1/2001-Mkt. Dated 8th March 2002.
9.
Regulatory mechanism will be set up to oversee the

functioning of the downstream petroleum sector.
(c)
Marketing of Product by Private Sector

The Government of India has decided to grant authorisation to
market transportation of fuels, namely, MS, HSD and ATF to the
new entrants including the private sector, after taking into account
the recommendations of the Report, "Indian Hydrocarbon Vision
2025". The guidelines for granting of authorisation to market
transportation-fuels are given below:
1.
As per the Resolution of the Government of India dated 21st

November, 1997, companies owning and operating refineries
with an investment of at least ` 2,000 crore or oil exploration
and production companies producing at least 3 million tonnes
4.
Notes
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3.
Now, authorisation to market transportation-fuels, namely,

Motor Spirit (MS), High Speed Diesel (HSD) and Aviation
Turbine Fuel (ATF), is also available to a company investing
or proposing to invest ` 2,000 crore in Exploration and
Production (E&P), refining, pipelines or terminals. The
valuation of the investments for the above purposes will' be got
done by the Government to its satisfaction.
In case of future investments, the time-frame for making such
investments in the eligible activities would be counted as ten
years from the date of grant of authorisation for marketing of
transportation-fuels for all projects taken up under this
scheme. Within the overall time-frame of ten years for making
investment of ` 2,000 crore in the eligible activities, financial
closure should be achieved within five years, and the
project/projects completed in all respects within ten years. The
aforesaid period of ten years includes the period earmarked for
financial closure. To be eligible, the company will be required
to make such investments as would result in the additionality
to the existing assets and/or creation of new assets in the
eligible activities.
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2.
123
of crude oil annually, are entitled for marketing rights for

transportation-fuels.
Investment in the following assets is considered eligible:
(a) Setting up new grass-root refineries and/or expansion of

the existing refineries along with facilities like crude oil
receipt and transportation facilities.
(b) Exploration and production of hydrocarbons including coal
bed methane and associated facilities like crude
oil/natural gas pipelines, crude oil and natural gas
processing plants.
(c) Terminals for crude oil/LNG.
(c)
(d) Common carrier natural gas/petroleum products/LPG

pipelines;
Provided in case of "common carrier pipelines", the
investor world be subject to all rules and regulations
relating to a regulatory mechanism that may be laid down
in future.
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124
(e) Investment in the above activities for setting up

additional assets for improvement in quality of product to
meet environmentally related norms.
Notes
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5.
The requirement of the specified amount of actual or proposed

investment would be applicable to the total of the various
investments/proposed, investments by the company in the
eligible activities and would 'not be" restricted to any single
activity.
6.
(a) The company proposing to make the specified level of

investment in the eligible activities or a company which
has already made ` 2000 crore of investment in the
eligible activities but is yet to complete the project projects
will be required to sign an agreement containing
conditions and milestones, with the Government in the
Ministry of Petroleum and Natural Gas (MoP&NG)/
Regulatory Board.
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The activities other than those specified above would not be

eligible.
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(c)
(b) The agreement would, inter-alia, have specific provisions

for bank guarantee of ` 500 crore for the proposed
investment. The guarantee, where imposed, would be
discharged on completion of the investment of ` 2,000
crore but the obligation of the applicant to complete the
project would continue till final completion of the project.
7.
The Government/Regulatory Board shall review the progress

of project/projects periodically with the concerned parties to
satisfy itself that the conditions and milestones given in the
agreement are being fully complied and there is no slippage
therein. If the investment up to ` 2000 crore is delayed beyond
ten years, then the bank guarantee may be invoked and any
other penalty as provided in the agreement imposed including
the cancellation of authorisation to market transportationfuels. In cases where, after investment of ` 2000 crore, the
project remains incomplete beyond the period, specified by the
applicant in his scheme, the market authorisation can be
withdrawn.
8.
The investments made or proposed-to-be-made in the eligible

activities would be in the form of equity or equity-like-
Notes
Every eligible company would get only one authorisation, i.e.,

the company that has invested or proposes to invest in the
eligible activities either in its name or in the name of the
company in which investment has been made or is proposed to
be made.
___________________
10. The authorisation to market transportation-fuels may be

exercised either by the eligible company itself or through its
subsidiary or through its Joint Venture (JV) company with
other eligible company/companies or through its JV company
with a Public Sector Undertaking already marketing
transportation-fuels.
___________________
11. The authorisation to market transportation-fuels will not be

transferable without permission of the Government.
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9.
125
instruments, e.g. convertible debentures (fully or partially), or

debt with recourse to the company.
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12. The company seeking authorisation to market transportationfuels will be required to make an application in the specified
form, accompanied by such fees as may be specified, giving
details of the scheme of marketing for which authorisation is
sought. There shall be no limit to the quantum and size of the
scheme and the number and location of Retail Outlets (ROs) in
the scheme provided that no encroachments on the existing
retail outlets will be allowed. However, tile marketing scheme
shall, by way of information, contain details of:
(a) The source of supply of products to be marketed;
(b) Tankage and other infrastructure established/proposed to

be established along with their capacity;
(c) Means of transportation of products to depots and to ROs;
(d) The number and locations of ROs proposed to be
established and details of their storage and dispensing
capacity;
(c)
(e) The total quantum and type of products to be covered

under the marketing scheme.
The scheme will specifically outline the mode of compliance
volunteered by the eligible company relating to retail service
obligations and marketing service obligations as may be laid
down by the Government/Regulatory Board.
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13. After scrutinising the scheme, the Government or the

Regulatory Board, as the case may be, may give authorisation
to the eligible company imposing conditions in public interest,
which may include:
PE
S
Notes
Servicing remote areas and low service areas as may be

declared by the Central Government from time to time, by
setting up ROs in such areas at least in proportion to the
existing percentage of ROs in the remote areas and low service
areas respective at the beginning of the year of applying for
authorisation.
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The Government/Regulatory Board shall have the power to cancel

the marketing authorisation if the eligible company fails to set up
retail outlets in the remote and low service areas as directed by the
Government/Regulatory Board while issuing authorisation.
___________________
Future Outlook and Policy Imperatives

In order to have strategic resources in the country, both the
refining and marketing companies must be made to develop
tankage cover of 45 days each, for crude and petroleum products,
so that the country, as a whole, has reserves of 90 days of
petroleum products. Naturally these companies will have to be
suitably compensated for carrying larger than normal inventories
needed for their operation by suitable price adjustments.
(c)
The impact of deregulation of downstream marketing is quite

uncertain due to the following reasons:
1.
Effects of competition: Amidst competitive environment the

marketing companies would need to make substantial
investments in upgradation of marketing outlets in the
creation of brand image. Advertisement costs are likely to
increase, the commission payable to dealers/distributors is
likely to move up, and dealers/distributors may be given
supplies on credit. All this has been witnessed in the
lubricants sector.
2.
Capex for upgradation of distribution infrastructure:

Companies would be required to set up new distribution
infrastructure in all locations where they are presently taking
hospitality of other oil companies and this could mean large
investments. It may also be noted that all these investments
have to be made within the next 6 years that could be a tall
order for all the companies. Though some hospitality
4.
Realignment of markets: Due to various constraints of

distribution infrastructure, product availability, etc. it may
become unviable for some of the companies to be present in all
markets and some re-alignment may take place, by which the
companies may forego their share in unviable markets.
Cash generation from LPG: Currently the biggest cash cow

for marketing companies is packed LPG. It is about ` 2 for
every rupee spent. 100% cost of cylinders is reimbursed to the
companies and the filling margins are extremely attractive.
The view is that cash generation could erode with
deregulation.
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3.
Direct competition from refineries: In the case of bulk

products like naphtha, FO, LSHS and bitumen, the refining
companies may begin to market their products directly with
large industrial consumers and this could result in severe
erosion of market share of the marketing companies. The
margins on these products are also likely to be under
continuous pressure.
6.
Fluctuating
marketing
margins:
As
prevalent
internationally, the companies may not be in a position to
change the prices of products, especially the retail products, in
response to temporary fluctuations in landing prices of
imported products/transfer price of refineries. In countries
where free market mechanism prevails, it has been noticed
that though the trading prices of refined products change
frequently, the retail selling prices do not fluctuate so
frequently, and it is the marketing margin, which fluctuates.
(c)
5.
7.
127
Notes
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arrangements may continue due to various compulsions, the

companies utilising these facilities would be required to pay
market-related price. Since the SPE/product sharing
arrangements have done away with, respective companies
would have to arrange product availability in their markets
and this could mean haulage of products and consequent
transportation costs.
The GMMs earned by the marketing companies in a deregulated scenario would thus critically depend on the
strategies and focus of each of the companies and it would be
very difficult, to quantify the earnings of the players in the
downstream marketing. The integrated companies, i.e., IOC,
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Petro Economics
Notes
BPC and HPCL would, however, emerge stronger than simply

refining and marketing companies.
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___________________
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Check Your Progress

Fill in the blanks:
1. The authorisation to market transportation-fuels will

not be transferable without permission of the
...
2. Currently the biggest cash cow for marketing companies
is packed ...
___________________
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Summary
LPG was introduced in mid-fifties as a cooking fuel by

multinational oil companies. IOC began marketing the product in
1965. In 1986-87, there were 123.7 lakh LPG consumers as against
33.3 lakh in 1980-81. They were served by 3071 distributors and
consumed 15 lakh tonnes of LPG.
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128
(c)
Four Public Sector Oil Marketing Companies (OMCs) viz., Indian

Oil Corporation Limited, Bharat Petroleum Corporation Limited,
Hindustan Petroleum Corporation Limited and IBP Co. Limited
are engaged in marketing of LPG in the country. Since logistic
costs play a significant role in commercial consideration, with
growing competition, each company is trying to reduce costs of
production, transportation, overheads, etc. Expansion of pipeline
network is taking place for reducing transportation costs and
product losses. It is expected that each company will therefore try
to expand its pipeline network in accordance to the Government
policy guidelines and provisions of the Act including the
market/retail service obligations and other regulations under the
Act. The balance products would continue to move by rail/road.
As per the Vision-2015 adopted for the LPG sector, a target has
been given to the OMCs to raise the over-all LPG population coverage
to 75% in the country by releasing 5.5. crore new LPG connections by
2015, especially in rural areas and under-covered areas.
The Government of India has decided to grant authorisation to
market transportation of fuels, namely, MS, HSD and ATF to the
new entrants including the private sector, after taking into account
the recommendations of the Report, "Indian Hydrocarbon Vision
2025".
Lesson End Activity

Research and prepare a report on the growth of CNG in India.
129
Notes
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Keywords
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Distribution Channel: Distribution channel means the way

through which goods and services flow from vendor to the
consumer.
LPG: LPG was introduced in mid-fifties as a cooking fuel by

multinational oil companies.
RGGLVY: Rajiv Gandhi Gramin LPG Vitran Yojana.
1. Discuss the evolution of marketing and distribution of

petroleum products in India.
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2. What are the recent trends in LPG marketing by PSUs?
3. Write a note on the marketing and distribution facilities in

India.
4. Discuss the future outlook and policy imperatives in marketing
and distribution of petroleum products.
Further Readings
Books

KPMG, Mumbai.
(c)

Web Readings
http://www.eia.gov
http://www.bp.com
www.business.gov.in
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Petro Economics
130
Notes
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(c)
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UNIT 9: Growth and Deregulation of Indian Oil Sector
Unit 9
131
Notes
Activity
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Growth and Deregulation of

Indian Oil Sector
Show
a tabular representation
___________________
of the pioneers in the use of
joint___________________
ventures for restructuring
on a chart paper.
___________________
___________________
Objectives
topics:
\
___________________
___________________
___________________
___________________
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Introduction
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Different sectors of the Indian economy have progressively moved

towards the market-driven regimes in the past few years. In the
sectors requiring regulatory intervention, viz. electricity, telecom,
etc. statutory regulators have been established.
The Petroleum and Natural Gas Regulatory Board Act, 2006 was
enacted in April, 2006. Consequently, Government has set up in
October, 2007, the Petroleum and Natural Gas Regulatory Board
(PNGRB) to regulate the refining, processing, storage,
transportation, distribution, marketing and sale of petroleum,
petroleum products and natural gas, excluding production of crude
oil and natural gas.
Regulatory reforms permit and encourage market forces to

enhance competition and produce a more competitive and efficient
industry structure.
(c)
Restructuring has become the buzz word in Indias Corporate

Sector; it is more out of compulsion than option. Organisations of
all sorts: manufacturing companies, service oriented units, public
sector units and now the government have started restructuring
themselves. The basic compulsion for restructuring is emanating
from the need for growth and change in the fast-changing market
place in India and abroad.
Petro Economics
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Restructuring as a concept may be understood as a process by

which organisations make internal changes in order to efficiently
utilise managerial synergy and meet the needs of the market."
These needs could be changes in organisation-structure, financial
restructuring, technological upgradation, market orientation and
so on. Restructuring is basically a process of change and is a
function of the needs of the organisation at a particular point
of time. Thus, the needs, dimensions and extent are linked and
these three combine together in order to give the volume of
restructuring, on one side, and the strategies, on the other.
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There are various dimensions of restructuring. Some of the major

dimensions of restructuring are:
___________________
Business/portfolio restructuring
___________________
Technical restructuring
Financial restructuring
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Organisational restructuring
There is nothing specifically called as market restructuring due to

two reasons:
1.
Entire restructuring exercise is to reorient the organisation

towards the market, and
2.
Any restructuring in the functional area of marketing would

ultimately be a mixture of the said four types.
These four major dimensions of restructuring are further
subdivided into component parts as shown in Figure 9.1.
Restructuring
(c)
Business Portfolio
Restructuring
Technical
Restructuring
Financial
Restructuring
Organisational
Restructuring
Discrete
Technological
Capital
Structural
Incremental
Facility
Asset
Management
Figure 9.1: Dimensions of Restructuring
Successful companies are focussing on the things they do best and

divesting those parts of the organisation that no longer fit in with
the overall vision. Constant shifts in global markets, product and
long-term objectives of companies demand that restructuring be a

continuous process, not a one-time event. Companies restructure
for eight reasons (Bandrowski, 1991):
133
manufacturing technologies, the positions of competitors and the
Notes
___________________
___________________
To sustain growth and financial performance.
2.
To get back to the core.
3.
Because of poor prospects for the core business.
___________________
4.
Because of shifts in markets and technology.
___________________
5.
Due to a volume or profit shortfall.
___________________
6.
To accomplish equity carve-outs.
7.
To achieve breakup value.
8.
In leverage buy-outs.
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1.
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How should a multi-divisional company go about restructuring

itself to increase return on equity and growth in earnings? The
1.
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process involves following steps (Bandrowski, 1991):

Profile of Business (Analysis)
Defining the business units, depending on their size and

potential, product/market segments may need to be
analysed, separately.
Summarise for each its niche, strategic fit, profitability,

growth, cash-flow competitive position, possible cost and
asset reduction, technologies and potential for innovation.
Develop a set of corporate investment criteria. Table 9.1
presents a list of criteria with their definitions for a large,
diversified company.
2.
Develop a Corporate Vision (Creativity)

Some questions to ask are:
What is the core business?

Which
units
could
participate
in
interdivisional
(c)
opportunities?
What will be the market and competitive environment

then?
What will it take to win in the market place?
3.
Rank of Divisions (Judgement)
Petro Economics
134
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Table 9.1: Corporate Investment Criteria for a Large Diversified

Company
I.
Managements expertise and past success are in two areas:

distribution services and speciality building materials. We will stress
these areas in the future.
___________________
___________________
Investments outside these areas must (a) offer very attractive

financial returns, (b) possess minimum risk, and (c) not consume
large amounts of cash.
___________________
___________________
___________________
Capitalise on the Companys Strengths
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Overlay on ranked list of division the following categories.

Starting from the top and working down:
Notes
II.
Present Attractive Financial Returns
Each divisions return on investment must be raised to a level

exceeding its cost of capital.
___________________
A return less than the cost of capital is tolerable only when (a) nearterm earnings growth is rapid and (b) returns will increase
significantly when growth slows.
___________________
III. Possess Growth Potential
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Give particular emphasis to divisions serving high-growth market

niches.
Also invest in divisions that can increase their penetration of
moderate growth markets.
IV. Offer Low Earning Cyclicality
Maintain low profile in businesses serving cyclical markets.
The exception is when a division (a) realises very high returns in

good times, (b) focuses on less cyclical segments of the overall market,
(c) serves two or more cyclical markets, and (d) has flexibility due to a
small fixed asset base.
V.
Represent Potential Critical Mass
Invest heavily in divisions that have or can attain a dominant

position in their market or niche, enabling them to (a) be the price
leader, (b) have economies of scale, and (c) control distribution.
Favour those divisions that have synergies with others.
VI. Can Built Customer Franchise
(c)
Invest in non-commodity products and services that are or can be

enhanced through some unique value added.
Favour divisions and product lines in which we can develop (a) brand
preference, (b) customer loyalty, and (c) premium pricing.
Heavy investment businesses.
Medium investment businesses.
Low investment businesses.
Turn around businesses.
Divestment businesses.
Amount of funds the company has for investment.
2.
Expectation of cash to be generated or used by the divisions in

each category.
3.
Determine Major Moves (Planning)

It should present:
Mission, vision, objective, strategy and financial

forecast for the overall company.
The same for each division.
How the mix of divisions will shift overtime?

What to do with each division and when?
Summary of financial implications of divestitures and

reinvestments with particular attention to cash flow.
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Overall financial forecast for the entire company.

4.
Rejuvenate, Divest and Acquire (Action)
Top management must communicate the vision, take

speedy action, encourage flexible implementation, provide
resources, monitor results and strive for continuous
improvement.
In the never-ending search for ways of gaining a sustainable
competitive advantage, companies have increasingly turned to the
use of strategic alliances as a method of international expansion.
When should strategic alliances be chosen? The answer to this
question has been investigated by many authors. Brouthers et al.
(1995) have answered the question in terms of The Four Cs of
Strategic Alliances. According to the four Cs, strategic alliances
should be utilised when:
Complementary skills are offered by the partners;
Cooperative cultures exist between the firms;
(c)
Notes
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1.
135
Number of divisions falling into each category will depend upon

two primary factors:
The firms have compatible goals;

Commensurate levels of risk are involved, (Figure 9.2).
Joint ventures, traditionally pursued only as a means to expand

into new businesses, offer a way out of the restructuring impasse.
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Companies such as Philips, Corning, Dresser, IBM and Honeywell

have used joint ventures creatively to exit from noncore
businesses. In so doing, these pioneers have departed from
convention in the design and management of their joint ventures
(Table 9.2). In making a hardnosed assessment of whether a joint
venture will indeed be an effective sales vehicle, executives should
address two key questions: what precisely is the nature of our
restructuring problem and what really are the buyers goals?
(Nanda and Williamson, 1995).
Notes
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Table 9.2: Pioneers in the Use of Joint Ventures for Restructuring

Restructurer
(A)
Incoming
Partner
(B)
Business
JV
Start
Partners JV
Shares
Termination
(A-B)
Outcome
Philips
Whirlpool
Consumer
appliances
1989
47-53
1991
Philips received a
substantially
higher price than it
would have through
direct sale.
Whirlpool
established a
strong European
presence.
Corning
CibaGeigy
Medical
diagnostics
1985
50-50
1989
Ciba-Geligy
entered the US
market as a major
player. Corning rid
itself of a
peripheral business
without destroying
the businesss
value.
Honeywell
Bull and
NEC
Mainframe
computers
1987
42.542.5-15
1991
Honeywell exited
the mainframe
computer business
and refocussed on
its electronic
control business.
Bull established a
substantial
presence outside
France. NEC
developed a
channel for
marketing its
computers in the
United States.
Dresser
Kamatsu
Construction
equipment
1988
50-50
1994
Dresser disposed of
its non-core
construction
equipment
business. Kamatsu
strengthened its
US presence.
IBM
Siemens
Marketing,
distribution
and service
of PBX
system
1989
1989
50-50
1992 IBM exited a

price-competitive
supplementary
business. Siemens
strengthened its
presence in the US
telecommunications
market.
(c)
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Notes
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Figure 9.2: four Cs of Successful International Strategic Alliances
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A joint venture is of much more value to a buyer that plans to

apply its own assets and skills to nurturing the business.
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Oil and gas alliances are set to unlock many billions of dollars of
shareholder value in years to come, generating new growth for the
industry. Already Shell and Amoco have pooled most of their west
Texas oil fields to become the first majors to combine operations
across an entire region. Shell and Mobil are doing the same on the
west coast. Amoco has linked its Austin chalk seismic data and
resources positions in Louisiana with Union Pacific Resources
Group. And in deep waters of the Gulf of Mexico, Texaco and
others have established the Deepstar consortium to cut costs and
cycle times. According to most oil companies, alliances will play an
important role in reshaping the industry over the next five years.
In a recent survey it was found that 84 per cent of senior managers
from leading US and Canadian oil companies expect alliances
rather than internal operations to be the main source of
performance improvements (Ernst, et al., 1997). Alliances are often
preferred to acquisitions and divestitures because they bypass or
reduce the valuation, tax and regulatory issues associated with
outright changes in control and allow both parent companies to
retain oil reserves as a hedge against price increases. Five
emerging types of alliance are especially relevant to the upstream
oil industry (Ernst, et al., 1997).
(c)
Consolidation joint ventures.

Alliances with specialists.
Enhanced supplier relationships and outsourcing alliances.
Advantages networks of producers and suppliers.
New, operated by other relationships.
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Table 9.3 gives the schematic details regarding the alliance types.
Notes
Restructuring programme which is going on in oil and gas

companies of the world has been brought about by global
competition due to interplay of market forces and government
policies.
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138
Saint (1996) has discussed the type of government policy measures

which need to be studied fiscal, economic and market in order
to establish a broad level playing field. For an individual oil
company the biggest driving force is in the form of policy changes.
Figure 9.3 gives the details regarding driving forces required for
restructuring the changes.
Table 9.3: Alliance Types
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E and P
examples
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Alliances with
specialists
technological/
regional basin
master
Requirements
for success
Primary
source of
value
Most
relevant
oil
arenas
Shell-Amoco
in the
Permian
Basin BPArcos Alaska
collaboration
on
maintenance,
operations,
procurement,
transport,
drilling
Brutish
AerospaceMatra
Marconi
(aerospace)
Choosing the
right partner
and acting
pre-emptively
Detailed predeal planning
Rapid
Integration
Creating a
new culture
Combining
overlapping
positions for
scale; skills
transfer;
market
leadership
Mature
big oil
areas
Amoco-UPR
in the Austin
Chalk region
Pharma/
biotech
ventures
Allowing
sufficient
autonomy; not
squashing the
specialists
advantages
Retaining
specialists top
talent
Creative deal
structuring to
align
incentives
Bringing
learning in
house
Combining
land and
complementary
skills
Emerging
open
areas
BP-Brown
and Root in
North Sea
maintenance
BP-Arthur
Andersen
PNC BankFirst Data

Bank (bank
processing)
Identifying
right
activities to
outsource
Maintaining
control over
the value
chain
Striking
appropriate
balance
between
competitive
sourcing and
benefits of
extended
agreements
Leveraging
suppliers
skills against
specific
activities;
Increasing
focus on core
activities
All
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Consolidation
joint ventures
Other
industry
examples
Low cost
(c)
Enhanced
supplier
relationships
Contd
Boeing
Multiple
Technology
(c)
New OBO*
relationships
Texaco
Deepstar BP
Andrew Field
Developing
new,
integrated
communication
approaches
Determining
new
performance
metrics
Linking
supplier
returns to
system
performance
Eliminating
overlapping
functions
Ensuring
clear partner
roles (role of
dominant
partner
easiest to
define)
Managing
communications
among
multiple
partners
Tailored
financial
arrangements
Linking with
key partners
to create
supply or
technologybased
advantages
Capturing
benefits of
integrating
supplier and
producers
activities
All
Performance
contracts with
teeth
Effective
mechanisms
to benchmark
performance
and exchange
skills
Partners that
are
contributors,
not shadow
auditors
139
Chrysler-Lear
(car seats)
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Advantages
networks of
producers and
suppliers
Shell-Baker
Hughes in
Gulf of
Mexico
MobileHalliburton
in west Texas
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Reducing
system coats
and cycle
time;
advantages
technology
position
Deep Gulf;
other
complex
exploration
frontiers
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Outsourcing
alliances
Improved
performance;
capability
sharing;
reduced
administrative
costs
All
Figure 9.3: Driving Forces for Restructuring and Change
Petro Economics
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A large number of countries have moved towards market

economies associated with the move to privatisation. Besides this,
most companies are adopting technology in order to develop wide
network with the customers and markets. This has enhanced their
ability to restructure the organisation. Oil companies are entering
into strategic alliances with one another so that they can imbibe
the best not only in terms of technology but also in terms of best
corporate ethics and practices. Such companies are also improving
their financial performance and satisfying the shareholders. But, a
company which wants to cope up with the driving forces in the
competitive environment, should initially work out what it is going
to concentrate. In many companies it has been observed that a
cutter of activities diverts management attention which uses
financial resources but which are generally scarce which can be
more effectively applied to the Core business. Figure 9.4 analyses
the business of a company from two angles, one from the angle of
strategic importance implying what the company is really seeking
to achieve. Another dimension is the economic value of that
business. The fundamental issue facing any company as it starts to
restructure is to say exactly what are the key businesses or core
competencies which it wishes to use in order to drive the company
forward.
Notes
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140
(c)
Figure 9.4: Drive to Consolidate
Another important driving force for restructuring is to have a

vision in terms of what is desired to be achieved in terms of
ambition-driven strategy (Figure 9.5). The vision has been
generated out of a set of values in terms of what one stands for and
a set of views of the future.
141
Notes
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Restructuring requires an integrated approach in which the whole

business is perceived. To become a high performance business it is
imperative to have a strategy which would satisfy all stakeholders,
i.e. shareholders, customers and employees (Figure 9.6).
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Figure 9.5: Vision: A Powerful Tool for Change
Restructuring Requires an Integrated Approach
The high performance business is one which:
Strategy
---------- satisfies its Shareholders
Processes
Organisation
---------- by improving its processes
Resources
---------- and aligning its organisation and

resources.
Figure 9.6: Integrated Approach
(c)
Companies undergoing restructuring and change require the seven

pillars of wisdom to be successful (Figure 9.7). Leadership is at the
top, followed by concentration do what you really need to do.
Then there is targeting, i.e. having the vision to know where you
are going. The fourth is encouragement, and the fifth delegation in
the form of empowerment to make things happen. The sixth is
integration so that the restructuring in change-process is seen
through all its pieces. Finally, there is counselling and the
provision of necessary watching and training.
Petro Economics
142
Notes
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Figure 9.7: Seven Pillars of Wisdom
Change and adaptations are universal constants. They are

becoming prerequisites for the Indian Oil Industry. Restructuring
of other oil companies illustrates the adaptive process and how it
might apply to the Indian context.
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It is true that India must go through an adaptive process because

with upstream activities and downstream capacities failing to keep
up with demand, the gap between domestic crude production and
refinery demand is widening. India is facing a large import bill.
Downstream organisations must respond to rapidly changing
consumer demand which is expected to double by the year 2007.
This could be achieved by shifting the product-mix to the light end
of the barrel. This increase in demand will require ` 55,900 million
additional investments in refinery capacity.
(c)
The starting points for restructuring of oil companies are similar.

Very often the same characteristics of bloat, bureaucracy, poor
resource management, poor asset efficiency and slow process cycle
timings are encountered. There are a couple of situations where
the adaptive processes are quite different, e.g. different regulatory
frameworks (Bloy, 1996).
The government has several options to respond to future needs
from prospective demonopolisation allowing people to invest only
in new opportunities, to restructure in the form of conveying
certain existing opportunities for fields, refineries and so on. By
increasing the degree of private sector participation, competition
intensifies and investments expand. This results in improved
supplies, greater customer choice, lower long-term prices, a
healthier industry and improved revenues to the government. The
available options reflect progressive degrees of private sector
involvement. Arranging the different options in terms of three
criteria the left axis in Figure 9.8 shows the benefits of competition
143
Notes
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with the maximum at the top; on the bottom the availability of

capital with the maximum to the right and government take with
the maximum being at the top. In all the cases, privatisation
produces more competition, more capital and a higher government
takes. This is one way of arranging options by having some
commonalties and some differences.
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(c)
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Figure 9.8: Availability of Investment Capital
Figure 9.9: Options for the Government
Petro Economics
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Stable Monopoly
Reforms Emerge
Identity Crisis
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The changes required in the oil companies are more radical and
sweeping because they need putting in of whole aspects of
infrastructure and architecture which currently do not exist. In the
deregulation process, from an oil companys perspective, these
dimensions always begin as same sort of stable monopoly or
oligopoly with the Government. The competition heats up and
there comes a period when consolidation must occur in the
industry. It is usually at the point of consolidation that the oil
companies choose to make the changes that are necessary to deal
with a competitive environment. Unfortunately, they are often
weakened by the process but ultimately settle into a competitive
arena.
Notes
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144
Refocus
Dynamic
Competition
Domestic industry looks

like the rest of the world.
NOC follows leaders.
Domestic industry overheating leads to

consolidation. NOC has to reshape, then
commences radical changes. Supply/demand
rules. Strong competitions win.
Foreign competitors proliferate and out-compete NOC.

NOC suffers profit deterioration losses, because
bewildered, sometimes tries new business lines.
Demonopolization begins: foreign companies gain a foothold and are offered

exploration rights; oil and product imports and exports expand; new refineries
and retail through joint ventures, asset purchases and share purchases. Price
liberalization and tax reform occurs. NOCs profits rise, but it fails to change to
adapt to new business environment.
Government sets prices. Government allocates capital. Only competition is inter-fuel (e.g.
oil/coal). Stable business environment.
(c)
Figure 9.10: Predictable Patterns: From Monopoly to Competition
In essence, we have to recognise the difference between current

reality and what the Oil Company can and will be in the new
environment. The next step is to identify what needs to change in
the way the company is strategically focussed, what the company
intends to be vertically integrated. The most important aspect is
changing employees mindsets. Corporate culture is a major
145
Notes
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hindrance of the change process necessary to cope up with the new

environment. Another dimension is the process that includes not
only the internal processes but also the relationship of the oil
companies with the government. The government has to move
away from the oil-business. The last dimension is to create new
ways of acquiring and using information. All these integrate the
vision of oil companies with the changing environment in India
and outside.
___________________
___________________
___________________
___________________
Upgrade
Information
___________________
Improve
Processes
Gap
Reorlent
People
Refocus
Strategles
Stable
Monopoly
Fewer people
Broader capabilities with authority,
responsibility, accountability
Financial, rather than physical, focus

Concentrate on core business
___________________
Strategic
vision for
the
company
Dynamic
Competition
Figure 9.11: Preparing for the Future
ONGC - In Retrospect
The history of oil exploration in India is more than hundred years

old. The earliest record of petroleum exploration dates back to 1825
when soldiers of the 46th Regiment during their military
reconnaissance mission rowed up the Burhi Dihing River in Upper
Assam and came across oil seepages at Supkhong village.
However, systematic efforts to locate the seepages were conducted
by H.P. Medicott in 1865 who reported oil seepages in Makur area
while investigating the coal fields of Upper Assam. Based on his
recommendations, the first mechanically drilled well in Asia was
bored at Makum. This well yielded 300 gallons of oil from a depth
of 118 ft. before ceasing the flow. The credit for exploration and
exploitation of oil in this area goes to Assam Railways and Trading
Co. Ltd. (AR&T), who in 1882 acquired a concession covering the
petroleum rights at Makum and additional acreage over what
came to be known as Digboi area in 1888 and it is here that
the history of systematic exploration based on geological
considerations and then available drilling technology were
initiated.
(c)
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Current
Reality
Simpler organisaton
Faster decisions
Streamlined processes
Decision-based
Networked and
accessible
Petro Economics
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Subsequent to the Digboi discovery, exploratory efforts were

extended in many of the exposed anticlinal structures close to the
hill plain junction in Upper Assam-Nagaland. Later Assam Oil
Company (AOC), a subsidiary of AR&T Co. Ltd. in pursuance of
the companys interests acquired areas south of Shillong plateau
in Cachar and Tripura for petroleum exploration. Significant
accumulations of oil were encountered in Badarpur field which was
subsequently developed and exploited until its abandonment,
sometime in early 30s. A number of structures were also mapped
in Tripura and adjoining areas of Bangladesh. Similar efforts to
explore for oil and gas were initiated in the early part of the 20th
century in the western parts of erstwhile India in Potwar region
and substantial accumulations of oil, within time equivalent
horizons of Upper Assam, were found at Khaur and other areas in
Pakistan.
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Beginning with the discovery well at Digboi in 1st September,

1889, some encouraging results were obtained in the wells drilled
subsequently and an average initial production of 200 gallons per
day was established from a depth of 662 ft.
Notes
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146
Soon after the Indian Independence, the activities of Assam Oil

Company and that of the Burma Oil Company, operating under the
aegis of Shell Oil, were merged to form a semi-government and
private equity partnership company, known as Oil India Limited.
The activities of this company were extended to the Assam plains
and as a consequence of which large accumulations first at
Naharkatiya and then, at Moran, were located by systematic
exploration-efforts. These discoveries represent some of the best
known oil and gas accumulations in the north-eastern sector which
continue to contribute significantly to the countrys oil production,
till date.
(c)
Fifties: In the fifties the government of India, had to bend before

Burmah-Shell, Stanvac and Caltex for getting them to agree to set
up oil refineries in India. It had given them right to import crude
from their own sources at their own prices and an assurance of nonationalisation for 25 years.
In the early fifties, the oil explorer encountered resistance from the
political leaders and science-administration managers, whose
deep-seated belief that there were no oil reserves outside the
Brahmaputra valley of Assam so much so that the then
redoubtable Dy. Chairman of the Planning Commission, Shri V.T.
Krishnamacharya challengingly said that he would weigh K.D.
Malviya the then Minister for Petroleum in gold if he succeeded in
finding oil, elsewhere. There was also the belief that oil exploration
Notes
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It was only when the erstwhile Indian Ambassador to the USA, Mr

G.L. Mehta, sent a moving report to the Government of India
describing how the United Fruit Companys tight control over the
economy and polities of several Latin American Countries had
driven the then helpless Brazilian President, Late Varghes to
commit suicide that Pandit Jawahar Lal Nehru and Maulana Azad
started giving strong support to the indigenous efforts for oil
exploration. It was felt that if United Fruit Company could
exercise so much control, how much deadlier the grip of Standard
Oil of New Jersey and Shell International could be to any
Countrys political economy.
147
was a gamble and investing money in it was throwing resources

down the drain.
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It was then recognised that establishing an indigenous oil company

to explore and exploit potential reserves was a necessity. A
Petroleum division within the Geological Survey of India (GSI) was
created. A delegation, headed by Late K.D. Malviya, the then
Minister of Natural Resources and Scientific Research visited
USSR, Sweden, the UK the Netherlands, Romania, France, and
West Germany to study the status of the oil industry and to
ascertain the availability of equipment and facilities for training.
The Petroleum Division later became the Directorate of Oil and
Natural Gas under the Ministry of Natural Resources. Later, this
was raised to the status of a Commission on August 14, 1956 by an
Act of Parliament. It was further converted into a Statutory Body,
with the main function to plan, promote and implement
programmes for the development of petroleum resources. Thus,
Oil and Natural Gas Commission (now Oil and Natural Gas
Corporation Limited) was born.
Meanwhile, Burmah Oil also transferred bulk of its share to the
Government of India, and accordingly, a joint venture company
was formed, named Oil India Limited. In 1981, all shares of OIL
were taken over by the Government and it was converted into a
Natural Oil Company.
(c)
When ONGC began its activities in 1956, production of crude oil

from India was only four lakh tonnes. ONGC was established at a
time when there was very little appreciation for the Countrys
capabilities and resources in the petroleum sector. Thanks to the
expert opinion from Britain, it was assumed that, except in Assam,
India has no oil. Pitted against the multinational oil companies,
ONGCs chances were predicted to be very slim. In such an
environment of doubt and confusion there were two stalwarts, who
were perennial source of inspiration for the Commission. One was
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In the initial years geological and geophysical surveys were

undertaken exclusively, so as to locate prospective sites where
wells could be drilled and tested for occurrence of oil and gas. The
first well was at Jwalamukhi where gas was struck in May 1958,
in small quantities. In the same year, oil was struck in Cambay.
This was followed by the discovery of oil in Ankleshwar (1960).
The first commercial production of oil and natural gas by ONGC
started from the Ankleshwar field on September 1, 1961 at the rate
of 100 tonnes per day. With more fields producing oil in Gujarat,
the Koyali Refinery was set up to refine indigenous oil. Through
the 1960s, there were major oil strikes in Assam in places like
Rudrasagar, Lakwa, Galeki, etc. ONGCs commercial production
from Assam began in March, 1966. During the 60s, oil production
in the country was confined to two States of Assam and Gujarat.
CC
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___________________
Pandit Jawaharlal Nehru who gave support and encouragement to

the Commissions Geoscientists and the second man was Late KD
Malviya, the then Minister in Nehrus Cabinet who is considered
as the real architect of Indias petroleum policy. Braving all these
discouraging factors, the Commission started prospecting for oil in
Cambay in Gujarat.
Notes
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148
Realising the importance of the oil industry for Indias future,

Pandit Nehru in one of his speeches said that success in finding
considerable quantities of oil will make a tremendous difference to
India and Indias economy. We have seen, in recent months and
years, how vital is oil, not only in the Worlds politics. Pandit
Nehru was conscious of the high risks and high rewards involved
in the exploration activity. Therefore, he said, the policy is dead
clear and the policy is, that I repeat, that oil is one of the major
commodities in the Public sector."
(c)
Seventies: In the late sixties and in the decades of the seventies

significant breakthroughs were achieved around the world in the
offshore exploration. A fillip was given to the offshore efforts when
OPEC countries repeatedly raised the crude oil price from 1973
onwards. While ONGC had been achieving steady success in its
inland operations, the realisation came in the first year of
seventies that a debut had to be made in the sea.
A Russian seismic ship had carried out reconnaissance work for
ONGC in 1964-67 and had collected data that provided evidence of
some promising structures in Offshore Mumbai. Detailed seismic
survey was accordingly taken up in these areas in 1972-73. About
the same time, ONGC placed an order in Japan for its mobile
offshore rig Sagar Samrat.
149
Notes
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In February 1974, oil was struck in Bombay-High and this was the
turning point in the saga of Indian petroleum industry. Bombay-High
has been classified as one of the giant oil fields of the World and its
discovery dramatically altered the energy scenario of India. The field
was put on production in May 1976 within a short-time after its
discovery. This is also a sort of world record for such giant fields.
Bombay-High field, located about 160 kilometres NNW of Mumbai
city in the Arabian Sea is now the nerve centre of ONGCs activities
for the last 22 years. This field alone contributes a little over 40 per
cent of the Corporations total annual oil production currently.
It is believed that in terms of the number of Offshore structures,
platforms and pipelines, Bombay-High stands on top of the list of
oil fields located all over the world.
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Eighties: The eighties were the years of more exploration and

production. During the eighties ONGC discovered fields like
Neelam, Gandhar and many other small fields, both onshore and
offshore. Apart from consolidation of its position in Mumbai
Offshore, Assam and Gujarat, ONGC increased its activities in the
Krishna-Godavari Basin and the Cauvery basin in the South. It
intensified its activities in the East-Coast of India and discovered a
number of small structures.
Nineties: The nineties were the years of growth in domestic oil
production. The production in 1990-91 was 33.02 MMT and India
achieved a self-sufficiency level of 56%. To meet the growing
demand, ONGC accelerated the rate of production by introducing
major projects like Development of Neelam fields, Development of
L-II and L-III schemes of Mumbai Offshore, besides production
from small fields.
(c)
The conceptualisation and implementation of these expansion

schemes took place during the VIII plan period. These mega
projects involving 5 major process platforms, 29 well-head
platforms and more than 1000 kilometre of pipelines were installed
in record time, without time and cost overruns. The sheer
magnitude of the technology and capital required for
conceptualisation, design, engineering, fabrication and installation
of thousands of tonnes of steel structure, production and
transportation system which can withstand harsh marine
environment called for vision, dedication and grit on the part of the
people, who are manning these operations. By completing these
projects on time, ONGC has proved its project-execution
capabilities and has emerged as one of the few companies in the
world which can efficiently man all the activities of an Oil
Exploration & Production (E&P) company.
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With an enhanced oil recovery programme, the domestic oil

production reached an all-time high of 35.16 MMT in the year
1995-96. But because of the increased consumption, the selfsufficiency level has come down to 44%. The domestic production in
1997-98 was 34.30 MMT and the self-sufficiency level was 37%.
This has gone down to 31% during 2002-2003. With the expected
growth in demand, the Indias self-sufficiency in oil will reduce to
less than 25% in the next 10 years.
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Work Programmes have been undertaken primarily by ONGC for

IOR/EOR in its 15 largest fields, which account for 80% of ONGCs
reserves and production. The estimated cost of 21 schemes is about
` 30,033 crore. The expected gain in oil from 21 schemes will be
around 156 MMT by 2030. 15 schemes have been completed (5 in
offshore and 10 in Gujarat). 6 schemes are under implementation
in Assam & Western Offshore. The cumulative incremental oil gain
was of the order of 56.303 MMT upto March, 2010. ONGC has
made investment of `21402 crore upto March, 2010.
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OIL in Retrospect
(c)
Oil India Ltd. (OIL) is a public sector undertaking involved in the

exploration and production of hydrocarbons (crude oil and natural
gas), extraction of liquified petroleum gas and the transportation of
hydrocarbons through its pipeline network. The operations of the
company are largely concentrated in the North-East region of the
country and account for about 7 per cent of the total area being
explored in the 26 sedimentary basins in India. OIL holds mining
leases covering an area of about 1990 square kilometres in Assam.
It also holds petroleum exploration licences, covering an area of
552 square kilometres in Arunachal Pradesh.
Oil India Private Ltd. was a registered company in February 1959 set
up as a joint venture between the Government of India and the
Burmah Oil Company, UK. The Government had a 33.33 per cent
stake and the rest of the equity was held by the Burmah Oil
Company. The companys name was changed to Oil India Ltd. (OIL)
in 1961 and the equity stakes were realigned to 50:50. The objective
of the company was to develop the oilfields, discovered in Assam.
During the mid-fifties, Assam Oil Company, a subsidiary of Burmah
Oil Company, had discovered oil in Naharkatiya and Moran. In 1981,
the Government acquired the entire equity of the company.
It has constructed a pipeline to transport crude oil from the
oilfields to the refineries at Guwahati, Barauni and Digboi.
151
Table 9.4: Growth of Indian Petroleum Industry at a Glance
Notes
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Notes: *: Provisional ! : As on 1st April of initial year. N.A.: Not Available.

Source: Public Sector Undertakings / DGCI&S, Kolkata / Ministry of Finance/Petroleum Planning &
Analysis Cell.
Petro Economics
152
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Research
on the changing
___________________
environment of ONGC.
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Check Your Progress

Fill in the blanks:
1. a major hindrance of the change

process necessary to cope up with the new environment.
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Notes
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2. Oil India Ltd. (OIL) is a public sector undertaking

involved in the exploration and production of
, extraction of liquified petroleum gas
and the transportation of hydrocarbons through its
pipeline network.
The biggest primary producer of oil and natural gas is all set to
transform itself into an efficient value-creator. The environment in
which ONGC operates is changing rapidly.
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Demand-supply gap widening

Indian crude demand
outpacing supply
ONGCs assets mature but
significant potential remains
Technology has improved

dramatically
Advanced techniques
enhancing recovery and

productivity
Data API and
management becoming
even more critical
ON GC must
embrace new
opportunities and
challenges
Regulations changing
Competition being
introduced e.g. NELP

Operating freedom and
accountability increasing
Worldwide E&P restructuring

Independents emerging
Service company and
operator roles converging

Major and NOCs
reorganising around assets
(c)
Figure 9.12: ONGCs Environment is Changing Rapidly
A widening gap in demand and supply of oil in India is exerting

pressure on ONGC to enhance recovery. The changing Indian
regulatory environment is beginning to allow greater operating
freedom for ONGC but is also introducing more competition.
Restructuring in the global E&P industry has led to dramatic cost
reduction and emergence of credible competitors. Technology in the
global scene has improved dramatically (e.g. 3D/4D seismic, FPSU,
ONGC must face challenges and embrace opportunities. ONGC

has to focus on the following:
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(a) Reserve accretion: ONGC must recreate its frontier of the

70s when reserve accretion was the mantra and the best
organisational resources were deployed on the most important
areas.
153
slim hole drilling). To stay at the forefront, ONGC too will have to
adopt them appropriately.
(b) Commercial objectives: To retain its premier position in the

increasingly competitive E&P environment, ONGC must
enforce commercial accountability. Each of ONGCs assets (e.g.
exploratory areas, producing fields, support services, research
institutes) must become commercially accountable and
appropriately empowered business units.
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To make such a system work, ONGC will need to reinforce a

commercial performance ethic. This will require an evaluation
system that motivate, recognises and rewards good
performance. In addition, several systems and procedures
related to MM, finance and personnel will need to be modified.
(c) Multidisciplinary working approaches: The contribution
of multidisciplinary working approaches to improve the
performance of oil companies worldwide is widely recognised.
ONGC must move away from its current functional approach
(which, often, leads to fragmentation of efforts), and depend
more on multidisciplinary cross-functional teams.
(d) Additional opportunities: Several potentially attractive
growth opportunities are available to ONGC in addition to its
existing Indian E&P business. These include overseas E&P
(via ONGC Videsh), oilfield services, and downstream
integration into gas-related areas.
Changing Environment Implies Fundamental Change at

ONGC
(c)
ONGC possesses the intrinsic capabilities to make these

fundamental changes. In recognition of this potential, the
government identified ONGC as one of the Navratnas, who have
been allowed significantly enhanced operating freedom. Further,
ONGC, GAIL and IOC have been identified to continue as flagship
companies of GoI.
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The basic elements to execute the organisational changes are in

place; the need for change is well-recognised at all levels;
technology gaps are generally well-understood; understanding of
the detailed requirements for change exists; in fact, some
initiatives (e.g. upgradation of financial systems, multidisciplinary
team meetings at some work centres) are already under way.
What is now required is to develop detailed plans to change
organisational structure, work practices and procedures. The
energy of existing initiatives needs to be combined with these
plans to generate the necessary momentum for change.
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Figure 9.13: Changing Environment Implies

Fundamental Change at ONGC
(c)
Exploration Strategy
ONGCs current exploration strategy includes greater attention to

the six established basins by reinterpreting existing data using
improved techniques. It will simultaneously explore new basins
and move into deep-water exploration. Overseas operations,
through ONGC Videsh Ltd. will be a major growth area. It has
acquired acreage in Kazakhstan and plans to concentrate on 6 to 8
countries in Central Asia and the Middle East since they represent
the best opportunity for ONGC. Negotiations are also underway
with several international oil companies for assistance on
enhanced oil recovery techniques on existing fields, most notably
Neelam, the production of which is steadily declining.
Steps by ONGC to Increase Production

(a) Additional production from Bombay High: ONGC conducted
3-D seismic survey on Bombay High field and the acquisition of
3-D seismic data of the entire field has been completed.
155
(b) Production from marginal fields: ONGC has successfully

completed development of two marginal fields B173A and
B121/119.
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Diversification
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(c) Deep sea drilling: ONGC has commenced deep sea drilling
for the first time in May 98 at Cauvery basin at a water depth
of 750 metres and successfully completed the well.
In its sincere effort to become a global giant, ONGC has embarked

upon the following diversification programmes:
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(a) Liquefied Natural Gas (LNG): ONGC along with GAIL,

IOC and the BPCL have promoted a ` 12,000 million Company
called, Petronet LNG Ltd. for setting up of LNG Terminal at
Dahej and Cochin for which the Government of India has
conveyed approval for development of facilities for import and
utilisation of LNG. The first-LNG shipment has been received
at Dahej in Feb. 2004.
(b) Paraxylene Plant: ONGC is actively pursuing a
diversification project for recovery of value-added products like
Paraxylene, Ortho-xylene, Benzene, etc. by processing the
Aromatic Rich Naphtha at Hazira.
(c)
The Government facilitated restructuring of the equity holding

in MRPL, a joint sector refinery promoted by HPCL and the
Aditya Birla Group of companies. Accordingly, the 37.5% stake
of the Aditya Birla Group was purchased by ONGC along with
further investment of ` 600 crore in the form of equity to take
ONGC's stake to 51%. The financial restructuring was
completed before 31.3.2003 which helped in preventing MRPL
with one of the most modern refineries of 9 million tonnes
capacity from turning sick. The revival prevented loss of
employment of about 2000 personnel, loss to banks and
financial institutions of over ` 5,400 crore given as loans for
the project and to over ` 7.5 lakh individual investors in this
prime national asset. With authorisation to set up 1,100 ROs
in hand and the controlling stake in MRPL, this initiative
makes ONGC the first fully integrated oil company in the
country.
(c) Power Plant at Hazira: ONGC has signed a MoU with

NTPC for setting up of joint venture power projects. Hazira
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(d) Single Buoy Mooring System (SBMS): An MoU is likely to

be signed shortly with BPCL, HPCL and IOC for setting up in
joint venture an SBM at Hazira for handling import/coastal
movement of petroleum/petrochemical products.
(e) Power Plant at Panipat: An MoU is likely to be signed
shortly with IOC for setting up a 300 MW Gasification
Combined Cycle Power Plant at Panipat.
It is proposed to disinvest 5% of the paid up equity capital of

ONGC from out of the Government share-holding in the PSU.
Presently, Government share-holding in ONGC is 74.14%. After
5% disinvestment, Govt. share will come down to 69.14% of the
total share-holding. Government is estimated to realise about
` 10790 crore at a share price of ` 1369 as on 11.10.2010. In
principle approval of Honble Minister P&NG has been accorded
and Department of Disinvestment has circulated the Draft CCEA
Note for Inter-Ministerial Consultations.
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has been identified as the first project with a capacity of

around 300 MW by using Naphtha and/or surplus gas as fuel
available at Companys Gas Processing Plant at Hazira.
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ONGC looks at marketing of petroleum products

The strategic partnership between oil majors, IOC and ONGC,
kicked off through an equity swap, will take a more concrete shape
with the ONGC planning to get into marketing of petro-products.
Authorisation to market transport fuels has been granted by GoI to
ONGC.
A combination of exploration and marketing would spread the
risks for ONGC as costs involved in exploration are very high with
a lot of uncertainties as to the quality of oil finally struck.
(c)
Organisational Transformation Project (OTP)

As a national oil company, ONGC, in the past, was not always
commercially driven. Financial consultant Arthur Anderson is
helping the company alter its accounting standards to improve
resource-use, while McKinsey & Co is helping to benchmark
ONGC with international oil companies and improve operating
systems. Structured geographically into five regional business
centres until now, ONGC will switch to an asset-based structure
where an asset manager, aided by a multidisciplinary team, will
carry full operating responsibility. All support services, drilling,
Asset-based Organisation Structure
PE
S
logging or seismic acquisition, will be purchased from within

ONGC or from outside. To renew focus on reserve accretion, a
dedicated exploration group has been formed. The asset structure
with multi-disciplinary teams has worked best elsewhere in the
world. If successful, ONGC sees itself producing at least 70% more
oil, 10 years hence, approximately 10-15% from existing fields and
the remaining from frontier areas and overseas facilities.
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For ONGC to maintain its dominant E&P position, it must focus

on reinforcing reserve accretion, enhancing multidisciplinary
working approaches, ensuring clear authority and accountability to
commercial objectives and build teams to tap new growth
opportunities.
This is validated by the experience of most national oil companies

(e.g., Pemex, YPF, etc.), majors and independents (e.g., Shell, Mobil,
British Petroleum, etc.) which show that the best way to meet these
objectives is through an asset-based organisation-structure.
Figure 9.14: Concept of Asset-based Structure for ONGC
(c)
Asset-based is a term used in the upstream oil industry to

describe organisations which assign multidisciplinary asset teams
to each exploratory area and producing field. In international
companies following asset-based approach, each team is headed by
an asset manager who has full responsibility and authority.
Services such as drilling, logging, seismic data acquisition and
processing, major maintenance, logistics, etc. are purchased by the
assets from in-house departments (through explicit transfer prices)
or from external suppliers. The corporate office sets policies for
the company on matters like personnel, finance, equipment
standardisation, high value purchases, etc.
Notes
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Asset-based Structure for ONGC
Notes
The model for an asset-based structure for ONGC shows that the
major building blocks of the organisation would be an exploration
group, several producing assets, central/regional services and
central support functions.
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Under the structure, all personnel working for a producing asset

would report only to its asset manager. The asset manager, in
turn, would sign a performance contract (like an MOU) with the
CMD for maximising reservoir performance. The asset manager,
with support from his multidisciplinary team (MDT), would take
all operational decisions for the asset. The asset would hire
services from within ONGC or from outside. Support functions
such as finance and personnel will be at the corporate level (for
policy-making and key finance and personnel decisions) and within
the assets (for others).
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To renew focus on reserve-accretion a dedicated Exploration Group

will be formed with the sole responsibility for reserve-accretion,
primarily in exploration areas in India and overseas.
Maintaining Functional Excellence in Asset-based Organisations

MDTs enable different disciplines to take reservoir-related
decisions jointly and in an interactive manner. The individual
members of these teams, however, continue to build expertise in
their respective disciplines. This skill-building is facilitated by
central groups responsible for organising technical seminars and
training programmes and providing forums for interactions
between persons of the same discipline.
Asset Multidisciplinary Team
(c)
Responsibility:
Asset
Manager
Sub-surface
Surface
Managing the
reservoir
Managing
surface
facilities
Support
Providing or coordinating MM,
logistics,
personnel,
finance services
Service level agreements

Shared services from region,
corporate and institutes
Figure 9.15: Broad Organisation of Asset Multidisciplinary Team
Game Plan for ONGC
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The latest annual results of ONGC, Indias main crude oil and
natural gas producer, show improved finances on reduced output.
The reason is a mere technicality: ONGC now gets international
prices for crude. The price correction is necessary, to better reflect
scarcity value; we are increasingly and overwhelmingly dependent
on imports. Moreover, there is continuing shortfall in crude output
at Bombay High, ONGCs main producing asset. Improved
reservoir health seems some years away, with corrective measures
long delayed. Worse, there has not been any sizable oil or gas find
for over a decade.
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ONGC's Major Deep Water Exploration Programme
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ONGC, a major Navratna PSU under the Ministry launched the

"Sagar Samriddhi" project to achieve its strategic goal of accreting
4 Billion Tonne Oil Equivalent (BTOE) reserves in deep waters of
India. This should lead to establishing 1 BTOE recoverable
reserves. ONGC is deploying three drilling ships specifically for
this purpose including its own drilling ship 'Sagar Vijay' for water
depths upto 900 metres. 'Discoverer Seven Seas' and 'Bedford
Dolphin', both contracted ships, will undertake drilling in water
depths upto 1800 metres and beyond 1800 metres, respectively.
ONGC will be investing over US$ 0.75 million (` 3.45 crore,
approx.) per day in Project "Sagar Samriddhi".
(c)
The silver lining in the latest results is production of value-added

products, from gas, touching 3.5 MMT. Actually, ONGC is the
countrys largest producer of cooking gas (LPG). But its lack of
presence in marketing and distribution considerably stymies
ONGCs realisations. But the key agenda for ONGC really ought to
be to change its stodgy, departmental systems, with across-theboard corporate restructuring. It needs, for instance, to form joint
ventures for drilling, logging and other critical functional areas to
tap global expertise and improve compensation. ONGC has little
expertise in deeper offshore exploration, and none whatsoever in
production in those waters, where, incidentally, the potential for
striking oil and gas is the maximum. Goldman Sachs research
finds ONGCs lifting costs the least compared with those for the
global majors, but then, the domestic major confined itself to the
shallow offshore and onshore. In fact, a BZW Research study
estimates ONGCs finding costs as well over twice that for the
major (ET. Sep. 99).
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A unique Agreement was signed by ONGC Videsh Limited (OVL)

on 12.3.2003 to acquire 25% share in a 12-Million-Tonne-perannum crude oil producing field in Sudan for about ` 3,220 crore.
The first shipment of Sudan crude was received at Mangalore
Refinery and Petrochemicals Limited (MRPL) on 15.5.2003. This
adds to the success of OVL acquiring 20% stake in Sakhalin Oil
Fields in Russia at a cost of ` 8,500 crore. The country would
annually get from Sakhalin Oil Fields, 4 to 8 Million Tonnes of
crude oil from 2005 and 5 to 8 million cubic metres of gas per day
from 2008 onwards, respectively. The Vietnam gas field where
OVL has 45% share at ` 980 crore investments in the 2 TCF
reserve field commenced commercial supplies of gas to customers
on 18.12.2002. OVL also acquired interests in attractive
exploration blocks in the USA, Myanmar and Libya, in 2003. The
government also approved OVL's agreement with Austrian firm
OMV (26.125%) on 23.8.2003 for buying their stake in an
exploration block 5A in Sudan which has already registered two
significant discoveries. In addition, OVL has entered into an
agreement with OMV to acquire their 24.5% interests in another
Sudanese exploration block 5B also, which has bright oil prospects.
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One of the largest beneficiaries of decontrol is ONGC which will

benefit from higher crude oil prices. The linking of crude prices
with international prices will also help ONGC to manage its large
foreign debt exposure. LPG price decontrol will also significantly
benefit the company. Going forward when natural gas prices are
linked to international fuel oil prices, realisation from gas sales
will also rise significantly.
(c)
The high Government holding in IOC makes it a prime target for

repeated disinvestments. Indian Oils resource generation and
reserves are extremely comfortable and the company does not face
any funding constraints. The size and profitability of IOC makes it
a leader. Moreover, over 80 per cent of the fixed assets of IOC have
been financed through internally generated resources. The position
of IOC in the oil sector would remain insurmountable for quite
some time. Further, the aggressive expansion plans would enable
it to maintain its prominent position in the face of competition.
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IOC has identified investments of about ` 25,000 crore during

the Tenth Plan and projects of about ` 10,000 crore, currently
in hand.
161
To cope with the changing and emerging scenario, IOC has

identified five areas, namely, cost, quality, customer care,
value addition and risk.
Indian Oil nurtures the vision of becoming an integrated and

diversified global energy corporation. It is augmenting
infrastructure and expanding into exploration and production
of crude oil, petrochemicals, power generation, LNG and fuel
management.
It is also globalising its R&D, training and consultancy
services as well as marketing in the downstream sector,
including lubricants.
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Indian Oil has formed a joint venture Indian Oiltanking

Ltd. in association with Oiltanking GmbH, Germany, and
IBP Co. to develop tankage infrastructure. Two other joint
venture companies, Indo-Mobil and Avi Oil India, offer
premium and speciality lubricants. As a partner in Petronet
India Ltd., setting up of product pipelines will also be taken up
in the country. A strategic alliance exists with Air BP in the
area of aviation fuel services.
While Indian Oil is already managing oil terminal in Zambia,
its premium range of SERVO lubricants are being marketed in
Nepal and UAE, with other markets to follow soon.
Memoranda have been signed with Petronas of Malaysia,
Marubeni of Japan, Petrotrin and National Petroleum
Marketing Co. of Trinidad & Tobago, and Emirates National
Oil Co. for collaborative ventures in both upstream and
downstream areas, including training and consultancy.
(c)
Part of its diversification plans, Indian Oil is studying

offshore oil fields in India and abroad for commercial
exploitation in collaboration with Enterprise Oil, U.K. Various
proposals for collaboration, including deep-water exploration,
in India and abroad, are contemplated with ONGC. Other
collaborative efforts include LNG terminals with allied
facilities at four port locations in India in a joint venture with
other Indian and foreign companies. Five power projects are
being set up with JV partners.
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IOC is in talks with Reliance and Essar to float separate joint

venture companies to market petroleum products of private
refineries. The proposal for a marketing tie-up would herald a
deregulated environment where state-run leaders tie-up with
private companies to draw on each others strengths. The
strategy behind the proposed tie up is in getting in as much
product-availability as possible.
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There is a plan to forge a strategic alliance with ONGC. Each

company with this end in view is buying a stake in the other.
ONGC has a high-risk high-profit portfolio, whereas IOC has,
a low-risk low-profit one. The best would be a blend of the two.
The control over bulk of the pipelines network would further
strengthen its position due to significantly lower costs as
compared to competitors.
The key strengths of IOC are:
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Massive market shares.
Control over most of the pipeline network.

Well spread out refineries network.
Economies of scale in all operations.
The areas of concern for IOC are:
Comparatively, low market share in the retail segment. After

deregulation of marketing, market shares are sure to come
under threat.
(c)
IOC owns only a very small proportion (less than 20 per cent)
of its retail outlets.
The most important issue is that of the oil-pool deficit. The
importance of negative pool has been maximum on IOC, as it
is the largest company. The pool owns about ` 8,500 crore,
making it to resort to large borrowings in India and abroad.
The companys plan for a global issue has also been stymied
because of this anomaly. OCC will reimburse when the oil pool
balance is restored. But IOC will have to bear the difference in
interest rates. IOC will have to prepare itself for the
continuing gearing up for the changed scenario. It is often the
largest player which stands to lose the most. This is already
visible in the lubricants business where Indian Oil had a 55
per cent market-share before decontrol. The consequent entry
Notes
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What
are the major joint
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venture projects of BPCL?
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It is proposed to issue fresh equity capital by IOCL upto 10% of

its paid up capital along with a simultaneous disinvestment of 10%
of the Government shareholding in the Company. At present,
Government holds 78.92% of total equity capital in the Company.
Post fresh issue and disinvestment, it is likely to come down to
62.65%. Draft Note for CCEA in this regard has been circulated for
Inter-Ministerial Consultations. Government is likely to realise
about ` 7947 crore at a share price of ` 414.75 as on 11.10.2010.
IOCL is also likely to get about ` 10,070 crore to meet its CAPEX
requirements.
163
of 20 foreign players has brought down the share to 39 per cent

though it is still the market-leader.
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BPCL and Deregulation
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BPCL plans to build refineries in North and Central India and is

looking at long-term supply agreement in the south, mainly with
Cochin Refineries. Its joint venture with Oman Oil (6 mtpa) at
Bina in Central India is expected to be complete by 2002. This
would increase its presence in the north. Besides it has another 3
mtpa plant in tie-up with Assam government and IBP is scheduled
to be commissioned by the year 2000. In order to transport its
product through the pipeline route, its Mumbai-Manmad pipeline
was commissioned in September 1999.
(c)
The company has restructured into six business units, in an

attempt to be more customer-focussed. The vertically integrated
units are retail, LPG (Liquid Petroleum Gas), lubricants, aviation,
refinery and industry and commercial.
Figure 9.16: Shareholding Pattern of BPCL as on 31st March 2003
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A growing market share and strong presence in retail segments

are BPCLs major assets. For instance, its market share in the
motor spirit (petrol) segment is an impressive 30 per cent as
compared to its overall market share of about 20.5 per cent.
Similarly, the company has a 24 per cent share in LPG and a 23
per cent in Diesel. These are likely to stand the company in good
stead. BPCL is also the best-placed in terms of ownership of its
retail outlets which is around 55 per cent which is quite higher in
this sector.
The major joint venture projects of BPCL are:
1.
Bharat Oman Refineries Limited (BORL) A JV with Oman

Oil Company (OOC).
2.
Numaligarh Refinery Limited (NRL) A JV with the

Government of Assam.
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The only major weakness of the company is that it produces only

around 50 per cent of its net sales. This reliance would go down
substantially only when its proposed refineries go on stream.
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3.
Numaligarh Refinery Marketing Terminal (NRMT).
Considering the need for a focussed approach for E&P activities

and implementation of the investment plans of BPCL at a quicker
pace, a wholly owned subsidiary company of BPCL, by the name
Bharat PetroResources Limited (BPRL) with an authorised share
capital of ` 1000 crore was incorporated in October 2006, with the
objective of carrying out Exploration and Production activities.
(c)
In December 2008, BPRL farmed into an offshore block in

Mozambique with 10% PI, and in January 2010, farmed into an
offshore block in Indonesia.
All the above blocks are in various stages of Exploration. BPRL
consortium has drilled 6 wells in 2009, and is planning to drill 12
wells in 2010. A discovery has been announced in the Campos
basin in Brazil and also in offshore Mozambique. BPRL has
partnerships with some world renowned Operators including
Petrobras and Anadarko.
HPCL and Deregulation

In order to survive in the deregulated environment, HPCL is
implementing Arthur Andersons business engineering report. It
165
has split its business into four units retail (automotive),

industrial (direct-customer), LPG and lubricants.
Notes
HPCL has identified diversification through joint ventures into

power generation. HPCL has also started investments in the
pipelines which could be quite necessary in the era of decontrol.
The corporation has also started a major exercise of modernising
its retail outlets across the country.
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Disinvestment
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The Government has decided to disinvest its shares in the

Hindustan Petroleum Corporation Limited (HPCL) through
strategic sale and Bharat Petroleum Corporation Limited (BPCL)
through initial Public Offering. Employees would be offered 5 per
cent shares at 1/3rd price. The Supreme Court in a judgement
pronounced on 16.9.2003 on Public Interest Litigations,
challenging the disinvestments of HPCL/BPCL, has held that the
Acts under which the assets of erstwhile Esso/Caltex/Shell were
acquired by the Government would have to be amended/repealed
by the Parliament before proceeding with disinvestments of
HPCL/BPCL.
In its meeting held on 3.10.2003, the Cabinet Meeting on

Disinvestment approved the proposals of disinvestments of (1) 51%
equity of Engineers India Limited through strategic sale and (2)
61.8% equity of Balmer Lawrie & Co. Ltd. also through strategic
sale.
North East Refineries
Three are four refineries in Assam, viz. Guwahati, Digboi,

Bongaigaon Refineries and Petrochemicals Limited (BRPL) and
Numaligarh Refineries Limited (NRL). Guwahati and Digboi
refineries are fully owned by Indian Oil Corporation (IOC), BRPL
is a subsidiary of IOC and NRL is a subsidiary of Bharat
Petroleum Corporation Limited (BPCL). These refineries mostly
refine crude produced by ONGC and OIL. As these refineries are of
sub-economic size and suffer from locational disadvantages, they
need Government's intervention for ensuring their viability after
the dismantling of the APM. Even though these refineries are
unviable, it is necessary to keep them operational and viable in
view of the need to stimulate industrial development and to
provide for socio-economic development in the north-east region.
(c)
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Petro Economics
___________________
___________________
___________________
___________________
The year of commissioning and the capacity of NE refineries are

given in the following table:
Table 9.5: Commissioning and the capacity of 4 refineries in Assam
Refinery
Digboi
Guwahati
BRPL
___________________
NRL
___________________
Total
___________________
___________________
___________________
___________________
Notes
* Million Metric Ton
Year of Commissioning
1901
Capacity (MMT)*
0.65
UP
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166
1962
1.00
1979
2.35
2000
3.00
7.00
Challenges before the North East Refineries after

Deregulation
While during APM, the refineries received an assured return on

their investments, the Post-APM viability of NE refineries is
threatened on account of the following factors:
CC
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Sub-economic size: Refining activity has economies of scale.

As per the norms, the minimum size of a viable refinery is
around 9 MMTPA. Thus, all NE refineries are of sub-economic
size. Smaller capacity leads to high operating costs compared
to the large-size refineries, with whom NE refineries have to
compete.
(c)
Lower availability of NE crude: The present availability of

NE crude at around 5 MMTPA is 2 MMTPA less than the
combined installed capacity of 7 MMTPA of NE refineries. As a
result, these refineries have been operating below their
installed capacity. This tantamount to further increase in the
per unit operating costs, which are, otherwise, high.
Lower local demand: The demand of petroleum products in
NE region is quite less, thereby, necessitating their evacuation
outside the region of a substantial portion of the production of
these refineries. Currently, the demand in these regions is
about 1.4 MMTPA. More than 3 MMTPA of products are
moved out of the region. Thus, the additional costs of productevacuation are to be borne by these refineries.
Additional investments for quality improvements: Euro-II
equivalent emission norms and auto fuel specifications are
proposed to be implemented throughout the country by April
2005, followed by Euro-III equivalent auto fuel specifications
by April 2010. To be able to market their products in the
Steps taken/being taken to improve the viability of NE refineries

z
S
Notes
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___________________
___________________
___________________
Fiscal benefits: 50% excise duty exemption is available in the

products of NE refineries, effective, March 1, 2002.
___________________
Measures to increase the crude oil production in the

North-East region: With a view to increase the availability of
NE crude so as to improve the capacity utilisation of these
refineries, the following measures are being taken:
___________________
(a) To accelerate exploration through New Exploration

Licencing Policy (NELP), which provides attractive fiscal
package and contract-terms to the investors.
CC
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(b) To undertake enhanced Oil Recovery (EOR) and Improved

Oil Recovery (IOR) Projects to increase recovery factor and
arrest decline of crude oil production from their producing
fields.
(c) To increase work over operations to improve production.
(d) To improve reservoir management to optimise production

from existing fields.
(e) To address environmental and other operational issues to
increase exploration and production efforts.
Sourcing of additional crude from outside the region: In
addition to the aforesaid measures to increase the availability
of NE crude, a proposal to pump in additional crude oil from
outside the region into the NE region is also under the
consideration of the Government.
Over capacity: This is a serious threat to smaller players in

the refining sector.
(c)
167
UP
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country, NE refineries would also need to upgrade

specifications of their petrol and diesel and would need to
make additional investments for this purpose. As the amount
realisable through the quality premium on fuels would be
much less than the costs of investments, this would further
adversely affect the viability of these refineries.
Industry: Overall, the surplus in the domestic refining

capacity is getting reduced. The annual consumption of some
104 MMT of products matches the rated domestic refining
capacity of 117 MMT. There are, however, serious imbalances
in product-wise demand and product. The fact that HSD
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Petro Economics
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Increasing customer awareness and stipulations on phased

improvements in transport fuels' specifications for enhanced
environmental protection call for major capital investments in
additional facilities in the refineries. These essential investments
do not yield any increment margins, and therefore, overall costoptimisation becomes the determinant for refinery profitability.
In the commodity market of petroleum products, pricing is the
competitive determinant in Direct Sales, whereas Service-cumSatisfaction attracts the retail customer. The relevant costs are to
be paid out of the available margins, reducing profitability per unit
sold. Value addition in the refinery and beyond, therefore, assumes
critical importance.
CC
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___________________
demand has plateaued in the recent years defies logic. The

inescapable conclusion is that the pricing differentials are
leading to adulteration using imported as well as domestic
stocks. The profitability of majority of the domestic refineries
is threatened since the designs and the operations are
configured to maximise diesel production.
Notes
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168
Global trends point towards overcapacity in crude oil production

and refining. Oil majors are undergoing various restructuring to
meet the global scenario. Global trends points towards:
Organisational restructuringfunctional
replaced by Asset-based management.
approach
being
Mergers & Acquisitions BP-AMOCO.

Strategic Alliances Royal Dutch/Shell and Mobil in Europe.
Focus on core competencies Exxon sold world-wide speciality
chemicals business to Shell.
(c)
Indian trends taking place include the deregulation of the

petroleum sector, promulgation of NELP, organisation
restructuring, ERP, private participation, strategic alliances etc.
In this deregulated scenario there may be an overcapacity in

downstream by 2001. The Figure 9.17 clearly shows the likely
picture through the demand-supply gap at present is also expected
by many analysts to remain favourable. But in the case of
overcapacity, integrated companies are going to be the greatest
beneficiaries of deregulation. Smaller players who will stick to
pure refining sector may be outplayed. The profit margins will
greatly decrease after 2001, due to overcapacity.
169
Impending oversupply
Notes
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AQ
Figure 9.17: Key Issues in Deregulated Scenario
future
CC
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Additional Investments are needed for meeting

environment-norms in diesel, gasoline and fuel oil.
High Production Cost compared to international companies will

be a deterrent for exports.
Mega Consolidation of Oil PSUs by Partial or Full Divestment in 5
companies to IOC and BPCL.
(c)
The road map on auto Fuel Policy envisages supply of Euro III MS
and HSD in the entire country and Euro IV MS and HSD in NCR
and in the cities of Mumbai, Kolkata, Chennai, Bengaluru,
Hyderabad including Secunderabad, Ahmedabad, Pune, Surat,
Kanpur, Agra, Lucknow and Solapur by 1st April 2010.
Accordingly, supply of BS-IV Petrol & Diesel was commenced on a
single day, i.e. on 1st April 2010, in the 13 identified cities as per
the roadmap laid down in Auto Fuel Policy. However, due to
significant increase in the demand for auto fuels, supply-side
constraints and critical logistic issues including movement of
products in large quantities, it was decided by the Government to
stagger the introduction of BS-III Petrol and Diesel in rest of the
country between 1st April 2010 and 1st October 2010. Accordingly,
BSIII auto fuels were introduced in the entire country (other than
13 cities) between 1st April 2010 and 22nd September 2010.
The existing R&M companies such as IOC, HPCL, NPCL and
BPCL will see an expansion in their refining margins in the initial
Petro Economics
___________________
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___________________
___________________
___________________
years. However, the benefits of a retail marketing/distribution

network will accrue over the longer term. One can expect a 50%
upside potential under a scenario of an average duty protection of
15%.
Notes
The epitome of strategies for growth for oil companies can be

enumerated as:
UP
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170
Emphasis on product quality.

Branding of products.
___________________
Low cost pipeline transportation of crude and products.
___________________
Appropriate product mix.
___________________
Retention of key outlets in major cities.
___________________
Segmentation of retail markets.

Focus on customer service.
Cost reduction.
CC
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Economies of scale as per international standards.
Forward and backward integration through acquisitions,

mergers, diversification to become Integrated Energy
Company.
Check Your Progress
Fill in the blanks:
1. The biggest primary producer of oil and natural gas is

all set to transform itself into an efficient
..
2. .. is a term used in the upstream oil
industry to describe organisations which assign
multidisciplinary asset teams to each exploratory area
and producing field.
(c)
Summary
The history of oil exploration in India is more than hundred years
old. The earliest record of petroleum exploration dates back to 1825
when soldiers of the 46th Regiment during their military
reconnaissance mission rowed up the Burhi Dihing River in Upper
Assam and came across oil seepages at Supkhong village.
Beginning with the discovery well at Digboi in 1st September 1889,
Notes
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UP
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Soon after the Indian Independence, the activities of Assam Oil

Company and that of the Burma Oil Company, operating under the
aegis of Shell Oil, were merged to form a semi-government and
private equity partnership company, known as Oil India Limited.
The activities of this company were extended to the Assam plains
and as a consequence of which large accumulations first at
Naharkatiya and then, at Moran, were located by systematic
exploration-efforts. These discoveries represent some of the best
known oil and gas accumulations in the north-eastern sector which
continue to contribute significantly to the countrys oil production,
till date.
171
some encouraging results were obtained in the wells drilled

subsequently and an average initial production of 200 gallons per
day was established from a depth of 662 ft.
CC
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Oil India Ltd. (OIL) is a public sector undertaking involved in the

exploration and production of hydrocarbons (crude oil and natural
gas), extraction of liquified petroleum gas and the transportation of
hydrocarbons through its pipeline network.
The biggest primary producer of oil and natural gas is all set to
transform itself into an efficient value-creator. The changing
Indian regulatory environment is beginning to allow greater
operating freedom for ONGC but is also introducing more
competition. ONGCs current exploration strategy includes greater
attention to the six established basins by reinterpreting existing
data using improved techniques. The impact of deregulation on the
smaller players in the refining sector has been feared most.
Lesson End Activity
Identify the recent steps taken by GoI for deregulation in oil

industry.
Keywords
(c)
Restructuring: Restructuring as a concept may be understood as

a process by which organisations make internal changes in order
to efficiently utilise managerial synergy and meet the needs of the
market."
Asset-based: Asset-based is a term used in the upstream oil
industry to describe organisations which assign multidisciplinary
asset teams to each exploratory area and producing field.
___________________
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172
Notes
___________________
___________________
___________________
___________________
___________________
1. Discuss the concept of restructuring.
2. What are the key dimensions of restructuring?
3. Restructuring requires an integrated approach. Discuss.
UP
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Petro Economics
4. What are the key impacts of deregulation in oil industry on

ONGC and OIL?
5. Discuss the diversification strategies of ONGC.
___________________
6. Define asset based management system.
___________________
7. Write a note on growth in refining activities of oil companies.
___________________
___________________
Further Readings
Books
CC
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KPMG, Mumbai.
reflection data: A case study, Current Science, v. 90, p. 1421-1430.
Web Readings
http://www.eia.gov
(c)
http://www.bp.com
UNIT 10: Case Study
Unit 10
173
Notes
Case Study
___________________
UP
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Objectives
___________________
___________________
___________________
___________________
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Case Study: Reliance Petroleum
___________________
___________________
Reliance Petroleum is Australias largest distributor of BP and

Castrol products. Its 2,500 employees manage an extensive
network of bulk fuel and lubricant depots, delivery vehicles, and
service stations. Following a merger in 2007, Reliance Petroleum
introduced new Customer Relationship Management (CRM) and
intranet systems with Microsoft Office SharePoint Server 2007.
However, the company still needed to integrate data from
multiple systems and make that data available to all business
users. With the assistance of Microsoft Gold Certified Partner,
Oakton, Reliance Petroleum deployed a data warehouse solution
based on Microsoft SQL Server 2008 R2. It includes enhanced
data integration, reporting and analysis. By using SQL Server
2008 R2, Reliance Petroleum has cost-effectively extended
business intelligence capabilities to field staff and improved
decision-making by sales staff, managers and executives.
___________________
CC
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Petroleum distributor gains better decision making and

faster ROI with BI solution
Situation
(c)
One of Australias largest companies, Reliance Petroleum has

grown following the takeover of several key BP Petroleum
distributors. The company now operates over 200 BP service
stations and nearly 60 gofuel (24-hour refuelling) locations for the
retail sector, along with 70 bulk fuel and lubricant depots for the
industrial, mining, transportation and retail sectors. It is
currently the second largest privately owned company in
Australia, with annual revenue in excess of AUD$3 billion
(US$2.618 billion).
Following these takeovers, Reliance Petroleum inherited a range
of different IT systems. These had to be united if the company
was to make the efficiency savings on which the takeovers were
based.
Contd
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Petro Economics
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The same sort of data came from different sources and software
platforms, says Peter Gray, Service Delivery Manager, Business
Technology, Reliance Petroleum. Often people would run reports
or look at sets of numbers that wouldnt line up, but nobody could
actually explain why they werent lining up.
Notes
UP
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174
In addition, some data was outdated by the time it got to the

people who needed it. Sales teams, for example, would only get
monthly sales data, which limited their ability to react quickly to
new trends.
The company decided to stabilise its information environment by
standardising on one database platform. In mid-2008, the
company deployed Microsoft SQL Server 2005, Microsoft Office
SharePoint Server 2007, and Microsoft Dynamics CRM. Its
objective was to provide cross-business customer data to support
the commercial sales team and a new telesales division, as well as
an intranet to unite the company and help staff share
information.
CC
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However, the fact that data was generated in diverse systems

meant that the SQL Server database could not by itself collate
and manage all the data the business wanted.
With our numerous existing applications, it was difficult to share
and report on even the most basic sales and customer data, says
Gray. To make business intelligence (BI) available to everyone
within the company in a cost-effective manner, we needed to
integrate data from each different data source, and then introduce
new reporting and analysis services.
For internal reporting, the head office at Reliance Petroleum used
the IBM Cognos BI platform, but the licencing fees prevented the
company from rolling it out to field staff such as managers of
depots and retail service stations.
(c)
Solution
Having established a single repository for data with SQL Server

2005, IT staff faced the challenge of finding a way to feed data
into it from all parts of the business, integrating the data and
making it available and valuable to everyone in the company.
Reliance Petroleum explored whether a data warehousing
approach might work. This would provide staff with data that was
consistent, integrated and consolidated.
In late 2009, Reliance Petroleum brought in Microsoft Gold
Certified Partner, Oakton, to see whether an SQL-based data
warehouse was feasible. To see whether this approach could
Contd
UNIT 10: Case Study
Notes
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___________________
UP
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It is important to use a proof of concept to make sure that the

new system can meet the business requirements, and to validate
the business case, says Hugh Rogers, Business Intelligence
Practice Manager, Oakton. With the proof of concept, we could
establish the facts to underpin the business case for a fully
integrated data warehouse.
175
satisfactorily integrate data from across the business, Oakton

decided to build a prototype.
Oaktons proof of concept comprised Microsoft SQL Server 2008

R2 Integration Services, which extracts, transforms and loads
(ETL) data from underlying source systems into SQL Server 2008
R2. This technology combines data from a wide array of sources,
including custom-built programs such as Petrolink, the enterprise
resource planning (ERP) system at Reliance Petroleum.
CC
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In addition, the company used Microsoft SQL Server 2008

Reporting Services with the Active Directory service and Office
SharePoint Server 2007. This meant employee could log on to the
companys intranet and view dashboards and standard reports
specific to their job role.
Reliance Petroleum staff also used Microsoft SQL Server 2008

Analysis Services to create online analytical processing (OLAP)
cubes. These multidimensional data structures are particularly
useful for analysing large amounts of information.
Following the successful trial of the proof of concept in late 2009,

Reliance Petroleum replaced its existing IBM Cognos BI software
with SQL Server 2008 Reporting Services and SQL Server 2008
R2 Analysis Services. The company merged its data through the
ETL process using SQL Server 2008 R2 Integration Services and
organised it within the data warehouse.
Now Reliance Petroleum has a single source for all data used by
the company. To help manage that data, Reliance Petroleum
subsequently deployed a new feature of the SQL Server Master
Data Services which ensures that the data within the data
warehouse is always correctly organised and can be centrally
managed.
(c)
Benefits
With a data warehousing system based on SQL Server 2008 R2,
Reliance Petroleum can extend business analysis capabilities to
field staff in more than 300 retail service stations. The company
has been able to reduce costs, improve business insight and speed
up decision making.
Contd
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___________________
___________________
___________________
Notes
___________________
___________________
___________________
___________________
___________________
___________________
Reduced licencing and training costs
Detailed reporting capabilities have been extended to more staff

within the company, while containing and in some cases
reducing the costs of extracting, sorting, and accessing the data.
We couldnt have done this cost-effectively with our previous

system, says Gray. By using SQL Server 2008 R2 Reporting
Services and SQL Server 2008 R2 Analysis Services, we achieved
a return on investment purely on licencing cost savings.
UP
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176
Petro Economics
___________________
Another key cost benefit is familiarity, says Gray. Our

employees can use Microsoft Office Excel a tool that they are
very familiar with to analyse data in ways theyve never been
able to before. And they can do this without the company having
to pay for training.
___________________
Question:
___________________
___________________
Critically analyse the case.
(c)
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Source: http://www.microsoft.com/en-gb/business/case-studies/Reliance-Petroleum.aspx
UNIT 11: Structure of Oil Industry
177
Notes
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(c)
BLOCK-III
Detailed Contents
Petro Economics
Notes
UNIT 13: STRATEGY FOR PETROLEUM AND

NATURAL GAS TRADING
z
UNIT
12: LOGISTICS AND TRANSPORTATION OF
___________________
OIL IN INDIA
___________________
z
Introduction
___________________
z
Logistics and Transportation Objectives
___________________
___________________
___________________
Crude Oil Marketing
LNG Transportation Policy of GoI (FOB)
Asias Natural Gas Supply and Demand
UNIT 14: PETRO RETAILING

z
Introduction
Understanding Petroleum Retail Business
The Wheel of Retailing
UNIT 15: CASE STUDY
(c)
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___________________
Introduction
UP
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UNIT
11: STRUCTURE OF OIL INDUSTRY
___________________
z
Introduction
___________________
z
Oil Industry Stages
___________________
178
Unit 11
179
Notes
Activity
List ___________________
down the trends towards
growth in refining capacity of
___________________
crude
oil in the world.
Objectives
UP
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Structure of Oil Industry

topics:
\
Oil Industry Stages
Oil Market Structure
___________________
___________________
___________________
___________________
___________________
___________________
Introduction
CC
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In this unit, the structure of oil industry will be analysed. The

analysis tends to view the oil industry as one that moves from oil
exploration and development through transportation to crude oil
refining and the marketing. Furthermore, historical review of the
involved market structures and pricing mechanisms are provided
which facilitate the way to understand how prices are arrived at in
this complex industry.
Oil Industry Stages
The oil industry, like any industry, develops its products through
different stages, as shown in Figure 11.1. In this section, the main
sectors involved in the oil industry will be reviewed. This will
give the reader an overall idea about the operating elements and
cost structure of each stage, and will lay the groundwork for
market structure analysis. The main stages involved in oil are
exploration and development, production, refining, marketing and
transportation.
Exploration and Development
(c)
Exploration for oil begins with performance of several kinds of

geological and geophysical surveys. Seismic surveys have turned
out to be the most useful.
___________________
___________________
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
CC
EU
___________________
PE
S
Petro Economics
(c)
___________________
Figure 11.1. Stages in the Oil Industry (From Abdel-Aa, I-LK, The Oil
Industry: People, Products and Progress, AMBIO. 2/6. Stockholm.
Sweden, December 1973)
Production
Notes
___________________
___________________
UP
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It is hard to separate production from exploration and

development, at least from the operating point of view as well as
from the cost structure. After a field has been tested commercially,
oil production begins. Normally for new fields, oil comes to the
surface by natural drilling force as long as the wells surface
pressure is less than the pressure in the reservoir. The source of
this self-driving force is either water or gas that is contained in the
reservoir or both. However, this natural flow will decline as the
well gets older and cumulative production increases. Thus,
secondary recovery methods such as water and gas injections and
late tertiary recovery are applied.
181
CC
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As far as oil pricing is concerned, it should, in principle, be

determined by the relationship of oil supply and demand. Given
the curve of demand and the supply curve will be drawn based on
production cost. It has been noted that the exploration and
development stage is part of the overall production operation in oil
industry. Thus, production costs have large Fixed Costs (FC),
which are mainly the costs of exploration and development, and
Variable Costs (VC), which are mainly operating costs. In the oil
industry, variable costs tend to be much lower than fixed costs.
This would imply that Long-run Average Total Cost (LATC) is
declining with increasing production. This characterises natural
monopoly industries and is even true for the giant oilfields such as
those of the Middle East.
(c)
In the oil industry, cost structure alone will not determine market
structure. Market size as well as government policies are very
important. Furthermore, there are a number of small fields which
tend to have higher operating costs and to cause LATC to rise.
Given the demand, and assuming perfect competition, a simple
model of the world oil market in the short run can be presented
when world oil supply is drawn as the upper part of a marginal
cost curve above the AVC, as shown in Figure 11.2. The
intersection of this supply curve with the demand curve will give
the equilibrium market oil price (P) and quantity (Q).
Supply of crude oil is generally regarded as inelastic with respect
to price, which means that oil production responds slowly to price
changes. Price elasticity of supply is defined as the percentage
change in quantity supplied as a result of one percentage change in
price. Accordingly, the supply is considered elastic when price
___________________
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___________________
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Petro Economics
___________________
___________________
___________________
___________________
___________________
___________________
___________________
elasticity of supply is greater than one and inelastic when the

elasticity is less than one. The inelasticity of oil supply is caused
mainly by the high fixed costs involved in the production stage.
Notes
On the other hand, demand for crude oil is a derived demand,

which depends on refined oil products demand. In general, demand
for refined oil products is inelastic with respect to price; therefore,
demand for crude becomes inelastic especially in the short run, as
shown in Figure 11.2. Price elasticity of demand is defined as the
percentage change in quantity demanded resulting from one
percentage change in price.
UP
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182
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CC
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Figure 11.2: A Static Model of the World Oil Market
Refining
(c)
Refining is a series of physical and chemical processes that convert

crude oil into many finished oil products. Physical processes are
those which depend on atmospheric and vacuum distillations.
For the chemical processes, many different methods have been
used, such as thermal and catalytic cracking, hydrogen catalytic
process, polymerisation, alkylation and isomerisation. After that,
blending and treatment processes make oil products ready for use.
Figure 11.3 presents the number of operating refineries in
different parts of the world as classified by processes for the years
1979, 1984 and 1989. It has been noted that the number of
refineries in oil producing areas has increased over the years.
However, most of the refineries are located near the markets for
their products.
183
Notes
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Figure 11.3: Number of Operating Refineries in the World Outside

Communist Countries
The oil industry, including refining, used to be controlled by the

major oil companies. This structure, however, has been changed
since the 1970s when oil-producing countries took over most oil
operations except refining, which are still generally under the oil
companies control. Figure 11.4 shows the distribution capacity by
regions at the end of 1987.
It is clear that the refining industry is located mostly where oil is
consumed. For example, the Western Hemisphere and Western
Europe have 24.4 and 13.9 per cent of world refining capacity,
respectively. On the other hand, the share of centrally planned
economies of world refining capacity is growing and was 17.8 per
cent on Jan. 1, 1989.
(c)
Most of the world refineries operate on average at about 80 per

cent or less of related capacity. This figure may sound high, but in
fact indicates a problem of excess capacity, a problem which has
tended to prevent oil producers from increasing their refining
capacities or building new refineries. This excess capacity has
resulted from the drop in world oil demand from its peak of 63
million barrels per day in 1981 to less than 53 million per day in
mid-1980s.
Petro Economics
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However, the recent upgrading activities will be reinforced by a

growing shortage of basic refining capacity in major consuming
areas. This shortage is likely to improve the profitability of sourcebased refineries in producing countries.
Notes
Catalytic cracking and catalytic reforming have been the oil

industrys basic upgrading processes ever since World War II. In
general, they have been adequate to meet moderate levels of
unleaded gasoline octane ratings.
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Figure 11.4: Distribution of Refining Capacity
Yet, the United States leads the world in the basic upgrading
capacity and it has the farthest recent increases in the most
sophisticated refining capability such as alkylation and aromatic
isomerisation.
(c)
Oil Marketing
Marketing is the most complex sector of the world oil industry.

Generally, there are many ways in which oil marketing may be
viewed. These include wholesale markets, in which large sales are
made to sellers of small volumes, versus retail markets, which sell
to final consumers. Sometimes sales are on a spot or single-sale
basis, and sometimes on short or long-term contracts. There are
also differences between crude oil and oil product markets.
Historically, until the early 1970s, crude oil was marketed through
integrated company systems. Sometimes, producing/refining
companies would exchange oil, usually on a barrel-for-barrel basis.
Notes
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This situation is now changed. Most of the worlds equity crude has
disappeared from the market, largely as a result of nationalisation
of the assets of most major oil producers. Although the traditional
concessionary companies have retained preferred access to crude
oil through service contracts, the amount of oil traded on a spot
basis has increased to above 50 percent. This trend has been
accentuated by the development of formal oil exchange markets
such as New York, London and Hong Kong.
185
Some crude oil, around 5 percent, was sold by producers through

spot markets to refiners.
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On the oil products side, the marketing was relatively simple in

the past. There were essentially three main products: motor
gasoline, heating oil and heavy oil. Motor gasoline markets were,
and remain, the most fragmented among the worlds oil products.
In the United States, which consumes about half of the worlds
gasoline supply, private service stations tend to be the main
marketing distributors. In the rest of the world, major private or
government companies own the outlets. However, company or
government-owned service stations tend not to compete on a price
basis, but on advertising and locational advantages.
For the middle distillates, mainly heating oil, diesel fuel and
aviation jet fuel, the situation is much more complex. For heating
oil, competition is less among suppliers, which implies less
emphasis on advertising and brand identification. Diesel fuel sale,
however, is mostly for trucks and other heavy equipment such as
railroad engines, construction equipment and marine diesel
engines. Because sales tend to be in larger volumes than for motor
gasoline, marketing relies on price differentials. For aviation fuel,
it tends to be an especially profitable marketing area. This is due
to the large volumes involved and high quality requirements.
(c)
On the other hand, heavy fuel oil is mainly used for electric power
generation. It is always sold on a wholesale basis, and often under
long-term contracts, with prices related to the prices of coal and
natural gas.
Oil Market Structure
In this section, a general review of the industrial structure of world

oil market will be provided to explain the forces which shape the
oil industry and influence oil pricing.
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Notes
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Before World War I, the world oil market was dominated by four
major international oil companies: Shell, Standard Oil, Nobel and
Rothschild. The latter two companies were in Russia and were
liquidated as private companies by the 1917 Russian Revolution.
Another major company that was founded by the British
government was the Anglo-Persian Company (now British
Petroleum). In the 1920s, the oil market was essentially controlled
by these three companies. During the 1930s, new major oil
companies developed as offshoots of the old Standard Oil
Company. They were Gulf, Texaco, Standard of California, Sohio
and Mobil. With these new entrants, the degree of competition in
the world oil market has increased, but only to a certain extent. In
the 1940s and 1950s, the seven sisters had balanced the supply
and demand mainly by market-sharing and joint producing
agreements. To some extent these agreements distorted world
market competition. This resulted in an oligopoly market structure
characterised by substantial differences between production cost
and market price.
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(c)
The deviation of oil prices from production costs allowed for

vertical integration and controlling the market all the way from
exploration to marketing. The share of the major oil companies in
world oil. Production refining and marketing was about 60 per
cent. This concentration ratio which indicates the degree of
competition in world oil market has declined dramatically,
especially in the production sector. This is due to the increased
participation of oil-producing countries in production and to the
evolution of the national oil companies. It is clear that the market
power of the majors has reduced. Yet, they are still controlling 25
per cent of world oil refining and about 3.5 per cent of marketing
activity.
The beginning of oil producers participation in oil industry was in
1960 when the Organisation of the Petroleum Exporting Countries
(OPEC) was established. OPEC was formed by five major oilexporting countries: Iran, Iraq, Kuwait, Saudi Arabia and
Venezuela. Qatar joined in 1961 and was followed by Indonesia
and Libya in 1962. By 1979, the number of OPECs members
totalled its present 13, including United Arab Emirates, Algeria,
Nigeria, Ecuador and Gabon. Furthermore, during the 1960s,
Crude Oil Pricing
187
several national oil companies of the producing nations were

established, although in most cases without significant market
power.
Notes
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This system tended to prevent competition and lower prices. After

the war and the emergence of new suppliers from the Middle East,
the price structure changed to a dual basing point system. The
second basing point was the Arabian Gulf. By this system the
Middle Eastern oil was priced based on low prices from the
Arabian Gulf, which were agreed by the company and producing
governments as equal to f.o.b. U.S. Gulf parity prices plus the
transport cost from the Arabian Gulf to destination. This was
about equivalent to the U.S. Gulf price plus the transport cost from
some point near Malta in the Mediterranean. With the increase in
the demand for the Middle Eastern crude oil especially in Western
Europe, oil companies moved the parity point westward to
London, then to New York, in order to maintain low competitive
prices among the various producer countries exporting to Europe.
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Before World War II, the world oil market (mainly U.S., the
worlds largest producer, consumer and a net exporter) was
controlled by the major oil companies. Thus, the single basingpoint price system was applied. Under this system the price is
quoted only for the point of delivery. It equalled the f.o.b. price at
the base, which was the U.S. coast of the Gulf of Mexico, plus
transport and insurance costs to its destination.
(c)
During the 1950s, real oil prices tended to decline, except for the
years 1956-57 when the Suez Canal was closed. In this atmosphere
of price volatility, OPEC was formed in 1960. The two-basing-point
system was abandoned, at least for crude oil. Yet OPEC did not
succeed in stabilising oil prices and preventing them from falling.
OPECs first effective attempt to raise prices in line with demand
growth and inflation took place in February 1971, when the
Tehran agreement was signed. As a result of this agreement, the
price of 40 API Arabian Gulf crude increased by 33 bbl plus 2 bbl
in settlement of freight disparities.
Up to that time, oil prices were posted by the major integrated oil
companies. However, these were realised or market selling prices
which were determined by giving discounts of posted prices. The
posted prices, however, served as a basis for oil-producing
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After October 1973, as a marker crude 34 API Saudi Arabia

light became OPECs official reference crude oil. OPEC set a price
for Saudi Arabia light and let member governments set their own
prices for the different crudes reflecting the different locational,
physical and chemical characteristic of each crude.
Supply disruption from the Arabian Gulf because of Iran
Revolution in 1979-1980 caused spot oil prices to jump to over
$40/bbl and official prices of OPECs crudes to rise accordingly. In
the early 1980s, spot and future markets were widely used at the
same time. In those conditions spot and official prices declined.
This led OPEC members to follow market-based pricing systems.
In February 1987, OPEC effectively terminated market-priced
sales and oil prices tended to stabilise around a target price of
$18/bbl.
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governments to calculate their royalty interests and income taxes

from the oil companies operating in their countries. OPEC was
able to seize the initiative, and official OPEC prices emerged.
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Source: BP Statistical Review of World Energy 2011
(c)
Figure 11.5: Crude Oil Prices 1998-2009
In principle and to a large extent, prices for oil products can be

regarded as reflecting the economic value-added in the chain from
production to marketing. Product prices are linked to crude prices
through the full-barrel refiners margin, which can be considered
as value-added in the processing of crude oil.
For perhaps two decades after World War II, the major refining
companies posted prices for the major fuel products at which they
were willing to sell to any wholesaler or distributor. With stable
Notes
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For oil products, there have been at least three markets; spot
sales, term contracts and wholesale transactions. In oil surplus
situations, which characterise world oil market except for supply
crises of 1972-74 and 1978-81, spot sales tend to command the
lowest markup over crude oil costs and wholesale transactions the
highest. Term contract sales, however, justify some discounting for
outlet security, and therefore fall between wholesale and spot
sales. Nonetheless, the existence of a spot market generated the
need for some kind of reporting service. Platts price assessment
service developed to fill this need.
189
crude prices, the major product prices also remained stable for long
periods of time except for the summer/winter fluctuations in
heating oil and motor gasoline prices.
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Individual product value-added in refining varies among different

products. They also vary among market areas and over time. These
variations require refiners to be typically competitive even during
periods of supply surplus. More recently, competitive pressures on
product prices generated different kinds of discounts from official
crude selling prices.
Check Your Progress
Fill in the blanks:
1. is a series of physical and chemical processes

that convert crude oil into many finished oil products.
2. Prices for oil products can be regarded as reflecting the
economic in the chain from production to
marketing.
Summary
(c)
The main sectors involved in the oil industry have been reviewed.
It is found that high oil prices stimulate more investment in
exploration. Also, it has been noted that the exploration and
development stage is part of the overall production operation in the
oil industry. Because of the high fixed cost of exploration and
development, the oil industry tends to be a decreasing cost
industry. To convert crude oil into its useful finished product it has
to go through refining processes. Refining facilities are located
mainly near the consuming areas.
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As far as marketing is concerned, crude oil and oil products have in

the past been marketed quite differently. With the increased
fragmentation of the oil industry, crude oil marketing is becoming
more like product marketing of the past. This has been encouraged
by the emergence of official exchanges in major oil trading centres.
Notes
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Lesson End Activity
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Identify the top 10 companies of the world involved in oil

production.
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Keywords
Oil Exploration: Exploration for oil begins with performance of

several kinds of geological and geophysical surveys. Seismic
surveys have turned out to be the most useful.
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Refining: Refining is a series of physical and chemical processes

that convert crude oil into many finished oil products.

1.
What are the key stages of oil industry?
2.
Write a note on oil market structure.
3.
Discuss the trends in crude oil pricing.
Further Readings
Books

(c)
KPMG, Mumbai.
Science, v. 86, p. 985-990.
Ginsburg, G.D. and Soloviev, V. A., Submarine Gashydrates,
VNIIO Keangeologia, St. Petersburg.
http://www.eia.gov
http://www.bp.com
Notes
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Web Readings
191

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(c)
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Notes
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(c)
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UNIT 12: Logistics and Transportation of Oil in India
Unit 12
193
Notes
Activity
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Logistics and Transportation of

Oil in India
Research
on the concept of
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integrated operation.
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Objectives
topics:
\
Transportation in Oil Industry A Multi Modal Operation
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Introduction
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As a mineral product, crude oil is available only in limited oilfields

in the country. Crude oil is refined and blended to make various
streams of refined products to meet various types of end use.
Refining of petroleum products is a capital intensive and high
technology oriented process, whose threshold scale of production is
very high. Due to these reasons, there are only 16 refineries with
total production capacity of 114 million tonnes, which together,
serve to meet the demand of petroleum products in our country.
Therefore, logistics of movement of petroleum products from the
production centre to the consumption centre in a vast country, with
diverse topography like ours, is a complex process. Moreover, as
part of petroleum products is imported and exported, to that extent
the refined petroleum products move in and out of 13 (12
government and 1 corporate) ports in the country.
(c)
Logistics and transportation of petroleum products is a cost, which

every consumer in this country bears either directly or indirectly.
It is important that the whole gamut of activities is surveyed and
put together at a macro-conceptual level for better appreciation by
researchers, policy-makers and practitioners in the field.
It is believed that optimisation in logistics and transportation of
petroleum products can indeed create value in the whole end to
end supply chain management. This study attempts to bring all
interrelated issues together, so that areas of optimisation can be
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Petro Economics
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identified and models can be developed for integrated planning to

capture the value in the chain of activity.
Scope of the Study
Notes
Keeping in view the complexity of the operation, it is proposed to
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study the logistics and transportation of Oil in India:

1.
The study will cover all aspects of the activity in a structured
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way. In the process, many issues of economic significance will
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be identified. The study will attempt to provide solution to
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those issues.
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2.
modes of transportation.
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The study will make a case study from one of the dominant
3.
The study will provide a direction for further work in terms of

research and business opportunity
Sectoral Use of Petroleum Products
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Petroleum products are used primarily in three sectors, viz.

household, transport and industrial. As large segment of our
population still uses bio-fuels and agricultural wastes in the
household sector for domestic energy requirement, petroleum
products are not used in a significant way in the domestic sector.
However, use of bio fuels in household sector is sensitive from
environmental point of view and the dependence of household
sector on mineral fuels is increasing very fast. Out of the total
production of LPG, 80 per cent is used in domestic sector and its
use is increasing by 9 per cent per annum during 1990s. During
the last decade, transport sector has consumed 35 per cent of total
petroleum products and the industry has used 17 per cent and the
share of power generation comes to 4 per cent. With the increasing
trend of industrialisation and urbanisation, use of fossil fuel is
going to increase in all sectors and, to that extent, the
(c)
transportation activities are going to multiply in volume and

complexity.
Market Segments and Transportation Legs

From the logistics point of view, petroleum products traverse three
intermediate points, taking resort to multi modal transportation
system as depicted Table 12.1
S.
Origin
No.
2.
3.
Mode
Notes
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Primary supply point, i.e.
Refineries (both coastal
and inland), and Port
locations
Secondary supply
points, i.e. Major
Terminals and Tap
off points
Secondary supply points
Distribution storage
points (Depots) and
major customers
Depots
Retail outlets and

customers
Cross country
Pipelines, Coastal
Ships, Rail and
Road
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1.
Destination
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Table 12.1: Transportation Legs in Petroleum Transportation System
Rail, Road and

Pipelines
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Road
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Critical Transportation Features
Transportation of petroleum products is a specialised economic

activity, distinct from that of other commodities. The features,
which make it distinct and complex, are as follows:
Petroleum products are hazardous and inflammable.

Therefore, safety of the vehicle and its operating environment
is a very significant feature of transporting petroleum
products.
2.
Petroleum products are transported in bulk liquid and gas

form. Therefore, it needs specialised containers, built
exclusively for handling those products.
3.
Petroleum products are quality sensitive. Therefore, it becomes

the responsibility of the transport operators to maintain quality
of the products at all stages of handling, i.e. loading, unloading
and transporting. Products like Aviation Fuel, food grade
Hexane are very sensitive from the quality point of view. Many
a time, this requires dedicated transport carriers.
4.
Petroleum products are volatile and liquid. Therefore, products

suffer loss, real or apparent, during transit. The loss has
financial and environmental impact. A transport operator can
play a crucial role in saving this loss.
5.
Efficient handling of loading, unloading and transportation of

petroleum products need exclusive infrastructure, many of
which are built and operated by agencies other than Oil
Companies. Pipelines need pumping and storage stations. Oil
tankers need oil jetties, which are built and operated by port
sectors, and rail sidings are built and maintained by Railways.
These require huge investment, planning and co-ordination.
(c)
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1.
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Integrated Operation
Notes
Logistics and transportation of oil and gas is closely integrated

with the operation of Oil and Gas Companies. The Oil Companies
primarily plans the logistics and transportation is undertaken to
carry out their plan. The end users of oil and gas also play a role in
this, as they are the ultimate customers, whose needs dictate the
chain of activities.
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The Oil Companies themselves have built and are operating a

segment of the transportation infrastructure, either by themselves
or through their joint ventures. Similarly, many end users also
have developed their own transport facilities for their dedicated
use. The transport operators are service providers to both. The
transportation activity is carried out in close link with the users, so
that optimisation takes place at all the links of the total chain.
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Thus, transportation has links with production, import, storage of

inventory, end use pattern in the domestic market and export. At
every stage, value is created, optimised and is passed on to the
next stage.
(c)
Mode
Operators
Companies
(not exhaustive)
Comments
Pipeline
Oil Companies
ONGC, IOC, BPC,

HPC, GAIL, Petronet
Public sector and JVs,

shared pattern of use
Shipping
Large
Shipping
Companies
Barge
operators
SCT Great Eastern

Shipping Essar
Shipping Barge
operators
Both public and

private players are
competing with each
other, some sectors still
reserved for public
sector
Rail
Indian
Railways
Indian Railways
Monopoly operation,
Oil Companies have
created some assets for
own use purpose
Road
Oil
Companies,
Fleet
operators and
end users
Large number of
transport operators
Free market, multiple

players, localised
operation
Transportation in Oil Industry A Multi Modal Operation

No other tradable commodity travels so much as petroleum
products do. From well to wheel, it is a long chain of
transportation, storage, handling and value addition. Depending
197
upon distance between source and intermediate destination and

the size of the parcel, the modes of transportation varies. In the
current state of technology and commercial viability, following are
the four modes of transportation, which are being adopted in India:
Notes
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Ocean transportation, by tankers of various sizes, ranges from

5 thousand tonne capacity till 50 thousand tonne capacity,
mostly along both stretches of India coast.
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2.
Pipelines of various lengths and diameters.
3.
Rail wagons of various types ranging from 20 to 55 tonne

carrying capacity.
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Tank lorries of various capacities, ranging from 10 kilolitre to

25 kilolitre.
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4.
Volume, Distance and Mode

Ocean Transportation
Crude Oil
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Petroleum products are transported through the ocean transport

mode by way of the following five ways:
1.
Import of Crude (from international markets to Indian

Refineries for processing), and
2.
Coastal movement of Crude (indigenous Crude supplied to

Indian Refineries through tankers).
Petroleum Products
Import of products (from international market to Indian

market for domestic consumption).
4.
Export of products (from Indian market to international

market).
5.
Coastal movement of products produced in the Indian

Refineries (from Indian Refineries to other Coastal Terminals
in India).
(c)
3.
Pipeline Transportation
Transportation of petroleum products, crude oil and gas through

pipelines is considered as the cheapest, safest and environment
friendly mode of transportation. The network of underground
pipelines in the country has grown in a big way in the last few
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As on 1st April 2010 the country has a network of 28 product

pipelines with a length of 11037 kilometres & capacity to carry
67.21 MMT of products. Also there are 3 LPG pipelines with a
length of 2197 kilometres & capacity to carry 4.50 MMT of LPG.
Over and above this, there are 17 crude oil pipelines of 7425
kilometres, with capacity of transporting 105.55 MMT. The details
are as follows:
Table 12.2: Details of Product Pipelines under Operation
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decades. The network of pipelines is immensely helpful in

maintaining the supply chain of crude oil, petroleum products and
gas in the country. The onshore cross country pipelines are laid
underground at a depth of about 1.5 mtr. in a corridor of about
18 mtr. Wide, and is operated normally at high pressure.
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(c)
Source: Ministry of Petroleum and Natural Gas
With the increase in petroleum pipeline network, the railways

have lost their first position in transportation of petro products. It
now has the third biggest market share in transporting these, after
the coastal mode and pipelines. The fourth spot is occupied by road
transport.
While the railways have been losing market share, the volume
they carry has remained flat. Pipelines moved up from the fourth
spot to the second in 2010-11. There has been growth in line share
and simultaneous decrease in railways share in transportation,
mainly on account of increased utilisation of pipelines network
Road Transportation
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Road transportation is usually the last leg of the long journey of

petroleum products and it is mostly associated with the retail
segment of the petroleum industry. As an economic activity, its
significance is very wide as it touches a wide segment of small
employers of capital and manpower. Notwithstanding its economic
value, road transportation has a number of negative features. It is
a high-energy consuming mode; its contribution to environmental
pollution is high; it is hazardous to itself and to the surrounding.
However, considering the retailing nature of road transportation,
its service can hardly be dispensed with.
Marketing of Transportation Fuels in India
The process of liberalisation of the downstream sector in India

began in February 1993, with the decanalising of imports of
Superior Kerosene Oil (SKO), Liquefied Petroleum Gas (LPG) and
Furnace Oil (FO) and allowing private marketers to import and
sell these products at market determined prices.
In November 1997, the Government of India passed a resolution to
allow marketing rights for transportation fuels Motor Spirit
(MS), High Speed Diesel (HSD), and Aviation Turbine Fuel (ATF)
conditional on owning and operating refineries with an investment
of at least ` 2000 crore or oil exploration and production companies
producing at least three million tonne of crude oil annually.
With the dismantling of the APM, the GoI has amended the
provisions of the resolution of 1997, in line with announcement of
the India Hydrocarbon Vision 2025, under which marketing
rights are also available to a company investing or proposing to
invest ` 2000 crore (about US$ 415 million), in Exploration and
Production (E&P), refining, pipelines, or terminals. The
Government to its satisfaction will do the valuation of the
(c)
Notes
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According to Indian Railways, they carried 23.7 million tonnes of

petroleum oil lubricants in April-October 2011, a negligible change
over last years corresponding volume of 23.2 mt. This is happening
even as the volume of total goods carried by the railways increased
nearly four per cent to 537 mt in the same period of the year.
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across the country, said an official at the Petroleum Products

Planning and Analysis Cell (PPPAC), a wing of the petroleum
ministry.
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The marketing scheme shall contain details of:

z
The source of supply of products to be marketed;
Tankage and other infrastructure proposed to be established

along with their capacity;
Means of transportation of products to depots and to ROs;
The number of locations of ROs proposed to be established and

details of their storage and dispensing capacity;
The total quantum and type of products to be covered under

the marketing scheme.
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investments. In case of future investments, the time frame for

making such investments in the eligible activities would be
counted as ten years from the date of grant of authorisation for
marketing of transportation fuels. A bank guarantee of ` 500 crore
would have to be provided to the GoI, which would be discharged
on completion of the investment of ` 2000 crore. Every eligible
company would get only one authorisation for marketing
transportation fuels, and the authorisation will not be transferable
without permission of the GoI. The Company seeking authorisation
to market transportation fuels will be required to make an
application in a specified form. There shall be no limit to the
quantum and size of the scheme and the number and location of
retail outlets.
Notes
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Company will have to follow GoI/Regulatory board guidelines on

retail service obligations (to make available MS and HSD to retail
consumers throughout the specified working hours) and marketing
service obligations (to set up retail outlets in remote areas and low
service areas) that are set up from time to time in public interest.
(c)
Structural Shifts Envisaged in Transportation of Petroleum

Products
Transportation of petroleum products will undergo a structural
transformation in the short-term future. This will be more
pronounced in the road sector. Today, the fleet owners are having
only limited principal users, with whom they have a long-term
contract. Many of the tank lorries used for transportation of petrol
and diesel have an evergreen contract with any of the four oilmarketing companies. Secondly, as the entire principal user
companies are PSUs, there is security and loyalty from both sides.
At times, the fleet operators have used their collective bargaining
power and attempted to extract a rent from the PSU users.
permitted to market transportation fuels, namely, petrol, diesel
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From April 2002 onwards, nine private companies have been
Notes
and aviation fuel. These companies are Oil & Natural Gas
___________________
Corporation
Gas
___________________
Authority of India Ltd (GAIL), Oil India Ltd. (OIL), Mangalore
___________________
Reliance
Petroleum
Ltd.
(RPL),
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(ONGC),
Refineries and Petrochemical Ltd. (MRPL), Essar Oil Ltd., Cairns

Energy of UK, Petronet LNG Ltd. and Nagarjuna Group. With the
___________________
entry of these firms, there will be stiff competition among the users
___________________
of fleet and a new tariff level will be drawn.
___________________
Second development goes in favour of fleet owners, which is that
___________________
Oil Companies are coming up with new customer serving measures
___________________
or loyalty programmes which provide multiple service packages for
___________________
the fleet owners and transport operators. Those measures are
___________________
known as smart fleet cards, one truck stop shop etc.
Check Your Progress
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Fill in the blanks:
1. It is believed that optimisation in logistics and

transportation of petroleum products can indeed create
value in the whole end to end .
2. Petroleum products are used primarily in three sectors,
viz., household, and industrial.
Summary
(c)
Transportation of petroleum products in India is set for a drive

towards efficiency, economy and environmental protection. For a
macro level solution, we have Petronet model available to us. Its
effectiveness and operation has to be observed in the post April
2002 regime. For user specific localised solution we have the model
of Oil Tanking, which is a company providing tanking and
handling service worldwide, which has a presence in India as a JV
with IOC. In the transportation chain, there are multiple players
and each link provides room for investment and cost optimisation.
Lesson End Activity
Make a comparison between different modes of oil transportation

in India.
Petro Economics
Keywords
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Notes
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Logistics: Logistics means the management of business

operations, such as the acquisition, storage, transportation and
delivery of goods along the supply chain.
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Economic Design: Economic design of pipeline system involves

establishing an optimum relationship between pipeline sizes and
pumping configuration in terms of number of pumps and power
requirements.
1. What are the critical features of oil transportation?

2. What are the key modes of oil transportation?
3. Discuss the process of marketing of transportation fuels in

India.
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4. Write a note on structural shifts envisaged in transportation of

petroleum.
Further Readings
Books

Science, v. 86, p. 985-990.

Web Readings
(c)
http://www.eia.gov
http://www.bp.com
UNIT 13: Strategy for Petroleum and Natural Gas Trading
Unit 13
203
Notes
Activity
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Strategy for Petroleum and

Natural Gas Trading
Prepare
a presentation on the
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concept of trading of oil and
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natural
gas.
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Objectives
topics:
\
Crude Oil Marketing
Asian Gas Market Overview
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Introduction
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Crude oil, natural gas, refined products, and petrochemicals are all
sold into commodity markets. Commodities are mass-produced,
unspecialised products, with high fusibility, having characteristics
so similar that they are interchangeable. For example, light sweet
crude oil is fungible because a barrel produced in West Texas and
one produced in Saudi Arabia would produce similar mixes of
products if processed in the same refinery.
Taking a broad view of petroleum marketing it involves:

transporting the product to a point where custody transfer is
feasible, providing storage facilities wherever necessary, balancing
product and demand and obtaining the best possible price
Crude Oil Marketing
Refineries are normally located near population centres, often in

processing clusters that include petrochemical plants.
(c)
The overall pattern is for crude to be shipped to these clusters from

around the world in smaller tankers.
Since crude is so easily transported by marine tanker, in remote
areas of the world the development of a new field generally
includes building a pipeline connecting the field to a marine
loading terminal. This gives complete access to the world market.
An oil company may use its own tankers to ship to its refinery in
Europe or the U.S. but more often it will sell at the terminal to the
Petro Economics
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When a new field is discovered in the U.S., the operator normally

connects it to the nearest crude oil pipeline and receives per barrel
posted price published by the pipeline company. Producers also
have the option to rent space in the pipeline to transport their
crude. Because of the well-established market between producers
and refiners in the U.S. and abroad, and because it is a fungible
product, no particular attempt is made by companies to run their
own crude in their own refineries.
Organisation of Petroleum Exporting Countries
OPEC was formed in 1960 to give the producing countries a unified

voice in dealing with the western oil companys crude pricing. Its
major impact, however, has been since 1973, when it began
functioning as a cartel to control crude prices. In 1999, the OPEC
member states are Saudi Arabia, Iraq, Iran, Venezuela, Nigeria,
Kuwait, Libya, United Arab Emirates, Indonesia, Algeria, Gabon,
and Qatar.
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highly organised and efficient third-party market. Crude oil

traders responsible for procuring feedstock for the worlds
refineries are in constant contact with the producers, negotiating
prices and arranging transportation.
Notes
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204
(c)
From its beginning, the international crude market was highly

volatile. Since major crude oil discoveries were random events that
defied planning or scheduling, the supply of crude was usually too
long or too short, generating wide swings in price. This
environment was discouraging to investment of the huge sums the
emerging industry needed. Some stabilisation was clearly in
everyones interest.
The first effort to bring order to the market was made by the Texas
Railroad Commission in the 1930s, and it was quite successful. At
that time the United States principally Texas-was the worlds
biggest crude producer and exporter. The TRC was therefore able
to cut-back or increase Texas production as needed to bring world
supply and demand into rough balance. Working closely with the
major oil companies who controlled the foreign-produced crude, the
TRC was able to maintain relative price stability well into the
1960s.
By the early 1970s, the United States had lost its position of
leading producer in the world, and in fact had become a net
importer. This eliminated the TRC as a player, leaving the
205
Notes
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multinationals to manage the international crude markets alone.

It also gave OPEC new life as its members realised that they now
dominated world crude supplies. In 1973, a wave of nationalisations by the producing countries started. OPEC quickly took
control of the crude market and in October of 1973 more than
tripled prices. Since then, OPEC has tried to stabilise prices by
adjusting members production rates to meet market demand.
Their efforts have been successful at times, but at other times
major price fluctuations have occurred. This is not surprising
considering the diversity of interests that exist between individual
member states. For example, OPEC member Iraq invaded fellow
member Kuwait in the Gulf war.
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Another factor weakening OPEC is the substantial non-OPEC

production that has recently been developed around the world.
As of the late 1990s OPEC production has been reduced to only
40% of world production. It is significant, however, that OPEC,
particularly Saudi Arabia, still has virtually all the worlds surplus
producing capacity. This assures them continued influence on
crude prices.
Natural Gas Marketing
Because natural gas must be contained under pressure or it will

dissipate, commercialising (marketing) of remote gas inevitably
involves heavy investment in downstream facilities. One approach
is liquefied natural gas (LNG), where the gas is converted in place
to a more easily transported liquid. Another approach is to bring
demand to the gas field by building, for example, a fertiliser plant
in the remote location. The higher valued fertiliser can then be
economically transported to the consuming area.
(c)
Unlike crude oil, it is not feasible to build surface storage facilities

for gas. Gas is, in effect, stored in the reservoir and not produced
until it can be consumed. Underground gas storage usually using
depleted gas fields near the market, is a variant of this. In the
U.S., the bulk of gas production is in the southwest of the country
while the population and consumption is concentrated in the
northeast. Demand is heaviest in the winter, so the pipeline
operates at maximum rates during cold weather. In the summer,
when demand slows, production would be normally being reduced
and the pipeline operated at reduced levels. With underground
storage the pipeline throughput is kept high. When the gas reaches
the northeast, instead of being consumed, it is injected into the
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Petro Economics
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subsurface storage reservoir. During the next winter the gas is

produced out of storage to augment the gas coming up the pipeline.
Notes
With remote gas developments the gas reserves are totally

committed to the project, which may last 20 years or longer. This
pattern prevails throughout most of the world. In recent years
however the gas industry in the U.S. has become a great deal more
flexible. Deregulation of the industry has freed up pricing, so short
term markets for gas, even spot markets, have now, developed.
The contract chain has been altered so that the producer no longer
must sell its gas to the pipeline company, who then sells it to the
consumer. Instead, the producer and consumer can make the deal
direct or through intermediary trading companies, and hire the
pipeline to transport it. This flexibility and efficiency is benefiting
all parties. Gas futures are now traded on financial markets, much
the same as are crude futures. Companies have become quite
sophisticated in placing hedges to cushion themselves from shortterm gas price fluctuations.
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Refined and Petrochemical Product Marketing
(c)
Plant operators not only have to organise and procure their slate of
feed-stocks, they also have to keep the products they produce
moving smoothly out to retail markets. Although temporary
storage of excess liquid products, is more feasible than storage of
natural gas, the available storage capacity is I miniscule compared
to the enormous volume of petroleum products moving through the
system. This smoothly running enterprise again depends on welldeveloped markets for traders to easily dispose of their surpluses
and pick up their shortfalls. As with crude oil, there is no
particular attempt made by refiners to move the gasoline they
produce through their own service stations only. Instead, a Gulf
Coast refiner would typically deliver its surplus gasoline to other
marketers in the immediate area in trade for similar volumes
received from other refiners on the east coast, west coast, and
elsewhere. This saves the cost of physically moving the products
around the country, so everyone benefits.
Products are transported from plants by truck, barge, ocean-going
ship, and pipeline. A pipeline can handle a variety of different
products introduced as sequential batches. Some mixing occurs at
the batch interfaces and this material is reprocessed.
Trading of Oil & Natural Gas
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Deregulation of the natural gas industry and pricing set by supply

and demand, has opened the industry to traders. As in any
commodity market, traders try to buy low and sell high to turn a
profit; gas is bought and sold as a commodity. Pipelines providing
basic transportation of gas from one location to another connect
regions of supply to market areas. Some pipelines bridge the gap
between other pipelines or storage areas. Finally, the gas reaches
end users. It is here, at the burner-tip or burning point, that the
now of gas stops and it is consumed.
There are several types of end users-some of which are regulated,

depending on what type of business they are in. For example, local
distribution companies (LDC) provide a pipeline or distribution
system and gas supply for consumers in towns and cities. Since
LDCs are considered public utilities, they are subjected to rate
approval and regulation by their slate Public Utility Commission
(PUC). Other end users include non-regulated industrial
consumers that burn gas to generate heat, powering machines that
manufacture their products. Cogeneration plants use natural gas
to produce heat, creating steam that in turn generates electricity.
Commercial end users burn gas to provide space heat and heat for
hot water as well as power for air conditioning units. These
consumers include offices, schools, hotels, and restaurants.
Electric utilities are the single largest end users of natural gas in
terms of the volume of natural gas consumed per user. They burn
large quantities of natural gas to generate electricity, which they
then sell to electricity buyers. Because they are utilities, the price
they can charge for electricity is regulated by their state PUC.
(c)
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LPG is produced not only as a refinery byproduct, but also direct

from gas wells. As a byproduct, its production volumes are not
determined by its own demand, but rather by the demand for
gasoline and natural gas. As a result, the LPG market is
notoriously cyclic, swinging rapidly from surplus to deficit and
back again. It is therefore necessary to have more LPG storage
capacity than for other products. On the U.S. Gulf Coast and
elsewhere around the world, this has been accomplished by
washing out caverns in sub-surface salt formations.
This is in the process of changing as the electricity industry

undergoes deregulation, and the price of electricity will also be set
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Petro Economics
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Although they are neither producers nor end users, marketing

companies play a big role in the business activity on a pipeline.
Also called resellers or third parties, they are in the business of
capturing profits from opportunities presented. Their best-known
function here is as trading companies buying and reselling natural
gas for a profit. These companies are not paid a fee by any one, but
earn the difference (or take a Joss) between the price they pay for
gas and the price at which they sell it. As a result of deregulation,
my company IS free to buy and sell natural gas to anyone. In
addition, it is entitled to contract for pipeline capacity on almost
any pipeline system. The ability to enter the market with
opportunities like these has led to the explosive growth in the
number of natural gas trading companies.
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by supply and demand. Electricity is already traded as a

commodity on a limited basis, and some states are well on the way
to deregulating their industry. This means if natural gas prices
rise to the point that it is no longer economical to make the energy
conversion to electricity-based on the price received for the
electricity the utility will switch to alternate fuels or generate
more power from facilities that burn other fuels such as coal or
nuclear energy.
Notes
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208
(c)
Each day trading companies look for areas of excess supply or high
demand. If they find the region that is temporarily oversupplied,
e.g, they can inexpensively buy and take title to the supply when
they sell and transfer title to another party, they capture a
profitable spread in between. Transactions like this can occur
either at the same place or where the gas is consumed. The goal is
the spread.
Service, marketing, and trading companies are important to the
natural gas industry for several reasons. As service providers, they
perform necessary administrative business procedures, at a low
cost, for companies that dont have established departments or the
know-how to perform them. As traders, they keep supply and
demand in balance by searching for profitable arbitrage
opportunities where there are discrepancies.
Supply Strategy
North America, for instance, has an abundant supply of this
particular natural resource. Much of our natural gas comes from a
few regions and must be transported for use. Some is less
Notes
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But the biggest factor affecting supply in North America is price.

The higher natural gas prices are the more incentive producers
have to look for more supplies. As prices fall, wells that are only
marginally profitable will be closed to ensure that maintenance
and production costs do not exceed sales revenue. Also the risk of
loss in new drilling projects increases relative to the potential
reward when evaluating prospective wells.
209
expensive to produce because it is found in shallower depths, and

some is more expensive because it is more difficult to drill.
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Natural disasters can temporarily affect supply. Due to the vast

amount of production in offshore wells in the Gulf of Mexico,
hurricanes pose a threat to the stability of this supply region.
Whenever a hurricane threatens, producers evacuate workers and
stop production. This causes a temporary shortage. If a storm
actually damages these rigs, as Hurricane Andrew did in 1992,
shortages become more serious. During Andrew, several rigs were
damaged and made inoperable, and supply couldnt be restored for
about six months Natural gas prices soared as buyers scrambled to
replace lost supply. During the outage, supply from throughout the
U.S. and Canada was re-routed to make up for the lost supply from
the Gulf of Mexico area. Prices around the country continued to
rise as demand outweighed supply. However, when production
from the damaged rigs resumed, supply caught up with demand
and natural gas prices gradually fell back to pre-disaster levels.
On a smaller scale, wellheads can freeze during prolonged periods
of intense cold weather. When this happens, the wells in a specific
production area become inoperable and the supply from that region
is temporarily unavailable to the market. As temperatures return
to normal, production is restored, and the gas is again available to
the market.
Demand Profile
(c)
The demand side of the natural gas market is more dynamic than
one might expect. Natural gas has more uses than just heating and
air conditioning although natural gas is primarily used as a fuel to
generate heat; there are also more obscure uses. Crude oil
producers in California will sometimes use natural gas to extract
more crude oil from old, low-pressure wells. This is accomplished
by injecting highly pressurised natural gas into the ground
beneath the oil reserves to increase the crude oil reserve pressure.
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Petro Economics
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Power generation is the third largest market for natural gas.

Electric utilities and independent power producers use natural gas
to power gas-fired turbines to generate electricity.
The level of demand for natural gas rises and falls as a result of
changes in price for several other reasons as well. By far the most
important force altering the level of demand is weather.
The economy also effects demand. A strong economy that generates
demand for steel products, for example, will cause steel
manufacturers to run their equipment at maximum capacity to
manufacture additional products. Their demand for natural gas
increases as they use it to heat ovens over additional work shifts.
Demand for gas, in terms of consumption, is less sensitive to
changes in price than the supply is. This is true as prices increase,
but even more apparent when prices decrease. That is due to the
nature of this uses for natural gas, more consumers do not eagerly
rush into the market to buy if prices fall. However, if prices fall to
a certain level, it is not uncommon for producers to shut-in wells in
a matter of a few hours.
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This type of use accounts for only a tiny fraction of overall demand,
however Industrial companies represent the largest portion of
natural gas demand, powering machines and heavy equipment.
Residential consumption also accounts for a large portion
of total natural gas demand. Residential consumption is very
straightforward home heating, or as a fuel for stoves, fireplaces,
and hot water heating tanks.
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210
(c)
Transportation
A pipeline nomination is a notification given by a third party

shipper to a pipeline. It requests the pipeline recognise, account
for, and physically implement a transportation transaction for that
shipper. If the shipper is planning to transport gas on a particular
pipeline from point A to point B, it must notify that pipeline of its
intentions through a nomination. A nomination must include all
details needed to ensure that the pipeline can perform the
requested service properly. Nominations generally include:
1.
Shippers transportation contract number
2.
Delivering partys transportation contract number
3.
Start date
4.
Stop date
211
Shippers receipt location
6.
Shippers receipt amount
7.
Shippers delivered location
8.
Shippers delivered amount
9.
Receiving partys transportation contract number
5.
Notes
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Because natural gas transactions are done on a daily basis, natural

gas pipelines monitor their systems on a day-to-day basis as well.
With little variation, physical operators of wellheads, gathering
systems, and the pipelines themselves begin measuring and
accounting for volumes flowing through their respective systems at
7 A.M. central time and end at 7 A.M. the following day. The
typical nomination deadline is 10 A.M. central time for gas to flow
the following day. As a result of these deadlines, trading activity is
busiest in the early morning hours as traders conduct their
business for the following day.
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Once it receives a nomination from a shipper, the pipeline follows a

confirmation procedure, matching all the details of the shipping
party to those of the delivering party, and the details of the
delivering party to the details of the receiving party. If any of the
relevant information does not match, the nomination will not be
confirmed and must be resubmitted.
Once a nomination is confirmed, the pipeline schedules the gas to
flow. It notifies its operations personnel to expect the amount of
the gas in the shippers nomination to flow through the shippers
designated receipt meter and the shippers designated delivery
meter on the start date and every day thereafter until further
notice. There is typically more gas flowing through meters other
than the amount in one shippers nomination, so pipeline operators
designate the amount specified in the shippers nomination at a
particular meter as gas supply intended for the shippers account.
(c)
In the day-to-day market for physical natural gas, buyers and

sellers conduct the majority of their transactions with each other
over the telephone. Electronic bulletin boards are available for
physical trades to be cleared at a few major trading points by
third-parry operators. Natural gas traders maintain lists of
contacts at other companies whom they know to be traders of gas
on a particular pipeline, at a specific point, or in a designated
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Petro Economics
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Although the daily market for natural gas is active, the majority of
gas trading occurs during the last week of each month. This period
of time is known in the industry as bid-week. It is the time when
market participants buy and sell the majority of their gas
requirements and available volumes of gas for the following month.
Gas transactions are prepared in terms of volume per day, but the
standard industry practice is to deal for a month at a time. During
bid-week, trading volume is heaviest as producers try to sell their
core supply, end users try to buy for their core needs, and
marketing companies try to get in between the two.
Electricity is also traded as a commodity on a limited basis, but the
volume of trading is increasing. As deregulation progresses, it
should one day mirror natural gas trading. Commodity status is
one of the many similarities between the natural gas and the
electric industries, and these similarities are pulling the industries
together. Similar knowledge and skills are helpful in trading both
electricity and natural gas. In fact, most .of the pioneers in the
electric trading market was the gas traders.
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region of the country. It is through these contacts that most

transactions are done and market information is disseminated.
Notes
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212
Pipeline Economics
(c)
Economics of scale are the major element in pipeline economies.

From a theoretical point of view, doubling the pipeline diameter
will tend to increase the amount delivered by more than fourfold in
a given period of time other factors remaining constant. This
implies that total cost might double while the cost per unit
delivered would decline. At the construction and operation stages,
pipeline economics involve two cost elements: initial capital cost
and operating cost. Pipeline construction in costs constituted about
40% of total investment. These costs vary among diameter
classifications and are affected by geographic location, terrain and
pipe length. It has been noted that the cost per mile for a given
diameter is lower where the pipeline is longer.
The major cost components of pipeline construction are material,
labour and right-of-way damages. In most cases, material and
labour account for more than 75% of construction cost. As to the
pipeline operating costs, they seem to vary among different sizes,
uses and locations. For example, total operating costs for the U.S.
interstate natural gas pipelines were estimated by natural gas
213
companies to be $3.41 billion in 1985. A major part of operating

costs is the cost of pipeline power consumption
Notes
Activity
Research
on the latest
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changes in the transportation
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of LNG.
Check Your Progress
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Fill in the blanks:

1. . are normally located near population
centres, often in processing clusters that include
petrochemical plants.
2. .. was formed in 1960 to give the producing

countries a unified voice in dealing with the western oil
companys crude pricing
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According to the Hydrocarbon Vision 2025 envisaged by the

government of India, by the year 2012, the demand for LNG in the
country would be to the tune of 300 MMSCMD which would
increase to 400 MMSCMD by 2025. As against this, currently the
availability of domestic gas is 75-100 MMSCMD which is expected
to remain static in future. The extrapolation of demand and supply
of LNG for future suggests that in the year 2012, the country
would require to import 200 MMSCMD of gas while in 2025 the
import would be even higher at 300 MMSCMD. To make these
imports realise, by 2012, we would need 22 LNG vessels while by
2025, 34 LNG vessels would be required. With the kind of need we
have, the industry has started talking of FOB policy as in due
course of time, it is likely to become a strategic necessity.
Demand
2012
2025
300 MMSCMD
400 MMSCMD
75-100 MMSCMD
75-100 MMSCMD
Import needed
200 MMSCMD
300 MMSCMD
LNG Vessels needed
22
34
Availability
LNG Transportation Policy
LNG is the fuel of the future. It is a strategic commodity. Today, it

has become the lifeline of Indias power and agriculture (fertiliser)
sector. In such a situation, it becomes imperative that India must
exercise control over LNG shipping in times of war and scarcity.
Such a control over LNG shipping would work in favour of meeting
national energy security requirements. It would also deter
monopoly of suppliers and international shipping companies.
(c)
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Description
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Petro Economics
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The Free-on-Board basis results in lower delivered cost to buyer for

long-term supply contracts. It is simply because the risk and profit
element associated with the LNG transportation is removed from
the suppliers list of responsibilities. The FOB imports also ensure
flexibility of gas sourcing which results in competitive pricing of
gas. FOB basis by controlling shipping enables LNG buyer
(importer) to better address the huge Take or Pay obligations for
LNG Sale and Purchase Agreement (SPA). Control over long-term
shipping moderates the freight level for the country.
LNG Carriage Cost Indian Flag v/s Foreign Flag
Indian shipping has recently been granted a globally competitive

Income Tax regime that is Tonnage Tax. However, ship owning
firms in India are still subject to other forms of direct and indirect
taxation such as Dividend distribution tax, Withholding tax,
Service tax, Fringe benefit tax, etc. A foreign flagged vessel may be
exempt from all such taxes if owned in a tax-free jurisdiction. If we
take the current Indian Tax Regime into account, the cost impact
per day per MMBtu would be as under:
(c)
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Rationale for FOB
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Dividend tax
$931.50
Withholding tax
$3109.59
Tonnage tax
$45.67
Service tax
$139.73
Total Additional Tax
$4226.49
Total annual outgo per ship
$1.543 million
Additional cost per ton
$0.617
Additional cost per MMBtu
$0.0134 or 1.34 cents
Incremental cost of shipping on account of Indian taxes would be

approximately 1.34 cents per MMBtu. Assuming an FOB cost of
$2.53 per MMBtu and the cost of shipping at 27 cents per MMBtu
the landed cost would be $2.80. The incremental cost of 1.34 cents,
on account of Indian taxation would hence be 5 per cent of the
shipping cost and a mere 0.5 per cent of landed cost.
The government may exempt Indian shipping companies from the
above taxes so that costs differential between Indian and foreign
flag vessels are eliminated. It may be pertinent to mention here
that Indian shipping companies were in the past exempted from
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The Rakesh Mohan Committee Report in its report has well

amplified the significance of national tonnage.
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TERI Report
Notes
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Indian Flag Value Addition to the Nation
215
Withholding Tax vide Section 10 (15) (4) (C) of Income Tax Act
until June 2001.
Gross Register Tonnage (GRT) = Gross Value Added (GVA) to

the economy of ` 2211
1 per cent change in GRT = 0.0068 per cent change in GDP
Under the Indian Tonnage Tax regime, it is mandatory to invest 20

per cent of book profit into additional tonnage acquisition. If LNG
is permitted to be imported on foreign flag vessels, then this
opportunity of national fleet expansion and value additions thereof
are totally lost.
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It has been calculated that for every 8 years, 1 VLCC can be added
to the Indian fleet for every 1 LNG carrier owned under Indian
flag, which is a huge value addition of ` 33.32 crore (assuming
150,000 GT for 1 VLCC x ` 2211). In other words, the country will
lose 1 VLCC or ` 33.32 crore every 8 years for every single foreign
flagged LNG vessel employed.
According to Hydrocarbon Vision 2025, about 56 million tonnes per
annum and 84 MTPA respectively of NG will be required by 2012
& 2025. This will be about 22 & 34 LNG ships respectively. Thus
from year 2025, 33 VLCCs (22 x 1.5 VLCCs) value addition to the
Indian economy will be to the tune of ` 1095.6 crore per year.
LNG shipping closely controlled either by importing countries

(Japan, South Korea, Spain) or exporting countries (Algeria, UAE,
Malaysia, Brunei, Qatar). Control of shipping offers opportunity
not only to conserve freight outgo but also to effectively control the
FOB cost of LNG imports, through diversification of supply
sources.
(c)
Japan, Korea strongly encourage not only LNG ship owning but
also shipbuilding.
Control over LNG shipping will provide long-term fiscal and
energy security benefits. Incremental cost of Indian flag tonnage is
virtually non-existent (0.5% of landed cost) and exists only due to
taxation and government levies. Value addition through the
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Petro Economics
Notes
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growth of Indian fleet is substantial and outweighs any marginal

cost on account of Indian flag. In the wake of all these issues, it is
not a matter of surprise that the Indian shipping industry has
been demanding an LNG policy based on Indian flag tonnage on
FOB basis.
216
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Asian Gas Market Overview
The final market overview segment is the emergence of an

increasingly important natural gas market in Asia. This growing
importance of natural gas in Asias energy mix is being driven by a
variety of factors, including the abundance of gas within the
region, environmental considerations, the drive to use domestic
energy resources wherever possible, and efforts to diversify sources
of energy supply away from dependence on Middle East oil.
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Importance of Natural Gas in Asias Energy Supply Chain

The coincidence of five factors is driving rapid growth in the
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consumption of natural gas in Asia:

z
Resources: The proven reserves of natural gas in Asia have

increased by 43 per cent over the last decade and now amount
to 10.2 trillion cubic meters (TCM) over 35 years supply at
the current region-wide demand rate of 294 BCM per year and
over 41 years supply at current regional production levels.
Technology: Ongoing developments in the technology for

combined cycle gas turbine systems combined with their lower
capital costs and shorter development cycles compared to coal
fired plants have opened vast new applications for gas in
power generation.
Environment: Major Asian countries are getting serious

about local environmental quality, and natural gas provides a
cost-effective means of improving air quality.
(c)
Nuclear concerns: Growing public concern over the safety of

nuclear power in Japan, Korea, and Taiwan will slow nuclear
power development in all three countries, opening yet further
markets for natural gas.
LNG costs: The cost of new LNG facilities is declining,

making LNG a more competitive fuel.
Asias Natural Gas Supply and Demand
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The results of these driving forces is that natural gas demand in

Asia is projected to grow from the current level of about 225 billion
cubic meters per year to over 600 billion cubic meters by 2020
(Refer Figure 13.1). This represents growth rates at an average
annual rate of 6 per cent through 2010 and 4.5 to 5 per cent for the
following decade.
217
The extensive use of combined cycle gas turbine systems in the

power sector will account for about two-thirds of that total growth
in gas demand.
On a regional basis, the development of new gas productive

capacity in the region will mirror demand developments over at
least the next decade, creating increased competition in the market
as supplies from the Middle East and eventually from Russia
increasingly compete for the regional market.
(c)
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Key gas resources that will be developed in the region include

Bangladesh (Bay of Bengal), Indonesia (expansions in Bontang,
Sumatra, and Irian Jaya), Australia (Gorgon, Northwest Shelf,
Bayou Undan), Russia (Sakhalin Island), Malaysia (Tiga), China
(Ordos, Sichuan, and Tarim Basins), Vietnam (Nam Con Son),
Papua New Guinea, and others.
Figure 13.1: Total Asia Gas Demand Profile
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Global and Regional LNG Supplies Continue to Expand
Notes
Of critical importance to Indias LNG import plans is the outlook

for regional and global liquefaction capacity. In CERAs view,
global liquefaction capacity could increase to as much as
235 million tons per year (MTPA) by 2010 from the 1999 level of
102 MTPA. However, this growth assumes that regulatory
frameworks and pricing dynamics develop in supportive directions.
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Planned liquefaction capacity additions in Asia and the Middle

East are more than sufficient to meet CERAs projections of
demand potential beyond 2010. (Refer Figure 13.2). Key
expansions will be:
Indonesia: Expansion of Bontang, Greenfield project at Irian Jaya
(Tengah), with decline at Arun.
Malaysia: Tiga project already under development.
Brunei: Minor expansion.
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Australia: Expansion of Northwest Shelf, Gorgon development,

Bayou Undan.
Russia: Sakhalin II Greenfield project.
(c)
Source: Cambridge Energy Research Associates.
Figure 13.2: Middle East: Expansions at Qatar, Abu Dhabi, and Oman
Greenfield Project in Yemen
Downward Pressure on LNG Prices: A Feature of the Next

Decade
Historically the development of the LNG business has been based
on tightly integrated projects involving all aspects of the LNG
219
Notes
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value chain from liquefaction to transportation to regasification.

This structure has been necessitated by the need to project-finance
huge infrastructure projects. In turn this meant long-term take-orpay contracts, and hence all parties involved in the project
required the security of these long-term relationships.
CERA expects in the long- run this structure of the LNG industry
to change into fundamental directions with lower prices and
greater contract flexibility. These changes are driven by new
circumstances in both the supply and demand side of LNG trade:
Plentiful supplies: The next 10 years in the LNG business are
expected to be a buyers market, with abundant supplies and
aggressive development of a number of large remote gas resources.
This will meet aggressive competition among suppliers for new
LNG business opportunities.
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Reduced costs: LNG development costs are declining as a result

of better technology and the increasing competitiveness of LNG
markets.
Buyer price pressures: LNG buyers are becoming more cost

conscious as they are in turn being pressured by their customers
and by their host governments to reduce the cost of energy
throughout the value chain. Sellers to Japans LNG market are
already seeing this pressure. Japanese buyers have traditionally
been able to directly pass on the cost of LNG to their customers.
This, however, is becoming increasingly difficult, particularly for
majority of Japans LNG, which goes into electric power. Japans
power companies are being pressured by their customers and by
the Ministry of International Trade and Industry (MITI) to lower
the cost of power to Japans industries in order to make those
industries more competitive in international markets. The intense
pressure to lower tariffs is being reflected directly in the utilities
and LNG price negotiations.
(c)
Fragmented negotiations: CERA expects that in the near future,

the buying practices of Japanese LNG importers will change. The
current practice of negotiating en masse with sellers will give way
to individual negotiation for each LNG importer. This will add to
downward pressure on prices
Buyers seeking greater flexibility: There is increasing buyer
demands for increased flexibility to lift schedules in order to avoid
future take-or-pay obligations. These demands have arisen from
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Availability of spot supplies: The excess supplies that seem

certain to materialise over the next decade will give rise to an
expanded spot trade in LNG. This will encourage buyers to
demand greater contract flexibility.
Reducing the Cost of LNG: Can it be done?
There have been significant reductions in the costs of developing

LNG projects between the 1980s and 1990s (Refer Figure 13.3).
Plant costs in the 1990s were only about 65 per cent of those of
plants built in the 1980s, with reductions of up to 37 per cent in
various segments of LNG capital costs build-up. One key question
for the next decade is whether those gains will continue. Most
areas of cost improvement seem likely to continue, while others are
open to question.
(c)
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two factors. First, several buyers face take-or-pay obligations as a

result of the economic downturn of 1997. They seek to avoid any
future repeat of the experience. Second, electric utilities,
particularly those in Japan, face uncertainty in future load growth
because of the evolution of independent power generators. Under
these circumstances, they are more reluctant to make long-term
take-or-pay obligations.
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Source: Cambridge Energy Research Associates
Figure 13.3: LNG Plant Cost for Developing Market
Feed gas value: Will host governments adapt to the new era of
lower costs and greater market competition?
Cooling systems: Increasing efficiency likely.
Notes
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Liquefaction process: Larger trains and lower capital costs

should continue to emerge.
221
Production operations: Increasing pressure for efficiency and

improving technologies should continue to improve cost efficiency.
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Gas-driven turbines: Increasingly used for mechanical drive with

resulting efficiency improvements.
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Storage: Increased tank size and thus lower unit costs will
continue.
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Ships: Increased size and fuel efficiency likely to continue, but at a

reduced rate as vessel size vs. port flexibility come into play.
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Project execution: Tighter controls and greater efficiency still

possible.
Check Your Progress
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Fill in the blanks:
1. The basis results in lower delivered

cost to buyer for long-term supply contracts.
2. . development costs are declining as a
result of better technology and the increasing
competitiveness of LNG markets.
Summary
The overall pattern is for crude to be shipped to these clusters from

around the world in smaller tankers.
(c)
Since crude is so easily transported by marine tanker, in remote

areas of the world the development of a new field generally
includes building a pipeline connecting the field to a marine
loading terminal. OPEC was formed in 1960 to give the producing
countries a unified voice in dealing with the western oil companys
crude pricing. Its major impact, however, has been since 1973,
when it began functioning as a cartel to control crude prices.
From its beginning, the international crude market was highly
volatile. Since major crude oil discoveries were random events that
defied planning or scheduling, the supply of crude was usually too
long or too short, generating wide swings in price.
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Because natural gas must be contained under pressure or it will

dissipate, commercialising (marketing) of remote gas inevitably
involves heavy investment in downstream facilities. One approach
is liquefied natural gas (LNG), where the gas is converted in place
to a more easily transported liquid. Another approach is to bring
demand to the gas field by building, for example, a fertiliser plant
in the remote location. The higher valued fertiliser can then be
economically transported to the consuming area.
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According to the Hydrocarbon Vision 2025 envisaged by the

government of India, by the year 2012, the demand for LNG in the
country would be to the tune of 300 MMSCMD which would
increase to 400 MMSCMD by 2025. As against this, currently the
availability of domestic gas is 75-100 MMSCMD which is expected
to remain static in future.
Lesson End Activity
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Research on the key initiatives taken by GoI to promote the

trading of oil and natural gas in the global market.
Keywords
OPEC: Organisation of Petroleum Exporting Countries

FOB: Free-on-Board
LDC: Local Distribution Companies (LDC) provide a pipeline or

distribution system and gas supply for consumers in towns and
cities.
1. Discuss the concept of petroleum products marketing.

2. Write a note on OPEC.
(c)
3. What are the demand and supply strategy of oil and gas?
4. Discuss the trading strategies of oil and gas.
5. What are the key targets set for LNG transportation policy of
GoI (FOB)?
6. Discuss the recent trends in global and regional LNG supplies.
Further Readings
223
Notes
Books
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KPMG, Mumbai.
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Science, v. 86, p. 985-990.

Web Readings
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http://www.eia.gov
(c)
http://www.bp.com
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Petro Economics
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Notes
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(c)
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UNIT 14: Petro Retailing
Unit 14
225
Notes
Activity
Objectives
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Petro Retailing
topics:
\
Special Nature of Petro-Retail
Prepare
a chart to show the
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general retailing concepts and
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bring
out the difference in
commodity selling and brand
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retailing.
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Introduction
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The petroleum retailing industry in Asia and Middle East faces

significant challenges. With low product differentiation, lack of
customer loyalty, coupled with intense competition, due to
deregulation, as in India, the various players will try to gain share
from each other. This will exert downward pressure on margins
and force players to adopt new and innovative strategies.
India has deregulated the pricing mechanism for retail petroleum,

enabling new players to enter the market, which was once a
fiefdom of the public sector. The entry of new players like Reliance
will grow the number of stations from existing 19,000 to over
23,00025,000 in next 45 years. This will reduce the average
throughput per station, and total fuel volumes per player. With
market determined pricing mechanism, prices will have to be
lowered, thus reducing margins from fuel products.
The modern world could not exist without the low cost movement
of people and commodities. Oil powered transport dominates the
economic infrastructure that links and sustains present day
(c)
communities, agricultural systems and the global economy.

Billions of people now depend on food production that requires
substantial inputs of petroleum fuels to power farm machinery, for
fertilisers, herbicides and transport. Some people say industrial
agriculture is a way of converting petroleum into food. Countries
are dependent on imported food to feed their population.
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Petro Economics
Notes
Oil supplies 40% and natural gas 22% of the worlds commercial
226
energy. Road, rail, water and air transport consume 60% of this oil.
Other fuels have a negligible transport role. The remaining
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petroleum products are used for power generation, heating, in
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agriculture and mining, and for the manufacture of plastics, fibres,
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petrochemicals, paint, fertilisers and pesticides. Oil has overtaken
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coal as the main fuel since 1945.
In 1859 Pennsylvanias Colonel Drake drilled one of the first oil

wells. Another 40 years of invention led to the internal combustion
engine, the beginning of oil powered transport and the many other
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uses of oil. Oil triumphed over coal fired steam for shipping after
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World War I and for rail after World War II.
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Road and air transport have triumphed since 1950. There was a
rapid expansion of electric power grids from 1920 and the take-off
of oil powered industrial agriculture began in the 1930s.
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US fears of oil shortages during World War II, along with the
invention of welded steel pipelines, saw the first marketing of
natural gas, previously flared at oil fields. Natural gas has been
the worlds growth fuel since 1970.
Conventional oil rapidly displaced the direct use of coal as an
industrial and transport fuel because of its ease of storage and
transport, the fine control possible in its various uses and its high
power-weight ratio. Oil is the most economically effective of all the
fuels, especially for transport.
Contemporary industries and services using coal, gas and

electricity require petroleum powered transport to be economically
effective and viable. The availability of cheap oil is the most critical
factor for the future of our contemporary world.
To maintain smooth working of all these sectors, it is very
(c)
important to supply oil in time. A major requirement of oil is met

through the retail sector as the entire requirement of transport
sector, barring exception of state run road transport. A major
portion of requirement in power generation (both factories as well
as domestic), agricultural demand of petroleum fuels, etc. is also
met through the retail sector.
Notes
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Evolution of retailing to its present form traces its origin to the

barter system prevalent in the pre-currency days. People
exchanged their surplus products with each other on a perceived
value. This perceived value was actually based on the need of both
the giver and the receiver. (We probably cannot call them the seller
and buyer!). The receiving power (purchasing power!) was
determined by the surplus product available with him.
227
Retailing: General Retailing Concepts, difference in

Commodity Selling and Brand Retailing
With the emergence of standard for bartering, initially salt and

later in the form of currency, the concept of selling emerged.
Selling is seen as a comprehensive process of exchange between
the product and its price transfer of ownership of product from
the seller to buyer and flow of money from the buyer to seller in
lieu of the products. Such selling included all types of products.
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In earlier days since the supply outstripped demand, there was no

effort on branding and development of merchandise. Whatever was
produced, it sold. With the advent of industrial revolution and
subsequent competitive selling the concept of retailing, direct
marketing, etc. emerged.
Retailing is defined as a business that sells products and/or
services to consumers for their personal or family use.
This definition includes the interface of retailers with both vendors

and consumers, as well as other processes like supply chain
management that impact retailers.
Retailers, therefore, have to do many tasks.
They analyse their customers.
2.
They develop strategies.
3.
They choose markets and channel in which to compete.
4.
They make location decisions.
5.
They find, design, purchase, price and promote merchandise

and services.
(c)
1.
6.
They organise their operations and manage their employee

and stores.
7.
They create an atmosphere that is inviting to customer and

conductive for buying.
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Strength of Retailing
Notes
z
Retailing is the last link in the supply chain the journey from
well to wheel
Retail is the face of the Oil Company
Retail assumes the feature of service while dispensing product
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Petro Economics
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Retailing is Selling
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Retailing is selling a point at which the ownership of product

gets transferred to the buyer
Selling involves meeting customers need in exchange of price
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Identify the customer and his need
Develop selling strategy
Locate market and channel
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Retail Function Involves
Position the product and showroom/dispensing station
Design the product, price and promotion
Manage operation, employees and store
Create ambience for customers visit and transaction
Basics of Petroleum Retail Business
Financial Aspects
Performance Assessment
(c)
The Effect on Retailing

z
The changing face of shopping
Who feels the effect?
The city centre
The corner shop
The long-term effect
Some implemented schemes encompass:
Town centre management
Social Consequences
Increased Choice
Late Night Shopping
Clean Functional Buildings
Single Storey Buildings
Fun-Shopping
Costs
Excludes those without a car
Traditional service is lacking
Benefits
Employment
Investment
Encourages spending
Costs
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Economic Consequences
z
S
Notes
Benefits
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Threatens other forms of retailing
Supermarkets import goods
Encourages car use at the cost of public transport
Establishing a New Retail Outlet
For opening a new retail outlet, the following important features

need to be considered carefully:
The process required for setting up a new retail outlet, though
appears to be simple but in fact requires a great deal of
knowledge combined with a lot of hard work both in the field
as well as on the desk.
A thorough survey, field study of the area in general is carried

out and especially of the Trading Area where the RO is
proposed to be set up.
A Trading Area is selected and a map study is done.
Extensive field surveys are carried out and vital inputs taken.
(c)
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230
All ROs including those of the competitors are marked on the

map.
A stretch and side of the road is selected and the proposed

location of the site indicated on the map.
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Having done so, a shorter stretch on the road is selected.
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Class of Market to be identified.
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Traffic Count/Survey/Census
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Notes
Once done so, the search should be started for the plot of
land for the proposed RO.
The EO must also accompany the SO for site selection.
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Site Selection Criteria
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The land should be free of encroachments.
There should not be any proposal of a fly-over or road

widening.
That there should not be any dwellings at the site or in the

immediate vicinity.
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That there should not be any such industry in the immediate

vicinity having open flames.
Should not be at the immediate bank or catchments area of a

river or canal.
The land should not be earmarked by town planning for some

other purpose.
The site should be away from crossings as per requirements.
The land is not mortgaged.
Water table to be checked and soil taken for testing.
There are no court cases on this land.
The site meets all the requirements of Explosives, IRC, PWD,

NHAI, local Govt., etc.
The site should not be on a curve.
(c)
Market Intelligence (MI)

z
MI is a very important part of data requirement necessary for

planning and setting up a new RO. Information for MI should
contain:
Population counts
Age profile
Spending habits
Business counts by type
New development profiles
Average spending profiles (by product)
Affluence levels, Social class
Nearby facilities (ATMs, Petrol Stations, C-stores, etc.)
Transport sector details
Agriculture details
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Notes
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Franchising Models in the Petroleum Industry
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Franchising not new to the Oil industry has been used for over a
hundred years in this country. Oil industry has the largest franchisee
network spread across the country. Started with franchising packed
Kerosene tins in 1890s with the following Mission:
A vast network spanning the length and breadth of the

country was set up quickly
With the advent of Petrol vehicles a franchisee network for

marketing Petrol and subsequently Diesel was set up
In the 1950s domestic LPG was introduced and a separate

network was established
Since then we have a very vast network of franchisees for

special products and lubricants as well
The following Table illustrates the growth of Franchisee-based

Petro-Retail Market in India set up by major oil companies in
India:
No. of Dealers/Distributors (as on 1.4.2010)
Name of Oil Company

OCL
BPCL
HPCL
Total
Retail
SKO/LDO
LPG
18643
3943
5095
8692
1014
2187
9127
1638
2404
36462
6615
9686
(c)
Source: Public Sector Undertakings.
Franchisees are of different types with varying franchising models

for different products as shown below:
Individuals
Partnerships
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Notes
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Industrial houses
Cooperatives
Govt. Bodies
COCOs
Modus operandi of Franchisee-based Petro Retail business can be

evolved on these lines:
___________________
z
The decision on how to franchise was strongly driven by the

product category, investments required and the need for
control of operations
Accordingly Petrol/Diesel network was predominantly

company controlled while other products had a more loosely
structured dealer controlled network
Lubricants and special products are also franchised to a nonexclusive network.
However, over a period of time some of the models have been

diluted with changing priorities.
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Historically, franchisees treated as partners by oil companies in

manners, as given below:
Dealer selection was an extremely critical activity with a very

clear idea of what sort of person was the right candidate
The compensation or dealer profitability was very attractive
Comprehensive training
Strict control of all activities at the outlet
Limited product category
Competitive pricing
Close interaction and relationships with network
(c)
Dramatic changes in market dynamics in petro retailing in India

are taking place in this direction:
Evolving consumer needs
Market becoming highly competitive
Large formats with state-of-the-art facilities
Non-fuel offerings like convenience stores, ATMs, Fast food

outlets, medical shops, grocery, dhabas, etc.
Branded fuels
Quick oil change centres
Loyalty programs
Use of Technology
From just selling fuel to managing all these activities is a
233
Notes
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completely new game for the organisation and the network.

Franchisee mindset, capabilities and requirements:
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Newer business areas require Dealer to acquire new skills
___________________
Effort to reward ratio is initially much less than that for fuel
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trade
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Focus on category management
Most franchisees do not want to expose large fraction of
___________________
personal wealth at risk
Enhanced customer interaction multiple touch points
An understanding of customer acquisition costs as an
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investment for the long term rather than cost.

z
Maintenance of standards and consistency of operations
Stricter financial control MIS and data management
However, many franchisees are highly averse to any new

concepts/plans.
Therefore,
several
key
priorities
for
both
franchisors and franchisees need to be demarcated, considering the

following:
Creating a positive brand image and clear brand positioning
Creating high brand awareness & recall
Developing a sustained business model
Developing a strong national marketing policy
Choosing the right location
Selection of Franchisees akin to selecting partners in
(c)
business
Understanding from day one that the real customer is the

buyer of the product or service that is sold, it is not the
Franchisee
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Petro Economics
Show
diagrammatically on a
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chart paper the various stages
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of wheels
of retailing.
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Developing systems,
consistency
structures,
suppliers
Developing a flexible & low cost structure
for
achieving
Notes
Activity
There is a clear need to significantly strengthen partnership with

mutual obligations between the franchisor and franchisees in
terms of following:
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Written contract
Partnership requiring delivery by both parties
Leverage of existing business system/brand equity
Finite period of operation-potential for renewal
Sharing of financial gain
Specific operational procedures to be adhered to
True partnership with mutual obligations and focus on several

aspects in addition to financial returns
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Check Your Progress
Fill in the blanks:
1. .. powered transport dominates the

economic infrastructure that links and sustains present
day communities, agricultural systems and the global
economy.
2. . is defined as a business that sells
products and/or services to consumers for their personal
or family use.
(c)
This theory suggests that new retailing institutions enter the

marketplace as low-status, low-margin, low-price operations and
then move toward higher status, margin, and price positions.
With respect to the wheel of retailing theory, a low spot on the
wheel, once occupied by a low-margin retailer that has traded up,
is left open for an innovative retailer that can operate at a margin
lower than those earned by existing retailers. Some observers
suggest that modern marketing methods, including research and
positioning, will stop or slow the wheel of retaining as retail
235
marketers resist abandoning market positions they have carefully

selected.
Notes
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Figure 14.1: Explains the Various Stages of the Wheel of Retailing
The ongoing cycle of retail passes through three phases:
The Entry Phase: When new retailers enter the market
The Trading-up Phase: When retailers begin improving upon

their trade volumes and move from the initial low status, low price,
to higher status and better margins.
The Vulnerability Phase: When the competition increases,
margins get squeezed, and return on investment begin declining.
(c)
Each phase attracts its own set of retailers who retail their
merchandise to get maximum advantage. The merchandise is
designed to meet the demands of the market. Innovative retailers
mark their entry with merchandise which is typically low priced,
low status, etc.
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Commodity v/s Brand Retailing
Petro Economics
There was time in not so recent past when salt was retailed as
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simple, plain salt till brands like Tata salt, Dandi, etc. marked
___________________
their entry. The petroleum sector was typically selling motor spirit,
___________________
high speed diesel, etc. till recently.
___________________
However, last couples of years have seen entry of speciality,
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branded fuels like Speed, Hi-Speed, Josh, Premium, etc.
Why did that happen? In a stagnant market where the overall

demand is not growing at a satisfactory rate, one way to expand
margins is by expanding the market share. That means wresting
___________________
some of sales volumes from the competitors. Alternatively,
___________________
company can decide to charge a higher price than the competition.
___________________
Typically, customers are not willing to pay a higher price till the
merchandise is perceived different from other. The perceived
value of the product differs in customers minds with respect to
products additional features. In times of increase competition,
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companies often adopt strategies aimed either at increasing cost

competitiveness or at growing revenues. A strong brand helps in
shifting the demand curve as depicted in Figure. 14.2.
(c)
Figure 14.2: Importance of Brand Personality and Brand Image
Brand Personality is what distinguishes one brand from another.

It is the sum of intangible assets of the brand. It is the symbolic
aspect of brand. Southgate defines brand personality as the human
characteristics of the brand. For example Harley Davidson
motorcycle is seen as a macho, freedom-seeking person.
Notes
among the brand personality. These are:
___________________
Sincerity (Kodak)
Excitement (Bacardi)
Competence (Wipro, Pentium)
Ruggedness (Levi, Marlboro)
___________________
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David Aaker has identified five different personality factors found
___________________
___________________
___________________
David Aaker suggests three approaches to develop brand
___________________
personality: self-expression; relationship, and functional benefit.
___________________
Self-expression can be defined as the motive behind the
___________________
consumption of a particular brand. For example the products like
___________________
Close-up, Titan, and Mercedes-Benz fall in this category. A
___________________
Mercedes car is purchased as much for its status conferring nature

(self-expression) as to its utility.
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Relationship fits those brands which depict a reliable, dependable
(competent) personality. For example Lalitaji of Surf, due to her

personality, sound reliable and trustworthy when she says, it
makes sense to buy Surf.
Functional Benefit approach links brand with some functional

aspect. For example, Ariel Supersoaker uses one of the product
attributes to highlight its functionality. Mahacola signals the
value for money to its consumers through its jumbo sized cola
bottle which is priced competitively.
Brand Image is the totality of impressions about the brand.

David Aaker says, Brand image as an association and image both
represent perceptions which may or may not reflect objective
reality. as image of competence may be based upon the
appearance of a doctors office and the manners of his staff rather
than on the objective measure of the health of former patients.
(c)
Brand personality is the sum total of all the significant tangible

and intangible assets that a brand possesses. Whereas, brand
image is how the brand is perceived by the consumer. It can be
said the brand personality is the cause while brand image is the
effect.
238
Following table highlights the difference.
Notes
Brand Name
___________________
Lifebuoy
Price
___________________
Carbolic
___________________
Little Hearts
___________________
___________________
___________________
___________________
___________________
Gearless
Brand Image
Value for money

Hardworking
Comfort
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Kinetic Honda
___________________
___________________
Brand Personality
Petro Economics
Ignition start
Comfort
Puffed biscuits
Novelty
Distinct packing
Attractive
Heart shaped
Romantic
Brand Equity, as the price at which one brand is preferred over

other, can be referred to as the final outcome of a brand identity
(personality and image). This is the payback of investment into a
brand. Brand equity is what makes the demand curve shift
upwards (Ref. Figure 14.3).
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Therefore, to drive revenue growth, petroleum retailers have to

either attract new consumers or increase their share of the existing
consumers wallet. Key to this lies in creating a strong brand adds
perceived value which can command a price and or volume
premium by differentiating from commodity products.
Figure 14.3: Brand Equity
(c)
Basic difference between Brand and Product

z
A product is something that is made in a factory
A brand is something that is bought by a customer
A product can be copied by a competitor
A brand is unique
A product can be quickly outdated
A successful brand is timeless
Special Nature of Petro-Retail
US Market
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Indian Market
Quality interpreted as no
Quality interpreted as impact on fuel
adulteration
efficiency and engine performance.
Quality interpreted as getting the
Quality is not a parameter for
right amount of fuel
consideration
Price is not a differentiating factor
Price is a very important factor
always
However, as the Indian market evolves parameter such as quality

& quantity may become hygiene factors.
Another major difference between other retailing (like apparels,
white goods, foods stuff, etc.) and petroleum products retailing is
that the former retailing is often treated by customers as a form of
Leisure where as petro-retailing is a specific need drive on
purchase situation. This divides the Indian petroleum shopper into
four distinct segments.
z
Routine Chore Doer
Looks for minimisation of hassle at the petrol pump.

Petroleum purchasing is seen as drudgery, a menial job.
(c)
Seeks addition vehicle repairs and maintenance services.
Likely to be a person indulging in monotonous routine

jobs.
Notes
___________________
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When we go and buy a packet of Amul butter, we can see the

packet, feel it, examine its condition unlike most the petroleum
products which cannot be seen, felt, or examined unless special
efforts we made. Have you ever seen LPG? While fuelling your
vehicle at a petrol pump what you see is the nozzle going inside the
tank and a metering assembly registers the volume of product
dispensed you never get a chance to see what is going inside the
tank. In a way petro-retailing works on trust consumers believe
that they are getting what they are buying. Its like gold you
cant check the purity yourself so you trust the goldsmith. It is this
special nature of petro-retailing which introduced a new element of
product attribute the correct quality and quantity delivered by the
petrol pump, or by the gas distributor. When compared with
developed markets like USA, the Indian market, therefore has its
own interpretations of some of the key constitutes of products mix.
239
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Notes
___________________
Time Poor (The Rabbit)
Strong need for location convenience and other nonfuel

related services.
Characterised
convenience.
Likely to be a professional, 247 worker.
___________________
___________________
___________________
___________________
z
___________________
need
for
quick
service
and
Unique to emerging market, is driven by a strong desire

for integrity and by strong relationships with the retailer.
A typical late adopter.
The quality-guarantee is the underlying driver for

purchase decisions.
___________________
___________________
z
his
Trust seeker
___________________
___________________
by
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Petro Economics
Prestige seeker
Higher level emotional needs for reinforcements of selfesteem.
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Relatively more brand conscious.
May often be stereotyped as the self-made man.
Potential target for international or premium brands.
(c)
Research Findings of A.T. Kearney Report

To understand the buying behavioural pattern and drivers for
petroleum and non-fuel products and services, A.T. Kearney
conducted a quantitative research with 500 consumers in New Delhi.
The findings clearly indicated that the location is a key factor-most
consumer prefers to purchase their fuel from petrol stations near
their residence or office. Why do consumers exhibit this behaviour?
Probing into the reasons for selection of their regular petroleum
stations threw up some expected responses over 90% cite assurance
of quantity and quality of petrol to be the key drivers of choice.
However, a number of less expected responses were also received. For
example, 70% of the respondents say that having air filling facilities
is important in their decision making process.
Key finding from this research were:
z
Trust in Fuel quality & quantity and location conveniences

are the primary drivers for choice of petrol pumps amongst
consumer in New Delhi.
241
85% of consumers also attach significant importance to the

experience in terms of quick service, attendant disposition
and station ambience.
Notes
___________________
Consumers have very low brand locality - over 50% are

indifferent to the brand of petro-retailer.
___________________
70-80% of consumer would prefer their station to stock fuel

based products and offer air refill facilities, small facilities,
small repairs, etc.
___________________
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Only 45% of car and 35% of two-wheelers have ever purchased

at a conveniences stores-snacks & beverages being the most
common items.
More than 90% of the consumers do not usually fill their

tanks.
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The latter may have two implications - petrol marketers building a

brand proposition around speed of service may need to incentivise
consumers to buy larger quantities of fuel in each visit to reduce
the frequency of visits. However, companies building a non-fuel
retailing model could focus on offering cross-sell products and
services.
Linked Retailing
Under this concept your main product is the anchor while some
other products one retailed as add on. Typical example is a
Multiplex Mall where the main product is entertainment at
multiplex, but a shopping mall or food plaza adds to the customers
convenience. Most of the car dealers sell customised car accessories
as linked retailing.
The origin of this form of retailing can be traced to the cinema
halls or colleges of earlier days where a canteen was set as for sale
of food stuff to customers who actually came for a movie or studies
respectively.
(c)
Petroleum retailing companies have been successfully trying it for

a long-time. The major categories under this allied retailing are
convenience stores (urban or rural), food services, and ancillary
services. There is always a positive rub off from one product
category to another. For example a petrol pump may have an ATM
as an ancillary service. A customer who actually comes to the site
for a transaction at the ATM may buy fuel to avoid another trip to
___________________
___________________
___________________
___________________
___________________
___________________
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Petro Economics
___________________
___________________
___________________
petrol pump. A truck driver may prefer to stop at a specified pump

just because it has a dhaba for his choice!
Notes
Convenience Stores: These are small stores selling categories

such as impulse items, gifts, daily need items, snacks, arid other
packaged foods. There are branded stores.
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___________________
In rural areas, there are stores which cater to farmers such

convinces stores sell various brands fertilisers, pesticides, and
other farming inputs to farmers. Such stores are set-up in typical
rural markets. DCM Shriram Consolidated Limited has very
successfully implemented this concept at their Hariyali Kisan
Bazaar.
___________________
Food Services
___________________
At the petrol pumps depending upon the availability of space,

retailing companies are adding food services. Bharat Petroleum
has opened McDonalds outlets. Dominos is present at some of the
India Oil petrol pumps. There are Cafe Coffee Day outlets at
Bharat Petroleum and Hindustan Petroleum petrol pumps.
___________________
___________________
___________________
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___________________
To cater to the highway trucker segment, oil companies have set

up low-end dhabas which offer quality food at affordable prices.
Factors to be considered in deciding the food services model:
1.
Space available (including parking).
2.
Labour implications.
3.
Skills/resources requirements.
4.
Consumer demographics / psychographics.
5.
Competitive environment.
(c)
Ancillary Services
These include products like ATMs, Courier Services, Dormitory,

Insurance Counters, Automated car wash, Laundry, etc. Some oil
companies have put up pool tables at their petrol pumps. Even
swimming pools have been commissioned at large stations. Rub-off
from other products has been proven through some surveys
conducted by oil industry. One of the surveys conducted to link
ATM with fuel has established that about 60% of ATM customers
buy their fuel from the same RO.
243
Notes
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___________________
___________________
___________________
___________________
Another survey has clearly shown retention of sales at ROs with

allied facilities in an otherwise declining market. A survey of
dealers conducted in Delhi had 87% dealers saying, A shop adds to
the overall ambience of our RO making the customer believe that
our RO is better than others. Thats how it increases our sales. In
response to a question that how much of fuel sales will be lost if
the non-fuel retail shop were to be closed, they clearly indicated an
expected loss of 15%25% in MS sales and about 5%10% in HSD
sales.
___________________
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Figure 14.4: ATM Users Buying Profile
At two ROs of a national oil company where McDonalds outlet was

commissioned the company registers 225350% of sales growth on
weekends (when compared to weekly average) when families visit
the McDonald outlet. That clearly indicates purchase of fuel while
footfall at the outlet is due to some non-fuel offering.
Check Your Progress
Fill in the blanks:
1. are small stores selling categories

such as impulse items, gifts, daily need items, snacks,
arid other packaged foods.
2. Under concept your main product is the
anchor while some other products one retailed as add
on.
(c)
Summary
Evolution of retailing to its present form traces its origin to the

barter system prevalent in the pre-currency days. People
exchanged their surplus products with each other on a perceived
value. This perceived value was actually based on the need of both
the giver and the receiver. Retailing is defined as a business that
___________________
___________________
___________________
Petro Economics
___________________
___________________
sells products and/or services to consumers for their personal or

family use. With respect to the wheel of retailing theory, a low spot
on the wheel, once occupied by a low-margin retailer that has
traded up, is left open for an innovative retailer that can operate at
a margin lower than those earned by existing retailers.
Notes
___________________
___________________
___________________
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Lesson End Activity
Identify the key companies involved in Petro-retailing in India.
___________________
___________________
Keywords
___________________
Retailing: Retailing is defined as a business that sells products

and/or services to consumers for their personal or family use.
___________________
___________________
Brand Image: Brand image is the totality of impressions about

the brand.
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1. Discuss the evolution of petroleum retail business.

2. What are the key steps included in establishing a retail outlet?
3. Write a note on wheel retailing.
4. State the difference between commodity and brand retailing.
5. Make a comparison between Indian and US retail market.
6. Define linked retailing.
Further Readings
Books
(c)

Science, v. 86, p. 985-990.

http://www.eia.gov
http://www.bp.com
Notes
___________________
___________________
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245

___________________
___________________
___________________
___________________
___________________
___________________
___________________
(c)
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Petro Economics
246
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
(c)
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UNIT 15: Case Study
Unit 15
247
Notes
Case Study
___________________
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Objectives
___________________
___________________
___________________
___________________
___________________
Case Study: Pipeline Transportation
___________________
The issue of transportation of oil by pipeline basically joins three

vertices, viz., (i) the liquid nature of oil products and principles
of hydraulics (ii) piping technology, and (iii) the commercial
prudence. The triangle created of these has the following features,
which distinguish the pipeline mode of transportation from other
modes.
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In case of pipeline transportation of petroleum products, the

carrier does not traverse, unlike other modes and only the
products move from source to destination. The carrier remains
immobile. Therefore, the energy consumption and the associated
costs, including environmental pollution, in moving the carrier up
and down, is not there in pipeline transportation. Pipeline can
negotiate terrain, which are inaccessible or accessible at
prohibitive cost to other mobile modes of transportation.
Pipelines, of course, have limitations and hazards.
(c)
Firstly, pipelines are capital intensive and technology driven

modes. The fixed costs are very high and variable costs are
negligible. Therefore, its commercial viability largely depends
upon high degree of utilisation. Its minimum level of return is
high, which puts the threshold production volume at a level,
which is much higher than any other modes. In other words,
pipeline needs higher degree of support from throughput than
other modes of transport available to petroleum products. The
high threshold volume warrants matching infrastructure
requirement at both ends of the pipeline, typical infrastructure
required for pipelines are tanks, pumping unit and control and
monitoring station. Operating and servicing of all these are part
of pipeline operations. The hazards in pipeline transportation
have two dimensions, namely, technical and social. There are two
major types of problems with regards to technical hazards,
namely, corrosion of pipelines, and, second, is generation of static
electricity arising out of frictions. There is sound technological
Contd
___________________
___________________
___________________
Petro Economics
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Leaving aside these limitations and hazards, which have sound

technical and managerial solutions, the most important aspect in
pipeline transportation is its economics. As the fixed cost of
pipeline is huge, it has a large bearing on investment and
financing decision.
Perspective Issues in Indian Pipeline Systems
India, with its vastness and peninsular size, pipeline

transportation of petroleum products is the most cost economic
proposition. The network of pipelines can be further augmented
with economic value in the supply chain of petroleum products.
Need for new pipeline opens up avenues for investment, financial
structuring and technological challenges. Some of the issues have
been discussed below.
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___________________
solutions available for these two. But if these two aspects are not
properly taken care of either at the time of construction or during
operation, any of these can create hazards of serious nature. (The
hazards, which are social in nature, arise mostly from attempts of
pilferage, inadequate risk awareness associated with the pipeline
and the product that it carries).
Notes
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Petronet Initiative
In view of the need for having a network of pipelines carrying

petroleum products across the country, some cross country
pipelines have already been laid in India as listed above. In order
to build more of them, the following considerations were coming
in the way:
Firstly is that pipelines are natural monopoly. More number of
pipelines under the ownership of a single company would mean
strengthening of monopolistic condition. Therefore, it was
considered wise to unbundle the linkage between pipeline owner
and pipeline user.
(c)
Secondly, in view of the typical nature of cost and revenue curves

of pipeline projects, its financing has a nonconventional structure.
Moreover, with a view to having assured stream of returns, it was
felt to build in users commitment into the project itself.
With these principal features in the mind, Petronet India Ltd.
(PIL) has been formed as a non-governmental financial holding
company by a directive of the Government of India for expeditious
development of pipeline network in the hold and will be
progressed in synchronisation with the commissioning of EOL
Refinery. It has a 44km offshore section cutting across Gulf of
Kachchh. The pipeline costs ` 375 crore, with a broad break up as
given below:
Contd
UNIT 15: Case Study
Forex
PE
S
` Crore
Head of Expenditure
Co II
land and site development civil work
Mainline pipes, materials and construction

Process design
100
15
Preliminary I pre-operative expenses
IDC I Financing charges
31
Contingency and escalation provision
20
Capital cost
177
MM on working capital
Total cost (` 375 crore)
179
168
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23
20.91
Project Internal Rate of Return

(per cent)
16.04
Project payback period (years)
6.05
Average Debt Service Coverage

Ratio
2.12
Income (` Crore)
Profit before Debt Interest and

Tax
(` Crore)
(c)
Profit after Tax (` Crore)
___________________
196
0
1
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Equity Internal Rate of Return

(per cent)
___________________
___________________
Users commitment into this kind of projects either through take

or pay contract or through joint venture partnership is very
important from the point of view of steady stream of revenue,
which would justify rate of return. With the cost of project at
` 375 crore and tariff of ` 207 per MT of throughput, the financial
indicators of the project are given below:
00-01
___________________
The return from investment of the above magnitude solely

depends upon the tariff for the throughput processed. The tariff
as worked out by Oil Co-ordination Committee is ` 120 per MT,
which is expected to rise to ` 207 per MT in the post APM period,
i.e., April 2002 onwards for Vadinar Kandla section. Throughput
is expected to rise from 5.41 MMT per annum to 9.66 MMT per
annum by 2012-13.
Project Indicators
Notes
01-02
02-03
03-04
54.1
66.2
105.2
107.3
35.4
45.1
82.2
82.8
(7.1)
(5.5)
28.3
30.8
Other Issues of Pipeline Transportation

Pipeline Route Selection
Selection of pipeline route inevitably involves dislocation of
physical and social space, which has profound implication in the
Contd
___________________
___________________
___________________
___________________
___________________
Petro Economics
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
implementation of the project. Following are some standard

guidelines usually adopted while selecting the pipeline route:
Notes
1. Shortest possible route connecting originating, intermediate

and terminal locations.
2. Easy approachability and accessibility during operation and
maintenance stage of pipeline.
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3. To preserve ecological balance and to avoid/minimise

environmental degradation. Minimum encroachment of
reserved forests and other protected areas.
4. To keep rail, road, river and canal crossings to the barest
minimum.
5. To avoid hilly or rocky terrain.
6. To avoid pipeline route running parallel to high voltage

transmission line/D.C. circuit.
7. To utilise existing ROW / ROU, if any, as far as possible.
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Though pipeline is always protected against external corrosion

with cathodic protection system, with external coating of coal tar
enamel or polyethylene, but if the ROD of pipeline passes through
water logged area for the maximum period of the year, it may
cause heavy external corrosion and leakage.
There are quantitative route selection methodology with multiattribute decision-making techniques, which rank alternate
routes and show the life cycle cost estimate of the shortest route
and optimal route.
(c)
Design Optimisation
Economic design of pipeline system involves establishing an

optimum relationship between pipeline sizes and pumping
configuration in terms of number of pumps and power
requirements. A smaller diameter pipeline requires a more
powerful pumping systems and vice versa. Lower investment in
pipeline may be offset by higher investment in pumping and
consequently higher power consumption for a given throughput.
Hence, for a given throughput, there is an optimum size of
pipeline and optimum pumping system which will give the least
Net Present Value of the investment (capital and operating) for
till design life of the pipeline system.
Right of Use
Apart from securing Right of Use (ROU) from the landowners, the
following clearances are usually required for laying a crosscountry pipeline:
Contd
Clearance Required
Environmental clearance
Agency
Ministry of Environment and
Forest,
Govt. of India
Pollution Control Board

clearance
PE
S
UNIT 15: Case Study
Pollution Control Board of State
Notes
___________________
___________________
___________________
Government
___________________
Forest clearance
Forest Authority of State

Government
CCOE clearance
Chief Controller of Explosives,

Nagpur
State Government
___________________
State Govt's various Departments
___________________
Approval for pipe laying
Clearance for road, river

crossing
___________________
___________________
___________________
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Governance Issues
As a pipeline grows in capacity, its costs increases less than

linearly while throughput increases exponentially. Thus,
pipelines have a decreasing average and marginal costs of
production.
The problem with natural monopoly is that they can be expected
to restrict their output or directly set prices higher than marginal
cost without the concern for entry of a competitor. Once it is
known or thought of that an industry exhibits some
characteristics of a decreasing cost industry, and then comes the
difficult question of how to regulate the said firm.
(c)
Regulation of such firm aims to provide cost-driven prices, but it

cannot achieve efficiency for the fact that with marginal cost less
than average cost; the natural monopoly cannot be required to set
prices equal to marginal cost. Coming to regulation part of the
particular industry, the regulatory mode for achieving public
policy objectives in pricing has not been widely used in Europe
and Asia; instead, most of these industries have been owned and
operated by the governmental authorities. But now with the wave
of private sector participation in virtually every industry, the role
of regulation is revisited. Advances have been made in
technologies to such an extent that hitherto industries, which
were considered to be as natural monopoly, are increasingly seen
as potential candidates for infusion of competitive forces.
In the emerging policy regime in India, there would be a Down
Stream Regulator to oversee that pipelines are used as common
carrier and are accessible to all potential users at fair tariff.
Question:
___________________
Petro Economics
252
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
(c)
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UNIT 16: Indian Experience in Petro Retailing
253
Notes
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___________________
___________________
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___________________
___________________
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(c)
BLOCK-IV
Detailed Contents
Petro Economics
Notes
___________________
Introduction
___________________
Deregulation Overview
___________________
BPCLs Additional Value Propositions
___________________
UNIT 17: ECONOMICS OF CRUDE OIL
___________________
z
Introduction
z
___________________
Basic Petroleum Supply Chain Economics
___________________
Sources and Availability
___________________
World Oil Demand & Supply
Introduction
Tanker The most Economic Transport Mode
OPECs Role in Price Structuring
UNIT 19: GEOPOLITICS IN OIL AND NATURAL

GAS TRADING
z
Introduction
Global Energy in Perspective
Geopolitics of Oil and Natural Gas
UNIT 20: CASE STUDY
(c)
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UNIT 18: TRADE AND TRANSPORT
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UNIT
16: INDIAN EXPERIENCE IN PETRO
___________________
RETAILING
254
Unit 16
255
Notes
Activity
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Indian Experience in Petro

Retailing
Prepare
___________________
overview of deregulations of
___________________
Indian
petroleum.
___________________
___________________
Objectives
topics:
\
QuikTrip Operating Model
___________________
___________________
___________________
___________________
___________________
___________________
Introduction
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Indian consumers have very low brand loyalty towards petroleum

products, which in place brings in the need for strong brandbuilding exercise by the petro retailers. The following unit explains
lessons learned for Indian petro retailers from successful strategies
of
major
international
players.
Segmenting
shoppers,
understanding their behaviour patterns and drivers, fuel based
differentiation, and providing value added products and services
are some of the interesting areas covered under Petro Retailing,
especially from Indian perspectives.
With growing competition and deregulation, the rules of the game in

the petroleum retailing industry in India will undergo some major
changes in the next few years. The revolution in the Indian telecom
sector is a recent example of the impact of free market dynamics on
the structure of the industry and on the strategies of various players.
Deregulation of the petroleum retailing sector in India will
undoubtedly lead to a similar battle for market share, with new
players attempting to gain share from current incumbents.
(c)
z
Refineries deregulated w.e.f. 1st April 1998:
All products except five - Gasoline, Gas oil, ATF, LPG and
Kerosene decontrolled
ATF decontrolled w.e.f. April 2001
Petro Economics
Marketing and Pipelines sector deregulated w.e.f. 1 April 02
___________________
Market determined pricing of all products - Prices of

MS/HSD reviewed fortnightly
___________________
___________________
Notes
Oil Pool dismantled
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___________________
Petroleum Regulatory Board to be set up
___________________
Subsidies on LPG & Kerosene borne thru fiscal budget and to

be phased out in the next 3-5 years
___________________
___________________
Upstream companies share under recovery on subsidy
___________________
Freight subsidy for far flung areas continues
Marketing rights for transportation fuel awarded to new
___________________
entities
___________________
z
Marketing service obligation for rural & far flung area for all
players
Guideline for laying new pipelines announced
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Deregulation has brought forth balance between reasonable

earnings for the industry and protection of consumer interest.
Strong Brands Drive Revenue Growth: Findings of A.T.

Kearney Report
In times of increased competition, firms often adopt strategies
aimed either at increasing cost competitiveness or at growing
revenues. A.T. Kearneys work across industries globally, has
shown that in growth markets, the major imperative should be
revenue enhancement through profitable share and market
growth.
To drive revenue growth, petroleum retailers will have to either

attract new consumers or increase their share of the existing
consumers wallet. Creating strong brand equity will be the key to
(c)
achieve these objectives, consistently and profitably. Empirical

evidence shows that strong brands add perceived value which can
command a price and/or volume premium by differentiating from
commodity products.
257
Notes
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Source: A.T. Kearney.
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Figure 16.1: Shift in the Demand Curve leads to Increased Revenues
Source: A T Kerarney
Figure 16.2: A. T. Kerarney Brand-building Methodology
In this unit, we shall focus on the two most critical initial steps of
the 7-step approach to facilitate the development of strong
consumer brands:
1.
Know your consumer
2.
Build the offer.
Among consumers in India today, brand recognition and

differentiation of existing petroleum retailers is currently low. We
believe that this presents a potential opportunity to new players as
well as existing companies, to adopt a differentiated consumerfocussed strategy centred on building a strong petroleum retail
brand.
(c)
Know your Consumer
To develop a strong brand and product proposition, a key

imperative is to understand your target consumers psyche,
behaviour and needs. Segmentation is a powerful tool to help
marketers identify the most profitable consumer segments and to
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For example, Mobil split the US petroleum consumer population

into five psychographic segments Price shoppers, Homebodies,
Road Warriors, True Blues and Generation F3 (Figure 16.3).
Research showed that the latter three segments had high purchase
frequency and low price sensitivity and were therefore identified as
the most profitable target segments. Mobils marketing strategy
was then built around these consumer segments.
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develop an offer which fulfils their needs better than competition.

Psychographics segmentation is more often used today than
traditional demographic measures, as it captures better the key
behaviours and underlying attitudinal drivers. Many successful
global petroleum brands have used detailed psychographic
segmentation as the foundation of building strong brands.
PE
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Notes
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Similarly, a detailed psychographic segmentation was developed by

A T Kearney for a leading Oil and Gas company in Canada, as the
basis for their national marketing strategy. Their value proposition
was built on satisfying the common emotional and rational needs
of the consumer segments, which were identified as the most
attractive.
Source: A T Kearney
(c)
Figure 16.3: Consumer Segmentation of US Petroleum Buyers: Mobil
The relative attractiveness of each consumer segment is usually

evaluated against criteria such as:
Segment size in terms of numbers and purchase value.
Competitive intensity in each consumer segment.
Key Success Factors (KSFs) required serving each segment.
Firms existing competencies and ability to develop/access the

required skills.
PE
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Objectives of the firm, both financial and non-financial.
Notes
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The Petroleum Shopper in India
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Often, in less developed or regulated markets, such psycho

graphics segmentation is not always so revealing. To test this
hypothesis, A T Kearney recently initiated qualitative market
research amongst petroleum consumers in New Delhi to check if
distinct consumer segments exist. Interestingly, our research
identified four psychographic consumer segments, and we believe
these offers a strong basis to develop differentiated value
propositions.
Routine Chore Doer
main driver is to minimise the hassle at the petroleum

station; petroleum purchasing is seen as drudgery.
requires services such as additional vehicle repair and

maintenance services.
most often persons indulging in monotonous routine jobs.
Source: A T Kearney
Figure 16.4: Consumer Segments
Time Poor
(c)
Requires location convenience and other non-fuel related

services.
Seeks quick service and convenience.
professional, 24 7 worker.
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Trust Seeker
Probably unique to emerging markets such as India.
Driven by a strong desire for integrity and by strong

relationships with the retailer.
Late adopter, akin to the Indian middle class.
Quality-guarantee is the main driver for purchase

decisions.
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Prestige Seeker
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Higher level emotional needs
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Seeks reinforcement of self-esteem.
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Is very much brand conscious.
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They are often referred as self-made man.
Sought after by international or premium brands.
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As the consumer in India has not been exposed to differential

pricing in petroleum, the price sensitive consumer is not as welldefined as in other markets. However, our experience of consumers
in India in other product categories, as well as international
learning, indicates that there will be a sizeable segment of
consumers in India who are extremely value conscious and whose
primary evaluation of value will be price-based.
(c)
Comparing the drivers of petrol station choice with more developed

markets such as the United States, there are some stark
differences which may give some pointers as to how consumers
may evolve in India. In the US, while location (71 per cent) is the
primary parameter, price (56 per cent) is also a very important
factor. Product performance or quality (24 per cent) is the third
most important factor. However, there is a big difference in the
consumers interpretation of quality. In India quality is interpreted
as no adulteration, but in the US it means impact on fuel
efficiency and engine performance. Quantity (interpreted in India
as getting the right amount of fuel, i.e. integrity) is not a
parameter for consideration in a market such as the US.
As the Indian market evolves, parameters such as integrity of fuel
quantity and purity are likely to become hygiene factors, and not
bases for differentiation. However, a brand proposition built on a
broader platform such as quality can be an enduring
differentiation. For example, marketers would be able to evolve
their brand offering in line with the development of consumer
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needs - from purity to higher order needs such as performance, fuel

efficiency, or even the quality of the buying experience.
Notes
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The choice of the target consumer segment drives the development

of the brand offer and impacts many aspects of the organisational
strategy such as location, pricing and human resource policies.
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Build the Offer
The target consumer should determine the value proposition; for

example, a company which is targeting the Prestige Seeker
would design its offerings very differently from a competitor
targeting the Time Poor consumer type.
Company A: The Prestige Seeker
Brand positioning a superior product for the discerning

consumer.
Product-service offerings could include differentiated fuel

products premium grade petrol, additives and services
such as an automated car wash.
The look of the petrol stations would be international

with technology enabled services.
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Company B: Time Poor
Brand positioning build entirely on a Time is money

value proposition.
Focus on offering rapid transaction times, swipe-at-thepump facilities, smart cards, medicine shops, etc. to
ensure that the time-poor consumer gets the quickest
service possible.
(c)
Petroleum retailing is both a product and a service, and

differentiation is possible around either or both of these axes. From
our analysis of successful international strategies, we have
identified four main platforms for differentiation: (1) Fuel-based,
(2) Value added products/services, (3) Price, (4) Consumer
experience. We shall consider the manner in which of these
parameters can be exploited by petroleum marketers to develop a
differentiated brand strategy.
Fuel-based Differentiation
Key success factors in Fuel-based differentiation strategies are:
1.
Product development competencies offer superior products.
2.
Brand image creationperception of product superiority.
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In markets such as the US, petroleum retailers sell multiple

grades of fuel-based on their octane ratings, additives added and/
or process differences. Multiple grades cater: to an evolved
consumer segment who seek enhanced fuel performance and can
support the premium price/margin business model. For example, in
USA a leading petroleum brand has built a strong equity around
good performance, enabling it to capture a greater share of the
performance motivated consumer segment. The impact of this has
been the relatively high contribution of premium grades to the
brands product mix, translating into correspondingly higher
revenues and profitability. Premium grade petroleum consumers
in the US have been found to be less price-sensitive and more
brand-loyal. In India, the growth in the number of cars in the large
car segment, adoption of multi-point fuel injection engines and the
introduction of stringent pollution emission norms suggests that
there maybe an opportunity for fuel-based differentiation targeting
the Prestige Seeker and Trust Seeker consumers.
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Value-added Products and Services-based Differentiation

Apart from being used as a basis for differentiation, non-fuel
products and services can contribute significantly to revenue and
profit enhancement. Non-fuel revenues of petroleum retailers
contribute as much as 38.6 per cent in the US and 28 per cent in
France, and their significantly higher profitability makes them
particularly attractive; average profit contribution of non-fuel
products and services is 65.8 per cent in the US and 40 per cent in
France.
There are a number of products and services which petroleum

retail stations can offer, but they can all be broadly grouped into
three categories convenience stores, food service outlets and
ancillary service.
Convenience Stores: The concept of convenience stores has not as

yet taken off in India and we believe that in the near term this
(c)
may not be a profitable opportunity for petroleum retailers. Our

analysis of the Indian consumer shows that their need for
convenience is currently reasonably well-satisfied at competitive
prices by the unorganised retail sector such as the neighbourhood
kirana store, the thelawallah with his fresh vegetables and the
friendly paanwallah. Most consumers in India today are unwilling
convenience store business model; the MRP regime also restricts

the c-store operators ability to charge a premium for the higher
service levels that it may provide. Coupled with this are the
model in India, where the supply chain for most products remains
highly fragmented and inefficient.
Check Your Progress

Fill in the blanks:
1. is a powerful tool to help marketers

identify the most profitable consumer segments and to
develop an offer which fulfils their needs better than
competition.
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2. Many successful global petroleum brands have used

detailed segmentation as the
foundation of building strong brands.
Bharat Petroleum has launched an Enhanced Fuel Proposition

(EFP) program A nation-wide effort at dispensing pure quality
and correct quantity of fuel, and at the same time delivering
courteous, fast and efficient service.
The retail outlets covered under this program display the Pure for
Sure sign - an out-turned palm forming a circle with the thumb
and the first finger - also imprinted on the dispensing units and on
the back of the blue uniform sported by DSMS, and TUVs
certificate displayed at the outlet. At such retail outlets, Bharat
Petroleum guarantees that the correct quality and quantity are
dispensed.
Market research has revealed important lacunae in terms of time,
convenience, and ambience in the shopping experience of
households needs and by offering an up-market ambience.
(c)
Notes
Activity
Give
your
opinion
on
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Petroleum retailers in India
will ___________________
have to become more
consumer-focussed
as
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competitive
pressures
increase and new players
___________________
enter the market.
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difficulties in operating a profitable convenience store business
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to pay the price premiums required to support the organised
If one explores the product, categories that drive convenience store

shopping in the US, they are tobacco, soft drinks and beer. In
India, with a proliferation of tobacco and soft drink outlets and a
restriction on alcohol sale, it is evident that the driver categories in
India would be different. The critical issue hence is to develop a
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product assortment that would drive both traffic and consumer

purchases; this being a function of the consumer group which the
brand targets. For example, for the Routine Chore Doer, the
product offer could hinge on fresh fruits and vegetable, e.g. a
Mother Dairy vegetable stall at every petrol pump.
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Source: A T Kearney
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Figure 16.5: Creating Differentiation in the C-Store business
Operating a c-store requires an entirely different set of capabilities

from petroleum retailing. Sourcing and supply chain management
is critical skills for a c-store operator and may need to be
outsourced by Indian petroleum marketers as they build other
consumer facing kills. A reduced risk model could be an alliance
with an established retail chain e.g. FoodWorld or Subhiksha
which would provide the required skill synergies and also ensure
immediate consumer credibility and - trials. This model has
worked well in more mature markets where consumers require
greater choice and assortment mix.
(c)
It is also important that the petroleum c-store operator develops a

strategy that differentiates its convenience store from other similar
stores as well as the traditional retailer. There are multiple
opportunities for differentiation in the convenience store market;
the key is to make a consumer-based choice.
For an international brand entering the market in India, targeting
the Prestige Seeker consumer segment, the smart shop clean,
well-lit, wide aisles may offer a differentiated value proposition. A
convenience store operator can select from eight levers which
provide a basis for differentiation depending on the needs of the
target consumer segments.
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Food Service Outlets: This is an emerging sector in the nonpetroleum range of products from sandwiches to full branded fast
food operations; and our research in New Delhi indicates that 40
per cent of car owners seek food service facilities at petrol stations.
The critical issues are: what services should be offered, and how
should they be provided?
In the US, food prepared on-site for take-away is a significant
category of food service sales and caters to the habit of grazing the
eating on-the-move.
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In India, eating-out is more of a social event, and thus the platform

of Food on-the-go may be less relevant. Our observation is that
convenience stores are likely to be destinations and not traffic
interceptors in India. Therefore, full-fledged fast food operations
could offer greater appeal at petroleum stations. The exact nature
of food service provided is a function of the target consumer; a
Barista coffee pub appeals to a very different consumer type from a
Chinese van consumer, but a Haldirams and a McDonalds may
be complementary.
An interesting option could be to capitalise on the growth of
organised Indian fast food retailing, using relatively well-located
and spacious real estate (petrol stations) to establish chat corners
jointly with brands such as Haldirams, particularly in the smaller

towns.
Petroleum marketers can adopt a number of operating models for

food service. From an alliance with an established brand such as
McDonalds to the retailers own brand/label.
Factors to be considered in deciding which food service model to

adopt:
Availablity of space (including parking);
2.
Labour issues;
3.
Human resource issues;
4.
Local demographic and physcological requirements
5.
Competition
(c)
1.
Branded food service offers the benefit of immediate brand

recognition by consumers. It also provides assurance of quality,
freshness and consistency. In India, where the concept of food
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service at petroleum stations itself is new, an alliance or joint
266
venture is likely to be the most suitable operating model.
Ancillary Services: Ancillary services complement regular
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convenience stores and food service by providing additional reasons
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for consumers to visit the non-fuel area of the stations while
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increasing the retailers share of the consumers wallet on each

visit. The range of ancillary service that can be sold through
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petroleum stations is large, and includes ATMs, insurance sales
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agents, courier services, pre-paid card sales, laundry services, car
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wash, newspaper and magazine stand, and even lotteries. Our
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research among petroleum station consumers in New Delhi
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indicates that over 40 per cent of car users would like ATM and car
wash services to be provided at petrol stations. However, the key
question is how much would consumers be willing to pay for these
services? Car wash services are currently available through the
unorganised sector for as little as ` l50 per month at ones
doorstep; can a petrol service station compete profitably with this?
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Interestingly, the research also indicated that there may be a

latent demand for laundry services among taxi, truck and auto
drivers but not among urban private car owners.
Key Success Factors in Value-added Product /Services-based
Differentiation Strategies
1.
Manage barriers to trial and usage, such as consumers

perceptions of differentials in price, selection and service
2.
Customise the assortment and offering to local market conditions
3.
Maintain low operating costs and tight inventory control
(c)
Price-based Differentiation
This is an obvious differentiator for any product or service, and in

markets such as the USA where as many as 56 per cent of
petroleum buyers cite price as a reason for selecting their brand, it
is a powerful platform for differentiation. In India, where there are
a large number of bargain hunters, a price-based strategy could be
potentially very powerful. The challenge of such a strategy
however, is to maintain uniqueness and sustainability. When a
number of petroleum retailers adopt a low price positioning, other
factors such as the associated offerings to ensure customer
retention become critical.
Notes
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Grocery Retailers: Hypermarket retailers are rapidly gaining

share of the fuel market in the West. In the USA, hypermarkets
have 3.3 per cent of the market value and in Europe, 5.2 per cent of
the number of petroleum retailing locations.
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Internationally, there are 2 broad categories of petro-retailers

which differentiate themselves based on price the grocery
retailers selling petroleum and the high volume, low margin
convenience store retailer.
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Hypermarkets discount petroleum by as much as 6-12 per cent and

are projected to account for over 16 per cent of the US market by
2000. These retailers use fuel sales as a loss leader to attract
consumer traffic to their stores. In fact, Wal-Mart has lobbied with
stage governments to repeal laws prohibiting them from selling
below-cost. But Paul Latham, VP of Costco Warehouse Corp.
believes that hypermarkets are succeeding because they offer
consumers one-stop shopping and competitive prices from a name
they know and trust. In India, hypermarket operations are still
nascent and unlikely to be a near term threat to petroleum
marketers. However, the likely success of the hypermarket retail
model in India will pose a longer term threat to petro-retailers
here.
Key Success Factors for Price-based Differentiation Strategies
1.
Ability to sell more profitable products/services to subsidise lower

margin loss leader petroleum sales.
2.
High degree of consumer price elasticity which ensures that lower

margins are compensated through greater volumes.
3.
Supply chain optimisation and sourcing efficiencies to deliver

lower-priced fuel consistently.
(c)
The High Volume, Low Margin Operating Model - Exemplified by

companies such as QuikTrip and RaceTrac in the US, these retailers
have developed operating models building on the high price
elasticity in petroleum retailing. Selling petroleum at prices that are
typically 5 per cent less than the average market price, companies
such as QuickTrip are able to achieve as much as 75 per cent higher
sales throughputs through their stations. Although their margins
are as much as 40 per cent lower than the majors, their overall
profitability is high. As in the hypermarket model, they use the
higher traffic through their stations to drive sales in their
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convenience stores, which also typically sell at discounts to the

market. The challenge to such a strategy in the Indian context is
that non-fuel sales are currently so low that the discount retailers
would be unable to boost overall profitability of their petrol stations
sufficiently through this route. Like QuikTrip, discount petroleum
marketers in India would also need to develop other consumer hooks
such as consumer experience to build consumer loyalty.
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Notes
QuikTrip Operating Model
A Chain of over 300 C-store format petroleum stations in 9 states

in USA is known to provide excellent service, quality petrol at
much lower prices.
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(c)
Discount quality petroleum to drive volumes
Annual average store sales: US $2 million in merchandise

& US $3 million in petrol vis--vis C-store averages of US
$955,000 and US $720,000 respectively.
On an average sells 75 per cent more petrol per gas station

per year as compared to the majors.
Guaranteed petrol programme insured against any fuel

related vehicle impairment.
Strong emphasis on excellent consumer experience.
Stores limited categories of food/snack/beverage items

available only in fast turnaround SKUs ensure competitive
pricing and delivery of the freshness promise through strong
backward integration.
Recruit smart & motivated people who are career-oriented.
Adequately decentralised for dynamic decision-making each

store is a profit centre
Strong community orientation
Consumer Experience-based Differentiation

Petroleum marketing has a strong service element which can be
used as a powerful lever for differentiation, especially in a
Indian Oils Initiatives
BSNL will have the opportunity to set up and offer communication

business centres at attractive rates to customers at Indian Oil
petrol stations. Indian Oils Indane distributorship network will be
engaged by BSNL for selling products like Recharge Coupons,
Sancharnet cards, as well as BSNLs bill collection.
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With an eye for enhancing customer convenience, Indian Oil has

already introduced cashless transactions through co-branded credit
cards at its petrol stations. The Corporation has also tied-up with
reputed agencies like Akbarallys for Coiwenio stores, with
Dominos and Kamats for food courts, with ICICI Bank, Centurion
Bank, etc. for ATMs to provide an exhilarating retail experience to
its customers.
In USA, QuikTrip also uses consumer experience to reinforce its
price-based strategy. Surveys of QuikTrip consumers show
extremely high value attached to their overall experience at the
pump premises. While QuikTrip ensures a warm and congenial
experience for its consumers by recruiting and grooming highly
motivated individuals, it also strikes the right chord with its
consumers by storing their favourite drinks and snacks. QuikTrips
management believes in reflecting an image of we do everything
right in all its direct and indirect consumer interaction.
Mobil Speedpass
Automatic miniature radio transponders attached to key chain or

affixed to vehicles rear window. Transponder automatically
transmits unique, secure ten digits that are recognised by an
electronic system located at the pump. These electronic devices
enable automatic charging of fuel purchases to a designate credit
or check card. All these are at no direct or indirect cost to
consumers.
(c)
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commodity market environment. The consumer experience, or

Moment of Truth, as it is also called, has been very successfully
used by petroleum brands internationally to protect market share
and to garner loyalty. A leading Oil and Gas company in Canada
has clearly differentiated its consumer experience by ensuring
warm and caring attitude towards its consumers. It builds
environmental consciousness and community orientation in its
overall image through sponsorships and theme creation. The
company also continuously improves and updates the retail
ambience through systematic renovation at their premises.
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In India, where many shoppers are highly relationship-oriented,

personalisation of the consumer experience could offer potential for
differentiation and maintaining loyalty. Our research in New Delhi
showed 85 per cent of consumers attach significant importance to
the experience within the premises in terms of quick service,
attendant disposition and overall ambience in choosing their petrol
pumps. Most have a stronger loyalty to the specific station than
the petroleum brand. Developing a brand offering for the trust
seeker with a promise of We make you feel special could be a
powerful strategy as long as the retailer is able to ensure
consistency of delivery across locations and over time.
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Technology can also be used to greatly enhance the consumer

experience. Many petroleum majors have adopted latest technology
to ensure that consumers have a fast and hassle-free service. These
are mainly in terms of the swipe at pump facilities, at pump
ordering of non-fuel items through wireless microphones,
customised electronic reports for corporate fleet programmes, etc.
Mobil Speed pass is a good example of successful differentiation
through technology-enabled service.
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An experience-based differentiation strategy could be particularly

relevant to existing petroleum retailers in India who would benefit
from strengthening of their bond with the existing consumer
franchise, thereby increasing the barriers to entry for new players.
(c)
Key Success Factors in Service-based Differentiation Strategies

1.
Ensure quality of the human interface through people

selection, training and development.
2.
Ensure consistency of service delivery across location and over

time.
3.
Systemise the consumer experience delivery process.
4.
Establish service recovery procedures.
5.
Use technology to enable better consumer experience.
Petroleum retailers in India will have to become more consumerfocused as competitive pressures increase and new players enter
the market. Retailers can no longer treat all consumers alike and
offer an undifferentiated set of products and services. We believe
that there is an opportunity for petroleum retailers in India today
to build revenues and enhance profitability by building strong and
A petroleum retailer can differentiate its offer on the basis of a

number of different platforms: fuel-based differentiation, valueadded products/service, and price and consumer experience.
Petroleum marketers need to develop a consumer centric strategy
which addresses some key questions:
z
What consumer segments should target?
What differentiation strategy should adopt?
Is there an opportunity to build a petroleum retail brand

around the concept of speed of service?
How can the potentially large Price Shopper consumer

segment be tapped-profitably?
Is the convenience store concept as a revenue driver or

brand differentiator premature in the Indian context?
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Is my basis for differentiation unique and sustainable?
What operating model would deliver my brand promise most

profitably?
Check Your Progress
Fill in the blanks:
1. services complement regular convenience

stores and food service by providing additional reasons
for consumers to visit the non-fuel area of the stations
while increasing the retailers share of the consumers
wallet on each visit.
(c)
Notes
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Our research amongst petroleum consumers in New Delhi

indicates that there are already distinct consumer psychographic
segments emerging (Routine Chore Doer, Time Poverty, Trust
Seeker and the Prestige Seeker) which may offer potential to
develop a differentiated offering in this commodity-like market
currently characterised by weak brand recognition and low levels
of loyalty.
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differentiated brand propositions based on in-depth consumer

understanding.
2. is an emerging sector in the nonpetroleum range of products from sandwiches to full

branded fast food operations; and our research in New
Delhi indicates that 40 per cent of car owners seek food
service facilities at petrol stations.
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Summary
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Notes
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Indian consumers have very low brand loyalty towards petroleum

products, which in place brings in the need for strong brandbuilding exercise by the petro retailers. With growing competition
and deregulation, the rules of the game in the petroleum retailing
industry in India will undergo some major changes in the next few
years. The revolution in the Indian telecom sector is a recent
example of the impact of free market dynamics on the structure of
the industry and on the strategies of various players. Deregulation
of the petroleum retailing sector in India will undoubtedly lead to a
similar battle for market share, with new players attempting to
gain share from current incumbents.
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Lesson End Activity
Prepare a research based project on Indian petro retailing.
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Keywords
Brand Personality: Brand personality is the sum total of all the

significant tangible and intangible assets that a brand possesses.
Linked Retailing: Under this concept your main product is the
anchor while some other products one retailed as add on.
1. Discuss the growth in Indian Petro-retailing market.

2. What are the key findings of research made by A.T. Kearney to
explore the strategic option for petroleum retailers in India?
3. Write a note on BPCLs additional value propositions.
4. Discuss the concept of QuickTrip Operating Model.
(c)
Further Readings
Books
273

Science, v. 86, p. 985-990.
Notes
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Web Readings
http://www.eia.gov
(c)
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http://www.bp.com
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Notes
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(c)
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UNIT 17: Economics of Crude Oil
Unit 17
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Notes
Activity
Research
on the concept of
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petroleum value chain.
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Objectives
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Economics of Crude Oil

topics:
\
Global Oil Consumption
World oil Demand & Supply
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Introduction
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This unit is designed as a basic study material on the subject,

drawn from applied knowledge in the field. At the end of the study,
a student is expected to learn rudimentary understanding of the
subject with enough knowledge to take up a professional
assignment in the field.
Petroleum economics has a value chain. Value is created at each of

the following links of the chain:
Raw material cost (cost of the crude oil),
2.
Primary transportation cost,
3.
Manufacturing cost (cost of refining),
4.
Primary storage and throughput cost,
5.
Wholesale downstream markets,
6.
Secondary transportation,
7.
Secondary storage and final distribution, and
8.
End users total cost.
(c)
1.
The scope of this unit is confined to only the first link that is the
economics of crude oil. However, it will highlight the interface with
the second and the third link, viz., primary transportation and
refining, in order to make the subject completely understood.
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Petro Economics
PE
S
Physical Crude Oil & Its Use Value

Notes
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The production process of crude oil involves divines like

exploration, extraction, storage, transportation and little bit of
purification, which together add additional value to it besides its
rental (scarcity) value. As a fossil fuel, it has geochemical
properties, which determine its use value. Although it is nonrenewable, yet, in a commercial sense, the worldwide reserve can
be enhanced by adding fresh proven reserves to the current level of
known reserves. About the capacity of oilfield, it is observed as
follows: An oilfield contains what it contains because it was filled
in the geological past, but knowledge of how much it contains
evolves over time. For any company in the upstream (exploration
and production) business, extraction of crude oil is as much a job as
exploration. Both the jobs are undertaken on a continuous basis.
The successful exploration ventures add to the proven reserves.
The industry is required to furnish estimates of so called Proven
Reserves in its financial reports to governments and the stock
exchanges. These estimates relate to what the wells in the current
stage of development are expected to produce. Therefore, a prudent
producer of crude oil not only monitors his current production
level, which earns his revenue; but also keeps a tab on production
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Crude oil is there under the ground, on-shore and off-shore. Unlike
any other economic good, it is not produced through man-made
process of transformation and value creation. It is available in
nature in limited and non-renewable quantity. It is well-known
that the stock is limited and that it can be extracted at a
substantial cost, given the technology.
___________________
reserve (PR) ratio, which gives his future revenue potential.

By virtue of the facts mentioned above, it is said that production of
(c)
crude oil is preceded by the following four conditions:

1.
One has to discover oil before it is produced.
2.
Production has to mirror discovery after a time lag.
3.
Currently the discovery rate is one barrel for every four

barrels consumed from the inheritance of past discovery.
Currently the depletion rate is about two per cent a year.
4.
Extraction rate is controlled by the physics of the reservoir.
Genesis of Crude Oil
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UP
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Geologists generally agree that crude oil was formed over millions
of years from the remains of tiny aquatic plants and animals that
lived in ancient seas. There may be bits of brontosaurus thrown in
for good measure, but petroleum owes its existence largely to onecelled marine organisms. As these organisms died, they sank to the
seabed. Usually buried with sand and mud, they formed an
organic-rich layer that eventually turned to sedimentary rock. The
process repeated itself, one layer covering another.
277
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Then, over millions of years, the seas withdrew. In lakes and

inland seas, a similar process took place with deposits formed of
non-marine vegetation. In some cases, the deposits that formed
sedimentary rock did not contain enough oxygen to completely
decompose the organic material. Bacteria broke down the trapped
and preserved residue, molecule by molecule, into substances rich
in hydrogen and carbon. Increased pressure and heat from the
weight of the layers above then caused a partial distillation of the
organic remnants, transforming them, ever so slowly, into crude oil
and natural gas.
Although various types of hydrocarbons, and molecules made of
hydrogen and carbon atoms form the basis of all petroleum, yet
they differ in their configurations. The carbon atoms may be linked
in a ring or a chain, each with a full or partial complement of
hydrogen atoms. Some hydrocarbons combine easily with other
materials, and some resist such bonding.
The number of carbon atoms determines the oils relative weight
or density. Gases generally have one to four carbon atoms, while
heavy oils and waxes may have 50, and asphalts, hundreds.
(c)
Hydrocarbons also differ in their boiling temperatures a key fact

for refiners who separate different components of crude oil by
weight and by boiling point. Gases, the lightest hydrocarbons, boil
below atmospheric temperature. Crude oil components used to
make gasoline boil in the range of 55 to 400 degrees Fahrenheit.
Those used for jet fuel boil in the range of 300 to 550 degrees and
those for diesel at about 700 degrees. Three essentials in creation
of a crude oilfield are as follows:
z
First, a source rock whose geologic history allowed the

formation of crude oil. This usually is fine-grained shale rich in
organic matter.
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Petro Economics
Second, migration of the oil from the source rock to a reservoir

rock, usually a sandstone or limestone thats thick and porous
enough to hold a sizable accumulation of oil. A reservoir rock
thats only a few feet thick may be commercially producible if
its at a relatively shallow depth and near other fields.
However, to warrant the cost of producing in more challenging
regions (the Arctic North Slope, for example) the reservoir may
have to be several hundred feet thick.
Third, entrapment. The earth is constantly creating irregular

geologic structures through both sudden and gradual
movements earthquakes, volcanic eruptions and erosion
caused by wind and water. Uplifted rock, for example, can
result in dome like structures or arched folds called anticlines.
These often serve as receptacles for hydrocarbons. Probability
of discovering oil is the greatest when such structures are
formed near a source rock. In addition, an overlying,
impermeable rock must be present to seal the migrating oil in
the structure.
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278
(c)
The oldest oil-bearing rocks date back more than 600 million years
and the youngest about one million. However, most oil fields have
been found in rocks between 10 million and 270 million years old.
Sub-surface temperature, which increases with depth, is a critical
factor in creation of oil. Petroleum hydrocarbons are rarely formed
at temperatures less than 150 degrees Fahrenheit and generally
are carbonised and destroyed at temperatures greater than 500
degrees. Most hydrocarbons are found at moderate temperatures
ranging from 225 to 350 degrees.
It is the particular crude oils geologic history that is most
important in determining its characteristics. Some crude from
Louisiana and Nigeria are similar because both were formed in
similar marine deposits. In parts of the Far East, crude oil
generally is waxy, black or brown, and low in sulphur. It is similar
to crudes found in central Africa, because both were formed from
non-marine sources. In the Middle East, crude oil is black but less
waxy and higher in sulphur. Crude oil from Western Australia can
be a light, honey coloured liquid, while that from the North Sea is
typically a waxy, greenish-black liquid. Many kinds of crudes are
found in the United States because there is great variety in the
geologic history of its different regions.
Crude Oil is a Composite Product
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Crude oil is seldom used in its natural form. It is refined through a

process of distillation and blended to form mixtures of various
refined streams. Each mixture would be having a range of close
distillations, which makes the properties of the mixture
homogeneous, suitable to a particular application. In this process,
a barrel of crude oil outputs a range of refined products. Therefore,
crude oil, in its natural form is a composite product. The value of
crude oil is, therefore, a function of the use value of the constituent
units, which are the refined products.
The basic process of refining is distillation, where a liquid is heated
in order to vaporise it. The vapours then cool and condense into a
liquid. Crude oil contains several hydrocarbon compounds with
different boiling points. The lighter compounds boil first and then
the heavier compounds boil as the heat increases.
Crude Oil is Quality Specific
Crude oil has geo-chemical properties, depending upon its natural

composition. It is usually specific to a location where it is available
and extracted from. Therefore, all grades of crude oil are not equal
with regard to their quality and value. Crude oil available world
over is not a homogeneous product, but what is available in a
particular field has a large degree of homogeneity and consistency
in it. As a natural commodity, which is predominantly used as
raw material, the quality specifications of any crude oil are very
broad and, therefore, may not conform to precise laboratory
specifications. Crude oil available in the world market is so diverse
that there are as many grades of crude oil as there are oil fields.
(c)
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Notes
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Crude oil is a surprisingly abundant commodity. The world has

produced some 650 billion barrels of oil, but another trillion barrels
of proved reserves have yet to be produced. An additional 10
trillion barrels of oil resources await development, assuming the
price of oil someday justifies production. These resources include
bitumen, shale oil and oil in existing fields that might be produced
through enhanced recovery methods.
From the user point of view, crude oil in the world oil market has
been classified into three broad categories. This classification helps
to identify the nature and use value of crude. Given below is a brief
exposition on these classifications, with their dominant features
and distinguishing a grade from other grades.
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Petro Economics
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Crude oil is categorised and evaluated according to three

characteristics. The first is sulphur content, which is important
because sulphur is a major harmful pollutant. Low sulphur crude
oil or sweet crude contains less than 0.5 per cent sulphur by
weight. Intermediate crude oil has between 0.5 and 1.0 per cent
and high content crude has more than 1.0 per cent sulphur by
weight.
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280
The second characteristic is density. Low density or light crude oil

is desirable because it yields higher value light products, such as
gasoline (petrol), jet fuel and light distillate fuel oil. Density is
measured in terms of gravity, which is determined by the
American Petroleum Institute (API) and is quoted in terms of
degrees. Light crude oils have gravity greater than 35 degrees and
heavy crude oils have gravity less than 24 degrees.
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The third characteristic of crude oil is field of origin, which is

important because it summarises many other characteristics, such
as viscosity, colour and metal content.
Besides the above mentioned broad classification, crude oils are
also known to be classified as (a) bituminous and non- bituminous,
(b) lube bearing and non-lube bearing, (c) high pour and low pour,
etc.
How Crude Oil is converted in the Refinery Process? What is
a Refinery?
A refinery is a factory. Just as a paper mill turns lumber into legal
pads or a glassworks turns silica into stem ware, a refinery takes a
raw material, i.e. crude oil, and transforms it into a range of
refined petroleum products.
(c)
Refining process takes place inside a maze of hardware that one

observer has likened to a metal spaghetti factory; Employees
regulate refinery operations from within highly automated control
rooms. Because so much activity happens out of sight, refineries
are surprisingly quiet places. The only sound most visitors hear is
the constant, low hum of heavy equipment.
The complexity of this equipment varies from one refinery to the
next. In general, the more sophisticated a refinery, the better its
ability to upgrade crude oil into high value products. Whether
simple or complex, however, all refineries perform three basic
steps: separation, conversion and treatment.
Separation: Heavy on the Bottom, Light on the Top
PE
S
The liquids and vapours are discharged into distillation towers, the
tall, narrow columns that give refineries their distinctive skylines.
CC
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Inside the towers, the liquids and vapours separate into

components or fractions according to weight and boiling point. The
lightest tractions, including gasoline and liquid petroleum gas
(LPG), vaporise and rise to the top of the tower, where they
condense back to liquids. Medium weight liquids, including
kerosene and diesel oil distillates, stay in the middle. Heavier
liquids, called gas oils, separate lower down, while the heaviest
fractions with the highest boiling points settle at the bottom. These
tars like fractions, called residuum, are literally the bottom of the
barrel.
The fractions now are ready for piping to the next station or plant
within the refinery. Some components require relatively little
additional processing to become asphalt base or jet fuel. However,
most molecules that are destined to become high-value products
require much more processing.
Conversion: Cracking and Rearranging Molecules to Add

Value
This is where refining is fanciest footwork takes place, where

fractions from the distillation towers are transformed into streams
(intermediate components) that eventually become finished
products. This is also where a refinery makes money because only
through conversions can most low-value fractions become gasoline.
The most widely used conversion method is called cracking because
it uses heat and pressure to crack heavy hydrocarbon molecules
into lighter ones. A cracking unit consists of one or more tall, thickwalled, bullet-shaped reactors and a network of furnaces, heat
exchangers and other vessels.
(c)
Fluid catalytic cracking, or cat cracking, is the basic gasolinemaking process. Using intense heat (about 1,000 degrees
Fahrenheit), low pressure and a powdered catalyst (a substance
that accelerates chemical reactions), the cat cracker can convert
most relatively heavy fractions into smaller gasoline molecules.
Hydro-cracking applies the same principles but uses a different
catalyst, slightly lower temperatures, much greater pressure and
hydrogen to obtain chemical reactions.
Notes
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Petro Economics
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Cracking and coking are not the only forms of conversion. Other
refinery processes, instead of splitting molecules, rearrange them
to add value. Alkylation, for example, makes gasoline components
by combining some of the gaseous byproducts of cracking. The
process, which essentially is cracking in reverse, takes place in a
series of large, horizontal vessels and tall, skinny towers that loom
above other refinery structures.
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282
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In India, secondary processing facilities are available in seven

refineries, of which IOCs Koyali only uses both the hydro- cracking
and the catalytic cracking method. All other refineries use the
carbon rejection process.
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Treatment: The Finishing Touch
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Today, a major portion of refining involves blending, purifying,

fine-tuning and otherwise improving products to meet these
requirements. Among the variables that determine the blend are
octane level, vapour pressure ratings and special considerations,
such as whether the gasoline will be used at high altitudes.
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Sources and Availability
(c)
The Middle East remains the largest crude oil producing, region. It
holds about two-thirds of the one trillion barrels of global proven
oil reserves. So the regions critical role in world crude oil supply
will continue and will grow. The core developments given in
following paras have shaped the pattern of regional oil production:
The higher crude oil prices of the 1970s and early 1980s afforded a
strong economic incentive to explore and produce oil and the
production rose in many areas. At the same time, oil demand
declined in response to high prices. Saudi Arabia became the
swing supplier, reducing its production as necessary to balance
supply and demand. Rejecting of that role in mid-1985 (when its
output had fallen to about 25 per cent of its 1980 peak), brought
the full force of supply-demand imbalance on to the markets and
resulted in price collapse of 1986 : Prices did not return to the pre1986 level until the Persian Gulf conflict of 1990-91, and even then
only briefly.
Again, in 1998, when Asian demand faltered with the regions
economies and Northern Hemisphere demand faltered with the
warm winter, the high production levels resulted in another price
283
Notes
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collapse. The market reaction in 1998, however, was not the same
as in 1986, as demand did not recover as quickly and supply did
not fall as quickly. Hence, the low price period lasted longer and
showed lower prices in 1998 than in 1986. In early 2000, crude oil
prices exceeded the levels of the Persian Gulf conflict in nominal
terms. Although price increases were sharp in early 2000, yet,
crude oil prices remained less than half of the early 1980s peak in
terms of real buying power.
Saudi Arabia, the market-balancer in the early 1980s, has been the
worlds largest producer during 1990s. Not only did Saudi Arabia
increase its production to fill the gap caused by the loss of Iraqi
and Kuwaiti supplies after Iraq invaded Kuwait in 1990, but
production declined in the other two large production regions, i.e.,
the United States and the Former Soviet union.
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Middle Easts production would have been higher throughout the

1990s if Iraqs production had not been constrained by the United
Nations sanctions imposed after Iraq invaded Kuwait in 1990. The
so-called Humanitarian Oil Sales has provided Iraq only limited
and closely controlled re-entry into world crude oil market.
Middle Easts production also would have been higher at various

times if it had not been for the market balancing role played with
varying degrees of success by the Organisation of Petroleum
Exporting Countries (OPEC).
North America is the second largest producing area after the
Middle East. The United States, the second largest producing
country in the world, accounts for almost 60 per cent of the North
American regions total. Canada, the United States and Mexico all
have long production histories and production from mature fields
has been declining. However, a new surge in technology has
benefitted both new field development and more complete
production from the existing fields.
(c)
North Sea production, off the United Kingdom and Norway, began
in the late 1970s. In contrast to prediction from the early 1980s of
the imminent decline in the regions production, the North Sea has
yet to see its peak. The regions success with new exploration and
production technology, and hence its continuing volume growth,
has been a central factor in world crude oil market for a decade.
Production in the Soviet Union peaked at about 12 million barrels
a day in early 1980s, when it was the top world crude oil producer.
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Petro Economics
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The regions demand collapse, in combination with its aggressive

production targets set to maintain foreign exchange, marked its
rapid production decline in the late 1980s as the Soviet Union
broke up. The former Soviet Union has recently been the third
ranked producer, after Saudi Arabia and the United States. One of
the most visible new production prospects has been the Caspian
Sea in Central Asia, in spite of the enormous logistic and political
hurdles involved in making available the crude oil produced in this
area to world markets.
Notes
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284
Global Oil Consumption
The industrialised countries are the largest consumers of crude oil.

The countries of the Organisation for Economic Cooperation and
Development (OECD), for instance, account for almost two-thirds
of worldwide oil consumption.
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The developed economies use oil much more intensively than the
developing economies. For instance, oil consumption in the United
States and Canada equals almost three gallons per day per capita.
Oil consumption in the rest of OECD equals 1.4 gallons per day per
capita. Outside the OECD, oil consumption equals 0.2 gallons per
day per capita.
(c)
Regionally, the largest consuming area remains North America

(dominated by the United States), followed by Asia (with Japan as
the largest consumer), Europe (where consumption is more evenly
spread among the nations) and then the other regions. Asia was
the region with the fastest demand growth until the 1998 economic
crisis in East Asia. The regions economic upheaval is a central
reason for the oil price collapse of 1998.
The United States and Canada use oil more for transportation
than for heat and power, but the opposite pattern holds for most of
the rest of the world. As a result, global demand for oil is the
highest in the Northern Hemispheres cold months. There is a
swing of 3-4 million barrels per day (some 5 per cent) between the
4th quarter of the year, when demand is the highest, to the 3rd
quarter, when it is the lowest. The precise amount varies from year
to year, depending on weather, economic activity and other factors.
While the 4th quarter is not the coldest in any region, estimated
demand calculations are swollen by the traditional stock building
that occurs during the period.
intermediate products that can be made from it. In short-term,
285
Demand for crude oil is derived from the demand for finished and
Notes
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underlying demand for petroleum products. This misalignment
___________________
occurs routinely as a result of stock changes, the need to build
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however, demand for crude oil may be mismatched with the
stocks to meet seasonal demand, for instance, or the desire to
reduce stocks of crude oil for economic reasons. In the longer term,
___________________
blending non-petroleum additives into petroleum products (such as
___________________
ethanol as is being done in India currently) can also reduce crude
___________________
oil demand relative to demand for finished products.
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World liquids consumption in the IEO2011 Reference case
___________________
increases from 85.7 million barrels per day in 2008 to 97.6 million
barrels per day in 2020 and 112.2 million barrels per day (225
quadrillion Btu) in 2035. World GDP is a key driver of demand,

growing by an average 3.6 per cent per year from 2008 to 2020 and
3.2 per cent per year from 2020 to 2035. Developing non-OECD
strong
CC
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nations, particularly in Asia and the Middle East, experience

economic
accompanied
by
growth
in
increasing
the
Reference
demand
for
case,
which
liquids
in
is
the
transportation and industrial sectors.
Rising prices for liquids increase the cost-competitiveness of other

fuels, leading many users of liquids outside the transportation
sector to switch to substitute sources of energy when possible. As a
result, the transportation share of total liquid fuel consumption
increases, accounting for about 80 per cent of the overall increase
in liquid consumption in all sectors over the projection period. In
2035, the transportation sector consumes 60 per cent of total
liquids supplied, as compared with 54 per cent in 2008.
Check Your Progress
Fill in the blanks:
(c)
1. The countries are the largest

consumers of crude oil.
2. The countries of the Organisation for Economic
Cooperation and Development (OECD), for instance,
account for almost .. of worldwide oil
consumption.
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286
Notes
Activity
List ___________________
down
the
factors
influencing the price of crude
oil. ___________________
World Oil Demand & Supply
Details on demand and supply of oil since 1999 are given in the
following tables:
Table 17.1: Global Oil Demand (2009-2011)
UP
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Petro Economics
Source: IEO2011 Reference case
World Oil Supply
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Table 17.2: OPEC Crude Production

1.
Capacity levels can be reached within 30 days and sustained for 90 days.
2.
Includes half of Neutral Zone production.
3.
Nigeria's current capacity estimate excludes some 200 kb/d of shut-in capacity.
4.
Includes upgraded Orinoco extra-heavy oil assumed at 455 kb/d in May.
(c)
Table 17.3: Non-OPEC Supply

Market
Notes
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The spot crude oil market is a global one. Prices of Crude are
generally quoted Free on Board (FOB) at their loading port. The
spot markets are based on five major centres and a number of
smaller ones, although the actual trading often takes place many
miles from the nominal centre. The five major spot markets today
are: (a) North-west Europe, loosely based on the ARA area
although the cargo market works primarily out of London; (b) the
Mediterranean, based on Italys west coast but including imports
from the Black Sea and through the Suez Canal; (c) the Gulf of
Mexico, out of Houston; (d) the Caribbean, including South
America; and (e) Singapore, the most recent addition to the list and
the fastest growing.
287
Pricing
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Crude oil price formation does take place in two markets, namely,
physical market and paper market. Both the markets have their
own dynamics and both interact with each other in a complicated
way. In economic sense, price is what a buyer pays for the utility of
the goods that he buys. In that sense, the price of crude oil is the
market price in the physical market. Paper market is actually a
derivative market, where physical crude is not available. Paper
market is a backward extension of physical market, where right on
physical crude is traded and thereby its future price is formed. We
will briefly deliberate on these two markets, the players in the
market, the instruments used, the associations and the activities
in the market.
Physical Market
The area of physical market has been dealt with in the preceding
section. Basically it is the market, where physical oil is sold and
bought and the actual seller and actual buyer meet and enter into a
contract to deliver and accept the cargo at a price. The mechanism of
that pricing will be discussed in later part of this section.
(c)
A refiner is the final buyer in the physical market, who buys crude
for processing and pays the price, which he cannot pass on to any
other buyer of crude. Besides the final buyer, there are many
buyers in this market, who buy crude and sell it at appropriate
time, maybe at the same place or at different places. They are:
(a) traders, and (b) refiners. Sellers in this market are: (a) the
original producers of crude oil, (b) traders, and (c) refiners.
Petro Economics
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For a refinery in India, purely from geographical proximity

(therefore freight economics) point of view, the physical crude oil
market presents itself in three regions: (a) Middle East, (b) West
Africa, and (c) Far East. The countries in Middle East, mainly
producing sour crude oils, are: Saudi Arabia, Kuwait, Abu Dhabi,
Yemen and Egypt. Countries in West Africa, mainly producing
sweet crude oils are: Nigeria, Angola and Libya. Country in Far
East, mainly producing sweet crude oils, is Malaysia. Besides these
three regions, there are however more regions, which present
alternate economic sources, are Venezuela and Australia.
Notes
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Players in the Physical Market
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Original producers of crude oil are of two types: a) the National Oil
Company (NOC) of the country of crude oil origin, like Saudi
Aramco, Abu Dhabi National Oil Company (ADNOC), Kuwait
Petroleum Corporation (KPC), Petronas in Malaysia and many
others. Each oil-producing country has one such company, which
holds the ownership of the oil in their geographical territory.
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(c)
1.
National Oil Company: All such NOCs do not necessarily

play the same role for their respective countries. Some NOCs
are actively into crude oil selling business, refining business
and are in control of the sale and destination of their cargo.
They, in fact, allocate the quota among their buyers. They also
declare their price, which is called Official Selling Price (OSP).
They are the price makers in the market. Example of such
NOC is Saudi Aramco. Their OSP level determines the
revenue for their country on the one hand and sets the price
level in the market on the other. While fixing the OSP, these
companies do a balancing act on multiple fronts. Some of these
fronts are: (a) demand and supply of crude in the physical
market, (b) revenue for the producing country and margin for
the refineries (the buyers), (c) current production level and
investment for future oil fields, and (d) some other geostrategic fronts as having political and military dimensions.
There are some NOCs whose main role is to set the price for
their crude (OSP) and ensure revenue for their respective
country. They have given the act of marketing their crude
wholly or partly to some multinational oil company. Examples
of such NOCs are Egyptian General Petroleum Corporation
(EGPC), and Yemen Oil & Gas Company (YOG).
There is one more type of NOCs, like Petronas (of Malaysia),

who are quite diversified in their activities. One, they are the
sale equity holder of Malaysian crude, viz., Labuan, Miri,
Tapis. Two, they declare OSP. Three, they market their crude.
Four, they have E&P activities in other countries like Sudan.
Five, they trade crude oils of other countrys origin. Six, they
run refineries and do domestic marketing of products. Seven,
they sell refined products to other countries. They are so
diversified that they even run universities for their country.
Trading Companies: The second category of players in the
physical crude oil market is the trading companies. They buy
crude oil from the market and sell to others. They invariably
have some equity holdings in some crude oils somewhere in
the world. Alternatively they have purchase contract from the
original crude oil producers. They buy and sell, depending
upon their relative position and price at the moment of selling
and buying. They swap their crude oil with others. Some time,
they also hold physical stocks at some parts in the world. They
take advantage of price movement in all markets across the
globe. Usually they are having operation all over the world.
They keep tab on the requirement of the refineries. They
closely monitor the developments in the world crude oil market
affecting the price. They own or operate fleet of vessels, so that
they can quickly seize arbitrage opportunities arising between
two markets. Thus, they play an intermediary role between
buyer and seller across the world and make margin for
themselves taking advantage of price movement.
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2.
Notes
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YOG holds ownership of certain portion of the crude oil, Masila

produced in Yemen and the ownership (equity) of the
remaining part rests with a multinational oil company, Nexen.
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EGPC is given the marketing right of their crude Gulf of Suez

Mix to British Petroleum, while retaining with them the right
to fix the price (OSP) for their crude.
(c)
The last 15 years have seen emergence of a new type of trader:

the Wall Street refiners. They were given this name when the
US investment banks set up oil trading arms to deal in oil
derivatives in much the same way as they deal in other
financial instruments. They are assuming the risk for a
number of companies involved in the oil market and laying
these risks off in the physical or futures market in the same
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3.
Integrated MNCs: The third category of players are

integrated multinational oil companies (MNCs) having
integrated operations in the oil market, namely, E&P,
refining, marketing and trading. They are very powerful
operators in the crude oil market by virtue of their scale at
operation, volume of transaction and financial strength. They
are very few in numbers and the number of has been further
narrowed down in the wake of mergers that took place in
recent past. They are: British Petroleum, Exxon Mobil, Shell,
Total Elf Fina, Chevron Texaco. They play multiple roles in
the crude oil market, such as: (a) they are suppliers of crude
oil, as they bring equity crude oil to the market; (b) they buy
crude oil for their own refinery system; and (c) their trading
wing buy and sell crude oil and make margin.
4.
Refiners: The fourth and final category of players in the crude

oil market is the refiners. They are the users of crude oil and
are the ultimate buyers. They are the ones who pay the price,
whatever may the level. At times they can also be the sellers of
crude oil, which they have bought. They do resell the crude oil
due to various reasons like: (a) to take opportunity in price
movement; (b) the swap the crude oil, inter grade or inter
month; and (c) unscheduled change in demand pattern.
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way as an insurance company does in other sectors. Several of

them also take substantial outright position in their own right.
Notes
(c)
Refiners have interest not only in the price they pay for the crude
oil; they also have interest in the value of crude which they realise
from the refined products that are produced from the same crude
oil. Therefore, a particular type of crude oil has an economic value
for a particular refinery, which is otherwise called as Gross
Product Worth (GPW). Given the GPW of a type of crude oil for a
particular refinery, the CFR (Cost and Freight) price of crude
determines the margin that a refinery gets by processing a type of
crude oil.
Paper Market
Paper markets are basically markets where right to crude oil is
traded. It is a mixture of crude oil market and financial market.
Here the players are not necessarily having any interest
whatsoever with oil. This market has multiple uses, the principal
among which is price risk management. Since oil price is volatile,
Fundamentals of Physical Market
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The factors bringing about equilibrium price in crude oil market

are many. One would presume that it is the cost of production.
Alternatively, it would be presumed that the demand and supply
or some such economic law would be able to explain the price
behaviour. Economists have attempted to explain the crude oil
prices in order to forecast them in both short and long terms.
However, no theory has thus far been able to use economic
variables in a model that can accurately predict future oil prices.
Still there are consultants, who take into account the
fundamentals of the market and factor anticipated political
developments and project the future price both in short and longterm under various probable scenarios. As a student of Economics
of crude oil, we need to be aware of the fundamental factors that
work in the market and influence the price.
The region-by-region demand patterns interact to establish the
price level. The interaction is constant and usually invisible to
anyone not directly involved in the oil industry. As a general rule,
thousands of transactions that take place simultaneously are
complete without fanfare. The price fluctuations are small and of
interest to the buyers and sellers within the Industry.
The steady state stability gets disrupted by a number of factors,
suddenly bringing crude oil prices to the headlines. Demands
surge, refinery outages and supply cutbacks can all cause prices to
run up. Some developments, like refinery outages, logistics snags,
demand surges in a cold snap, etc. cause a price spike. Prices shoot
up initially and then recede again when the supply and demand
balance has been re-established. Long-term factors, like OPEC cut
or a recession, have long-term impacts. Like crude oil price
declines experienced during 1998 or the crude oil price increase
experienced during 2000, take longer time to return to the
(c)
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Notes
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which creates risk for the buyer and seller of crude oil, this market
provides avenues where this risk can be transferred. This is an
integral part of oil market. This market consists of institutions like
Oil Exchanges, Financial Institutions and Brokers, in which
instruments like futures and swaps are bought and sold. The
futures and swap in the paper market help to form the price in the
physical market. However, this is beyond the scope of this
material.
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More than the production cost, the supply and demand conditions
in the global market over all, and more particularly, in the main
refining centres: Singapore, Northwest Europe and the US Gulf
Coast influence the price. Crude oil market is essentially a global
auction; the highest bidder wins the supply. Like any auction, the
bidder does not want to pay too much. When markets are strong
(when demand is high and / or supply is low), the bidder must be
willing to pay a higher premium to capture the supply. When
markets are weak (demand low and / or supply high), a bidder
may choose not to outbid competitors, waiting instead for later,
possibly lower priced supplies.
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underlying price trend. The marginal cost of a barrel of crude oil

differs not only from one country to another, but also from one well
to another. Both the varying reservoir characteristics and the
physical characteristics of crude oil are important components of
the cost of producing crude oil. The costs can range from as little as
two dollar per barrel in the Middle East to more than 15 dollar per
barrel in some fields in the United States, including capital
recovery. It is interesting to note that technological advances in
finding and producing crude oil have made it possible to bring once
expensive deep water Gulf of Mexico oil into production for less
than 10 dollar per barrel.
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Prices in spot markets, cargo by cargo and transaction by

transaction, send a clear signal about the supply / demand balance.
Rising prices indicate that more supply is needed and falling prices
indicate that there is too much supply for the prevailing demand
level.
(c)
While most crude oil flows under term contract, its price (OSP)
varies with spot market. Futures market in Oil Exchanges also
provides information about the physical supply / demand balance
as well as the markets expectations.
Seasonal swings are also an important underlying influence in the
supply/demand balance and hence in price fluctuations. Other
things being equal, crude oil markets would tend to be stronger in
the fourth quarter on a global basis, when demand is boosted both
by cold weather and by stock building. It is supposed to be weaker
in the late winter as global demand falls with warmer weather.
The overall supply picture is, of course, influenced by the level of
inventories. Stocks keep the global supply system operating.
Stocks indicate whether any regional market has too little, too
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much or just the right quantity of oil. When stocks in a given

market are high, they represent incremental supply immediately
available, so prices tend to be weak. The opposite is true in low
stock situation.
Notes
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Price change patterns can vary between regions, depending on the
prevailing supply/demand conditions in the regional market,
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especially in the short-term. That price response and the
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differences in regional price movements are critical to the way the
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crude oil market redistributes to rebalance after an upheaval.
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Tradable Crude and Non-Tradable Crude
For a refiner in India, the time frames for buying crude oil are two:
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(a) annual term contract, and (b) spot purchase. There are some
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types of crude oil in Middle East, which can only be bought by
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annual contract and these crude oils are destination specific. These
are, therefore, called non-tradable crude. These crude types, like
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Arab Heavy, Arab Light, Arab Medium and Kuwaiti Crudes, are
sold by the respective NOC under annual contract and are bought
by the refiners directly.
The crude oil types other than these non-tradable types, which
change hands of multiple sellers, are available in spot market.
Physical crude oil market is such that it is to be booked at least
two months prior to the month of loading the cargo. For example,
generally, if a cargo is to be loaded any time in the month of
March, the loading terminal will plan the months loading in the
first week of February and the allocation of the cargo by the
original seller will be finalised by the first half of January.
Formula Price
When a refiner book a cargo says in January, for loading in March,

what is agreed between the buyer and seller in January is the
quantity and a price. The price has two elements. One is the basic
(c)
price (say B) and another is the premium and discount (say P).
This type of price is called floating price or formula price.
Invoice Price = B + P
At the time of booking, what is agreed between buyers is the P,

which remains fixed, as far as B is concerned, it is usually linked
Petro Economics
to the price of a Benchmark Crude or Official Selling Price (OSP) of
Notes
an NOC. The price of the Benchmark Crude is assessed by
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independent price assessing agencies, like Platts, or Petroleum
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Argus on daily basis.
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Usually payment is made 30 days after the date of loading.

Therefore, the payable amount looks like the following:
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Invoice Price (payable in April) = B (of March) + P (as agreed in

January).
The basic price (B in the equation) is the floating element and is
linked to a Benchmark Crude Price, which is assessed by a price
assessing agency, like Platts, on daily basis. What is considered for
the purpose of determining a payable price is an average of a
Benchmark crude price for a specific period, called the pricing
period. Typically, it is average of the calendar month in which the
cargo is loaded. A variant of the pricing period could be five or six
days on an average after the date of loading.
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A typical pricing clause in a contract would read like this: mean of

Platts Dubai average for the calendar month of loading plus 1.18
dollar per barrel (hypothetical value).
(c)
This formula has the following characteristics:

z
The price has been agreed in advance.
The major part of the price, that is the basic price, remains
relevant to the time when cargo is loaded (i.e. the pricing
period around the loading period; could be a month or five or
six days).
The basic price is market determined, as assessed by an

independent expert body in the Industry, which is acceptable
to the buyer and seller.
At the time of signing the contract, neither buyer nor the seller
has knowledge of the basic price. Their respective fundamental
position and knowledge of the market guide them to agree the
fixed part of the formula, that is premium or discount (P in
the equation).
P also captures the quality difference of the cargo booked with

respect to the benchmark crude.
As it is a monthly average of the daily assessment, the price

gets moderated by the law of average.
Neither buyer nor the seller gets affected by the specific

loading window, as long as the loading window falls in the
calendar month (i.e., the pricing period).
Benchmark Crude
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Because there are so many different varieties and grades of crude

oil, buyers and sellers in oil industry have found it easier to refer
to a limited number of references or benchmark crude oils. Other
varieties are then priced at a discount or premium, according to
their quality. The main criteria for a marker crude is for it to be
sold in sufficient volumes to provide liquidity (many buyers and
sellers) in the physical market as well as having similar physical
qualities of alternative crudes.
Brent is generally accepted to be the world benchmark. Brent is

used to price two-thirds of the worlds internationally traded crude
oil supplies. In the Middle East, Dubai crude is used as a
benchmark to price sales of other regional crudes into Asia. Dubai
is one of the few Gulf crudes available on the spot sales, as opposed
to long-term supply contracts. In the United States, the benchmark
is West Texas Intermediate (WTI). Tapis is generally used as
benchmark for Far East Crude.
OSP of NOCs
NOCs with original hold on their countrys crude usually announce

the FOB price of their Crude oils for their term buyers. This rate is
applicable for all the cargoes loaded during a specified period and
uniform for all the buyers in the region, irrespective of the volume.
(c)
Notes
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This formula at times gets modified by taking average of, say, two
benchmark crudes for B, like Oman Dubai average. The practice
in the industry is to make the formula as objective as possible, so
that the value of the crude under deal is accurately captured,
without discriminating with either party. Industry has developed
many variants of this formula to suit the risk management
objective of the buyer and/or seller, but the spirit of the formula
remains the same.
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Some companies like Saudi Aramco and KPC, announces a

premium or discount to the average of Benchmark crude (Oman
and Dubai). They announce in the first week of the month for the
next month.
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As distinguished from the above, company like ADNOC announces

an absolute number in the first week of the month, applicable for
all the cargo loaded in the previous month.
Notes
Some other companies like the NOC of Yemen and Nigeria

announces a premium or discount to Benchmark crude (Brent).
The applicable price is average of 5 or 6 days after the Bill of
Loading days.
The underlying principles in the OSP system are the following:
z
It is a declared price (or posted price) by the seller, uniformly

applicable to all the buyers in the region. There is no room for
negotiation. Buyers have little choice with regard to price.
While setting the price, the sellers usually make the price level
in line with the spot price in the respective destination
market.
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The sellers also see that the buyer gets the value for the price they
pay. In other words, they see that the refiner getshis net back at
the price fixed by them.
In this process, a producer NOC, says Saudi Aramco, realises

different FOB price (net back) for the same type of crude oil, loaded
for different destinations.
Platts & Argus
(c)
Platts is a leading energy news service agency. It was set up by Mr

Warren Platt in 1923. In course of time, the agency has widened its
operation to a wide gamut of services in the energy sector
worldwide. Platts is known for its expertise in price assessment
energy sector. It has earned a unique place for itself by meeting
the need for impartial information, market price transparency and
real time news.
In the crude oil market, Platts plays a crucial role in the daily
assessment of crude oil prices, including those of benchmark
crudes. It does assess the price of crude oil for each market. It has
established methods, networks and institutional arrangements to
keep track of market developments and price movement. With all
these arrangements and after having extensive interactions with
market players, Platts, at the end of the day, assess and reports a
high, mean and low price, at which a particular crude oil was
traded in a particular market. The Platts assessed price is
Check Your Progress

Fill in the blanks:
1. In the crude oil market, . plays a crucial

role in the daily assessment of crude oil prices, including
those of benchmark crudes.
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2. . markets are basically markets where

right to crude oil is traded.
Summary
Crude oil is a heterogeneous and composite raw material. Its value

is realised from the price, which its yields fetch in the product
market. Crude oils price is determined by plethora of forces
operating in both physical and financial market. Crude oil
is transformed into value added refined products, which have got
use value to its consumers. Crude oil is made available to a
refinery by transportation, which adds to its cost. Tax from
petroleum products is a major revenue item for governments of all
countries. Therefore, tax structure of a country has a bearing on its
cost.
Lesson End Activity
(c)
Research on the recent issue for payment of outstanding oil debt

between India and Iran.
Keywords
Cartel: A formal (explicit) agreement among competing firms. It is

a formal organisation of producers and manufacturers that agree
to fix prices, marketing and production.
Notes
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Petroleum Argus is another agency of the same kind. The

methodology adopted by Argus for price assessment is different
from that used by Platts. Nevertheless, the price assessment by
both for the same crude follows somewhat similar level. However,
in the crude oil market, Platts has more acceptability than Argus.
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considered to be the price for that day for the particular type of
crude. The price of benchmark crude as assessed by Platts is used
to work out the formula price of crude oil as per contracts.
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Statute: A formal written enactment of a legislative authority that

governs a state or city.
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___________________
1.
Why petroleum economics is considered as a value chain?
___________________
2.
What are the important steps involved in production of crude

oil?
___________________
3.
Write a note on sources and availability of crude oil.
___________________
4.
What are the recent trends in global oil consumptions?
___________________
5.
Define benchmark crude.
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Further Readings
Books
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KPMG, Mumbai.
Science, v. 86, p. 985-990.
Ginsburg, G.D. and Soloviev, V.A., Submarine Gashydrates,
VNIIO Keangeologia, St. Petersburg.
Web Readings
http://www.eia.gov
(c)
http://www.bp.com
www.business.gov.in
UNIT 18: Trade and Transport
Unit 18
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Notes
Activity
Research
on the difference in
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customs duty applicable for
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crude
and on refined products.
Objectives
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Trade and Transport

topics:
\
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Introduction
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The main oil producing areas are not the same as the main
consuming areas. Hence, oil must be moved from regions where
supply is greater than demand (exporting regions) to regions where
demand is greater than supply (importing regions). These flows
dictated by economics, logistics and temporary imbalances in
supply and demand are central to the efficient operation of the
crude oil market.
The worlds three largest consuming regions, North America,

Europe and Asia Pacific, are all importers. All the other regions
are exporters. The Middle East still exports vastly more oil than
any other region, despite strong growth in production in other
areas in recent years.
There is less variation among the importing regions. In the decade
preceding the 1997-98 financial crises, Asia Pacifics economic
boom propelled it into the number one spot; with import growth
more than double that of any other regions. Even though the
United States is the largest individual importer, both net and
gross, North America as a region ranks third; because Canada and
Mexico are two of the United States three top suppliers.
(c)

Transportation and storage play critical role in the flow of trade in
crude oil. They are not just the physical link between the importers
and the exporters and, therefore, between producers and refiners,
refiners and marketers and marketers and consumers; their
associated costs are a primary factor in determining the economics
and pattern of world trade.
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There are two modes of transportation for inter-regional trade:

tankers and pipelines. Tankers have made global transport of
crude oil possible. They are low cost-efficient and extremely
flexible. Pipelines, on the other hand, are the mode of choice for
transcontinental oil.
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Not all tanker trade routes use the same size ship. Each route
usually has one size that is the clear economic winner, based on
voyage length, port and canal constraints and volume.
Pipelines are critical for landlocked crudes and also complement
tankers at certain key locations by relieving bottlenecks or
providing shortcuts. The only inter-regional trade that currently
relies solely on pipelines is crude from Russia to Europe.
Production from Caspian Sea region also depends upon pipeline for
evacuation.
Taxation
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For a refiner in India, the landed cost of imported crude includes

customs duty and applicable Octroi duty. Currently customs duty
is ad valorem @20 per cent calculated on CIF value plus one per
cent landing charge. Octroi duty is four per cent at Mumbai. As per
the latest ruling of Supreme Court of India, duty is to be paid on
the quantity received in the shore tank not on Bill of Lading
quantity, as used to be the practice earlier.
The difference in customs duty applicable for crude and on refined
products is of great economic significance in the pricing structure
of oil. If customs duty on crude oil is say 10 per cent and that on
refined products is say 20 per cent, then the refineries in the
country get duty protection of 10 per cent, in a regime when
product pricing is on import parity basis.
(c)
OPEC vis--vis World Oil Market

Organisation of Petroleum Exporting Countries (OPEC) was
founded in September 1960 and its member countries include
Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar,
Saudi Arabia, the DAE and Venezuela. Original OPEC members
include Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. During
1960 and 1975, the organisation expanded to include Qatar,
1.
Notes
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OPEC members share common interests and as a group have a

significant influence on world oil market, despite their lack of
monopoly over world oil production. EIA (Energy Information
Administration) estimates the current eleven members account
for roughly 40 per cent of world oil production and about 80 per
cent of the proven oil reserves. Following are some significant
characteristics of OPEC member countries:
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Indonesia, Libya, the DAE and Algeria. Ecuador and Gabon were
members of OPEC, but Ecuador withdrew in 1992 and Gabon
followed suit in 1995.
Member countries of OPEC are important world oil exporters.

Excluding Indonesia, members net exports averaged 85 per
cent of total oil production in 2001.
OPEC countries oil industries are mostly nationalised,

allowing OPEC members political establishments to increase
or decrease oil production. Through managing world oil
supply, OPEC can control world oil prices to help meet the
groups economic and/or political goals. Member governments
tend to rely heavily on oil revenues.
3.
The lions share of the worlds spare oil production capacity lies
in OPEC countries. Non-OPEC countries hold approximately a
combined 500 thousand barrels per day (bb/d) of spare
production capacity, while OPEC spare production capacity
estimates for 2002 are as high as eight millions bb/d.
4.
As per January 2002 estimates, 80 per cent of proven world

crude oil reserves are located in OPEC member countries.
5.
Production costs are far lower in OPEC countries. Prolonged

periods of low oil prices make the world more reliant on cheapto-produce OPEC oil. In contrast to OPEC countries; nonOPEC countries share the following characteristics:
Most non-OPEC countries are net oil importers. The seven
largest non-OPEC producers 2001 net exports averaged
15 per cent of total oil production
(c)
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2.
Because major non-OPEC countries have private oil

sectors (Mexico is one notable exception), the political
establishment generally has very little control over
production levels. Companies react to international price
expectations, exploring and drilling more and in higher
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Private companies keep very little spare production

capacity. Hence, in case of a significant world oil
production disruption, OPEC would be the primary
immediate source of additional oil to displace the loss.
Non-OPEC lifting costs tend to be higher than OPEC

lifting costs, which makes non-OPEC production more
vulnerable to price collapses. Prolonged periods of low
prices can drive higher cost producers out of business and
make major oil companies focus less on higher cost areas.
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cost areas when prices are high and focussing on lower

cost production when prices are low.
Notes
OPECs Oil Policy
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The single most important objective of OPEC is to maximise the

revenue of its member countries. This objective can be achieved
only if oil prices remain at a level that can sustain demand and
supply and remain stable over a secular period. OPEC cannot
determine the price level of oil by its dictates. OPEC is a cartel and
not a monopoly producer. The dynamics of oil market is such that
oil prices are volatile and are subject to multiple forces. One of
those factors is oil production at a particular time, which
determines supply of oil in short-term. Second factor is oil reserves,
which determines supply of oil in the long run. OPEC, by virtue of
its having, large exportable surplus and proven reserves does
attempt to control price through output variation.
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(c)
The revenue maximisation objective of OPEC is dictated by a

number of compulsions, a few of which are mentioned below:
z
Meeting budgetary requirements of its member states: Oil

revenue forms around 90 per cent of the total budgets in most
OPEC countries. OPEC countries need a stable income
primarily for two purposes: (a) to develop their economies and
afford a fair standard of living for their people; (b) to expand
their oil production capacity to cover the expected future
increase in oil demand.
Transfer of technology: OPEC countries need new

exploration and production technologies and expertise, which
require massive investment. This is a challenge for OPEC
countries, which has to be faced in line with their political
philosophy of not accepting production sharing agreement with
Oil Majors.
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In the revenue earning game played by both the oil producing

countries and oil consuming countries, OPEC does not want to
be a losing party. OPEC has been observing that oil consuming
industrial countries are levying high taxes of various types to
gain revenue on the one hand and also to reduce consumption
of oil. OPEC secretariat has studies that taxes levied by the
government of industrialised countries constitute 65 per cent
of the price of petroleum products. For example, taxes in UK
on gasoline are 70 per cent of its price.
Notes
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Another compelling purpose for which OPEC countries barter

their output and price control is to earn measures of political
stability and military security.
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OPECs Production Cut and Compliance
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In the prevailing condition of depressed demand world over,

OPECs curb in production has maintained a kind of balance,
which can be seen from the two tables given below. While table one
gives a snap shot of world demand and supply split in terms of
OPEC and non-OPEC, table two presents the degree of compliance
of quota by OPEC member countries. It can be seen that the major
producing countries in OPEC block are adhering to their ceiling
production. Saudi Arabia is the only country with the capability to
further increase its capacity significantly in short period, say 30
days.
(c)
Table 18.1: World Demand Supply Balance

Contd
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Notes
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Measured as deliveries from refineries and primary stocks,

comprises inland deliveries, international marine bunkers,
refinery fuel, crude for direct burning, oil from nonconventional sources and other sources of supply.
(c)
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1.
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2.
Other Asia includes Indonesia throughout. Latin America

excludes Ecuador throughout. Africa excludes Angola
throughout.
3.
Total Non-OPEC excludes all countries that were members of

OPEC at 1 January 2009. Non-OPEC Historical Composition
excludes countries that were OPEC members at that point in
time.
4.
Total OPEC comprises all countries which were OPEC

members at 1 January 2009. OPEC Historical Composition
comprises countries which were OPEC members at that point
in time.
5.
Net volumetric gains and losses in the refining process

(excludes net gain/loss in China and non-OECD Europe) and
marine transportation losses.
6.
As of the July 2010 OMR, Global Biofuels comprise all world

biofuel production including fuel ethanol from the US and
Brazil.
7.
As of the March 2006 OMR, Venezuelan Orinoco heavy crude

production is included within Venezuelan crude estimates.
Orimulsion fuel remains within the OPEC NGL and non-
9.
Comprises crude oil, condensates, NGLs, oil from nonconventional sources and other sources of supply.
Includes changes in non-reported stocks in OECD and nonOECD areas.
Notes
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8.
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conventional category, but Orimulsion production reportedly

ceased from January 2007.
10. Equals the arithmetic difference between total demands minus

total non-OPEC supply minus OPEC NGLs.
11. Equals the "Call on OPEC + Stock Ch." with "Miscellaneous to
balance" added for historical periods and with an average of
"Miscellaneous to balance" for the most recent 8 quarters
added for forecast periods.
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The vast majority of development projects in OPEC countries,

accounting for incremental capacity is being operated and funded
by MNCs. Governments of OPEC member countries are
increasingly finding it hard to comply with the quota restriction
beyond a point, to the extent the surplus capacity is being funded
by MNCs.
The Effect of OPEC Policy
Summarily, OPEC operates its policy through the following

four instruments: viz., (a) output variation, (b) destination control,
(c) declaration of official selling price, and (d) policy announcement.
These instruments directly impact the availability of physical
crude in certain segments of market with different time lags. For
example, if OPEC cuts reduce availability of physical cargo in the
region of South Asia and Asia Pacific in the same month, it affects
USA after a lag of 45 days.
(c)
Reduction in physical loading of crude by OPEC member countries

influences on the crude inventory available with refineries.
Through the invisible hand of market, reduction in supply brings
about disequilibrium in the price, which triggers ripples in the
price level. By fine tuning the output, OPEC attempts to keep the
price of OPEC basket crude in a certain band, which currently is
22 28 US dollar per barrel.
The output and price linkage is not a linear linkage. Like any other
market phenomena, it has its own complexities. Firstly, there are
powerful non-OPEC producers, who may have domestic
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Indias OPEC Policy
India has large stakes in OPEC countries. The geographical

proximity of Middle East is really an opportunity for India by way
of security of supply and economic freight. Second, some of the
Indian refineries are configured to process the types of crude
produced in Middle East.
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compulsions not allowing them to toe the line of OPEC dicta.

Second, there are substitute fuels, like gas, coal, nuclear, which
compete with oil for their commercial use. Third, the
transportation and handling of physical crude also impacts the
price formation of crude, as ships, pipeline, and storage may pose
bottlenecks, hindering availability of crude at the point of
consumption. Fourth, the paper market and financial market also
plays a significant role in price formation of crude oil. OPEC
members do not participate in these markets and the forces
operating in these markets have dynamics, which are different
from those of physical oil market.
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(c)
The combination of rising oil consumption and relatively flat

production has left India increasingly dependent on imports to
meet its petroleum demand. In 2010, India was the world's fifth
largest net importer of oil, importing more than 2.2 million bbl/d,
or about 70 per cent of consumption. A majority of India's crude oil
imports come from the Middle East, with Saudi Arabia and Iran
supplying the largest shares. Iranian oil's share of Indian imports
has decreased in recent years, largely due to issues with processing
payments.
Figure 18.1: Indias Oil Import by Source
1.
2.
Notes
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Till recently, Indian refineries were operating in protected

environment and under administrative pricing regime. The
features of crude import which were then operating under the
previous regime were:
307
Objective of Indias OPEC policy can be classified under two

headings, viz. (a) to have a security of supply at all times and
especially at the time of exigencies like war or natural calamities;
and (b) to get crude at the best price.
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Canalised procurement by Indian Oil Corporation, under the

operating guidance of Oil Corporation Committee
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Crude types were limited, which formed a common basket for

all the PSU refineries
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Sources of import were also limited, dominated by protocol

and convention of Indian Government with National Oil
Companies of Middle East
4.
Operational practices were constrained by existing

infrastructure, which were highly inadequate, and therefore,
built in costs were incurred for crude import
5.
The total operating costs were shared amongst all the PSU
companies in proportion to their throughput. Therefore, there
were invisible costs
6.
Import procedures were strongly tied by Government

guidelines. All activities were subject to retrospective scrutiny
of audit, vigilance and parliament.
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3.
Policy Direction for India
In the short and medium term time frames, that is, within two to
five years, Indian refiners and policy-makers need to take few
policy initiatives, keeping in view the objectives of security and
economy with respect to crude oil import.
(c)
Indian government and business associations (like FICCI &

ASSOCHAM) need to step up commercial diplomacy in the OPEC
member countries. Commercial, economic and diplomatic
relationship with OPEC member countries and oil producing
companies would go a long way in taking care of Indias crude oil
import.
It is important to realise that a vibrant and growing economy, with
competitive export and adequate foreign exchange reserve are a
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few pre-requisites for the success of any policy drive in the external
sector. Middle East countries need collaboration in technology and
expertise in drilling, exploration and information technology.
Indian companies having comparative advantage in these fields
need to be marketed in these countries. Indias premier companies
like ONGC Videsh Limited (OVL), the consultancy JV of ONGC,
IOC & GAIL (ONGlO) and Petroleum India International (PII) can
play constructive role in this venture.
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308
Indian companies have to secure equity in overseas oil fields. OVL

has done well by doing this in Sakhalin, Iraq, Vietnam and Sudan.
This is an area where Multinational Oil Companies like British
Petroleum (BP), Total Elf Fina, CaItex Chevron Texaco and Shell
have considerable expertise world over. Indian companies have to
penetrate into this area, which require huge capital, risk taking
ability, institutional arrangement and above all managerial vision.
Areas of Action for Indian Refineries
(c)
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Indian refineries have to learn and practice and art and science of
buying high value crude at competitive price. Certain areas
requiring attention are:
1.
Diversification of crude basket, which means continuous

search for non-conventional crude; trial processing of crude
from new fields and up-gradation of refinery configuration to
process new varieties of crude and to extract maximum yield.
2.
Diversify the supply sources. New Crude sources are to be

tapped. For example, countries like Venezuela, Angola, Egypt,
and Libya have not been properly examined. There are of
course constraints like shipping, which are to be addressed.
3.
Have port related facilities to handle VLCC. It requires a

focussed attention to overcome of the infrastructural
bottlenecks to bring in large parcel size from a remote source.
4.
Vigorously enter into risk management areas. It is commonly

known that crude prices are highly volatile and considering
the volume, stakes are very high. Therefore, we need to resort
to techniques of passing on the price risks to others, which
have specialised in risk taking business. A well-designed policy
framework is to be built by the Indian oil companies for this.
Institutional set ups and support systems in this filed are
already available. This is an area where Indian oil companies
counterparts
operating
in
309
are lagging behind their

international oil market.
Notes
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Check Your Progress
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Fill in the blanks:

1. There are two modes of transportation for inter-regional
trade: and ..
2. Member countries of OPEC are important world

. exporters.
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Summary
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As various regions of the world are asymmetrically endowed with

crude oil, it moves from surplus region to deficit consumption
regions. Therefore, crude oil is a highly traded commodity. A
refiner, who is the ultimate buyer of crude oil, pays for all these
costs and realises its margin by selling refined products, which are
processed out of crude oil.
Lesson End Activity
Research more on the areas of action required by Indian oil

refineries.
Keywords
OECD: The Organisation for Economic Co-operation and

Development is an international economic organisation of 34
countries founded in 1961 to stimulate economic progress and
world trade.
(c)
Transportation and Storage: They are not just the physical link
between the importers and the exporters and, therefore, between
producers and refiners, refiners and marketers and marketers and
consumers; their associated costs are a primary factor in
determining the economics and pattern of world trade.

1. Discuss the impact of transportation on oil trade.
2. What is the role of OPEC in price structuring?
3. Write a note on Indias OPEC policy.
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310
Further Readings
Notes
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Books
KPMG, Mumbai.
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Science, v. 86, p. 985-990.
reflection data: A case study, Current Science, v. 90, p. 1421-1430
Web Readings
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http://www.eia.gov
http://www.bp.com
www.business.gov.in
(c)
Petro Economics
UNIT 19: Geopolitics in Oil and Natural Gas Trading
Unit 19
311
Notes
Activity
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Geopolitics in Oil and Natural

Gas Trading
Discuss
for
or
against
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Economic stability usually
___________________
brings
political stability.
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Objectives
topics:
\
Role of IEA
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Introduction
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Anticipated worldwide economic growth in the first decade of the

21st century will lead to concomitant increases in energy demand
and carbon emissions. In the developing world in particular, the
global tendencies are going to be pronounced. Over the next two
decades, total world energy consumption is expected to increase by
more than 50%. By 2020, energy demand in the developing world
will be more than double, which will roughly equal that of
industrialised nations.
(c)
In the IEO2011 Reference case, which does not incorporate

prospective legislation or policies that might affect energy markets,
world marketed energy consumption grows by 53 per cent from
2008 to 2035. Total world energy use rises from 505 quadrillion
British thermal units (Btu) in 2008 to 619 quadrillion Btu in 2020
and 770 quadrillion Btu in 2035. Much of the growth in energy
consumption occurs in countries outside the Organisation for
Economic Cooperation and Development (non-OECD nations),
where demand is driven by strong long-term economic growth.
Energy use in non-OECD nations increases by 85 per cent in the
Reference case, as compared with an increase of 18 per cent for the
OECD economies.
Electricity consumption forecasts, considered separately, tell an
even more dramatic story. Global demand for electricity is
Petro Economics
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World net electricity generation increases by 84 per cent in the

IEO2011 Reference case, from 19.1 trillion kilowatt hours in 2008
to 25.5 trillion kilowatt hours in 2020 and 35.2 trillion kilowatt
hours in 2035. Although the 2008-2009 global economic recessions
slowed the rate of growth in electricity use in 2008 and resulted in
negligible change in electricity use in 2009, demand returned in
2010, led by strong recoveries in non-OECD economies. In general,
in OECD countries, where electricity markets are well established
and consumption patterns are mature, the growth of electricity
demand is slower than in non-OECD countries, where a large
amount of potential demand remains unmet. Total net electricity
generation in non-OECD countries increases by an average of
3.3 per cent per year in the Reference case, led by non-OECD Asia
(including China and India), where annual increases average 4.0
per cent from 2008 to 2035. In contrast, net generation among
OECD nations grows by an average of 1.2 per cent per year from
2008 to 2035.
(c)
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predicted to grow by three-quarters from 1999 to 2020. In

developing Asia, electricity consumption is forecast to increase by
150% over the same period. As with total energy, electricity
consumption in the developing world will nearly equal that of the
industrialised world by 2020. Fossil fuels (oil, gas and coal) will
continue to provide more than 85% of the worlds energy for the
foreseeable future. The data used to prepare the figure do not
include energy generated by biomass fuels such as wood, charcoal,
crop wastes, and manures. Such fuels, used especially in the
developing world, may account for as much as 50 additional quads
of energy each year.
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Transportation is the primary driver of increased oil demand,

while increased natural gas consumption will be largely for power
generation and greater industrial requirements. US consumption
represents roughly half of that for the industrialised world and US
fuel source consumption closely mirrors world patterns. Developing
Asia, Central America, and South America will see the greatest
increase in requirements for natural gas; they are each expected to
triple their demand over the next twenty years.
World Oil Production and Consumption

World use of petroleum and other liquids grows from 85.7 million
barrels per day in 2008 to 97.6 million barrels per day in 2020 and
112.2 million barrels per day in 2035. In the Reference case, most
Oil Dependence and National Security
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Consumption of petroleum and other liquid fuels increases from

85.7 million barrels per day in 2008 to 112.2 million barrels per
day in 2035 in the IEO2011 Reference case. Much of this increased
consumption will be in transportation. In the long term, world
liquids consumption increases despite world oil prices that rise to
$125 per barrel (real 2009 dollars) by 2035. More than 75 per cent
of the increase in total liquids consumption is projected for the
nations of non-OECD Asia and the Middle East, where strong
economic growth and, in the case of the Middle East, access to
ample and relatively inexpensive domestic resources drive the
increase in demand.
Large increases in oil and gas consumption raise significant

geopolitical issues that could intensify as competition for supplies
increases, market power is accumulated in fewer places and more
products is moved over longer distances. Oil supply and demand
are not geographically well correlated. Despite the diversification
of oil-producing regions in the past 20 years, global dependence on
the Persian Gulfwhich holds two-thirds of the worlds proven oil
reserveswill increase over the next two decades. The oil wealth of
the Persian Gulf gives the region substantial geopolitical influence
and constrains the ability of the US to fully exercise its strategic
interests.
(c)
313
Notes
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of the growth in liquids use is in the transportation sector, where,

in the absence of significant technological advances, liquids
continue to provide much of the energy consumed. Liquid fuels
remain an important energy source for transportation and
industrial sector processes. Despite the rising prices of fuel, use of
liquids for transportation increases on average of 1.4 per cent per
year or 46 per cent overall from 2008 to 2035. The transportation
sector accounts for 82 per cent of the total increase in liquid fuel
use from 2008 to 2035, with the remaining portion of the growth
attributable to the industrial sector. The use of liquids declines in
the other end-use sectors and for electric power generation.
The most significant increases in oil demand will be in Asia,

further enhancing the Gulfs influence. Earlier in this article we
referred to the shifting web of alliance and conflict connected to oil
production and consumption. The evolving reliance on Gulf oil has
the potential to dramatically redefine that web.
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A number of policies can be initiated or expanded whose objectives

address oil and national security issues. Some of those objectives
depend on investment, financial, or diplomatic actions for their
realisation. Examples include increasing protection against supply
disruptions by expanding strategic stocks, more effectively
managing oil price volatility, and encouraging expanded
international production capacity. Other objectives, such as
developing unconventional oil resources or affordable alternatives
to oil, and using oil more efficiently are largely driven by
technology.
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314
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Developing Natural Gas Resources
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Geopolitical issues related to energy security are likely to emerge

in connection with natural gas supply. Global demand for natural
gas is growing as unevenly as it is dramatically, and the most
significant increases are in those regions of the world with the
fewest indigenous resources. Natural gas markets are limited by
the inflexibility and expense of gas (versus liquid) transportation.
Over half of the worlds natural gas reserves are very far from
users and it is currently not profitable to transport such stranded
gas from these reserves to customers.
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Geographic disparities exist between natural gas production and

consumption. These disparities highlight the need to address key
technical challenges concerning natural gas: developing resources;
accessing stranded resources through gas-to-liquid conversion,
liquefied natural gas process improvements, and new
transportation and processing infrastructures; extending the
resource base using alternative fuels such as biomass or, in the
long-term, methane hydrates; and using gas more efficiently in, for
example, advanced turbine systems and smart buildings.
(c)
Geopolitics: The Great Unknown

Market anxiety about access to uninterrupted supply of oil and
natural gas will not disappear overnight and will persist as long as
the ongoing geopolitical tensions are not eased:
z
Signs are appearing that higher prices are beginning to impact

the global economy, moderate oil demand growth and
stimulate a rebound of oil industry investment worldwide,
both upstream and downstream.
The physical market tightness should, therefore, gradually

recede but market anxiety over potential supply disruptions
will persist for a while under the current geopolitical
environment.
The Middle East in the Global Oil Balance
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The MENA region, through its dominance of world oil reserve

ownership, occupies a central position in the global energy
balancequite apart from its substantial gas reserves, although
the latter is not yet well developed. Even with the loss of ground to
other energy carriers, oil (and the region) will continue to play a
core role in the future of world energy.
Oil in the Global Energy Balance
The prestige of Middle Eastern countries in world energy markets

stems primarily from their role in the oil market, even though the
region also owns substantial reserves of natural gas. Their fortune
is thus directly related to how well oil holds its share vis--vis
other forms of energy in the evolving global energy balance. Over
the years, starting with the sharp price increases of the 1970s, it
has lost some ground to other fuels. The continued strength of oil
in global energy stems from its dominance of the transportation
sector, where it now accounts for about 96 per cent of the market.
It also accounts for 27 per cent in the industrial sector and 9 per
cent in power generationhaving lost ground to coal, gas, and
nuclear power in these sectors. The rate of substitution away from
oil is directly related to how technically feasible such changes are
and to the availability of cost-effective substitutes, which explains
why oil has continued to dominate the transportation sector, where
efforts to introduce alternatives have so far had limited success.
(c)
Notes
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The process of adjustment to a lower more sustainable price level

will take some time depending on both short-term price
developments and the evolution of the ongoing geopolitical tensions
(affecting the major producing countries) which, among all the
forces affecting the oil market, is the most difficult to predict.
315
World natural gas consumption increases by 52 per cent in the

Reference case, from 111 trillion cubic feet in 2008 to 169 trillion
cubic feet in 2035. Although the global recession resulted in an
estimated decline of 2.0 trillion cubic feet in natural gas use in
2009, robust demand returned in 2010, and consumption exceeded
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the level recorded before the downturn. Natural gas continues to

be the fuel of choice for many regions of the world in the electric
power and industrial sectors, in part because its relatively low
carbon intensity compared with oil and coal makes it an attractive
option for nations interested in reducing greenhouse gas emissions.
In the power sector, low capital costs and fuel efficiency also favour
natural gas.
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The Real Reasons Bush Went to War in Iraq
___________________
There were only two credible reasons for invading Iraq:

over oil and preservation of the dollar as the worlds
currency. Yet the government has kept silent on these
instead treating Iraq to the intriguing distractions of the
and Butler reports.
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Butlers overall finding of a group think failure was pure charity.

Absurdities like the 45-minute claim were adopted by high-level
officials and ministers because those concerned recognised the
substantial reason for war oil. WMD provided only the
bureaucratic argument: the real reason was that Iraq was
swimming in oil.
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control
reserve
factors,
Hutton
Some may still believe the eve-of-war contention by Donald

Rumsfeld that We wont take forces and go around the world and
try to take other peoples oil ... Thats not how democracies
operate. Maybe others will go along with Blairs post-war
contention: There is no way whatsoever, if oil were the issue that
it would not have been infinitely easier to cut a deal with Saddam.
(c)
Energy Dominates Growth Debate in South Africa

Where electricity sector was previously in the words of Thomas
Edison a natural monopoly, it has now become a political game.
The oil shocks of the Seventies resulted in governments worldwide
reconsidering their energy plans resulting in scores of nuclear
power stations being built at the time. The emphasis on the growth
of South Africas energy capacity must be seen to underpin the
previous policy of separate development to succeed through a
healthy economy. An energy-driven economy could ensure relative
peace in the labour sector. Energy self-sufficiency and labour
stability was the reason for the second and third Sasols, Mossgas
and the string of power stations such as Arnot, Tutuka, Lethabo,
Kendal, and the Drakensberg pumping station, Grootvlei,
Hendrina, Koeberg, Majuba, Kriel and others. These projects
Check Your Progress

Fill in the blanks:
1. disparities exist between natural gas

production and consumption.
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2. A countrys energy certainty is related to its ability to

have sufficient reserve capacity available to
accommodate its growth rate.
Ensuring the reliability of global energy supplies will call for

policies that both encourage the use of newer, cleaner energy
technologies and address the political challenges posed by the
worlds growing demand for oil and natural gas. Global energy
policy involving high consumption of oil and natural gas as
potential feedstock seeks to encourage expansion and
diversification of world energy supplies and to promote the
transparency and democratic institutions that help energyproducing countries make the most productive use of their
resources.
Energy is the vital ingredient in the world economy. While
concerted efforts are being directed towards energy efficiency and
investing into develop new energy technologies, oil and natural gas
will remain critical for many years to come. Economic development
around the world means global demand for oil and gas will
continue growing in the near term. Most significantly, Chinas
rapid growth and increase in overall energy demand continue to
affect energy markets. Some analysts estimate that China could
(c)
317
Notes
Activity
Prepare
an assignment on
___________________
the impact of oil policies on
___________________
foreign
policy.
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negated the possibility of an international energy boycott and

promoted economic and labour stability. The consequences of an
energy shortage are today just as real as they were 30 years ago.
Those consequences hold the same serious political and economic
problems in the economic, social and labour spheres of today. The
energy industry should lead the economic system and not be seen
as an unwilling partner or subservient, economic milking cow. A
countrys energy certainty is related to its ability to have sufficient
reserve capacity available to accommodate its economic growth
rate. Economic stability usually brings political stability, and viceversa.
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account for as much as one-third of the worlds marginal increase

in oil demand in the coming years.
Notes
As a result, the world must find and develop more reliable supplies
of oil and gas at prices that permit sustained economic growth.
Unfortunately, it is almost an axiom in the petroleum business
that oil and gas are most often found in countries with challenging
political regimes or difficult physical geography.
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Several ground realities shape our thinking about energy security

and how we should build reliability into our energy supplies taking
a cognisance of the following:
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Two-thirds of the worlds known oil reserves are in the Middle

East.
___________________
Imports supply roughly half of the oil and 15 per cent of

natural gas consumed by the United States, and an even
greater share of the needs of some of the United States most
important allies and economic partners.
Oil-supply shocks in any region of the world will have an

impact on the U.S. economy through the instantaneous
operation of international oil markets.
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Geopolitics of EU Energy Supply
(c)
As one of the worlds largest importers of oil, gas and coal, the EU
is a major player on the international energy market. However, it
remains a dwarf on the political stage as member states keep the
upper hand on foreign policy. With external dependence on imports
forecast to grow steadily, the EU has started to integrate energy
aspects into relations with third countries.
The geopolitical aspects of Europes external energy policy remain
within the competence of EU member states foreign policies and
a matter of national sovereignty. However, the progressive
incorporation of previously secluded energy markets into one
single bloc, combined with the EUs exclusive competence when it
comes to commercial relations with non-EU countries, is slowly
driving the issue up the EU political agenda.
Oil and gas reserves are unevenly distributed around the globe,
and the largest reserves are situated in politically or economically
insecure regions (Middle-East, Russia). North Sea oil and gas
fields have already been exploited beyond their peak, leaving
Europe dependent on non-EU countries for future supply.
45% of EU oil imports originate from the Middle East;
By 2030, 90% of EU oil consumption will have to be covered by

imports.
40% of EU gas imports originate from Russia (30% Algeria,

25% Norway);
By 2030, over 60% of EU gas imports are expected to come

from Russia with overall dependency expected to reach 80%.
Coal:
z
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Gas:
z
Notes
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Oil:
z
319
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The Commission Green Paper on security of energy supply

(November, 2000) drew a sobering picture of the EUs energy
situation. If no action is taken, it predicted, the EUs energy
dependency will climb from 50% in 2000 to 70% in 2030. The
particular situation for the main imported fossil fuels was
described as follows:
By 2030, 66% of EU needs is expected to be covered by

imports.
The Geopolitics of Oil in Central Asia
One important geopolitical consequence of the demise of the Soviet

Union was the rise of intense political and commercial competition
for control of the vast energy resources of the newly independent
and vulnerable states of the Caucasus and Central Asia.
These energy resources and, in particular, the oil and natural gas
deposits have now become the apple of discord in Central Asia
introducing, according to analysts, a new chapter in the Great
Game of control over Eurasia.
(c)
Although the stakes involved remain the same, i.e. power,

influence, security, wealth, the new playing field is further
complicated by an array of problems. These include intra-regional
conflict,
political
instability,
fierce
competition
among
multinational conglomerates, and a shortfall in commercial
expertise and legal infrastructures.
Moreover, the fact that the three countries which share the
majority of the region as energy and resources, namely
Kazakhstan, Azerbaijan and Turkmenistan, are landlocked makes
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them depend on their immediate neighbours for access to the

Western markets.
Notes
The essence of this new geopolitical game in Central Asia is

twofold: first, control of production of the oil and gas, and second,
control of the pipelines which will transfer the oil to the Western
markets.
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From a geopolitical point of view, Central Asia has always been

important. From the middle to the end of the 19th century, while
the region was part of the Russian Empire, the oil-bearing areas of
Baku were producing half of the world as oil supplies. In World
War II, during his campaign against Russia, Hitler tried to capture
Baku and the Caucasian oil fields as part of his strategy for world
domination. After the war, the Soviets retained these areas as
reserves, choosing to exploit oil deposits on Russian soil, in
Tatarstan and Siberia.
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Following the collapse of communism, the ex-Soviet republics of

Central Asia, especially Azerbaijan and Kazakhstan, have been
trying to exploit their natural resources, since they consider oil to
be the prime means of securing their economic and political
independence. According to the estimates of geologists, the oil
deposits of the Caspian Sea may not be quantitatively comparable
to the deposits of the Persian Gulf, but they are still considered of
excellent quality and able to provide a significant alternative
source of energy in the 21st century. In particular, it is estimated
that the entire Caspian Sea is a basin full of oil and natural gas,
starting from Azerbaijan and continuing to the opposite shore in
the territory of Kazakhstan and Turkmenistan. These deposits
take on enormous importance because of the expected exhaustion
of the deposits of Alaska and the North Sea by the year 2015.
(c)
US foreign policy in Central Asia is founded on the following

rationale:
z
The US intends to help the former Soviet republics of

Kazakhstan and Azerbaijan develop their oil and natural gas
industries.
Through the development of their oil and gas industry, which

will bring economic growth, the US hopes to extricate them
from the Russian sphere of influence.
The US Government is actively supporting American

companies in Central Asia involved in oil development as well
The US will try to channel the oil coming from those countries
into the international markets in order to diversify its own
sources of supply and keep oil prices at low levels.
The US Government believes that economic growth will

promote regional stability and the resolution of local disputes.
Finally, the US aims at reinforcing the role of Turkey in the

region, while at the same time maintaining the policy of
containment and isolation of Iran. For that reason it has
actively lobbied for a pipeline which will transport oil from
Baku to the Turkish port of Ceyhan.
Reliability through Diversification
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Energy investments are costly and risky, requiring long-term

commitments. Recognising this reality, global energy policy seeks
to encourage expansion and diversification of energy supplies. A
number of regions are attracting increasing interest from energy
companies in the United States, Europe, Japan and elsewhere.
Interesting prospects for expanded oil and gas production are in
the global business scene especially in the Caspian region, Russia,
West Africa, and North and South America, combined with the
promise of increased oil and gas production in the Middle East. In
each of these regions, current policy should aim at supporting
private sector-led development of energy resources by reducing the
political uncertainty that otherwise might hinder needed
investment.
Russia and the Caspian Basin
Russia already is an energy superpower. To achieve its full

potential, Russia needs to strengthen corporate governance and
the legal/regulatory framework for business, improve its foreign
investment climate, allow competition in the transportation
system, open the gas and oil companies Gazprom and Transneft up
to reform and competition, improve its technological capabilities,
and move domestic energy prices to world levels.
(c)
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as in the construction of pipelines which will channel the oil to

the West.
The Caspian Basin has tremendous potential, offering the

possibility of production increases from 1.6 million barrels/day
(b/d) in 2001 to 5.0 million b/d in 2010. The key issues in Caspian
energy development at the moment are to: (i) complete the second
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pillar of the East-West Energy Corridor by developing the South

Caucasus natural gas pipeline; (ii) improve the investment climate
throughout the region; and (iii) bring Kazakhstan oil into the EastWest corridor.
Notes
Multiple pipelines that economically bring Caspian resources to

the world market strengthen the sovereignty and economic
viability of the new nation states in the region. U.S. efforts in the
Caspian are intended to complement , and not to detract from
U.S. supports for Russias efforts to develop its energy export
potential.
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Africa
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Africa is playing an increasingly important role as an energy

supplier to U.S. and global markets. In 2003, both Nigeria and
Angola were among the top 10 suppliers of oil to the United States.
Oil production generates substantial revenue in countries such as
Nigeria, Angola, Gabon, Equatorial Guinea, Republic of Congo,
Chad, and Cameroon. Sao Tome and Mauritania also may become
oil suppliers in the coming years. Foreign direct investment is
needed to develop African energy resources as most new fields are
in deepwater offshore environments that require advanced capitalintensive facilities for development. Growing oil and gas
production could be a powerful engine for national economic
development in these countries. However, the Niger Delta
experience of 2002, in which protesters stormed oil facilities and
caused their temporary shutdown, shows that oil can also be a
disruptive force if a countrys oil revenues are not managed in a
fair and transparent manner. Nigeria has learned from its
experience in the Niger Delta and is setting an example on
transparency and economic reform enabled by oil revenues that the
United States hopes other countries in Africa will follow.
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(c)
North America
The most important and reliable sources of energy for the United
States are its neighbours and we are strengthening our energy
cooperation with Canada and Mexico. Senior energy experts from
Canada, Mexico, and the United States recently released a North
American Energy Picture report that, for the first time, jointly
measures energy stocks, trading balances, and energy flows. What
often goes unrecognised is that North American energy trade is a
two-way street. Mexico is becoming an important source of U.S. oil
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The reliability of North American energy trade is enhanced by

geographic proximity. More important than geography, however,
are the rule of law and predictable investment conditions created
by the North American Free-Trade Agreement (FTA), integrated
pipeline networks and long-term reliable supply relationships.
323
imports. At the same time, the United States is a net natural gas
exporter to Mexico, and U.S. refineries supply over 15 per cent of
Mexicos refined petroleum products.
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Venezuela
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The economic importance of oil in terms of Venezuelan-U.S.

relations cannot be overstated. Venezuela is the fifth largest oil
exporter in the world and the fourth largest supplier of oil to the
United States after Canada, Mexico, and Saudi Arabia. Last year,
Venezuelas state owned oil company, Petroleos de Venezuela
(PDVSA) accounted for 11.8% (1.52-million barrels a day) of U.S.
imports.
Venezuela and the United States have enjoyed strong historical
energy ties. Venezuelan oil policy, until recently, has been built
upon a reputation of reliability. Unfortunately, actions and
statements by parties from all sides over the last 18 months have
called into question the priority Venezuelans place on their
reputation as a reliable supplier. The United States will continue
to work to help Venezuelans resolve their political differences. But
until a constitutional, democratic, peaceful, and electoral solution
is achieved, and the level of rhetoric lowered, world energy
markets simply cannot view Venezuela with the same certainty
that they once did.
Saudi Arabia and the Gulf Producers
(c)
The economic philosophy of the Saudi Arabian royal family has not
changed since the reign of Abd Al Aziz, but the economic role of the
government has grown tremendously. The stated goal of Saudi
rulers has been to improve the economic conditions of the countrys
citizens while retaining the societys Islamic values. Imbedded in
this social contract, however, is the issue of political control. The Al
Saud recognised that the key to political power in the kingdom, lay
in replacing the old economy with lucrative new economic
opportunities for the countrys citizenry.
In the early stages of the kingdom, the only non-traditional
economic opportunities for Saudi citizens were linked to
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employment in the military, distribution of land, and some modest

contracts and commissions. Abd al Aziz had limited means. His
revenue was adequate to allow only minimal government
functions, not, to undertake economic and social projects.
Development of the countrys oil resources resulted in some wage
payments to Saudis and local purchases of goods and services by
foreign oil companies, but the impact on the Saudi economy was
initially minor. The main beneficiary of oil exports was the ruling
family and its tribal allies. Until the 1970s, oil income increased
slowly, and the government usually operated under financial
constraint. The governments economic decisions were largely
those of determining priorities among alternative uses of limited
resources. Government structure and subsidiary economic
organisations also evolved slowly. In 1952 the Saudi Arabian
Monetary Agency (SAMA) was created to serve as the central
bank, and in 1962 the General Petroleum and Mineral
Organisation (Petromin) was formed.
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(c)
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The general thrust of Saudi economic policy underwent a

fundamental change after the oil price crash of 1986. The serious
depletion of foreign assets, combined with the extensive decline in
oil revenues, necessitated a revised economic policy. The
depreciation of the United States dollar on international financial
markets also hurt Saudi purchasing power abroad. The kingdoms
external terms of trade deteriorated rapidly because oil exports
were largely denominated in United States dollars, and the bulk of
Saudi imports came from countries whose currencies were
appreciating relative to the United States dollar.
The Middle-East holds some two-thirds of proven world oil
reserves. The size of its reserves, combined with its low production
cost, guarantees that the Middle East will continue to play a
pivotal role in the world energy market. Saudi Arabia plays a key
role in global oil markets as the worlds largest oil exporter.
Moreover, Saudi Arabia supports international energy security by
maintaining considerable excess production capacity that can be
brought on line quickly in the event of a serious supply disruption
anywhere in the world.
Diversifying global oil supplies should not be interpreted as
diversifying away from Saudi Arabia or other Gulf producers.
Gulf producers will continue to have an indispensable role in the
world market, and the United States encourages them to increase
better balance and a more flexible, resilient oil market that
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foreign investment and steadily expand supplies. What we seek is
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In this regard, Gulf producers could reap greater benefits by
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opening their economies to more private investment so that oil and
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responds to price signals.
gas capacity could grow and energy supplies could respond more
fully to shifts in demand. Investment in natural gas is one sector
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where this process is beginning. Once only for local or regional use
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or wasted through harmful flaring, natural gas in the form of
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liquefied natural gas (LNG) has become an increasingly globally
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traded energy source for key markets. Qatar is working with major
international energy companies to become a leading LNG exporter.
In the United Arab Emirates, the successful Taweelah power and

water privatisation project is another example of the dynamic role
foreign investment can play in the energy sector. The United
States supports these positive private investment initiatives
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because they expand and diversify its energy sources, provide
opportunities for U.S. companies, and foster economic growth in

energy-producing nations.
Energy Scenario in South Asia
The South Asian region, which comprises Bangladesh, Bhutan,

India, Maldives, Nepal, Pakistan, and Sri Lanka, is home to 1.3
billion people, close to a quarter of the worlds population. The
region is currently experiencing a rapid growth in energy demand,
concomitant with economic growth and industrialisation. Adequate
energy supply is, therefore, a major challenge facing the economies
in the region.
In this concern Bangladesh government has placed a 2nd national

budget for the 2010-11 fiscal in parliament in which power and
energy sector were given the preference. Electrification Project,
2010 is getting pace in Bhutan. Bhutan Power Corporation Ltd.
(BPCL) has provided electricity to 130 households and 2043
(c)
households will also be electrified by this September. Pakistan

government has also announced ` 131 billion for hydel, thermal
and nuclear energy projects. However under the development
budget a sum of ` 118.34 billion had been allotted to power sector
including ` 29 billion for the construction of Diamer Bhasha Dam
and Neelum Jhelum Hydropower Project.
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The total primary energy supply, including renewable energy, is

expected to increase to 1411 MTOE in 2010/11, with biomass
accounting for 28% of the total energy consumption.
Notes
A Hemisphere of Energy Security Environment in NAFTA

Region
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Canada and Mexico are the top two suppliers of oil to the United
States, respectively. When combined with domestic production,
imports from these two continental neighbours supply more than
50 per cent of total U.S. daily oil consumption. More promising
still, Canada recently vaulted to the number-two spot among the
worlds proven reserve holders (behind Saudi Arabia) with its
classification of 176 billion barrels of economically recoverable oil
from massive oil sands deposits, located primarily in northern
Alberta.
(c)
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Regardless of Americas perception of Canadaand, indeed,

sometimes even Canadas perception of itselfour northern
neighbour is officially an energy superpower. The U.S. currently
imports roughly 2 million barrels per day of Canadian crude. Of
that volume, approximately 800,000 barrels come from oil sands
deposits. And with oil sands production projected to increase from
1.2 million barrels daily to as much as 4 million by 2015, we will be
able to count on increased supplies even amid mounting interest in
Canadian oil from countries such as China. In the next decade,
Canadas total daily oil production will reach close to 5 million
barrels a day over half of which (more than 2.5 million barrels
daily) will likely flow to the U.S.
This oil trade would be more than simply an expansion of the
largest commercial trading relationship in the world. Along with
additional supplies of Canadian crude will come the need for
American and Canadian jobs to produce the oil, andjust as
importantexpand the infrastructure to get that crude to market.
Each barrel of oil we buy from Canada is a barrel whose profit does
not end up in the hands of those who may wish us harm. And every
job building a pipeline or expanding a refinery in the U.S. puts food
on the table of Americans and tax revenue in our national
treasury.
Mexico, on the other hand, has an uphill climb with respect to
expanding its oil output, but the tools are all there. The Mexican
government has allowed the nationalist sentiment that goes along
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with being a major oil producer to impede its ability to reliably

expand production to meet domestic demand, let alone produce
additional crude for export. The geology of the under-explored
Mexican portions of the Gulf of Mexico is likely to be as prolific as
the American waters of the Gulf have proven to be.
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Transferring the Worlds Wealth
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In 2001, oil was selling for $20 a barrel; today it sells for more than
triple. This means that the Saudis, the Iranians, and all the other
producers are making an extra $40 a barrel. We are seeing today
in essence a transfer of wealth of historic proportions from the
economies of the United States, Japan, China, and Europe to the
economies of the oil-producing countries. American taxpayers send
their dollars and soldiers all over the world to fight for freedom
and democracy. Some 77 per cent of the worlds oil reserves are in
the hands of governments. These governments have little interest
in bringing down oil prices. Unfortunately, most of the oilproducing countries are corrupt dictatorships.
How Oil Shapes Foreign Policy?
What happens when you have the United States, China, India,
Europe, and Japan all competing over the same oil? We are seeing
today the beginning of a new era in which the Middle East will
no longer be a unipolar arena. There will be other players,
particularly China, that will move in and want to cut deals and
alliances.
The United States and Europe are trying to curb Irans nuclear
program, to stop it from developing the bomb, but the Chinese
have signed a $70 billion energy deal with Iran, and said they will
veto any attempt to impose sanctions on Iran at the UN Security
Council.
(c)
When the Security Council tried to impose sanctions on Sudan

one of Chinas main oil suppliers over the issue of Darfur, the
Chinese vetoed it. These are two cases in which Chinas energy
interest trumped their interest to be part of the international
community. An incident happened this year in Central Asia, which
is a very important new energy domain. In May a massacre
occurred in Uzbekistan, with hundreds of people killed by
President Islam Karimov. The United States and Europe asked for
an international investigation, but China, which had signed a
$600 million gas deal with Uzbekistan, said no. A few weeks later,
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We are seeing a situation in which Americas policy of bringing

democracy to the Middle East is being constantly compromised by
the fact that the United States and China are essentially
competing over energy resources. This is happening all over the
world, not only in the Middle East and Central Asia. It is
happening in Africa and even in the Western Hemisphere, where
China is moving into Venezuela and Canada.
Access to energy resources will shape the world in the years to
come. It will dictate the international behaviour of countries as it
plays an increasing role in relations between the major powers. In
future, we will see new alliances forged, such as between China
and Saudi Arabia.
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the United States was told by Uzbekistan that it had 180 days to
evacuate the air force base it was using to fly over Afghanistan in
the context of the war on terrorism. China has been a leading force
in calling for the United States to remove all its military forces
from Central Asia, including Kurdistan. So we see how oil shapes
foreign policy.
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One of the main causes of friction between China and Japan

involves access to oil and gas deposits in the East China Sea.
Similar occurrences are happening all over the world. The Chinese
are also developing a strong foothold in Pakistan, where thousands
of Chinese workers are building a new port in Balochistan at
Gwadar that sits right at the entrance to the Persian Gulf.
(c)
Israel should be very sensitive to developments between the

United States and China, and should be very careful in pursuing
military relations with China because there will be a cost. There
are a lot of things that can be done with China on many issues, but
for Israel to pursue military relations with China at a time when
very important parts of the U.S. defence establishment and
Congress are extremely hawkish on China is a very dangerous
game to play.
Americans are beginning to understand that their dependence on
foreign oil has doubled in the past thirty years. In 1973 America
imported 30 per cent of its oil. Today it imports more than 60 per
cent and that will increase. Americans are beginning to
understand that dependence on oil imports is Americas Achilles
heel and that this needs to be addressed. Oil is no longer an
environmental issue. It is increasingly becoming a national
security issue.
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In 1973, Brazil imported 80 per cent of its fuel. Today the

Brazilians are on the road to energy independence because they
have developed an agricultural sector that allows them to produce
transportation fuel from sugar cane. Brazil today does not feel the
impact of an oil crisis as other countries do.
A lot of investment is going toward producing transportation fuel

from coal. In South Africa, planes that fly out of Johannesburg run
on synthetic jet fuel made from coal, not oil. So a country does not
have to subjugate its entire foreign policy just to satisfy its need for
petroleum products. Two-thirds of U.S. oil consumption is in the
transportation sector. With a quarter of the worlds coal reserves,
America can do the same and embark on a path toward weaning
itself from its oil dependence. This has already been done in the
U.S. power sector today only about 2 per cent of U.S. electricity is
generated from oil.
Role of IEA
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India, as a gesture of regional cooperative venture, has succeeded

to tap oil and gas through pipelines from Iran. In January, 2005,
the Gas Authority of India Ltd. (GAIL) signed a 30-year deal with
the National Iranian Gas Export Corporation for the transfer of as
much as 7.5 million tons of LNG to India per year. The deal, worth
an estimated $50 billion, will also entail Indian involvement in
the development of Iranian gas fields. Even more noteworthy,
Indian and Pakistani officials are discussing the construction of a
$3 billion natural gas pipeline from Iran to India via Pakistanan
extraordinary step for two long-term adversaries. When completed,
the pipeline would provide both countries with a substantial
supply of gas and allow Pakistan to reap $200-$500 million per
year in transit fees. The gas pipeline is a win-win proposition for
Iran, India, and Pakistan.
(c)
The International Energy Agency (IEA) was created in 1974 as a

response to the threat posed by the first oil crisis. While energy
markets and the world have changed in many ways since then,
energy security remains a fundamental goal of its member
countries.
However, security considerations have become more broadly
defined. IEAs focus has been expanded from oil to other forms of
energy, such as natural gas, of which consumption and imports are
rapidly increasing, and to electricity, following several serious
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Recent energy market and geopolitical developments have pushed

security of supply back to the top of the energy policy agenda. The
events of 11th September 2001 and worsening political instability
in the Arab Gulf and elsewhere have heightened the sense of
vulnerability to disruptions to energy supplies. Energy
installations such as nuclear power stations, gas terminals, gas
pipelines, and oil installations have moved to a higher state of
alert. Global cross-border energy trade has grown by almost threequarters since 1973 and will continue to expand between now and
2030. Because of cost, geopolitical and technical factors, almost all
the increase in energy production from now on will occur in nonOECD countries. As a result, the reliance of IEA members and
non-IEA oil-importing developing countries on imported oil and gas
will continue to grow. This will increase mutual economic
interdependence, but will also intensify concerns about the worlds
vulnerability to a price and supply shock. These developments
underline the need for IEA member countries and non-member oiland gas importing countries to take a more proactive role in
dealing with the energy security risks in fossil fuel trade.
Measures to deal with short-term supply emergencies or price
shocks will need to be enhanced. Countries will also have to
diversify their fuels as well as the geographic sources of imported
fuels. Indigenous renewable energy sources will contribute to this
end. Improving relations with energy suppliers will also be
essential for IEA countries security strategies. The importance of
this dialogue was apparent in the effective response by producer
countries to the threat of market disruption during the military
action in Iraq in 2003. Better data collection and exchange for
improving transparency in world markets will remain the key in
this dialogue. Similarly, the importance of co-operation with other
non-member countries in such fields as emergency preparedness,
data exchange and energy policy reform will also grow as their
shares in global energy demand and imports rise.
(c)
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transmission failures in recent years. Furthermore, reliable access

to energy supply needs to be compatible with other policy
objectives, namely, the pursuit of greater economic efficiency in the
energy sector and the mitigation of environmental consequences of
energy production and use.
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Long-term security of supply will depend on whether the

investment needed to expand energy supply capacity will be
forthcoming in a timely manner. Mobilising all this investment will
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require the lowering of regulatory and market barriers, and the

creation of an attractive investment climate, including stable and
enforceable legal and regulatory systems, is a daunting task in
many developing countries and the former Soviet Union. Stamping
out corruption is also essential in many countries. Good
governance is crucial to extend electricity supplies to the energypoor and give them better access to other forms of modern energy.
The environmental implications for rising energy use will remain a
key issue for IEA countries. Energy-related CO2 will continue to
grow steadily unless tough new policies are adopted to counter this
trend. The adoption of new policies in OECD and non-OECD
countries, together with faster deployment of more efficient and
cleaner technologies, would yield big savings in energy and
promote switching to less carbon-intensive fuels. Political will and
public acceptability of the economic cost of such policies will
determine how far IEA countries go down this path.
(c)
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New technologies will undoubtedly be a major part of the solution.

Governments and the private sector should share the
responsibility for R&D of new energy technologies. While this type
of involvement has declined significantly in the past decade in IEA
countries, given that the energy industrys overall research efforts
are undermined in new market structures, governments need to
reappraise the need for renewed public commitment to energy
R&D. Sharing costs and gains through international collaboration
via such instruments as IEAs Technology Implementing
Agreement, is one way of getting better value for the money spent
on R&D. Addressing all of these policy challenges can be
encompassed in how to strike the balance between the 3Es,
namely, energy security, economic development and environmental
protection, in a cost-effective manner. The IEAs mission is to
support member countries efforts to devise policies to this end.
The IEAs operational mandate has expanded considerably over
the past three decades. The concept of energy security has
broadened from oil to natural gas and electricity. This trend will
continue in accordance with the changes in political, technological
and market framework and the emergence of new policy challenges
in future.
In the long-term, the IEO2011 Reference case projects increased
world consumption of marketed energy from all fuel sources
through 2035. Fossil fuels are expected to continue supplying much
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of the energy used worldwide. Although liquid fuelsmostly

petroleum basedremain the largest source of energy, the liquids
share of world marketed energy consumption falls from 34 per cent
in 2008 to 29 per cent in 2035, as projected high world oil prices
lead many energy users to switch away from liquid fuels when
feasible. Renewable energy is the worlds fastest growing form of
energy, and the renewable share of total energy use increases from
10 per cent in 2008 to 14 per cent in 2035 in the Reference case.
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Check Your Progress
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Fill in the blanks:
___________________
1. The . was created in 1974 as a

response to the threat posed by the first oil crisis.
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2. India, as a gesture of regional cooperative venture, has

succeeded to tap oil and gas through pipelines from
..
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Summary
(c)
Energy-intensive industrial sector consumes nearly 85 million

barrels per day of Petroleum for economic growth. Expanded
demand from the augmented capacities is being met through an
optimal mix of oil and natural gas resources to support industrial
and business operations worldwide at economies of scale. The
projected demand of oil from China and India in near future is
going to be almost two to threefold to keep pace with fastdeveloping economy. The potential sources to tap to meet the
growing demand are going to be the Middle-East, Eastern Europe,
Russia, Canada, Western and South Africa, China etc.
Demand for oil and natural gas has historically maintained a
striking balance until the first oil-shock experienced by the nonOPEC countries from the OPEC countries in 1974. Periodical hike
in the prices of oil and natural gas by OPEC has left little option
but to diversify the production bases of the commodities by
exploring alternate sources of production and supply at cheap,
convenient and competitive costs.
Lesson End Activity

Make a comparison of oil production in 2011 between the OECD
and non-OECD countries.
Keywords
Notes
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International Energy Agency: The International Energy Agency

(IEA) was created in 1974 as a response to the threat posed by the
first oil crisis.
333
OECD: The Organisation for Economic Co-operation and

Development is an international economic organisation of 34
countries founded in 1961 to stimulate economic progress and
world trade
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Discuss the recent trends in global energy.
2.
What is the role of Middle East in the global oil balance?
3.
Write a note on geopolitics oil and natural gas.
4.
How oil shapes foreign policy?
5.
Discuss the role of IEA in global energy.
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1.
Further Readings
Books

major Consuming Sectors, Stanford University, Stanford.
KPMG, Mumbai.
Science, v. 86, p. 985-990.
(c)

Web Readings
http://www.eia.gov
http://www.bp.com
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(c)
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UNIT 20: Case Study
Unit 20
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Notes
Case Study
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Objectives
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Case Study: Crude Oil Using a Large Case to Teach

Introductory Economics by Greet Woltjer
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In an economic principles course students should learn to

recognise problems that can be analysed with economic principles,
and to apply economic principles in order to understand the most
important mechanisms shaping the real world. But the typical
principles course fails to improve economic literacy of not only
those who take it, but also those frightened away by its reputation
as a technical course. The course fails because it does not teach
students how to apply economics to their personal, professional,
and public lives. (Hansen, Salemi and Siegfried 2002: 464). In
this paper it is argued that the crude oil market can be used as a
large case to motivate students to investigate economic principles
and to provide an opportunity to apply these principles.
(c)
In general, three types of improvements for the principles course

have been suggested. First, a lot of authors argue that the content
of economics courses should be changed. Becker (2003) suggests
that principles courses should be focussed on more sexy topics
that are relevant in the New Economy. This implies a reduction
of the current content, leaving out technicalities. In a symposium
to discuss Beckers article most authors suggest that a solid
foundation in basic principles is required to understand the more
difficult topics (Hamilton 2003, McMillin 2003, Siegfried and
Sanderson 2003). Siegried and Sanderson (2003: 212) argue that
the enduring strength of the discipline has been its limited set of
fundamental principles opportunity cost, comparative
advantage, trade-offs, specialisation and exchange, incentives and
marginal analysis, among others that provide powerful insights
when applied to a vast array of situations. According to Hamilton
(2003: 199) The difficulty lies in learning to believe that these
answers are a useful guide to so many questions. So, the focus
should be on a limited number of fundamental concepts and not
Contd
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on technical solutions, but there seems to be no reason to change

the main concepts discussed in the principles course.
Notes
The second solution is the use of more varied teaching techniques:

focussing on active student participation (see Becker 1997;
Hansen, Salemi and Siegfried, 2002). This may be very useful,
and the course discussed here includes a lot of educational tools to
stimulate active student participation (see Woltjer 2004).
However, the focus of this article will be on yet another solution.
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This solution is the use of real-world data and empirical evidence

in the course: To avoid simply dragging students to the
conclusion (Beckers preaching), one needs to answer a lot of
questions to get to the crucial points in studying real-world cases
(Hamilton 2003: 200). If students see that basic economics
principles can explain important developments in the real world,
this may help to create the feeling that economics is useful. The
discussion of real-world examples may be very useful from this
perspective. Such a case study approach may show students the
relevance of economics and motivate them to study economic
principles.
(c)
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Consistent with Volpe (2002) I use the term case study in a

broad way as real world examples, current or historical, that can
be analysed with economic theories and concepts and that may be
relevant for policy recommendations to governments, companies
or other institutions. So, the approach discussed here can be
combined easily with more active student involvement (as is
required in case studies defined in a more narrow sense), but can
even be used in a lecture approach. A good case will show
students that they need economics and will give them the
opportunity to apply the theories.
Many courses use a large number of small case studies. Textbooks
provide a lot of real world examples. This may help to see the
relevance of theories discussed in a lot of different contexts, but is
at the cost of a lack of depth and integration of those small case
studies. A lot of students skip the real world examples provided in
the textbooks, and if they read them, they dont have enough
information and time to place them into their context. For this
reason, one large integrated case may be more useful; students
have more time to become familiar with the characteristics of the
case at hand. Such a large case study may not only show the
relevance of economics in the real world, but can also show the
complex interrelationships between different aspects of the real
world.
A large, integrated case study must be carefully chosen. It has to
show the relevance of most topics in a principles course and must
Contd
UNIT 20: Case Study
It must generate interesting questions that have relevance for the

current situation. The crude oil market is a very good case from
Notes
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this point of view. The oil market is regularly in the news, and the
oil market is also related with macroeconomic and international
337
provide opportunities for immediate applications of these

principles.
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developments. The immense fluctuations in oil prices during

history and its relationship with politics make it a very
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challenging market. The oil market provides applications for

almost every topic in an introductory course: supply and demand
analysis, market power, oligopoly, game theory, economics of the
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public sector, the business cycle and exchange rate fluctuations,

as will be shown below. The oil market is relevant for the strategy
of companies that use a lot of energy as input, or that produce
goods like cars that need oil as a complementary good. The oil
market is also very relevant for government policy, both for OPEC
countries and countries like the US and the Netherlands. The oil
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market is very complex, but this complexity can be developed step

by step, as will be shown below.
A policy perspective on a case can improve the feeling by students

that theories are relevant. When a course is designed for students
in business a large international company seems to be an obvious
choice. But you may also choose other types of companies, like
car-producing companies and chemical companies, or a
government policy perspective. My course starts with a large,

international oil company, and discusses developments on the
international oil market in combination with long-term
international and national economic developments. The analysis
of these developments from the perspective of the international oil

company motivates the students to investigate almost all
economic theories that are normally discussed in an introductory
economics course, including a lot of topics that can be seen as
being neglected in those courses (Becker 2000: 110).
In the remainder of this paper I will discuss the design of the

course. The purpose of this discussion is to show how an
(c)
introductory economics course centred on a large case can help

students to develop a relatively complex and integrated vision on
the world. The description is intended to show that the use of
such a case can make economics more interesting for students.
The course has been designed in a problem-based format (see
Woltjer, 2004), but other formats will do too. The remainder of the
paper discusses the content of the course and shows how all
Contd
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aspects of an introductory economics course can be approached

from the chosen extended case.
338
Implementation of the case in the course
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The basic design of the course (my course is about 140 study
hours) is to discuss the main areas of economic thinking
(microeconomics, public sector economics, macroeconomics and
international economics) from the perspective of an international
oil company using the oil market in its international economic
environment as a case study.
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The content of the course is relatively standard. We start with an

introduction to scarcity and opportunity cost, and then go into
microeconomics, including supply and demand analysis, market
power, oligopoly and simple game theory. Then we discuss public
sector economics and externalities. With respect to
macroeconomics the labour market and monetary relationships
are being discussed. Finally, the part about international
economics discusses comparative advantage and alternative
theories of trade as well as real exchange rates. The oil market
from the perspective of a large, international oil company, as well
as an introduction to the basic concepts of economics, scarcity and
opportunity cost. First, citations from Shells annual report may
show the relevance of the oil market and international economic
developments for Shells strategy and performance. At the start of
the 1980s people expected oil prices to rise till about $100 per
barrel in the year 2000, while with hindsight $20 per barrel would
have been a better estimate. Around 1980 about $500 billion were
invested that were based on those incorrect price expectations.
The principles of scarcity and opportunity cost can be used to
explain the line of argumentation behind those predictions at the
start of the 1980s.
(c)
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The next step is to make the basic discussion about oil scarcity
more precise through supply and demand analysis. In 1874 the
real oil price was more or less the same as the current real oil
price. But despite its long-term price stability, in 1980 the real oil
price was almost 10 times as high as the oil price in 1970. These
large short-term fluctuations require an explanation. Supply and
demand curves are a suitable instrument for such an analysis. In
order to focus on supply and demand analysis we mention
explicitly, that most forecasters project non-OPEC, noncommunist production capacity and assume that it will all get to
market (Barry, 1993: 88), where OPEC production can be
assumed to be exogenous. We ask students to explain changes in
oil price as the consequences of a number of events (found on the
Contd
UNIT 20: Case Study
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website www.eia.doe.gov/emeu/cabs/chron.htm) with the help of

supply and demand curves.
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The next step is a deeper analysis of world oil demand and non OPEC oil supply separately. A graph showing price and world oil
consumption over time provides an incentive to think deeper
about demand. After the two large price increases, world oil
consumption decreased, while afterwards the growth of oil
consumption was much lower than before. Students have to think
about available substitutes in the short and long run, including
isolation of houses, and indirect effects like recessions. They
explain why the price elasticity of demand is much lower in the
short run than in the long run and may investigate to what extent
this explains the development of oil consumption. Because the
short-term price elasticity of demand is very low, OPEC countries
tended to underestimate the long-term effects of the high oil
prices at the start of the 1980s.
The analysis of non-OPEC supply may focus on the relationship

between technology, cost characteristics and behaviour of oil
producers. The technological characteristics of oil exploration and
production, i.e. high fixed and sunk costs in combination with a
very long-time period between the decision to search for new o il
and the actual production, explain the very low short-term price
elasticity of non-OPEC oil supply and the much more elastic
supply in the long run. But also other aspects of the oil market
can be investigated. For example, at the start of the 20th century
oil refineries tended to be located near the production sites, while
most are located near the consumption areas now, but recently
the tendency returned in the direction of the production areas.
(c)
This can be explained by differences in economies of sca le in

transport for crude oil versus refined oil products. Also the cost
advantages of vertically integrated companies can be understood
if students know that different qualities of crude oil require
different refineries. It is obvious that the discussion must be
focussed on the basic concepts; a formal analysis is neither
possible nor necessary in principles course. Discussion of those
problems already brings in some microeconomic principles not
emphasised in textbooks, but highly relevant to decision-makers
(Becker, 2000), such as bundling and complementaritys;
expectations and risk, switching costs and lock-ins. The use of the
large, real-world case automatically focusses attention on those
parts of economics that are relevant in practice.
Although the concept of demand is relevant to explain world oil
demand, and supply analysis is useful to analyse non-OPEC
supply, the dynamics of the oil market is mainly determined by
Contd
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The stability of OPEC can be explained by changes in its market

power (i.e. market share) as well as strategic aspects that can be
analysed as Prisoners dilemmas. The change in the pay-off
structure of the Prisoners dilemma of the OPEC and the
enormous differences in interest between the countries involved,
explain the difficulty in finding a stable solution for the OPEC. It
turned out that most countries became free riders.
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the market power of OPEC. The enormous profits generated by oil

producing countries after the two oil crises, in combination with
the reduction in OPEC market share from 60% till 30% during
the first half of the 1980s provides a very challenging case to
analyse the dynamics of market power, including the problem of
cooperation. The discussion requires an extension of standard
textbook theory with dominant firm oligopoly, or at least the idea
that OPEC oil demand is the difference between world oil demand
and non-OPEC oil supply. The discussion of OPEC market power
requires application of all topics discussed before, including the
difference between long and short-term price elasticities of supply
and demand.
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(c)
It is a very challenging question why most OPEC countries failed

turning black gold into development (Van der Linde 2000: 31).
Despite the enormous amount of money that came into the oil
producing countries after the tenfold increase of the oil price in
the 1970s, most countries remained relatively poor and even went
into debt problems when oil revenues decreased during the 1980s.
This may be a nice problem to start discussing government
decision-making. Public choice types of argument may explain the
lack of profitability of most investments in those countries, while
overly optimistic expectations about the future of the oil price
brought a lot of OPEC countries into debt problems. Those debt
problems reinforced the coordination problem between the OPEC
countries.
During the 1970s a lot of OPEC countries nationalised the oil
companies. This provides an interesting starting point to discuss
the ins and outs of private versus public decision-making. Most
state producers in OPEC countries did not much to improve on
their technologies of oil production, while the international oil
companies experienced fast technological progress. The state oil
companies depended for their finance on gov ernment that wanted
to use the money elsewhere. This implies that OPEC countries
are becoming more and more dependent on international oil
companies again (Van der Linde 2000, chapters 6 and 8), leading
to privatisation of state oil companies in the future. Such a case
provides a nice insight into problems of the public sector, and at
Contd
UNIT 20: Case Study
Notes
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Both sustainability problems and environmental problems like

the Greenhouse effect are intimately related with the oil market.
International oil companies like Shell and BP have a policy
focussed on sustainable development, partly inspired by the idea
that in the not too far future oil may become scarcer. The scarcity
problem can be better redefined as a problem of dependence on
politically unstable Middle East countries. The policy formulation
by Shell is used as a starting point for the discussion and
automatically focusses on sustainability, externalities and its
ethics. It was a surprise to me to see that a lot of business
students focussed their final paper on this type of problem.
341
the same time shows the importance of those insights for large
companies.
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The oil market may also provide a nice starting point for
macroeconomic topics. The oil price increases in the 1970s
stimulated wage increases in a lot of European countries, because
labour unions wanted real wage increases, where the oil price was
included in the basket to calculate inflation. This is a nice case to
discuss price indexes and the concept of real income. A graph
showing real labour cost, labour productivity and unemployment
for a much longer period may provide a new challenge to apply
supply and demand theory. The difference in reaction of labour
cost to oil prices between Europe and the US is a nice illustration
of the role of institutions in economic dynamics. High wages
compared to labour productivity generated excess labour supply,
where the effects of the high wages became only visible after a
long period of time because of the difference between short and
long-term elasticities. Just as with the OPEC countries, labour
unions underestimated the long-term effects of high wages. So,
the labour market provides the opportunity to apply the supply
and demand concepts in a completely different context.
(c)
Also money can be introduced through the oil market. Monetary

policy reacted completely different after the first oil crisis than
after the second oil crisis. A graph showing developments in re
interest rates, inflation rates and output gaps for some countries
over time shows the spectacular changes over time and illustrates
the difference in policy reactions: an increase in money supply
after the first oil crisis against a tight monetary policy after the
second oil crisis. Both a real interest rate of about 0% and a real
interest rate of more than 6% at the start of the 1980s are
surprising and have enormous influences on the financial position
of both companies and governments. The 1980s form a
spectacular period to investigate more deeply, and illustrates with
its combination of tight monetary policy, increases in government
Contd
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The change in location of oil refineries and oil production through

time is the focal point of the theory of competitive advantage.
Both technical, market and government policy aspects are
relevant here.
The oil prices are formulated in dollars. This already makes the
spectacular fluctuations in the real exchange rate of the dollar
extremely important for the oil market. The rise in the real
exchange rate, the rise in the real interest rate and the rise of the
oil price explain a large part of the international debts crisis of
the first half of 1980s. All those relationships are very much
interrelated. The oil crisis was the occasion for the tight monetary
policy, while this tight monetary policy generated the high real
interest rates as well as the appreciation of the dollar. Most of the
causal relationships can be understood with simple supply and
demand curves, creating new opportunities to get a feeling for this
very important instrument of economic analysis. And when
students understand this basic relationship, a graph showing the
development of the main long-term economic variables can be
explained by a relatively small number of facts. In this way, they
get, in combination with their principles course, a very short
overview of some fundamentals of world economic history of the
last forty years.
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spending and tax reductions in the US almost every aspect of

monetary economics that is relevant. It is obvious that also other
episodes from economic history should be discussed, where
students should be aware that the same basic scheme of
reasoning can be applied over and over.
Notes
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(c)
Also for macroeconomics the case automatically focusses on issues

that are relevant from an empirical and decision-makers point of
view. All the macroeconomic concepts that are, according to
Becker (2000), being neglected in textbooks but important in the
media, were automatically included in this course: nominal versus
real interest rates, inflation rate differences and exchange rates,
the loose tendency for real interest rates to be equal across
countries, and the issue of technological change and economic
growth.
In summary, the extended case study approach helps to integrate
different parts of economics and puts them into a broader context.
The necessity to use economic theory in explaining real world
long-term developments automatically includes in the course
economic aspects of the world that are neglected in textbooks but
are empirically relevant. Furthermore, although the focus of the
course is on economics, the setting is more or less
Contd
UNIT 20: Case Study
343
interdisciplinary, and this may increase the appeal of the

economics class (Cavilia-Harris 2003).
Notes
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Source: http://edocs.ub.unimass.nl/loader/file.asp?id=882
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Question:
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Notes
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(c)
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UNIT 21: International Hydrocarbon Economic Environment
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Notes
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(c)
BLOCK-V
Detailed Contents
Petro Economics
Notes
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Introduction
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The Future of Oil
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UNIT 22: TREND AND STRUCTURE OF OIL AND
GAS ___________________
ECONOMY
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Introduction
Structure of Oil and Gas Economy

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Trends of Oil and Gas Economy

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Introduction
Oil Securities for India: Issues and Concerns
UNIT 24: E-COMMERCE APPLICATION IN OIL

AND NATURAL GAS INDUSTRY
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Introduction
Emergence of E-commerce in Oil and Gas Industry
E-business in Oil and Gas
E-Trading in Oil and Gas
UNIT 25: CASE STUDY
(c)
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UNIT 23: GLOBALISATION AND OIL SECURITY

FOR INDIAN OIL INDUSTRY
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UNIT
21: INTERNATIONAL HYDROCARBON
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ECONOMIC ENVIRONMENT
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Unit 21
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Notes
Activity
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International Hydrocarbon
Economic Environment
Do ___________________
a comparative analysis of
upstream and downstream
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industry.
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Objectives
topics:
\
The Future of Oil
Indian Oil Industry in a Growing Economy
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Introduction
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The global oil industry has moved into a high profit market
condition and the short-term outlook appears promising.
Exploration and production technology is constantly improving,
creating the ability to find oil and gas in increasingly remote and
inaccessible locations. Oil and gas companies are growing wise to
consumer's demands. With added pressure from governments,
cleaner fuels are being introduced on a continual basis. Growing
global populations are requiring more petroleum products,
responded to by an increase in global refinery capacity.
The Future of Oil
(c)
"Oil is dead. Gas is king. Long live the king." This must be the
mandate to all oil company exploration offices. The reality is not
far from this. All of the jockeying for position with regard to the
mega mergers has in no small part been driven by desire of oil
industries to find gas or strengthen their gas portfolio: the reason
being that mega economies like China, India and North America
have a massive thirst for gas both now and more importantly, in
the future. Newer power generation projects will undoubtedly be
gas fuelled with the two emerging economies of China and India
plus the global thrust for the cleaner burning image of gas is
predicted to increase production to the detriment of both oil and
coal. Also transport will gradually move towards gas and duel fuel
vehicles to what extent is still not known.
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The Upstream Industry: Future of the North Sea
Notes
The future of the North Sea is a two-sided coin. On one side, new
investment has slumped due to the continued hangover from the
low oil price in 1998. On the other side, opportunities are enormous
for smaller, independent E&P companies, who are looking to
re-establish mature or even capped fields with the assistance of
new drilling technology. The UK Government have provided tax
breaks for such E&P companies, as a further sweetener to the
opportunities on offer in the UK sector of the North Sea.
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In the IEO2011 Reference case, Mexico and the North Sea are the
only non-OPEC production areas that lose more than 1 million
barrels of liquids production per day from 2008 to 2035. The most
significant decline in non-OPEC liquids production is projected for
OECD Europe, with a decrease from 5.1 million barrels per day in
2008 to 3.0 million barrels per day in 2035. Most of the decline is in
North Sea production, which includes offshore operations by
Norway, the United Kingdom, the Netherlands, and Germany.
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Over time, fewer and fewer prospects capable of compensating for

declines in existing fields have been discovered. The drop in North
Sea liquids production does not vary significantly among the four
price cases, both because the projected production is based on
depletion of resources and because all the countries currently
producing liquids from North Sea operations are expected to
continue encouraging investment and providing open access to
development.
(c)
Another factor that has added to the low level of development work
has been the mergers of a large number of companies with the
investments in the North Sea.
1.
Western Investment in Middle East: European and other

western oil majors are looking to expand their presence in
Saudi Arabia, following the kingdom's latest investment
proposals to foreign oil companies, including Royal Dutch
Shell, Exxonmobil, Phillips, and Chevron Texaco. Saudi
Arabia alone accounts for over a quarter of all global oil
reserves. Hence, the large oil companies are queuing up for a
share of this long-term supply.
2.
US Independents Prefer to Explore Overseas: More

independents are going overseas to search for oil and gas
because North American basins are mature, production is
China: China is becoming more and more dependent on

imported oil as it looks towards the next decade. In fact, the
amount of imported oil could be as high as 40 per cent of its
total consumption. The inherent problem that China is faced
with that there has been no new significant discoveries for a
number of years. China's E&P future is not as bleak as it may
sound. Some geologists have claimed that there are some
significant untapped resources in the Songliao Basin in the
northeast and in the Bohai Sea in the west and northwest.
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3.
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There is limited potential in the United States, unless

companies grow by acquisitions or trades. But this has been
labelled a 'zero sum game' where one side wins and the other
loses. Larger independents will be expected to start spending
more overseas, with the exception of the deepwater Gulf of
Mexico.
349
declining and competition is fierce for E&P deals. Foreign

basins have become much more attractive with regard to their
contract terms and their potential reserve size.
4.
Asia Pacific Region: Oil producers in the Pacific Rim are

expected to increase production significantly with the use of
enhanced exploration and production technologies. Deepwater
fields offshore from the Philippines have improved the reserve
picture there and production is expected to reach almost 250
thousand barrels per day by 2005. Vietnam's long-term
production potential also is still viewed with considerable
optimism, although exploration activity has been slower than
originally anticipated. Output levels from Vietnamese fields
are expected to exceed 500 thousand barrels per day by 2020.
5.
Libya: Libya has been heralded with the title of "The no. 1
Exploration Hotspot" in Robertson Research International's
survey in 1998.
Top ten exploration hotspots in the world as per the latest
survey are as follows:
Libya
Iran
UK
Australia
Algeria
(c)
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Iraq,
Indonesia,
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Angola,
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Brazil, and
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Egypt.
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6.
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Africa: Several West African producers (Angola, Cameroon,

Chad, Congo, Gabon, and Ivory Coast) are expected to reap
the benefits of substantial exploration activity, especially
considering the recent rebound in oil prices. Angola is expected
to become a million barrels per day producer within five years.
Given the excellent exploration results, Angola has the
potential to produce volumes up to 1.8 million barrels per day
in the next 10-20 years.
Electronic Trading
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Both the International Petroleum Exchange (IPE) and the

American Petroleum Exchange (APE) are testing the water with
regard to 'electronic trading'. The days of the trading floor pit and
'open outcry' may be numbered. The APE has recently set up an
internet based trading exchange for wholesale gasoline and diesel.
The IPE have developed a new system that will allow trading to be
carried out via the internet on a real time basis.
Downstream Industry Refining and Marketing

The global capacity for refining crude oil is estimated as 89 million
barrels per day in 2009.
(c)
Environmental Issues
MTBE has been banned in California and a US wide ban is but a

short step away. The reason is tenuous, the impact could be farreaching. MTBE is an additive brought in to produce a cleaner
burning fuel. However, MTBE is now thought by some to have
carcinogenic properties disputed by others and has now found its
way into the Californian water system probably from site
contamination or inland lakes with motor vessels experiencing fuel
leakage. The Environmental lobby in California is very strong and
has pushed through the total ban before conclusive testing has
been done. The cost of development of the replacement additive
will be high with the end-user the ultimate financier.
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Notes
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Much has been made of the 'greenhouse gas effect', the Kyoto
Protocol and emission trading. A rather sobering thought which
should produce a reduction in the hysteria surrounding the subject
is a recent report, which suggested that just one large volcano
eruption produces more environmentally unfriendly gases than the
entire world production of 'greenhouse gases' for the whole year.
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Alternative Fuels
Alternative Fuelled Vehicle (AFV) is any vehicle capable of

operating on an alternative fuel, such as LPG, natural gas, alcohol
or electricity.
There are two configurations:
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1.
Dedicated, one fuel
2.
Non-dedicated:
(a) Hi-fuelled,
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(b) Flexible fuelled, and

(c) Duel fuelled.
Hi-fuelled can operate on either an alternative fuel or gasoline but

not at the same time plus they have the separate storage system.
Flexible fuelled can operate in either alternative or conventional
fuel or a combination single storage and combustion system.
Duel fuelled can burn two fuels simultaneously, stored separately
and injected into the combustion chamber simultaneously. A
second variation of duel fuel has now become a front runner conventional fuel plus fuel cells (electric).
The contenders for the alternative fuel crown are:
Liquid Petroleum Gas (Propane) LPG,
Liquid Natural Gas (methane) LNG,
Ethanol,
Methanol,
Hydrogen,
Biodiesel
P-Series Fuels
(c)
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Both LPG and LNG are obtained from natural gas processing and
have been the most popular alternative for many years resulting in
the desire of major oil companies to become gas richer.
Notes
The other five can be obtained from renewable sources, either

crops/vegetable matter, sunlight, wood, or natural waste.
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Biodiesel, as the name suggests, is the replacement for diesel and

is made primarily from vegetable oils (Soya) as well as animal
waste. It can be used with existing engines, stores safely and
produces a similar power output to conventional diesel engines.
Several large-scale fleet tests are underway and the early reports
are good, including reduced engine wear.
P-series fuel is a vegetable oil, animal plant waste sourced fuel,
used as an alternative to gasoline.
Electric vehicles are three types:
Battery powered,
2.
Fuel cell, and
3.
Hybrid gasoline plus battery or fuel cell
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1.
Battery power still suffers from the high cost of batteries with a
relatively low power range. Both hybrid and fuel cell vehicles are
the fastest growing area of all alternative vehicle manufacturing.
The issues that currently affect AFV sales/production are:
z
The higher initial cost of the vehicle,
The total drive range limitation, and
Fuel supplies - lack of a network of retailers.
All forms of AFV will have an impact on the major oil companies,
either increased revenue from gas sales or reduced profits in petrol
retailing. Either way the full impact is expected to be felt until
2010 when the AFV ownership will be large enough to really hurt.
(c)
Domestic Hydrocarbon Economic Environment

Hydrocarbon sector in Indian Economy is to be seen in term of its
functional chain and historical development. The functionality and
growth of the various segments of the sector have got reflected in
the institutional set up, which have grown to play the functional
role and to operate the sector. Given below is a table of the
353
segments and institutions, which together would bring out the

composition of the sector.
Notes
Indian domestic hydrocarbon market is no more a closed market as

it used to be prior to 1997, Indian economy has consistently opened
itself up by providing investment and marketing opportunities
to foreign oil companies. Today, all most all oil majors and
multinational oil companies are represented in India by opening
their liaison office in India. Some of them have also opened one or
more Indian subsidiaries, including having joint venture tie up
with Indian companies. Their area of activities broadly covers the
following:
___________________
Selling and buying crude oil and other petroleum products to

Indian companies. In this process, these companies in some
areas have replaced Indian companies by directly dealing with
the customers. Example is selling Kerosene to parallel
marketers in India and selling Naphtha to Indian companies
directly.
___________________
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Investing capital in Indian companies. Example is

Petronas's (National Oil Company of Malaysia)
investment in LPG import at Haldia.
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___________________
It is worth noting that not much foreign direct investment has

materialised in hydrocarbon sector as was expected. This has been
glaring in the following segments:
The foreign joint venture partners in refining segment have
withdrawn their interests one by one. Example, Oman Oil
Company withdrew its interest from Central Indian Refinery of
Bharat Petroleum Corporation, which was a green field project
involving capital investment of over ` 6,000 crore (at 1990s price
level). Kuwait Petroleum Corporation has withdrawn from the
refinery project of Indian Oil Corporation, which was also a green
field project involving equal order of capital investment as of
Central India Refinery.
(c)
Not much foreign capital has been invested in downstream

infrastructure projects like building tanks and pipelines.
While liberalising the hydrocarbon sector for private and foreign
participation, it was expected to attract capital into this sector and
augment the infrastructure base. That was one of the reasons for
making ` 2,000 crore investment a precondition for providing
marketing right in the retail auto fuel segment. It can, therefore,
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Petro Economics
354
___________________
Indian Oil Industry in a Growing Economy
___________________
___________________
___________________
___________________
___________________
___________________
In view of unfavourable demand-supply balance of hydrocarbons in

India, acquiring equity oil and gas assets overseas is one of the
important components of enhancing energy security. The
Government is encouraging national oil companies to pursue
equity oil and gas opportunities overseas. Apart from ONGC
Videsh Limited (OVL) (40 projects in 15 countries), the other oil
public-sector undertakings (PSUs), namely Indian Oil Corporation
Limited (IOCL) (9 projects in 6 countries), Oil India Limited (IOL)
(12 projects in 8 countries), Bharat Petroleum Corporation Limited
(BPCL) (12 projects in 7 countries), GAIL (India) Limited (4
projects in 2 countries), and Hindustan Petroleum Corporation
Limited (HPCL) (2 projects in 2 countries), have acquired overseas
exploration acreages. The total investment by oil PSUs (OVL, OIL,
GAIL, IOCL, BPCL, and HPCL) overseas is more than US$ 13
billion (` 59,000 crore). OVL produced about 8.87 MMTOE oil and
oil-equivalent gas in 2009-10 from its overseas assets in Sudan,
Vietnam, Venezuela, Russia, Syria, Colombia, and Brazil. The
latest acquisition in May 2010 by OVL (along with OIL and IOCL)
is 11 per cent participating interest of Carabobo-1 project in the
hydrocarbon rich Orinoco belt of Venezuela, with proposed
investment of US$ 1.3 billion. The projected production is 400,000
bopd.
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During the current financial year (2010-11), production of crude oil

is estimated at 37.96 million metric tonne (MMT), which is about
12.67 per cent higher than the crude oil production of 33.69 MMT
during 2009-10. The projected production for natural gas, including
coal bed methane (CBM), for 2010-11 is 53.59 billion cubic metres
(BCM) which is 12.80 per cent higher than the production of 47.51
BCM in 2009-10. The increase in natural gas production is
primarily from the KG deepwater block.
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___________________
be inferred that hydrocarbon sector has successfully attracted

business interest in India from foreign companies, without
associated capital investment.
Notes
(c)
Mergers and Consolidation in Indian Oil and Gas Sector

There have been structural metamorphoses in the oil and gas
sector through the process of merger and consolidation. As it has
remained confined to the public sector domain, it is generally
known as restructuring, carried out as a part of reform and
privatisation process. The objectives behind these exercises were
manifold. The primes amongst these were to make the stand-alone
refineries viable and to divest government shareholding in them.
355
Notes
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Chennai Petroleum Corporation Ltd. (CPCL) and Bongaigaon

Refinery and Petrochemicals Ltd. (BRPL) were made subsidiaries
of Indian Oil Corporation Ltd. (IOC). Kochi Refinery Ltd. (KRL)
and Numaligarh Refineries Ltd. (NRL) were made subsidiaries of
Bharat Petroleum Corporation Ltd. (BPCL). This restructuring
programme was carried out by divesting the entire shareholding of
the Government in these refining companies in favour of IOC and
BPCL by March 31, 2001.
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During 2008-10, India features at 11th position on this global M&A

list with a total of 7 deals valued at USD 3.3 billion accounting for
1.52% share of the total value of deals for the period. Reliance
Industries leads the deals table from India with acquisition of 5%
equity stake held by Chevron in Reliance Petroleum Limited,
merger of the petrochemicals and refining businesses and
acquisition of 45% equity stake in Eagle Ford Shale asset. The
other India based M&A deals include government companies
acquiring 10% stake in OIL India, Essars acquisition of Kenya
Petroleum Refinery Co. (KPRL) from Shell, Chevron and BP and
smaller tranches of investments, USD 22.3 million and USD 10
million, by the PE firms Sage NPE Fund and Concord Enviro
Systems respectively
Check Your Progress
Fill in the blanks:
1. The functionality and growth of the various segments of

the ..sector have got reflected in the
institutional set up, which have grown to play the
functional role and to operate the sector.
2. Battery power still suffers from the . cost of
batteries with a relatively low power range.
Summary
(c)
In this unit, attempt was made to provide a structural framework

of worldwide oil industry with linkage to Indian oil industry. The
business environment in terms of demand, supply and
consumption with historical base has been outlined.
Lesson End Activity
Critically evaluate the role of private sector in Indian oil and gas
industry.
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Petro Economics
Keywords
356
Notes
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___________________
___________________
P-series Fuel: P-series fuel is a vegetable oil, animal plant waste

sourced fuel, used as an alternative to gasoline.
Upstream: These were mainly large, low cost oil and gas fields.
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___________________
Downstream: The main strategic assets are advantaged refineries

and significant retail positions in key markets.
___________________
___________________
___________________
___________________
1. Discuss the future of oil in the rising demand all over the
world.
___________________
2. What are the key sources of alternative fuel?
___________________
3. Write a note on Indian oil and gas economy.
Further Readings
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Books

KPMG, Mumbai.
Science, v. 86, p. 985-990.

(c)
Web Readings
http://www.eia.gov
http://www.bp.com
UNIT 22: Trend and Structure of Oil and Gas Economy
Unit 22
357
Notes
Activity
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Trend and Structure of Oil and

Gas Economy
Do an
online research on the
___________________
new drivers of competitive
___________________
advantage
in oil and gas
industry.
___________________
___________________
Objectives
topics:
\
The Emerging Issues in Indian Oil Industry
___________________
___________________
___________________
___________________
___________________
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Introduction
The petroleum industry in the private sector consists of a set of
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companies to undertake the following chain of activities as their
main source of business are explore for and produce crude oil and
natural gas; and refine and market oil products.
Some companies undertake all of the above functions; these are

called integrated companies. Others undertake only one or some
of them; these are usually referred to as independents. Some
integrated companies are also involved in other areas of business;
for example, many but not all are producers of petrochemicals and
other chemical products.
The industry can then be categorised as follows:
Oil Majors
Large integrated players: Traditionally this comprises Exxon,
(c)
Royal Dutch/Shell British Petroleum (BP), Mobile Chevron and

Texaco. Prior to 1984 this group also included Gulf Oil. They were
known as the "Seven Sisters". Chevron acquired Gulf Oil in 1984.
To some degree, a group of slightly smaller integrated companies
could be added to this list, e.g. Amoco and Aero and, since their
privatisation, Total, Elf and ENI.
Notes
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___________________
___________________
Other Integrated Companies
This group is similar to the majors but smaller in size and with
less geographical reach. It comprises companies such as Amerada
Hess, Conoco, Diamond Shamrock, Marathon, Occidental, Philips,
Unocal and Ultramar.
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358
Petro Economics
___________________
Independent
___________________
These are yet smaller companies, most of whom specialise in a

single segment. They include, for example, Anadarko, British
Borneo, Enterprise, Kerr McGee, Lasmo, Ramco, Saga and
Talisman. These are mostly having American operation. This
categorisation of the petroleum industry, thus, explicitly excludes
all state-owned petroleum companies. It has only been in recent
years that state-owned. Producing companies have moved outside
their home countries and invested internationally, usually in the
downstream. These include large state producing companies such
as Saudi Aramco, Petroleos de Venezuela, and Pertamina of
Indonesia from OPEC and non-OPEC state producers, such as
Statoil of Norway, Petrobras of Brazil, Pemex of Mexico and
Petronas of Malaysia.
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___________________
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Emerging Forces for Change during the 1990s

Structure and Forces Prior to the 1990s
(c)
The structure of the private sector oil industry remained

extraordinarily stable with a few key players the Majors
prevalent from the 1920s until the late 1990s. Over this long
period of time, the major private oil companies showed a
remarkable degree of resilience to changing market conditions.
Each company succeeded in more or less retaining its position
within the private sector hierarchy, at the forefront of the private
petroleum industry.
Until the demise of Gulf Oil in 1981, the private sector oil industry
was characterised by a core of seven firms the "Seven Sisters."
From 1950, the Majors consistently increased their asset base. Till
the first oil shock, the growth was steady, but post-1973 a new
phase emerged, characterised by more erratic patterns of
expansion. Most of the Majors again substantially increased their
assets in the 1970s, aided by the rising oil price induced revenues.
Those that conspicuously failed to replace lost Middle Eastern
assets soon found themselves in trouble.
359
Notes
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The nationalisation of upstream assets in the Middle East and

elsewhere were fundamental blows to the Majors, who had been
the leading players in most of the Middle East and other OPEC
member states. However, the Majors survived (with the eventual
exception of Gulf Oil) and to some degree prospered. They
remained at the forefront of the private sector industry through
the 1970s and 1980s for several reasons, such as:
___________________
___________________
1.
Downstream assets were largely left intact,
___________________
2.
Most majors had substantial US oil and gas production assets,

and
___________________
The discovery and development of North Sea and Alaska

created a new upstream portfolio of strategic assets
___________________
3.
Sources of Competitive Advantage
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The 1990s proved to be a period when forces began to build which

eventually led to important changes in the structure of the
industry. The leading positions of the Majors had been reinforced
for a long period by their deep-rooted sources of competitive
advantage. These were reflected in a set of 'strategic assets' that
advantaged the Majors relative to other private sector players.
Many of these assets were inherited from the past, having been
acquired and developed in earlier decades. They tended to be large,
profitable, cash generating, not easily replicated and long lasting.
These included:
Initially they were mainly in the Middle East. They were then
partially replaced by large North Sea and Alaskan fields.
(c)
Downstream: The main strategic assets are advantaged refineries

and significant retail positions in key markets. Most of the
industry's refining assets, at least in OECD countries, were
commissioned prior to the 1980s. Capacity growth has
subsequently tended to be incremental rather than in the form of
green field expansions. Equally, many retail networks were also
initially established in the past. Advantaged real estate and scale
economies had been secured.
Petrochemicals: Strategic advantage in petrochemicals has
tended to stem from technology, location and feedstock access.
Again, these positions had often been initially established in the
1970s and earlier.
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Petro Economics
___________________
___________________
___________________
Corporates: In a world of imperfect and heavily regulated capital

markets, financial strength proved a source of competitive
advantage. Equity funding from corporate balance sheets provided
the main source of finance for much of the industry, especially in
countries where creditworthiness was questionable.
Notes
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360
___________________
These strategic assets were sustained by a number of key

characteristics that were predominantly incorporated in the
Majors, for example:
___________________
1.
Technical skills and the ability to innovate: The Majors

have not tended to develop and retain proprietary technologies
(except in petrochemicals). However, they have remained at
the forefront in their abilities to apply the best technology and
innovate in new applications.
2.
Highly effective logistical skills: These have been especially

valuable in a business where transportation costs have been
critical and therefore development projects are large and
capital intensive.
3.
Reputation and relationships: The Majors had critical

strong relationships with home and host governments,
suppliers and customers.
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New Competitive Forces
(c)
The 1990s witnessed a build-up of forces that eventually led to a

restructuring of the industry through consolidation. The forces
affected each business stream and introduced new sources of
competition at both corporate and sectoral level. The main
elements included: Natural maturity of previously advantaged
fields. The "endowments" of the Majors, especially in the upstream
began to erode. Oil fields, such as Prudhoe Bay, Brent, Forties,
Stasford, Ekofisk, etc. matured and began to decline. Equally the
onshore and shallow water offshore of the Lower 48 states of the
United States was also in decline. The producing assets were, in
total, replaced in volume terms, but usually only by fields which
were less profitable due to smaller size, higher costs and, in some
cases, less favourable taxation regimes.
Initial Responses
The industry attempted to respond to deteriorating performance in
several ways:
1.
Cost Cutting: Cost reductions at corporate levels and in

operating assets were the prime response. To some degree, this
Portfolio Restructuring: Non-core businesses were shed as

petroleum companies went "back to basics". Most coal and
minerals operations were sold. BP sold its animal feed
business, BP Nutrition, Mobile sold Montgomery Ward, and
Texaco sold its chemicals business, which it considered to be
non-core. Arco exited almost all non-US activities and spun off
its chemicals operations. Underperforming assets were also
sold. For example, BP sold three US refineries - Ferndale
(Washington), Marcus Hook (Delaware) and Lima (Ohio). At
the same time, some companies also entered new sectors that
opened in the face of deregulation. US gas marketing attracted
Chevron (through shareholding in Dynergy) and Shell, who
purchased Tejas. In these markets they met new competitors,
such as Enron (who grew mainly out of gas pipelines); power
utilities such as Duke, Southern and Pacific Gas etc. and
innovative new players such as the internet power traders,
Utility.com. Others invested in the electric power sector,
mainly generation and usually IPPs. Shell bought as its
vehicle. Amoco and Texaco created power divisions. In power
generation, they faced competitors in the form of existing
utilities, deregulated utilities anxious to invest nationally and
internationally and new power sector companies. In the
majority of instances these investments have either proved
unrewarding or slow to generate adequate returns.
(c)
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2.
3.
361
Notes
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represented the stripping out of high cost structures that had

cumulated and prevailed during the era of high oil prices from
1973-86. Head office head counts were slashed. Contracting
out of non-core services became prevalent. Upstream costs
were successfully reduced, often through operating and
technological innovation. Technological advances included
horizontal drilling, sub-sea completions, floating production
systems, seismic data processing, etc. The North Sea saw the
introduction of "alliancing" between partners and contractors
in order to prevent duplication and high costs. The UK
government even supported cost reductions through its CRINE
(Cost Reduction in the New Era) initiative from 1992.
Focus on New Growth Areas: US companies in particular

sought new business opportunities outside the core US
markets. Many US upstream companies invested in the UK
North Sea, e.g. Amerada Hess. Most companies declared a
strategic intent to invest in Asian growth markets. Few had
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Petro Economics
362
___________________
___________________
___________________
___________________
___________________
4.
Financial Management: Shareholder returns were

enhanced in several cases through share buyback schemes.
Exxon consistently bought back its own shares for over a
decade and rewarded shareholders despite limited earnings
growth. Amoco, Mobil and Texaco also bought back shares.
5.
Sectorial Consolidation: As it became progressively clear

that the four strategic responses outlined above were
insufficient, a number of companies began to develop and
implement a new strategic response through structural change
- sectoral consolidation.
___________________
___________________
___________________
___________________
Downstream oil operations in mature markets were proving to

generate inadequate returns despite initiatives to cut costs and
prune portfolios. The first major move was by BP and Mobil, who
announced in February 1996 that they intended to merge their
European oil, refining and marketing assets and lubricating oil
operations. This received approval from the European Commission
in August 1996. They also increased retail market shares at
national and continental levels so that the BP-Mobil JV was able
to compete on equal terms with Shell and Exxon who previously
each had European average retail gasoline market shares of 13 per
cent compared to BP's eight and Mobil's four per cent. This was a
successful merger of two complementary sets of assets. This
merger was followed by Shell and Texaco (plus Star, the US
downstream operations of Saudi Aramco) merging in 1998 into two
regional companies Equilon on the US West Coast and Motiva in
the rest of the US, mainly in south and east. Dual branding (Shell
and Texaco/Star) has been retained. Ultramar and Diamond
Shamrock and Ashland and Marathon also affected US
downstream mergers. In the US upstream low profitability
triggered a merger between the Permian Basin assets of Shell and
Amoco to create 'Altura'.
(c)
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any success. Newly opening areas, such as Azerbaijan, Russia,

Kazakhstan, Angola and Yemen attracted many companies,
although success proved scarce. Angola proved the most
successful with Elf, Exxon and BP Amoco leading the
discovery of a number of large low cost fields in the deepwater.
The Former Soviet Union proved to be particularly
challenging.
Notes
A number of proposed downstream mergers fell through before

implementation. Shell and Texaco failed to complete a European
363
merger. Similarly, Philips and Ultramar Diamond Shamrock

abandoned their proposed US downstream merger. It was either
clear that cost savings were not easily identifiable or new
management structures could not be agreed.
Notes
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The "Super Major Theory"
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The existence of a trio of 'Super Majors' has raised questions as to

whether this group could dominate the petroleum industry. This was
a concern investigated by the European Commission in its review of
the Exxon-Mobil and BP Amoco/ Arco acquisitions. It has been
termed the "Super Major Theory". There is no unique theory, but the
common theme is the assertion that the super majors will be in a
position, usually at some stage in the future, to exert dominance.
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The European Commission's particular concern was that there

would be future collective dominance in the exploration and
production sector. It was asserted that the super majors" would
dominate the non-OPEC exploration sector. As existing non-OPEC
producing assets mature and decline, this would, in time, result in
the super majors dominating non-OPEC production. It was then
asserted that OPEC and the super majors would potentially have
an alignment of interests which would result in competitive
conditions conducive to active or tacit collusion between the two
blocks as to crude oil output levels. In such a scenario, it was the
Commission's contention that the two blocks would, through
collusion made possible by the very structure of the market in the
E&P sector, manipulate crude oil prices to a level which generates
maximum rent for the incumbents (i.e., the OPEC states and the
super majors) but which would be insufficient to sustain a number
of existing oil producers or to stimulate the entry of new entrants.
BP Amoco argued strongly that this hypothesis was flawed. This
was mainly because it considers that the E&P sector is competitive
and that, as a result, the super majors do not have unique
advantages that could generate future dominance. A number of
factors were cited to support this argument:
The super majors do not have dominant access to technology,
know-how and skilled labour. Such knowledge is not
proprietary and is available to any industry participant from
oil service companies.
2.
Financial resources and strength do not reside uniquely in the

super majors. Capital market deregulation has made it
(c)
1.
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___________________
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___________________
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Petro Economics
364
3.
Resource owners host governments are very unlikely to

permit a group of three companies to dominate development
and production of their resources. Host governments regularly
diversify their allocation of licences. Most blocks are shared.
Operatorship is usually spread between a numbers of different
companies. 'New areas' such as the Caspian and deepwater
Angola, have seen a wide allocation of awards.
4.
Small E&P companies have been successful in discovering and

developing oil and gas in frontier regions. Specific successes
include Triton in Colombia, Hunt in Yemen, Cairn in
Bangladesh and Anadarko in Algeria. Large integrated
companies but not super majors have also been successful,
e.g., Elf in Angola.
5.
Super majors are not and will not be in a position to control

levels of oil production either now or in the future. In practice,
control over both production and field abandonment is severely
constrained by a number of factors as follows:
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possible for sound borrowers to access finance freely on

competitive terms.
Notes
(c)
6.
The companies in a vast majority of cases do not operate

under exclusive, licences but rather as joint venture
partnerships.
Companies are precluded from controlling production. The

ultimate control of production levels lies with host
governments.
The super majors may be the largest private petroleum

companies by several measures. However, their total share of
world reserves or production is still small and well below any
measures of dominant shares. Even in the narrowest measure,
the three super majors together only comprise 15.6 per cent of
non-OPEC oil production. Other private companies and state
companies in both OPEC and non-OPEC countries comprise
the balance. This argument is consistent with the view that
the industry is now wider than had previously been the case.
New Drivers of Competitive Advantage

This section has so far argued that the petroleum industry as
had been known in the 1970s and 1980s has now changed
fundamentally. The players have changed. Existing players are
eroding. There are no technological barriers to entry. Industry

boundaries have shifted, widened and blurred. Some existing
players are investing along the value chain into other sectors, such
Notes
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as gas marketing and power that had previously been effectively
365
consolidating; new players are entering. Previous endowments are
closed to the petroleum industry. It is also argued that, while the
___________________
new 'super majors' are consolidating to improve performance,
___________________
partly through cost reduction, it is wrong to presume that their
___________________
size will cause them to be dominant in the petroleum industry.
The future industry structure will accordingly be determined by

the competitive environment. The petroleum sector looks set to
operate in increasingly open and competitive markets. Three
___________________
___________________
___________________
factors seem set to influence this. First, the process of
___________________
deregulation, especially in the electric power industry and to an
___________________
almost similar extent in the natural gas business looks set to

continue. Deregulation is deepening and widening globally.
Second, host governments are progressively opening their natural
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resources to international investment. There have been recent

openings in areas such as the Caspian, Venezuela, Brazil, Algeria
and Iran. Opening is under discussion in Kuwait, Iraq and Saudi
Arabia. And finally, it can reasonably be expected that the
competition authorities will strive to continue to ensure that
competition prevails in all stages of the industry. Consolidation
has been permitted, albeit with undertakings in certain cases, but
there is no evidence to indicate that the authorities intend to
change the structure of the industry through competition policy.
The structure of the industry will most likely be determined by the

degree to which various players establish and apply sources of
competitive advantage in open markets. The analysis in section
indicated that size alone is not a source of competitive advantage.
Super majors will not be successful merely because they are large.
Experience elsewhere implies that size is often a source of
complexity and, thus, a disadvantage. In a changing industry,
(c)
flexibility and speed of response is usually more valuable.

Where are the new sources of competitive advantage likely to
reside? John Kay in his book entitled 'Foundations of Corporate
Success' used a framework,
which identified four generic
dimensions that can drive competitive advantage: strategic

assets;
reputation;
technology;
and
corporate
architecture.
Petro Economics
Notes
___________________
This framework can be applied to the petroleum industry as

follows:
___________________
Strategic Assets: In the petroleum industry of the next

decade, strategic assets can be expected to include:
___________________
Large, low cost oil fields,
___________________
Large, low cost gas fields with low cost access to markets,
___________________
Refineries that are

geography and costs,
Significant retail market shares with low logistical costs

and advantaged supply and a strong convenience offer,
and
Ideal sites that integrate refining and petrochemicals.
___________________
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___________________
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1.
366
advantaged
by
configuration,
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Existing players own existing strategic assets but this will not
necessarily ensure that they will retain such competitive
advantages. Producing assets mature and will need to be
replaced by new discoveries.
New strategic assets will be created and sustained through
building on three characteristics: technology; reputation; and
architecture.
(c)
2.
Technology: Proprietary technology does not bestow

competitive advantage in the petroleum industry today, except
in the special case of petrochemicals. Nevertheless,
technological skills and applications can be expected to be
a source of future competitive advantage in a number of
dimensions:
Innovation in the application of technology. The best

examples of this have been in the upstream sector,
especially in deepwater and sub-sea applications.
Positioning for leadership in face of step changes in

technology in areas such as new fuel specifications,
renewable, low carbon technology, fuel cells and the
hydrogen economy.
Application of IT to reduce operating costs, lead moves

into e-commerce, nurture a learning culture and to help
sculpt new corporate structures.
To be seen by consumers, communities and governments

as being environmentally sound and responsible in terms
of operations and product quality;
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
To be seen as ethically sound by all stakeholders; and
___________________
To develop a strong brand that can permit the leveraging

of marketing operations.
___________________
Architecture: The successful company will develop and apply

a corporate architecture or structure that nurtures behaviours
that generate competitive advantage. From today's standpoint,
such characteristics include low costs, openness, flexibility,
learning orientation and empowerment. In the future, the
characteristics may change: the key is to be strong in the skills
that are scarce.
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4.
To be a preferred partner in the development of new

resources and markets that is being opened to
international investment;
367
Reputation: The petroleum industry has long been one where

discretionary decisions (e.g. licence or concessions awards)
have been important. Reputation will become an increasingly
important factor:
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3.
In short, competitive advantage can be expected to stem mostly

from key competencies. Existing asset positions will be beneficial,
but not a sufficient condition for future Competitive advantage.
The era of change now seems well established in the petroleum
industry. Change seems to be dominant. Change causes a reranking of competitive advantage and a resulting new industry
structure.
Check Your Progress
Fill in the blanks:
1. .. are yet smaller companies, most of

whom specialise in a single segment.
(c)
2. oil operations in mature markets

were proving to generate inadequate returns despite
initiatives to cut costs and prune portfolios.
___________________
Notes
Activity
List ___________________
down the recent trends
and structure of oil and gas
___________________
market.
___________________
When we speak of Oil and Gas economy in modern context, three

central issues usually emerge. One is globalisation, another is
economic development and the third is environment.
1.
___________________
___________________
___________________
___________________
___________________
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Globalisation: The word 'globalisation' is so commonly used

in different context is that its precise meaning sometimes gets
blurred. Literally it means to make something worldwide in
scope or application. In the context of Oil and Gas economy, it
is defined (by Mr Abdallah S. Jumah, President and Chief
Executive Officer of Saudi Aramco) as "effort to create a
world community, which promotes mutually beneficial
interdependence, offering the chance of real prosperity to every
corner of civilisation". The world Oil and Gas market is
increasingly becoming interconnected. The market is
characterised by open market, free flowing capital, technology
and labour and a healthy measure of international cooperation. Such a move towards globalisation would entail
fervent efforts to settle differences in various parts of the
world leading to greater stability, and the promotion of trade
and investments that extend help to those aspiring to improve
themselves.
CC
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368
2.
(c)
Petro Economics
Economic Development: Primed with new developments in

technology, international finance, information processing and
communications, many regions formerly on the economic
fringe have new chances to enter the mainstream of commerce.
These backwaters of economic deprivation are gradually
becoming relics of the past. That is not to say, of course, that
the world's economic problems are solved. Especially the
developing and underdeveloped nations of the world, with
growing populations, have a long way to go. To allow any
measure of economic growth, the world requires certain
essential factors working in its favour. A crucial among them
is ready, reliable source of energy. The economic dreams of the
earth's billions of inhabitants can only are met by ensuring
plentiful supplies of reasonably priced energy a fact that
underscores the need for enlightened energy policies. In
contrast, policies that could significantly increase the cost of
energy would make the uphill task of eradicating poverty from
the world much more difficult.
369
Environment: There is a broad consensus among energy

consumers, producers and governments that a clean
environment is just as important a goal as economic
development and it must receive close attention. The oil and
gas industry fully recognises this crucial need. The industry
made great strides over the past several decades to reduce
automotive exhaust emissions and improve the efficiency of oil.
Notes
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3.
Faced with balancing its economic and environmental

priorities, society still has to confront a thorny issue: can we
have it both ways. The expert view is that yes, we can have.
We do not have to choose between economic growth and a
clean environment. With wise management of our natural
resources and the promise of further technological advances,
neither one needs to be sacrificed.
___________________
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Factors that Shape Decisions of Sellers and Buyers:

While on the subject of trend and structure of oil and gas
economy, we need to know the factors at work, which continue
to shape decisions by sellers and buyers.
Evolving Phases in Indian Oil Industries
Indian Oil Industries - Its Global Facet: Oil Industry in

India is moving on a dynamic course since 1991, when the
country embarked upon the era of liberalisation and reform.
The reform process in the oil industry has been swift, multipronged and its impact has been of far-reaching consequence
for both the micro management of the Industry and macro
management of the economy. A peculiar feature of the reform
process in oil industry is that it has a large and intimate global
interface, besides the domestic aspect of liberalisation, largely
(c)
1.
___________________
For example, emissions from the new cars of today are 95 per
cent lower than the new vehicles of the 1960s. Even further
reductions are anticipated with continuing improvement in
new engine and fuel technologies. Both the oil and automotive
industries are working hand-in-hand to meet consumers'
expectations for a better environment.
In terms of workable energy policies, these three objective

point to several long-term policies, namely, emphasis on
proven energy technologies, plentiful supplies, reasonable
prices, commercial access, and full use of infrastructure
currently in place.
4.
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Petro Economics
370
___________________
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2.
Reform in Oil Industry - A Historical Perspective: Till

1993, the entire hydrocarbon chain in India was subjected to
extensive regulation and controls. Starting from exploration
and production, refining, marketing, infrastructure and
investment planning, pricing till micro distribution, the whole
gamut of activities were centrally planned. The philosophy
behind this centralised control was: self-reliance, import
substitution, strategic control, social and distributive justice,
promotion of heavy industries and State control of
commanding heights of the economy. Ministry of Petroleum
and Natural Gas (MOPNG) was at the helm of control and the
coordination was carried out through: (a) Oil Coordination
Committee (OCC) in the down-stream sector, and (b) direct
control in the upstream sector.
UP
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centring on licencing policy, pricing, restructuring and

customer focus. Let us here reflect on the global aspect of the
transformation which Indian oil industry is undergoing.
Notes
(c)
CC
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While the regulated system served the country will for a

considerable length of time, it gave rise to some limitations as
the politico-economic condition of the country underwent
transformation. Some of the perceived limitations are
enumerated below:
APM could not generate adequate financial resources for

investment in the upstream and the downstream sectors.
Sometimes it created deficit in the oil pool account, as due

to political compulsions selling prices were not revised
promptly. More importantly, while waiting for the
mounting receivables, oil companies borrowed at market
rates of interest, which were higher than what they
received on their outstanding.
The subsidies and cross-subsidies led to serious distortions

in consumer prices and did not reflect the economic cost of
petroleum products. This led to adulteration, diversion
and consequent inefficient use of products.
It is also said that assured returns on the cost-plus

formula did not encourage efficiency in operations of
PSUs. Since all investments and costs were reimbursed,
there was no incentive to make profitable investment
decisions.
371
Notes
As long as players were PSUs, the Government could

control investments and costs. But with the entry of
private players in the market, the cost-plus formula would
encourage gold plating' of the plant. This ultimately
would add to the overall cost and consumers would
ultimately have to bear the increase. Moreover, with the
entry of private players in the market, it was becoming
increasingly difficult to administer the APM and ensure
level-playing field.
___________________
Phased Deregulation of India's Hydrocarbon Sector: The

process of integrating Indian oil industry with world oil
market began in February 1993, when Government of India
allowed private parties to import and market Kerosene and
LPG at market determined price. Effective November 1993,
the selling price of all lubricating oils was allowed to be fixed
by the oil companies on commercial considerations. Around
that time, licences were granted to private companies to setup
refineries and foreign companies were allowed to invest in
equities of refineries.
___________________
___________________
CC
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UP
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3.
In the upstream sector, the APM had inadequate incentive

to invest in risky ventures.
From November 1997 till April 2010, administrative regulations on

pricing, marketing, quantitative and tariff restrictions on import
and export of petroleum products including crude oil, were pruned
and dismantled in a phased manner on a predetermined basis.
Thus, effective April 1998, refining sector was taken out of APM.
By implication, retention pricing concept for the refinery output
and cost plus formula on refinery input (crude oil) was withdrawn.
Refining licencing system was abolished. Crude oil import was
made free for private and joint sector refineries.
(c)
The ninth round of NELP (NELPIX) was launched on 15 October

2010 and 34 exploration blocks including 8 deepwater, 7 shallow
water, 11 inland, and 8 Type-S inland were offered. On-land blocks
are spread over six states, namely Assam(2), Gujarat(11), Madhya
Pradesh(2), Rajasthan(2), Tripura(1), and Uttar Pradesh(1).
The Emerging Issues in Indian Oil Industry

Globalisation is a venture into uncharted path. It has all the
elements of experimentation, observation, deriving experience and
fine-tuning. The experiment in Indian context is being carried out
___________________
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___________________
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___________________
Petro Economics
___________________
___________________
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fine-tuning. The experiment in Indian context is being carried out

in a liberal democratic framework, for which there is no precedent
available. The ingenuity of Indian professionals is the only support
and strength, on which the process is being advanced. As the
managers and policymakers of Indian oil industry today look
forward, they come across issues which are both daunting and
alluring, as they pose challenge to their search for excellence.
Notes
UP
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372
___________________
Import Parity Price
___________________
Fixing a price of oil is a trader's paradise. As the first owner of oil

(the crude) when it is extracted from the ground and is made
available as a 'goods' in economic sense, it gives a value to it. Those
are either the national-oil companies of oil producing countries or
the oil majors having equity in the oil fields. Before a barrel of oil
sees the light on the ground, a price tag is fixed on to it. That is
certainly not the 'cost of production price'. It is a 'market' price at
which the oil finds a buyer at that point of time. It is never 'the
fundamentals of market' which dictates the level of price, there are
whole lot of 'technical', 'sentimental' and 'strategic' factors attached
to it. However, today for a player in the international oil market,
there is a price assessment system available, which has evolved
and matured over the last 30 years and is still being evolved.
___________________
___________________
___________________
CC
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___________________
(c)
For a country like India, which imports 70 per cent of its oil also
does import all the features of oil pricing with it. The most
commonly known problem associated with oil pricing is its
'volatility' and 'opaqueness' (or OPEC-ness). During APM era, the
OCC's pool accounts were used to fame the volatility of the input
and used to send out a stable price line. In the absence of APM, the
existing mechanism of import parity' does not have the shock
absorber.
In a competitive market economy, the case for full and automatic
pass-through of international price changes to domestic retail
prices is strong, on both economic and institutional grounds. Full
pass-through allows for a correct price signal, which enhances
efficiency and does not expose the government to undue fiscal
volatility as a result of variable oil prices. However, most of the
developing country governments, India no exception, do not
implement automatic and full pass-through mechanism when
setting these prices. From a political economy perspective, full cost
pass-through may not be a robust policy reform. The issue also
needs to be examined from the point of view of consumer welfare
373
implication. For India, having come out of the 'managed retail

price smoothing' system, we need to consider various potential
pricing mechanisms which diverge from full pass through and
provide a degree of price-smoothing.
Notes
___________________
Managing Un-announced Surplus
UP
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___________________
Technology
CC
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For the last 30 years, Indian oil industry was living with a net
deficit from the supply side. Potential demand was considered to be
'given' and was always attempted to meet. In 1999-2000, India's
refining capacity increased from 69 million tonnes to 112 million
tonnes and is proposed to be enhanced further. On the
consumption side, the year 2001-02 was a depressed year.
Therefore, a glut like situation in the domestic market is being
managed by Indian oil companies. Surplus product is being
exported. The operating level of refineries in Singapore and Middle
East is being adjusted with the surplus thrown up by Indian
refineries. Indian refineries have built-in disadvantages with
respect to cost of crude procurement. Therefore, it is hard for them
to get a comparable margin while fighting for price of their product
in international market. Despite infrastructural bottlenecks,
Indian oil companies have started testing the export waters and
yet managing a respectable dollar per barrel ratio for their
refineries. In days to come, Indian oil companies and the
government will have to use their cards on technology and tariff to
play the game in international market with a hide-and-seek
product surplus situation in the domestic market.
Technology is a veritable tool for sustainable developments world

over. Environmental degradation, greenhouse effect and pollution
of air and ground water are issues of serious concern which Indian
policy-makers have paid attention to.
(c)
In order to reduce pollution, unleaded petrol is being supplied

throughout the country from February 2000. Further, supply of
diesel with maximum 0.05 per cent sulphur content is being
supplied in metro cities.
As Indian economy gets more and more globalised Indian
consumer will have access to cheap and energy efficient goods
available outside India. For a country like India, it is necessary to
develop an energy technology vision on the basis of which
technology development and dissemination can be managed and
___________________
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___________________
___________________
___________________
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Petro Economics
___________________
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___________________
___________________
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___________________
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___________________
promoted. From the point of view of oil security, expanded access,

environmental benefits, an energy mix and a set of technologies
defining the production and consumption related to such a mix
would be an important element of development policy and strategy.
With increase in oil prices, different countries throughout the
world would have a much stronger incentive to improve the
efficiency at different stages of the energy cycle. After the oil price
shock of 1973/74, global energy intensity started moving down
significantly. Projections up to the end of this century indicate a
substantial decline in energy intensity. These changes would be
the result of innovation across the board not only in the energy
system of the global economy, but also in the economic structure
for the production of goods and services.
Notes
Security
UP
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374
(c)
CC
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Uninterrupted supply line of fuel is a concern for all countries,

developed and developing alike. It is more so for a country like
India, which is dependent largely upon war-prong source like
Middle East. Diversification of crude procurement source has been
attempted, and successfully so, by private refineries and also by
PSU refineries after de-canalisation in April 2002. Efforts have
been stepped up by Indian companies like ONGC Videsh Limited
(OVL) and Reliance to secure crude acreage and equity in overseas
oilfield like Indonesia, Suqan, Sakhalin, Iraq and some other
places. This is a notable step in the direction of security and selfsufficiency. Economic diplomacy and overseas commercial venture
by Indian companies together would go a long way in securing
India's interest in foreign soil. Augmentation of infrastructure in
terms of port facilities, tankage and pipeline to handle sizeable
parcel in quick operation is another necessity of theme. Creation of
strategic reserves for oil is a known solution and government in
collaboration with TERI is working towards its implementation.
Globalisation of Indian oil industry is a positive step towards
having security of supply.
Self-Reliance
Self-reliance in the oil sector does not necessarily mean only
having right on crude oil. Exploration and production activities in
the Indian basin must be promoted. The exploration of crude and
extraction of crude are two separate activities having their own
separate cost structure. Particularly, exploration is a risky job.
375
Notes
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Even if oil is struck in a specified field, the available geological

data and techniques of measurement are inadequate to clearly
define the amount of crude oil that can be extracted from any field.
Hence, the assessment of the sale price of a discovery to another
firm that will undertake extraction of crude oil becomes difficult.
As a result, there are difficulties in the recovery of capital costs
sunk into exploration. Vertical link between exploration and
extraction has to be maintained through some institutional
arrangements. Some models on this issue have already been
worked out by Director General of Hydrocarbon.
___________________
___________________
___________________
___________________
Self-reliance in oil sector also would mean developing technical

capability within the country, and availability of capital and
foreign exchange required for investment.
___________________
Check Your Progress
___________________
Fill in the blanks:
CC
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1. means to make something worldwide

in scope or application.
2. A peculiar feature of the reform process in .

industry is that it has a large and intimate global
interface, besides the domestic aspect of liberalisation,
largely
centring
on
licencing
policy,
pricing,
restructuring and customer focus.
Summary
The likely future trend with regard to exploration, asset holding,

merger and acquisitions have also been touched upon to provide a
rudimentary knowledge base. The issues of current interest, like
globalisation, economic development and environment have also
been reflected upon. The phases of deregulation of India's
hydrocarbon sector have been chronicled along with the emerging
issues.
(c)
Lesson End Activity
Prepare a project report on the issues of current interest, like

globalisation, economic development and environment in oil and
gas industry.
___________________
___________________
Petro Economics
Keywords
376
Notes
___________________
___________________
___________________
___________________
___________________
___________________
Oil Majors: Large integrated players in petroleum industry

namely Exxon, Royal Dutch/Shell British Petroleum (BP), Mobile
Chevron and Texaco.
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OPEC: Organization of the Petroleum Exporting Countries is an

intergovernmental organization dedicated to stability in and
shared control of the petroleum.
Strategic Assets: In petroleum industry, strategic assets include
Large, low cost oil fields, gas fields, Refineries and Ideal sites that
integrate refining and petrochemicals.
___________________
___________________
___________________
1. What are the new drivers of competitive advantages?

2. Write a note on Super Major Theory.
CC
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3. Discuss the key phases of oil industry.
4. What are the emerging issues in Indian oil industry?
Further Readings
Books

Science, v. 86, p. 985-990.

reflection data: A Case Study: Current Science, v. 90, p. 1421-1430.
Web Readings
(c)
http://www.eia.gov
http://www.bp.com
UNIT 23: Globalisation and Oil Security for Indian Oil Industry
Unit 23
377
Notes
Activity
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Globalisation and Oil Security for

Indian Oil Industry
List ___________________
down the concerns for Oil
securities in India.
___________________
___________________
___________________
Objectives
topics:
\
Indian Context: Oil Security in Indian Context
Other Measures
___________________
___________________
___________________
___________________
___________________
___________________
Introduction
CC
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Oil industry in India is moving on a dynamic course since 1991,

when the country embarked upon the era of liberalisation and
reform. The reform process in the oil industry has been swift,
multi-ranged and its impact has been of far-reaching consequence
for both the micro - management of the industry and macromanagement of the economy. A peculiar feature of the reform
process in oil industry is that it has a large and intimate global
interface, besides the domestic aspect of liberalisation, largely
centring on licencing policy, pricing, restructuring and customer
focus. This unit reflects on the global aspect of the transformation
of Indian Oil Industry which it is presently undergoing and reflects
on certain options that we ought to exercise, keeping in view the
interest of Indian consumer and that of the country at large.
(c)
Uninterrupted supply of fuel is a cause of concern all countries;

more so for a country like India whose import dependence is 70 per
cent of its total requirement. Although security of oil is something
which every country would like to have, yet a close look at the
subject would let us know that security measure basically means
insulating a country from the shock arising from sudden and
unanticipated disruption in oil supply. By definition, security
measure is a defence mechanism, requiring perpetual
preparedness. Security is a balancing act, it comprises making of a
Petro Economics
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
rational choice amongst multiple options; both short-term and

long-term. Security has a cost implication. Therefore, a high degree
security measure may be cost prohibitive.
Notes
With this background, it will be interesting to study how other

countries have approached the issue and have taken care of their
security concern. In this study, a survey has been made of two
countries. One is Japan, which is almost hundred per cent
dependent for oil on external source.
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378
Second, is USA, which is a high consumption and high import

zone? India's case also has been dwelt upon at the end of the study.
Profile of Oil & Gas Sector in Japan

z
Oil reserve: Japan has very limited domestic oil reserves,

amounting to 44 million barrels as of January 2011, according
to The Oil and Gas Journal (OGJ), down from the 58 million
barrels reported by OGJ in 2007.
Indigenous production: In 2010, Japan's total oil production

was roughly 132,631 bbl/d, of which only 4,940 bbl/d was crude
oil.
(c)
CC
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___________________
Japan relies heavily on imports to meet its consumption needs.
Dependence on Middle East: 80 per cent of its oil requirement.
Japan's GDP grew at an average annual rate of 4 per cent

during 2009-10 and its final energy demand showed increase
at the rate of 1.5 per cent during the same period.
Breakdown of oil consumption by product shows a remarkable

product mix shift towards lighter ones: consumption of
gasoline increased at an average annual rate of 2.7 per cent,
naphtha 4.3 per cent, kerosene 1.1 per cent, gas oil at 1 per
cent, fuel oil at 0.8 per cent.
On the supply side, oil supply almost levelled off over the past
decade, while supply of nuclear power, natural gas arid coal
increased at an average annual rate of 4.3 per cent, 4.1 per
cent and 2.2 per cent respectively.
As a consequence, oil's share of total primary energy supply

declined from 78 per cent in 1973 to 46 per cent in 2009.
Since Japan has relied on imports for almost entire volumes of

oil it needs as a strategic commodity, the oil industry
operations centring on refining and marketing have been
According to OGJ, Japan had 4.7 million bbl/d of oil refining

capacity at 30 facilities as of January 2011, and has the
second-largest refining capacity in the Asia-Pacific region after
China.
CC
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Japan consumed 4.4 million barrels per day (bbl/d) of oil in 2010,
making it the third largest petroleum consumer in the world,
behind the United States and China. However, oil demand in
Japan has been declining since 2005. This decline stems from
structural factors, such as fuel substitution, an aging population,
and government-mandated energy efficiency targets. In addition to
the shift to natural gas in the industrial sector, fuel substitution is
occurring in the residential sector as high prices have decreased
demand for kerosene in home heating.
Japan's Oil Security Measures
Maintaining and enhancing emergency response

Measure: Japan is addressing improvement and enhancement
of the IEA's emergency response mechanism such as oil stocks
and oil allocation system. As of December 2000, Japan's
private sector oil stocks can meet the nation requirement for
77 days while the state oil stocks can meet that for 84 days.
2.
Maintaining and enhancing friendly relations with

Middle East Countries and other energy producing
countries: Interdependent relationship between the Middle
East oil producing countries including Japan is expected to
deepen further. While Middle East oil and gas resources
become more necessary than ever before for the Asian
countries, the Asian region, when viewed from another
standpoint, is expected to be a promising growth market for
the Middle East oil producing countries. The oil and gas
supply security is essential for the importing countries, and
likewise the Asian region becomes extremely important for the
oil producing countries in that it ensures demand security.
(c)
1.
3.
379
Notes
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placed under a variety of government controls for nearly half a

century without being exposed to international competition.
The liberalisation of Japan's oil industry has been completed
with the lifting of government control over imports of oil
products in 1996.
Promoting energy conservation, efficient use of energy

and alternate energy: The Ministry of Economy, Trade and
Industry has, in Long Term Energy Supply and Demand
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Petro Economics
380
___________________
___________________
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4.
Development of 'Japanese flag crude oil': Japan aims to

"establish core oil development companies" to explore and
develop projects overseas including buy-out of fields already
explored and stepped up introduction of natural gas including
construction of pipelines and GTL projects.
5.
Response to environmental issues: In addition to the

assurance of energy security, Japan's energy policy objectives
include simultaneous achievement of three E's, viz. Economic
Efficiency (reducing energy supply costs through deregulation
and liberalisation measures), Environmental Protection
(aimed at reducing CO2 emissions, to counter global warming
___________________
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Outlook published in July 2001, announced to strengthen

energy conservation measures. Japan's GDP is assumed to
grow at an average annual rate of 1.5 per cent over 1999-2010
periods, whereas primary energy demand is assumed to be
restricted to an essentially nil rate of 0.1 per cent per year.
Notes
___________________
___________________
___________________
CC
E-
problems), and Energy Security.
Japanese Perception on Oil Security

The concern about oil supply disruption has been greatly reduced
in and after mid 1980s due primarily to the ending of cold war.
Stepped up expansion of oil stockpiles and development of
alternative energy sources among IEA member countries as well as
increased oil production by non-OPEC countries all have served to
undermine OPEC's influential power in the international oil
market.
Spot and future markets have come to play a greater role, thereby
strengthening trends of oil becoming just a commodity. But the
terrorist assault on the US on September 11 has again reminded
that oil still has a feather of a strategic commodity.
(c)
With globalisation of Japanese economy, it is becoming a vital

issue for economic reforms to reduce its energy supply costs, as it
affects the international competitiveness of Japanese industries.
Profile of USA's Oil & Gas Sector

z
US have 30.9 thousand billion barrels of proved oil reserves at

the end of 2010.
During 2010, US produced around 7513 thousand barrels per

day.
Domestic oil production accounts for about 22 per cent and

Natural gas 27 per cent of US energy production.
381
US consumed an average of 19148 thousand barrels of oil per

day in 2010.
Notes
___________________
___________________
UP
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US had total import (crude and products) of 11689 thousand

barrels per day during 2001.
___________________
Top suppliers of oil to US during 2009 (January to October)

were Canada (2.4 MBPD), Saudi Arabia (1.04 MBPD), Mexico
(1.2 MBPD) and Venezuela (1.1 MBPD).
___________________
US have experienced a steep decline in refining capacity since

1981. Between 1981 and 2011, the number of US refineries fell
from 324 to 148 (137 are operating and 11 are idle).
___________________
___________________
___________________
___________________
___________________
___________________
Oil Security Measures in USA
CC
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One of the five 'Goals' set in the Comprehensive National Energy

Strategy (April 1998) of Federal Government of USA, Goal II
states "protecting our economy from external threat of interrupted
supplies or infrastructure failure".
The Goal sets two objectives:
1.
Reduce the vulnerability of the US economy to disruptions in

oil supply, and
2.
Ensure energy system reliability, flexibility and emergency

response capability.
Each objective has outlined strategies. The ones pertaining to oil

are as follow:
Objective 1: Reduce the vulnerability of the US economy to
disruptions in oil supply.
Strategy 1: By 2005, stop the decline in domestic oil production by
resorting to:
Developing improved reservoir imaging technologies to locate
oil in deeper and more complex reservoirs;
(c)
I.
II. Advanced extraction technologies to boost recovery from

mature reservoirs; and
III. Environmental technologies to reduce the cost of regulatory
compliance.
Petro Economics
___________________
Strategy 2: Maintain readiness to address threat and disruptions

to world oil supplies.
Notes
I.
To maintain the existing Strategic Petroleum Reserve sites

and inventory in drawdown-ready condition, together with
making investments in drawdown capability;
___________________
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382
___________________
II. Provide a credible deterrent to international oil disruptions;

and
___________________
III. Mitigate economic impacts, should such disruptions occur.
___________________
A Note on SPR
___________________
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___________________
CC
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___________________
The Strategic Petroleum Reserve (SPR) was established in

December 1975. SPR is part of a larger effort to coordinate
responses to petroleum supply disruptions with US allies through
the International Energy Agency. The member countries, at the
urging of the United States, have evolved a consensus agreement
that proper role of governments is to let free markets balance
supply and demand for oil in an emergency, and that the
governments should supplement supply early in emergencies from
strategic reserves. Acting together, the nations of the IEA could
inject 4 to 5 million barrels per day of oil from their reserves into
the market while other action is taken to address the cause of the
disruption.
Figure 23.1 Stock of Crude Oil in SPR
(c)
Table 23.1: U.S. Ending Stocks of Crude Oil in SPR (Thousand Barrels)
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
1977
Oct
Nov
Dec
2,646
5,084
7,455
1978
11,106
14,276
18,437
21,825
25,629
30,140
35,248
40,968
47,090
53,113
59,312
66,860
1979
73,142
78,166
82,501
83,867
86,880
88,567
90,101
91,189
91,189
91,191
91,191
91,191
1980
91,191
91,191
91,191
91,191
91,191
91,191
91,191
91,191
92,824
96,645
102,320
107,800
1981
112,490
116,057
120,860
134,170
150,068
163,081
173,128
184,674
199,247
214,777
222,542
230,341
Contd
241,241
248,537
255,534
260,994
264,141
267,154
273,593
277,884
284,592
289,963
293,827
300,613
306,133
311,830
317,735
326,833
332,484
340,672
351,780
361,000
367,240
371,291
379,089
1984
384,449
387,238
391,794
396,881
404,478
413,735
423,904
429,467
431,069
436,839
443,046
450,505
1985
457,409
460,138
461,617
464,940
471,930
476,571
483,538
487,126
489,255
489,881
491,464
493,316
1986
494,392
495,381
496,892
498,781
499,877
501,787
503,400
504,974
506,385
507,514
509,471
511,565
1987
514,910
516,709
519,987
521,983
525,129
527,187
530,012
531,978
533,890
535,652
538,547
540,648
1988
542,720
544,146
544,938
547,258
547,949
550,056
551,344
552,145
554,659
556,001
558,673
559,515
1989
561,519
563,888
566,224
568,009
570,403
571,724
574,388
575,373
577,131
578,271
579,490
579,857
383
235,271
1983
Notes
___________________
___________________
UP
E
1982
___________________
___________________
580,596
580,924
582,279
583,418
586,187
586,678
586,678
589,606
589,611
589,359
586,017
585,692
1991
585,692
581,564
568,482
568,482
568,482
568,488
568,502
568,503
568,503
568,505
568,502
568,508
1992
568,510
568,510
568,511
568,511
568,514
569,520
569,521
570,138
571,438
573,575
574,039
574,724
1993
575,311
575,807
577,611
581,702
582,119
582,753
583,333
584,087
585,658
586,248
586,794
587,080
1994
587,192
587,193
590,256
591,173
591,178
591,670
591,673
591,675
591,675
591,675
591,673
591,670
___________________
1995
591,671
591,673
591,672
591,671
591,669
591,672
591,670
591,673
591,668
591,663
591,648
591,640
___________________
1996
591,630
591,617
589,125
586,485
585,803
584,454
582,904
577,573
573,659
573,617
569,814
565,816
1997
563,482
563,474
563,468
563,463
563,458
563,454
563,451
563,449
563,444
563,439
563,430
563,429
1998
563,430
563,426
563,426
563,426
563,428
563,429
563,426
563,426
563,426
564,015
568,524
571,405
1999
571,951
571,950
571,950
572,451
573,595
574,798
575,701
574,875
575,472
572,270
569,115
567,241
2000
568,498
569,370
569,413
569,413
569,413
568,893
570,351
571,365
570,346
564,497
547,506
540,678
2001
541,675
541,677
542,290
542,350
543,270
543,270
543,734
543,734
544,760
545,209
547,325
550,241
2002
554,597
559,951
561,486
566,742
571,257
576,451
578,514
582,261
587,226
589,622
595,899
599,091
2003
599,247
599,247
599,247
599,585
603,116
608,541
612,407
618,300
624,363
630,871
633,599
638,388
2004
641,156
646,863
652,139
658,212
661,339
662,378
665,666
669,001
670,270
670,322
672,764
675,600
2005
679,670
682,013
688,150
691,880
693,938
696,398
698,811
700,726
693,659
685,238
685,630
684,544
2006
683,458
684,769
686,054
687,887
688,600
687,847
687,845
687,840
687,837
688,605
688,605
688,605
2007
688,605
688,604
688,602
689,392
690,270
690,270
690,270
690,437
692,803
694,129
695,503
696,941
2008
698,349
698,822
700,372
701,468
704,253
705,955
707,215
707,212
702,435
701,831
701,828
701,823
2009
703,786
705,541
712,800
718,786
721,698
724,098
724,094
724,092
725,086
725,081
726,129
726,616
2010
726,612
726,608
726,604
726,599
726,594
726,591
726,586
726,581
726,513
726,550
726,547
726,545
2011
726,543
726,542
726,542
726,542
726,542
726,531
718,215
696,456
695,951
CC
E-
1990
- = No Data Reported; -- = Not Applicable; NA = Not Available; W = Withheld to avoid disclosure of

individual company data.
Source: U. S. Energy Information Administration
Strategy 3: Diversify sources of oil available in world oil market:
Notable steps taken by US are in Caspian and Central Asian

region. US administration is working to encourage the
countries of that region to adopt open, fair and transparent
investment regime that will create a favourable climate for US
companies to participate directly in development of the
region's energy resources.
(c)
I.
II. US administration is also working to develop multiple

transportation options for moving the region's oil production
out into world markets.
Strategy 4: By 2010, develop technology options to help reduce
expected oil consumption by at least one million barrels per day.
___________________
___________________
___________________
___________________
Petro Economics
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
The development of light duty vehicles with higher fuel economy,

new technologies to provide increased production of transportation
fuels from bio-mass and natural gas, increased use of more
efficient transportation systems and improvement in the efficiency
of oil use in industrial processes can all help limit the expected
growth in oil demand.
Notes
UP
E
384
Objective 2: Ensure energy system reliability, flexibility and

emergency response capability.
Strategy 1: Promote reliability and flexibility of electricity
generation, transmission and distribution.
Strategy 2: Promote reliability and flexibility of domestic oil
refining, transportation and storage.
Strategy 3: Promote the reliability and flexibility of natural gas
transportation and storage.
Indian Context: Oil Security in Indian Context would mean

Uninterrupted availability of petroleum products to meet
unrestricted demand.
Exposure: 100 MMT demand 30 MMT indigenous crude

productions.
Uninterrupted availability of crude oil for refineries to run up

to full capacity.
CC
E-
Exposure: 114 MMT refining capacity 30 MMT indigenous crude

production.
Measures to ensure security in oil has two sides, i.e. demand and
supply.
1.
Demand Side Security Measures

(a) Conservation in use of oil,
(b) Commercial exploitation of non-fossil renewable energy,
and
(c)
(c)
2.
Availability and rational use of alternate form of energy

like power.
Supply Side Security Measures

(a) Source,
(b) Shipping, and
(c)
Storage.
First, India is positioned in close proximity to Middle East on

the one hand and Far East on the other. The world's largest
reserve of oil and gas lies in Middle East Region. It is here that
the production cost of crude oil is the lowest. Sailing time of a
loaded vessel from Middle East and Far East to India is 4 to 10
days. While Middle East produces high sulphur crude, the Far
East produces crude with low sulphur.
Notes
___________________
___________________
UP
E
385
India's geo-stationary position is endowed with following

favourable features from the point of view of source of crude oil and
refined products:
___________________
___________________
___________________
___________________
___________________
Second, strategically alternative source for India is West

Africa.
___________________
Third source, which is of latest development, is oil from USSR

and Caspian basin.
___________________
CC
E-
As strategy, India needs to have diplomatic and commercial

dealings with all the above sources, so that in case one source
becomes inaccessible for any reason, the other sources can be
tapped without much interruption.
Associated Measures for Oil Security

Shipping
This is by far the weakest link in meeting the emergency situation

in a cost-effective manner. India is ill-equipped to handle ships of
larger size, largely due to inadequate port facilities and low
tankage.
Port facilities have to be created to handle VLCC. Maybe offshore
floating storage, like LOOP, is developed.
Storage
(c)
Strategic storage for both crude and products has to be created to

enhance emergency response mechanism. This can be shared with
regional blocks, like SAARC and ASEAN countries, and like SRP
among countries, and of IEA.
Other Measures
A strong financial strength of the country is the best security to

meet any disruption. Specially, foreign exchange reserve of India,
India's export earnings and India's trading share in the
___________________
Petro Economics
___________________
___________________
___________________
___________________
___________________
___________________
___________________
international market are important parameters to shield India

against any kind of disruption.
Notes
Investment environment in the country and fiscal system

attracting foreign capital for exploration and extraction of crude in
deep sea areas are also important factors contributing to India's
self-reliance in oil consumption. Indian companies should be
encouraged to acquire equity in overseas oil fields, either
independently or in collaboration with local NOCs. Domestic
companies should also be encouraged to have trading, both in
physical and paper market, which would provide easy access to oil,
when required in emergency.
UP
E
386
___________________
Check Your Progress
___________________
___________________
Fill in the blanks:
1. A strong .. strength of the country is the

best security to meet any disruption
CC
E-
2. storage for both crude and products has to be

created to enhance emergency response mechanism.
(c)
Summary
It is commonly known that oil is a global commodity, in the sense

that its production and consumption centres lie far apart across
the globe. While its production is concentrated only at limited
natural pockets, its consumption centres are well spread out all
over the world. This asymmetry in demand and supply of oil leads
to widespread physical trading, which is associated with bulk
intercontinental haulage, storage and multiple transactions,
involving a complicated cost and pricing structure. Integration of
India's Oil Industry with the international oil market, therefore,
appears to be a natural process by the very logic of the trade. But
bringing about seamless integration between two separate markets
with their own distinct features and divergent interests is a
complicated surgery involving much larger socio-political and
economic process.
Lesson End Activity

Research on the impact of key oil security measures taken by
India.
Keywords
Security Measure: Security measure is a defence mechanism,

requiring perpetual preparedness. Security is a balancing act, it
comprises making of a rational choice amongst multiple options;
both short-term and long-term.
IEA: International Energy Agency
Notes
___________________
___________________
UP
E
Strategic Petroleum Reserve (SPR): SPR is part of a larger

effort to coordinate responses to petroleum supply disruptions with
US allies through the International Energy Agency.
387
___________________
___________________
___________________
___________________
___________________
1. What are the key issues and concerns of oil security for India?
2. What are the key measures used by Japan and US for oil
security?
CC
E-
3. Write a note on SPR.
4. What are the key oil security measures for demand and supply
side used by India?
Further Readings
Books

Science, v. 86, p. 985-990.
(c)

Web Readings
http://www.eia.gov
http://www.bp.com
___________________
___________________
___________________
Petro Economics
388
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
(c)
CC
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___________________
UP
E
___________________
UNIT 24: E-commerce Application in Oil and Natural Gas Industry
Unit 24
389
Notes
___________________
___________________
UP
E
E-commerce Application in Oil

and Natural Gas Industry
___________________
___________________
Objectives
topics:
___________________
___________________
___________________
Model of E-business
___________________
___________________
___________________
Introduction
CC
E-
There have been a large number of e-commerce (now

e-business) initiatives in the petroleum industry. In fact, the
landscape has changed significantly over the past year, and it is
likely to continue to change. Many of the initiatives in the oil patch
seek to improve supply chain integration. The e-business nirvana
in the petroleum industry is so-called "rig-to-pump" integration,
where there is visibility throughout the value chain from the
exploration and production phase (the rig) to the end user (typified
by the gasoline pump). While the petroleum industry has been a
leader in business-to-business e-commerce initiatives, there are
still gaps in the emerging online integration of the supply chain.
(c)
On the upstream side, there are procurement and workflow

facilitators, such as Trade-Ranger, PetroCosm, NetworkOil, and
Wellogix (formerly eNersection and WellBid). On the downstream
side, there are numerous petroleum product exchanges, most
notably FuelQuest, EnronOnline, RedMeteor, and the American
Petroleum Exchange. There are also ventures such as
PetroVantage looking at integrating refinery optimisation with the
rest of the supply chain.
E-Business is taking the world by storm, in Oil and Gas the use of
E-business is becoming more and more prevalent. My dissertation
paper explains you in laymen's terms, the applications of
E-business in Oil and Gas (O&G) and to overview the important
Petro Economics
Prepare
___________________
emergence of e-commerce in
___________________
oil and
gas industry.
___________________
___________________
___________________
operational and strategic value that E-business can have for global
and regional petroleum companies.
Notes
Activity
Today, in addition to traditional systems developments, there is an

epoch-making idea that is transforming how business is conducted.
This idea is changing business irrevocably. The idea is electronic
business, often known as e-business. E-business will allow
industries to create new products and services, further develop
customer loyalty and achieve greater market leadership.
UP
E
390
___________________
___________________
___________________
E-business brings into play an organisation's resources and partners
___________________
in new and innovative ways thus creating strategic advantage. The
___________________
potential of e-business goes far beyond new technologies it impacts

all aspects of a business strategy, process, organisation and systems
and will extend businesses beyond their own boundaries.
E-business has helped enterprises to improve customer interaction,
CC
E-
the flow and exchange of information and the reduction of costs

involved in business processes.
Emerging technologies related to e-business have already arrived

in the Oil and Gas industry, and new applications are appearing
continuously. Forrester Research, Inc. found that Energy and
Utilities are second only to the computing and electronic industry
in their potential to do on-line business.
E-business touches on all aspects of the industry value chain and
reach out to supplier networks, partners and customers. Processes
in Oil and Gas where information is created used and stored are
illustrated below in figure 24.1
UPSTREAM
DOWNSTREAM
Value chain Process Areas
(c)
Natural Gas
& LPG
Bulk
Hydro
carbons
Acquire
&
Explore
&
Develop
Produce
Crude,
Gas &
Supply,
Market
&
Refine
&
Process
Administer
Reserves
NGLs
Transport
Feed
stock
Leases
Market &
Distribute
Sell
Retail
Wholesale
Products
Products
Figure 24.1: Oil and Gas Value Chain Overview
391
The focus of E-business for Oil and Gas companies today revolves
around four basic tenets:
Notes
Improving the management and coordination of operations

around the world,
___________________
Streamlining processes/reducing costs,
___________________
Using information technology to best advantage,
___________________
UP
E
___________________
___________________
Position for necessary changes in the future.
___________________
Operations &
Maintenance
Human
Resources
Finance &
Accounting
Project
Planning
Develop and Maintain Systems/ Technology
___________________
___________________
___________________
___________________
Figure 24.2: Shared and Support Service Process Areas
CC
E-
The information needs of the industry have become more

comprehensive and complex, whilst technology, hardware and
related software applications have advanced by leaps and bounds.
As Figure 24.3 illustrates, the e-business applications at the front

end are being supported by ERP. This is done most of the
companies to increase efficiency in the work they carry out and
reduce administrative costs.
Perform
Marketing
Develop
Products
Internet
Marketing
Component &
Supplier
Management
Perform
Sales
Internet
Sales
Manage
Customer
Orders
EProcurement
Call
Center
Technology Enabled
Selling
Sales
Config
Procure
Materials/
Services
EDI
Produce
Products
Supply
chain
Manage
Logistical
Distribution
Warehouse
logistics
Shipping
Manage
Customer
Service
Call
center
Field
Service
Order
Management
(c)
Customer
Service
ERP
Figure 24.3: E-business Applications across the Value Chain
E-business can help facilitate efficiency in operations and

collaboration among partners at a more efficiently and cost
Petro Economics
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Direct integration of oil companies to external suppliers and third

parties (engineering companies, drilling, services, governments,
distributors, etc. as illustrated in Figure 24.4) can be enabled by
internet/intranet technologies. This integration creates more
seamless processes across wider reaches (nationally, regionally or
globally), and in effect removes unnecessary process handoffs and
overhead. The integration of oil companies with external agents for
process efficiencies is at the beginning stages around the world.
CC
E-
___________________
effectively than prior technology evolutions (e.g. Telex, Fax, EDI).

In addition, E-business can allow rapid entry into new markets
and industries and can allow companies to provide new products
and services in a faster time period tailored to a more connected
(and discerning) wholesale or retail customer. With the Internet,
customers can have better access to availability and prices of Oil
and Gas commodities and at each step will require value-added
service from their traditional suppliers. E-Business is one means to
that end.
Notes
UP
E
392
(c)
Figure 24.4: Integration across Multiple Players

Outside the Core Value Chain
Oil and Gas companies are thinking through the ways in which EBusiness can help them to be more competitive in the Internet
enabled economy. ERP system implementations were the "must
do" innovations of the last two decades to get internal information,
processes and transactions in order. E-business should be thought
of as a necessary extension of ERP installations that in effect
will allow Oil and Gas companies to "supercharge" their ERP
investments to reach out and integrate seamlessly with suppliers,
third parties, existing customers and new markets.
393
Notes
___________________
___________________
UP
E
In addition to extending ERP investments, E-business will speed

up and facilitate the transformation of the industry through the
emergence of on-line or "virtual" communities for purchasing and
exchange of commodities. E-business will lower barriers to new
entrants in areas of the Oil and Gas value chain while at the same
time enabling traditional oil & gas companies to converge to other
industries to offer the end use customer a more robust product
offering at a higher perceived value and margin.
___________________
___________________
___________________
___________________
Model of E-business
The initiatives of E-business within the dimensions of E-Commerce

outlined above (B2C, B2E and B2B) can be categorised using tool
referred to as the E-business evolution model or the 4-box Model.
___________________
___________________
___________________
___________________
Convergence
CC
E-
Integrating Across
Industries- creating
network markets
Industry
Transformation
Online Integration
between customers
and suppliers
Outsourcing and
focusing on core
competencies
Value chain
integration
Channel
Enhancement
Improved connections
between outside parties
Figure 24.5: 4-box Evolution Model
Using the 4-box model, E-business initiatives can be grouped into

four categories along an evolutionary path the higher up the path
indicates a higher chance in organisational model required and a
higher role that E-business can play. The four stages of evolution
(c)
are channel enhancement, value chain integration, industry

transformation and convergence. That stages are not mutually
exclusive for any company and do not imply that a company must
evolve along a linear path quite the contrary. New entrants to an
industry or market typically enter a business transformers (boxes
3 & 4) while incumbents utilise E-business to the benefit of their
Petro Economics
Notes
internal processes and to improve their external relationships with

suppliers and customers.
394
___________________
Channel
___________________
connections between outside parties to the enterprise. This is
___________________
accomplished with E-business through efficiencies in enterprise

marketing,
sales,
procedures.
___________________
___________________
Focusses
on
realising
improved
UP
E
___________________
enhancement:
customer
service
and
interest
sharing
Opportunities for channel enhancement: Include on-line

catalogues, automated connections across suppliers, linked to
___________________
affiliated companies to enable collaboration for spot market sales,
___________________
and real time visual information sharing.
___________________
Value chain integration: Involves creation of seamless processes
___________________
by
electronically
linking
people,
applications,
departments,
business units, business partners and governmental agencies

globally.
exist
within
the
drilling
proposals,
drilling
CC
E-
Opportunities
operations, global portfolio optimisation and throughout the Oil

and Gas supply chain processes.
Transformation: Involves initiatives that allow companies to

more fully outsource many of their non-core activities. Outsourcing
of back-office functions exists today while outsourcing of their key
functions is beginning to take shape.
For example, external companies provide some exploration
services, but not to the full extent possible. The advent of data
visibility across organisations will enable true collaborative
outsourcing.
With transformation, Oil and Gas companies can focus their efforts
on optimising their portfolios to cut costs, enhance performance
and create value.
Convergence: Involves the facilitation of entry into additional
(c)
markets. E-business makes the viability of new business models

more probable and will push companies to re-think product/market
strategies and their need for future strategic partnerships. The
proliferation of E-business along with the cost efficiency that it
brings, will allow a new means of reaching and supplying different
products to new markets.
E-business in Oil and Gas
395
Notes
Upstream Sector Impact and E-business Opportunity
___________________
___________________
UP
E
Processes within the upstream segment of the industry are broadly

outlined in the following process map (Figure 24.6) that will be
utilised to highlight areas that upstream companies should
investigate for potential E-business opportunities. Upstream
companies should consider identification and investment in
activities that truly add value, that exploit process excellence, that
re-bundle products/services and that create entry barriers to
others.
___________________
___________________
___________________
___________________
___________________
___________________
___________________
CC
E-
___________________
Figure 24.6: Upstream Process Map
Table 24.1: Potential Applications of E-business are Outlined

Process
Example of actual or potential use of

E-business
Acquire &
Administer
Leases, Licence
Areas or
(b) Administration of leases, contract obligation, and

ownership
relations
with
governmental
organisations and third parties can be enables
via web technologies.
(c)
Concessions
(a) Internal/external data gathering for the

development of acquisition or divestiture strategy
can use web technology.
Explore &
Develop Reserves
Using web to review seismic data across

organisations internal and external parties utilising
collaborative technologies will reduce cycle times,
risks and costs external data may be used accessible
via the internet.
Contd
Petro Economics
Notes
Produce Crude,
Gas & NGLs
(a) External data may be made accessible via the

internet
396
(b) Data can be shared amongst facilities via

intranet technologies
___________________
(c) Production information can be made available via

the internet.
___________________
___________________
___________________
___________________
___________________
___________________
UP
E
___________________
The upstream sub-sectors are not external client facing, the

greatest E-business opportunities lie within linkages and
collaboration inter- and intra-company (e.g. the creation of
seamless process flows). Upstream Oil and Gas companies are
looking for ways to improve their exploration processes in light of
the following drivers:
Table 24.2
___________________
___________________
CC
E-
Oil Prices
Oil prices have continued to rise throughout the year, due

mainly to agreement among OPEC nations output limits.
OPEC and non-OPEC nations have discussed measures
to Stabilise prices. Still prices remain near all-time lows
adjusted for inflation, and companied continue to face
pressure to slash budgets.
Economies in the Asia Pacific and America have slowed
or reversed their financial downturn, resulting in a
movement toward positive economic growth. Effective
deployment
of
operational
technology
(Seismic
interpretation and visualisation, horizontal drilling,
advanced deep water and EOR techniques) have
increased productivity and opened areas once thought to
be off-limits.
Technology
Globalisation
(c)
Environment
New computer hardware, software and systems/data

integration have improved business (back-office)
processes and have helped reduce upstream support
costs. Integration does not fully exist between geotechnical (front-office) and business (back-office) system.
Dramatic improvements in IT infrastructure are
occurring, leading to better global collaboration.
Emerging economies, present opportunities for vast new
markets.
However, the volatile political and financial climate
associated with these areas must be properly balanced.
- National Oil and Gas companies (e.g. Statoil, CNOC,
Petrobras, ONGC Videsh) are becoming more aggressive
in areas outside of their present borders.
There are continued demand upon the petroleum
industry to leave a smaller environmental footprint.
Accordingly, spending on environmental protection has
increased dramatically.
Upstream companies are in the beginning stages of the use of

E-business
with
the
strongest
emphasis
today
on
integrating/transforming the value chain.
397
In the future, an upstream company could focus on portfolio

management, bringing the right outsourcers to bear as illustrated
in the separation of key functions diagram below:
Notes
___________________
Exploration
UP
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___________________
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Production
Distribution
___________________
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Portfolio
Management
___________________
Brokers
Development
Retailers
___________________
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Figure 24.7: Key Upstream Role Separation through Alliances,

Partnerships and Outsourcing
Downstream Sector Impact and E-business Opportunities
CC
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Many E-business B2C and B2B opportunities exist within the

downstream sector, beginning with transportation (e.g. barges),
trading, through the refineries, and to the Convenience Stores
where gas and other products are sold to customers. The
participants in the downstream arena include suppliers,
information brokers, logistics providers and the customer network.
Downstream E-business Transformations takes place with the
outsourcing of non-core process and the entry of non-traditional
players in the trading and brokering arenas.
(c)
Downstream E-business Convergence Opportunities can best be

illustrated by the example of a gas station meeting or
interconnecting all the needs of a Customer Service Stations offer a
complete Convenience Service to the traveller.
Figure 24.8: Interconnection of the need of a Customer Services Stations
___________________
E-Markets
Notes
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PE
S
Petro Economics
An E-Market is an online business trading communities that focus

on either indirect or specific direct goods or services. E-Markets
link buyers and sellers globally by enabling them to manage, buy,
sell, and trade products and services, and ultimately reduce
operational expenses. E-Markets can be built around vertical
(industry specific) and horizontal (cross industry) markets. A
potential evolution of E-Markets is the joining of multiple EMarkets to create Meta-Markets. A Meta-Market is a portfolio of
trading communities that leverage network effects and economies
of scale across multiple E-Markets. E-markets and meta-markets:
___________________
Will develop around existing Horizontal and Vertical Markets?

Horizontal being across industries, vertical being within an
industry segment.
CC
EU
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Will provide a central platform for transaction automation,

demand aggregation, improved market liquidity and extended
market reach?
Will introduce new market and process efficiencies to an

industry supply chain?
Will provide end-to-end procurement solutions?
The Meta-Market as a Portfolio of E-Markets is Illustrated in

Figure 24.9.
(c)
Figure 24.9: The Meta-market: A Portfolio of E-markets
Forrester Research predicts that by 2005, $1.6 Trillion of online

B2B trade will be conducted through E-Markets. The underlying
paradigm of E-Markets is that these communities are enabling
businesses to shift from optimising an individual business to
optimising a network of businesses for competitive advantage.
Notes
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E-Markets will significantly affect how companies seek competitive

advantage. Some existing sources of competitive advantage
(superior logistics, sourcing capabilities, and distribution channels)
may become simply best practices, readily available to all that join
an E-Market. Companies will now be able to differentiate
themselves by developing the ability (culture, skills, and
management processes) to work successfully with E-Markets.
Those who join E-Markets early, and begin learning how to use
E-Markets to their full advantage, may have a significant
competitive advantage. Traditional sources of competitive
advantage that may take on increasing significance are superior
innovation capabilities, customer service and knowledge of
customers.
399
E-Markets can be created by a group of buyers, a group of

suppliers or by a neutral party. Industry consortiums have the
advantage of having participants and volume from the start,
industry knowledge, and talent pools and have credibility.
E-Markets in Oil and Gas
Applications of E-Markets in the Oil and Gas industry today are

primarily for
(1) Buying/selling of indirect materials and
(2) Commodity trading/exchange.
(c)
Trading/exchange concepts will be explored later in this article.

Markets for buying/selling of indirect materials can be broadly
categorised under the term "E-procurement", implying the
automation of purchase and sell transactions electronically
utilising a marketplace. E-procurement provides significant
advantages yet it is important to note that management and
operation of procurement without the "e" does not go away. The
value of E-procurement sites highly dependent on the local
marketplace (customers) and the supplier networks (suppliers).
Participants are key to cost and quality of the site. Some examples
of E-Markets in the Oil and Gas arena include:
(a) Traderanger.com: will be an electronic marketplace with a
single, standardised system for ordering and invoicing, as well
as content management services. It will initially undertake all
exchange activities for goods and services traded within the
Oil and Gas exploration and production businesses, as well as
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400
the refining, marketing, retail and petrochemical sectors of the

industry.
Notes
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(c) Petrocosm.com: a B2B online exchange for the Oil and Gas
industry linking buyers, sellers, participants and service
providers to real-time product and service trading across the
supply chain. Developed based on both supplier and buyer
needs requirements, PetroCosm will be a marketplace
facilitating the transfer of products and services for the Oil
and Gas industries worldwide.
(d) Global Equipment Exchange: recently opened offices in

South America. The Global Equipment Exchange, launched
earlier this year (2000) as part of the Oil and Gas Journal
Exchange (www.OGJeXchange.com). The Internet based
exchange links buyer and sellers of surplus and used oil, gas
and power generation industry equipment on a global scale.
Global Equipment Exchange's inventory consists of a wide
array of surplus and used equipment in the power generation,
Oil and Gas industries.
CC
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(b) Sparefinders.com: automatically links the buyers and sellers

of engineering spare parts in an Internet marketplace.
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E-Market Outlook
Because the value proposition is so powerful, e-Markets are

expected to make up a significant portion of overall online
business. A key success factor will be the ability to identify value
added communities (VACs).
(c)
Winners are VACs

z
Whose buyers are the largest players in large concentrated;

VACs could focus on direct materials and/or procurement.
That evolves to own the

transactions, and/or both.
Those have or are transitioning into meta-markets by

expanding into multiple verticals and that technology engines
that will be leveraged into meta-markets.
customer
relationship,
the
Losers are VACs

z
That cannot gain critical mass of buyers and/or sellers (the

"chicken and egg" problem).
With poor service capabilities or domain expertise.
Those enter already crowded VAC markets, such as travel,

technology or printing solutions.
401
Those focus on only one horizontal or small vertical category.
Notes
Activity
List ___________________
down the future trends of
ERP in oil and gas industry.
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Trade/Exchange
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Trading via the Internet (or E-Trading) is more than just buying
and selling of products and services among industry participants
it is a new way of doing business. The use of the Internet to
automate/facilitate the traditional processes of commodity trading
and risk management can be broadly categorised as E-Trading.
E-Trading involves the entry of new players to the industry and
the transformation of existing players. New players (e.g. Newco
Internet companies) have the ability to move fast and enter new
industry spaces via the internet. Existing players have the
advantage that they can leverage existing knowledge and
relationships with industry participants.
Check Your Progress
Fill in the blanks:
1. ..
brings
into
play
an
organisation's resources and partners in new and
innovative ways thus creating strategic advantage.
2. The four stages of evolution are channel enhancement,

value chain integration, industry transformation and
...
External and internal trends that are pushing for E-Trading in the
Oil and Gas industry include:
External Trends that Push E-Trading
(c)
(a) Globalisation of markets: The Internet is allowing

companies to move outside their national and regional
boundaries.
(b) 247 market access: With globalisation, the need emerges for
anytime access to the market to allow traders access to global
markets during their own business day. Enabling this trend is
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the acceptance of after market trading, the development of

electronic trading systems, and deregulation.
Notes
(c) New E-Market models: Online trading/exchanges, auctions,

aggregators. These new on-line markets create communities.
The anonymity of exchanges and auctions increases
competition and brings about true market pricing. Volumes
and liquidity will also rise. Development has been triggered by
the success of online stock market trading companies like ETrade, DLJ.com and Schwab.
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(d) Knowledge management: Information is available in great

abundance in the minds of individuals, within organisations,
and in external sources like the Internet. Improvements in
gathering, managing, and accessing this information are
allowing the trading function to improve its profitability by
increasing the top line (more profitable trades) and reducing
the bottom line (lower administrative costs).
CC
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Internal Trends that Push E-Trading
(a) Multi-task work orientation: much like their counterparts

in the stock market
(b) Time sensitive and critical tasks: deal making, execution
(c) Work that is driven by external data: critical to profitable
trading
(d) Need to leverage knowledge capital: must be rapidly

disseminated and used appropriately
(e) Volatile/dynamic environment: quick reaction to constant

change Core Strategic Goals.
(c)
The enterprises that provide electronic trading services on the

Internet can have varying organisation frameworks from neutral
organisations to extensions of a traditional company trading
departments. The Internet facilitates and automates transactions
and is an excellent means for posting of availability and rapid
changing prices to potential buyers.
Commodity products (i.e. gas, electricity, liquids) are the easiest to
trade via the internet because they require minimal interaction
between the buyer and the seller to explain product characteristics.
The key processes and Critical Success Factors (CSFs) necessary to
Table 24.3: Critical Success Factors

Trade/Risk Management Critical
Success Factors
Notes
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Key Trade Processes
403
manage and exploit the volatility via trading and risk management
in the hydrocarbon supply system are listed in the Table below:
___________________
(a) Forecast demand & supply
(a) Strong relationships with

producers & consumers
(b) Crude selection & optimisation
(b) Instantaneous global access to

price & changing market
conditions
___________________
(c) Understand transportation &

exchange options by network
___________________
(c) Make document deals

(d) Arrange transportation &
Exchanges
(d) Powerful price and market

analytics capability
(e) Manage risk/exposure/position
(e) Accurate system-wide position

physical and paper
(f)
Settle and analyse deals
CC
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The following Table outlines the various mechanisms utilised on

the Internet to facilitate the trading process:
(c)
Table 24.4: Market Models
Some electronic trading/exchange related sites are listed below.

These sites typically began with a focus on a specific commodity
but have expanded to offer additional value added services and
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have moved into offering trading support across a broader range of

commodities.
z
Altranet: Anonymous electronic trading natural gas, crude

oil, liquids, electricity
Enbridge: Electronic market place for physical trading of

crude oil
Enron Online: Trading of Enron's natural gas, electricity,

coal, weather, bandwidth, liquids, petrochemicals, pulp and
paper, emission credits (not all products available on-line yet)
Bloomberg.com: Wholesale power trading and emission

credits
NYMEX: Interactive data network for bidding, offering and

trading commodity futures and options offered by NYMEX for
crude oil, heating oil gasoline, natural gas, liquids, and
electricity
TradeCapture.com: On-line commodity trading for crude oil

and refined products
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Notes
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MCX: On-line commodity trading for oil and refined products.
Trading Outlook
Online trading models can be local, regional or globally focussed

and typically feature a broad spectrum of energy-related products
and services, be it for Oil, Natural Gas or Liquids. Neutral starts
ups are typically local while large players seek to extend their
operations on a global scale.
(c)
When reviewing electronic energy trading opportunities as whole,

there is little immediate opportunity due mainly to existing
business practice, market and regulatory conditions. General
consensus is that the situation is poised to change due to the
introduction of trading models from other parts of the world, to
changes in regulations and to the trend towards globalisation of
the trading operations of larger industry players.
Changes have been sparked by talk of super-regional trading site
implementations out of Brazil or Argentina and evidenced by the
recent launch of several smaller scale sites (such as IENEX,
Axesoenergia, NodoCero and Energia y Opciones). The success of
these new sites is still to be seen. The forecast is that some will
405
survive while others will be swallowed by regional expansions of

larger when the market and regulatory conditions are right.
Notes
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Today's mega trends in retailing centre around branding,

globalisation, entertainment and technology. The industry is
heading toward convergence retailing, where the convenience
centre is connected to the Internet and supports services such
as car washes, fast food, grocery and retail products, fuel
management, kiosks, and banking. An embedded gateway is the
key that connects the retail site network with external networks
and the Internet. Service providers use the gateway as an access
point to provide value-added services.
___________________
The problem facing the petroleum industry is how to bring millions

of devices into the digital age, without incurring the cost of
a massive update and replacement program. Working with
Cyberonix, Sun developed a low-cost solution. The architecture is
based on a multiyear project to apply Java technology to industrial
automation and control.
___________________
CC
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Market Trends
With this solution, a "wrapping layer" can be added to most of the

installed devices used in petroleum retail. This layer consists of
hardware and Java technology-based software. An industrial
controller (and optional service gateway) is added to the equipment
set at the site. Java technology-based control applications run on
the controller, providing connectivity to the Internet and other
enterprise applications. In effect, this enables an industrial control
retrofit to the existing petroleum retail equipment.
The e-GasStation Architecture
(c)
The new e-GasStation architecture allows remote access and

control of retail service station operating assets, and
synchronisation with telematic environments. Dynamic smart
services that are bundled in this unique solution empower remote
monitoring and control of pump dispensers, fuel tank monitors,
POS devices, car wash sensors, as well as security, HVAC,
refrigeration, lighting, meters, and industrial equipment.
The e-GasStation architecture specifies a distributed services
platform for real-time remote monitoring and control, data logging,
and alarming of retail service station operating assets. Distilled
information can be sent to a personal wireless device (in addition
to e-mail, voice mail, and database logs). To Internet-enable
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Notes
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systems such as security, energy management, and equipment

monitoring, a unique solution based on Sun's Embedded Java
technology was developed.
406
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Figure 24.10: The e-GasStation Architecture
Sun's Role in e-GasStation Implementations
(c)
Sun plays two key roles in the implementation of the e-GasStation

architecture:
1.
Provider of the appropriate networking and back office server

support infrastructure
2.
Supplier of an optional service gateway device to complement

the industrial controller with in-store processing and
multifunction capabilities
From the workgroup to the data centre, Sun servers and storage
systems provide dependable solutions that enable high availability,
superior scalability, flexible storage capacity, and seamless
connectivity. With a solution-focussed approach and an
uncompromising commitment to quality and service, Sun has
earned a position among the top UNIX server vendors. Sun's
service gateway, the Cobalt RAQ 4i server device, acts as a bridge
between the external network and local networks based on
Ethernet as well as solutions from Powerline, LANworks,
Phoneline's Wireless LAN, and Bluetooth. It can reside between
Business Models/Benefits
The primary purpose for developing the e-GasStation technology is

to increase profitability. Improved monitoring and maintenance of
critical retail and fuel handling equipment can reduce costly
failures and enhance operational efficiency. Some of the business
issues currently being addressed by this technology are:
CC
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(a) Pump Meter Drift Monitor/Control: The e-GasStation

architecture allows petroleum retailers to precisely monitor
and control pump dispenser meter drift. Studies have shown
an inaccuracy range of between 1.03 to 1.3 gallons dispensed
for each gallon recorded under drift conditions or with
improperly calibrated pumps. The ability to remotely monitor
and control wet stock meters can result in significant savings.
(b) Car Wash Monitor/Control: Profit and customer satisfaction

are enhanced by providing a more reliable car wash service.
The e-GasStation architecture allows car wash sensors to be
remotely monitored and controlled. Key Performance
Indicators are sent to PDA devices, alerting the appropriate
service representative for prompt repairs to reduce downtime
and improve customer loyalty. Since most motorists pay
between $4 and $7 for car wash services, it is important to
keep this profit centre up and running.
(c) Site Energy Management: Using the e-GasStation
architecture, knowledge gathered from site energy
consumption can be used to negotiate energy contracts with
reduced rates. Energy consumption trends of devices such as
coolers, appliances, and HVAC systems can be used to set
conservation policies. Along with these policies, remote control
thermostats and lighting adjustments can save from 2 to
20 per cent in yearly energy costs.
(c)
Notes
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As the retail petroleum industry adopts Internet technologies, Sun

offers the vision and key components to ensure that these
businesses thrive in the Net economy. Sun Enterprise servers are
key components of integrated, tuned, and tested business
solutions, developed with top-tier application providers.
407
the industrial controller, the back office LAN, and client servers,
providing a full suite of Internet and application services.
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(d) Shrinkage Management: The e-GasStation solution can

correlate information gathered from multiple sources such as
POS transactions, tank levels, fuel leakage, and pump
calibration to detect fraudulent situations and notify the
appropriate representatives.
Notes
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(e) Preventive Maintenance: Correlation between dispenser

rates and POS transactions can be used to detect the reduced
fuel flow rates that commonly result from clogged filters. The
e-GasStation architecture uses event notification to dispatch
service representatives to fix the problem before an outage
occurs.
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Unique Features of the e-GasStation Architecture
___________________
Remote monitoring and control of legacy operating assets
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Legacy device capability augmented with a single Embedded

Java technology-based controller
Common communication bus adds intelligence to legacy

devices
Common interface to devices from different manufacturers
Sends and receives messages in a predictable fashion
Alarm classes define diagnostic information
CC
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The e-GasStation architecture demonstrates how low profit-margin

service stations and related C-Stores can be brought into the
digitally connected world, without requiring prohibitively large
investments. At the same time, petroleum companies are providing
the foundation for new revenue opportunities at the site, as well as
stronger customer relationships.
(c)
Next-Generation Services
Once this infrastructure is in place, petroleum retailers will be in a

position to offer new, Internet-based services to customers and
their automobiles. As an additional revenue stream for service
station operators, these should be welcome. Proposed services
include:
z
Video and music download to automobiles and digital radios
Global Positioning System (GPS) mapping services
Local advertisers can (for a fee) send messages to customers

who are waiting to fill their tanks
409
Smart chip (card, ring, key chain) integration and co-branded

marketing programs offer targeted, personalised services
(customer relationship management activities)
Notes
___________________
Real-time gasoline price auctions beamed to Intelligent

Network Vehicles and PDA devices
___________________
Automobile synchronisation mechanisms that send alerts by email to PDA devices, warning of potential service conditions
for automobile parts.
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Additional Services that may be added to the e-Gas Station

Architecture include
Dynamic fuel pricing
Kiosk support
Category management and streamlined evaluation of sales

data (for fuel and bar-coded, SKU items)
Voice over Internet Protocol (VoIP) technologies to consolidate

telephone lines
Remote software maintenance and distribution
Security surveillance systems
Wireless technologies to help facilitate the speed and ease of

deployment, while reducing costs associated with physical
networks
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ERP and E-Business
(c)
ERP is a structured approach to optimising a company's internal

value chain. The software, if implemented fully across an entire
enterprise, connects the various components of the enterprise
through a logical transmission and sharing of data. When
customers and suppliers request information that have been fully
integrated throughout the value chain or when executives require
integrated strategies and tactics in areas such as manufacturing,
inventory, procurement and accounting, ERP systems collate the
data for analysis and transform the data into useful information
that companies can use to support business decision-making. ERP
systems, if implemented successfully, enhance and redesign
business processes to eliminate non-value-added activities and
allow companies to focus on core and truly value-added activities.
The following are two examples where ERP systems have
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E-business stands for "electronic business," which involves

communications and doing business electronically through the
Internet. E-business is defined as "the use of electronically enabled
communication networks that allow business enterprises to
transmit and receive information". It can significantly improve
business performance by strengthening the linkages in the value
chain between businesses (B2B) and consumers (B2C). Besides
increasing efficiency in selling, marketing and purchasing, ebusiness achieves effectiveness through improved customer
service, reduced costs and streamlined business processes.
Furthermore, e-business creates a strategic, customer-focussed
business environment for shared business improvements, mutual
benefits and joint rewards. Companies use the Internet to
implement Customer Relation Management (CRM) and Supply
Chain Management (SCM) capabilities, which enable them to link
their operations seamlessly with customers and suppliers.
CC
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dramatically increased the efficiency and productivity of

companies: IBM has used ERP to reduce the processing time for
updating pricing data from 80 days to five minutes and Chevron
has used ERP to decrease its annual purchasing cost by 15%.
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(c)
Future Trends
The rapid growth of the Internet will lead to a large increase in the
number of ERP users. Companies are eliminating disintegrated
legacy systems by replacing them with Web-enabled, integrated
ERP systems. These integrated systems become part of the overall
business strategy that connects an enterprise with its suppliers
and customers, and transforms the entire value chain. Companies
that intend to move into a net economy are beginning to emerge
and focus on multi-enterprise systems integration and growth.
They are forming strategic partnerships with major e-business
infrastructure providers (Sun, IBM and Microsoft) to continuously
integrate their ERP systems for reaching the internal and external
performance target. Major ERP vendors (Oracle, SAP, BAAN, JD
Edwards) are constantly updating and releasing integrated ERP/ebusiness suites to support an open, collaborative and competitive
business environment:
z
The major ERP vendors will continue to build compatible and

adaptable ERP components and develop extended ERP
solutions designed to address the latest market demands. For
example, Oracle's Release it is a business application suite
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Notes
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that consists of Supply Chain Management, Order

Management and new self-service software modules. It is tied
to a Customer Relationship Management application. The
whole software suite works seamlessly with one another to
handle everything from customer service on one end to
relationship with suppliers on the other. It is all registered to
run on the Web. Based on the company's vision, anyone from
giant corporations to tiny dotcoms can buy a single package
from Oracle to run their e-business, rather than buying
software from a host of competitors and trying to stitch it all
together (Outsourcing-erp.com). If it works, it will move
computing from desktop PCs to huge Internet servers that run
anything from Websites to complex corporate networks.
Oracle's skills and technologies are taking the centre stage. JD
Edwards offers its One World Software as a host service over
networks. This application service is designed to be easier to
deploy and adapt. It will overcome the inflexibility of the ERP
system on its implementation time.
With the convergence of the Internet and wireless technology,
users can access Web-enabled ERP systems anytime and
anywhere through the use of newer and easier-to-use devices,
such as personal digital assistants, smart phones, in-devices
and biometric tools. For example, an accounting manager who
is out of town will leverage his company's ERP with a personal
digital assistant to review financial reports and give directions
to his subordinates. He/she can log on to the system using
his/her fingerprint or voice.
The use of XML in B2B communications will enable a host of

new relationships between companies, vendors, suppliers and
customers. Exporting data from application suites and
developer tools using XML will become a standardised feature.
For example, IBM translates generic XML information into
device-specific formats that can be used on wireless devices.
Outsourcers, ERP vendors and e-business infrastructure

providers' alliance together to provide more robust, scalable
and compatible e-business platforms for the companies.
PricewaterhouseCoopers has built a strategic relationship with
the Sun-Netscape Alliance (an alliance of Sun and AOL) to
provide technology and services that enable companies to
build business-critical e-business solutions that leverage
(c)
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The future trend of ERP outsourcing is to explore into the

applications service market. By the year 2007, offering ERP
service over the Web will be a $2 billion business, as more
than a dozen Application Service Providers (ASPs) are moving
into the market. ASPs take ERP and non-ERP applications
from multiple vendors and put them together into a service.
Rather than selling their creations in house to corporate
customers, they make their products available over the Web
on a lease or rental basis. In addition, some mid-market
companies are seeking to outsource their non-core business
processes, such as payroll and employee benefit
administration. According to a recent survey, 75 to 80% of a
company's financial cost is tied up in labour or labour support.
As stated by Marion, any realistic attempt to reduce or
manage costs in the finance and administration area has to
focus not only on improved technology, but also on labour
issues the high costs of labour and the shortage of skilled
labour.
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investments in SAP R/3. Netscape Application Server for R/3

has provided a reliable infrastructure for Web solution
(iPlanet) that allows customers to access Price Waterhouse
Coopers' SAP system in a secure manner.
Notes
Check Your Progress
Fill in the blanks:
1. The new . architecture allows

remote access and control of retail service station
operating assets, and synchronisation with telematic
environments.
2. The primary purpose for developing the e-GasStation
technology is to increase .
(c)
Summary
The first and foremost driver is the constant pressure to improve

processes and reduce costs to increase shareholder value. In
addition to cost pressures, recent volatility in prices has pushed for
strong emphasis on trading and risk management agility. A second
important driver is the need to truly operate as a seamless regional
or global enterprise in line with merger/acquisition and expansion
plans. A third driver is the need to satisfy the more demanding
413
needs of third parties/customers along the value chain satisfying

environment and regulatory concerns. True collaboration among
internal and external entities is necessary to operate effectively in
all aspects of the business.
Notes
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E-business initiatives with the most immediate impact on process

efficiency and cost reductions are those related to value chain
integration. B2B initiatives, such as utilising the Internet as a
collaboration medium and participating serves in e-Market places
for improving the price discovery and purchasing processes.
Infomediaries portals and corporate websites are important for
public relations but have less of impacts on the bottom line. In the
downstream arena, B2C initiatives are necessary to stay on par
with the competition. B2C allows maximising the use of additional
sale, contact and distribution channels where brand recognition
and relationships with the customer are imperative. Finally, B2E
initiatives for promoting knowledge management across the
enterprise boundaries can help to meet employee needs and has
the potential to garner competitive advantage at all levels of the
organisation.
Lesson End Activity
Research on the impact of e-business in E&P activities.
Keywords
E-business: E-business stands for "electronic business," which

involves communications and doing business electronically through
the Internet.
E-Market: An E-Market is an online business trading
communities that focus on either indirect or specific direct goods or
services.
ERP: ERP is a structured approach to optimising a company's
internal value chain.
(c)
GPS: Global Positioning System

1.
Discuss the emergence of e-business in oil and gas sector.
2.
What are the key models of e-business?
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Petro Economics
___________________
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___________________
___________________
3.
What are the e-business opportunities in upstream and

downstream segment of the oil and gas industry?
4.
Define E-market.
5.
What are the key trends that are pushing for E-trading in the
oil and gas industry?
6.
Discuss the concept of e-GasStation.
7.
Discuss the role of ERP in e-business.
___________________
___________________
Further Readings
___________________
___________________
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Notes
UP
E
414
Books

KPMG, Mumbai.
CC
E-

Web Readings
http://www.eia.gov
(c)
http://www.bp.com
UNIT 25: Case Study
Unit 25
415
Notes
Case Study
___________________
UP
E
___________________
___________________
Objectives
___________________
___________________
___________________
Case Study: E-Business Applications Used by Oil Giants British Petroleum: XML-enabled Order Exchange between BP
Energy Company & Barber Engineering & Controls Ltd.
The first one describes about the B2B transaction taking place
between companies.
About BP at a Glance
British Petroleum is recognised as a leader in the use of eprocurement.
Infrastructure
innovations.
The main objective is to get hold of top 35-40 suppliers

enabled for e-procurement in 2003.
Its vision is to seamless, fully integrated automated process.
Why Buyers are Pursuing E-Commerce?
To leverage the internet as a business tool.
To reduce cycle time.
To have a complete automated business processes.
To have a global reach and visibility across the value chain.
Improve compliance.
Gain statistical benchmarking for standard products.
CC
E-
built
and
experience
gained
to
enable
(c)
E-commerce Hurdles for Oil and Gas Suppliers and Service

Providers are:
z
Multiple sales channels with unique e-procurement systems.
General lack of IT and internet expertise.
Cost of systems and implementation.
Transaction fees.
Contd
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Petro Economics
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Risk being reduces to a 'commodity' (downward pressure on

pricing).
Complex product and services not readily categorised in

catalog.
All efficiency gains are for the buyer.
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CC
E-
___________________
Notes
UP
E
416
(c)
The Below Slides Show You How Exactly

Business to Business Transactions Occur in the Industry
Contd
UNIT 25: Case Study
417
Notes
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UP
E
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(c)
CC
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Contd
Petro Economics
418
Notes
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(c)
CC
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___________________
UP
E
___________________
Contd
UNIT 25: Case Study
419
Notes
___________________
UP
E
___________________
___________________
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This case study shows web-based forms used both the buyer and
the supplier for e-transactions. Either partner has the option to
integrate this information exchange directly to their internal
back-office systems. This would not affect their trading partner,
because the XML transaction hub that connects them maintains
the format that they us use.
CC
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Stat-Oil: Some Facts of Stat-Oil

z
Established in 1972
Headquarters in Stavanger, Norway
Partially privatised in 2001 through IPO process
16,700 employees in 23 countries
Production/Reserves: 1 mmboepd/4.3 bn boe
Marketing 2/3 of Norwegian gas volumes
World's 3rd largest crude oil seller
Why Does Stat-Oil Need e-Business?

Globalisation of industry.
Reduce cost of extracting, refining and marketing oil and gas.
Maximise usage of scarce and disbursed resources.
Take advantage of
telecommunications.
Reduce risk and mitigate best practice in operations and

Health Safety and Environment (HSE).
(c)
technical
advances
in
IT
and
Offer training and consistency in information distribution

throughout the Company, regardless of geography and timezones.
Contd
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Petro Economics
Notes
StatOil's e-Business Roadmap
420
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UP
E
___________________
What are the Benefits?

z
Reduction of internal transaction costs
Reduction of external transaction costs

..result, reduced costs
CC
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Improved and simplified flow of information and data
High speed access to information
Standard infrastructure and standard collaboration tools
..result, better, quicker safer and more cost efficient

information
Harvest further benefits from existing systems
..result, "operational excellence" = competitive edge
(c)
How will this Affect StatOil Business?
Increased
processes
cooperation
on
establishing
standards
and
Visibility of suppliers and accessibility of suppliers on

Marketplace infrastructure
Ease of operation, faster time to market
Ease of starting up in new locations, better utilisation of

existing infrastructure
Contd
UNIT 25: Case Study
421
Notes
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UP
E
___________________
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___________________
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___________________
The Road to B2B E-commerce in StatOil
Shell Canada
Shell Canada Expands
Software Platform
___________________
___________________
E-business
on
Secure
Tivoli
CC
E-
One of the largest integrated petroleum companies in Canada

with approximately 3,400 employees, Shell Canada is a leading
manufacturer, distributor and marketer of refined petroleum
products. It is also a major producer of natural gas, natural gas
liquids, bitumen and sulphur.
To retain its leadership position, Shell is deploying both businessto-consumer and business-to-business applications to provide
better, faster customer service and lower operational costs. A
senior staff systems analyst with Shell Canada's Shared
Infrastructure group says, "e-business is very important because,
among other things, it allows us to share information in a more
timely fashion with customers and business partners. This saves
us money and attracts customers by making Shell an easy
company to deal with."
Challenge: Manage E-business Growth
(c)
When Shell began to develop and launch its online services, it

recognised that there would be an increasing need to monitor,
manage and safeguard its Web-facing applications. Security, in
particular, was a concern. "On average, they were launching one
new e-business application every two months," "They can't afford
to deploy and manage a separate access control system for each
one."
As a highly satisfied, longtime user of IBM AS/400 servers

running J.D. Edwards ERP applications, Shell Canada placed
IBM high on its list of potential security management solution
Contd
Petro Economics
___________________
___________________
___________________
___________________
___________________
vendors. Other proposals came from Sun Microsystems and

Oracle.
Notes
But even more important to Shell was the fact that IBM could
provide a comprehensive solution. "They looked for a stable
vendor with both a breadth of product offerings and a depth of
support and services to accompany those offerings," "IBM was one
of the few companies that could provide all that, and its products
seemed more mature compared to other security management
offerings."
UP
E
422
___________________
Solution: Single Point of Control
___________________
Shell Canada selected IBM Tivoli Access Manager for e-Business

as its focal point for security authorisation and administration.
"Tivoli Access Manager gives us a single point from which to
control and manage security for our e-business applications,"
___________________
___________________
With minimal consulting from IBM Global Services, the Shared

Infrastructure team completed the base installation of Tivoli
Access Manager in about one day. Performing the installation
themselves, with knowledge transfer from IBM, has helped the
team become more self-sufficient in managing the Tivoli software.
And when questions arise, they have various resources at their
disposal. "The Tivoli product documentation is excellent."
CC
E-
___________________
And if shell systems administrators don't find what they need in

the manuals, they use the Tivoli support Web site to browse
product updates, or they post their questions as problems on the
support site. Also, for the really tough problems, they have direct
access to the developers and other technical experts within Tivoli.
About a year after it installed Tivoli Access Manager, Shell
implemented IBM Tivoli Monitoring with Tivoli Enterprise
Console to monitor about one dozen UNIX servers supporting its
e-business environment. And now, the Shared Infrastructure
team is evaluating other Tivoli performance monitoring and
capacity planning tools as well.
(c)
Result: High Performance, Easier Administration, Lowers

TCO
By far, centralised administration of user IDs, passwords and

security policies across the company's Web servers has delivered
the greatest benefit to Shell Canada. It's saving time especially
at the help desk and improving Shell's ability to catch potential
security problems. And these advantages ensure Shell can provide
customers and business partners with seamless access to the
information they need. In addition, Tivoli systems management
solutions have enabled Shell to meet high performance
expectations for its e-business applications.
Contd
UNIT 25: Case Study
Question:
423
Notes
___________________
___________________
UP
E
The company needs to be able to respond quickly to increase

usage-even though usage patterns are often difficult to predict.
Therefore, Shell wants to ensure that its e-business infrastructure
is reliable, predictable.
___________________
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___________________
___________________
___________________
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(c)
CC
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___________________
Petro Economics
424
Notes
___________________
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___________________
___________________
___________________
___________________
___________________
(c)
CC
E-
___________________
UP
E
___________________
Glossary
PE
S
Glossary
Notes
___________________
Administered Price Mechanism (APM): The price of a good or service

as dictated by a governmental or other governing agency. The APM is a
complex, self-balancing system of a number of oil pool accounts.
Asset-based: Asset-based is a term used in the upstream oil industry to

describe organisations which assign multidisciplinary asset teams to each
exploratory area and producing field.
Brand Image: Brand image is the totality of impressions about the
brand.
CC
EU
Brand Personality: Brand personality is the sum total of all the

significant tangible and intangible assets that a brand possesses.
Cartel: A formal (explicit) agreement among competing firms. It is a
formal organisation of producers and manufacturers that agree to fix

prices, marketing, and production.
Conventional: Most oil explored and produced by the world so far and
will be produced over the next 20 years is termed conventional oil,
which flows at high rates from giant oilfields.
Crude Oil Reserves: It provides a good framework within which

industry can further evolve a set of industry accepted practices for the
understanding of hydrocarbon assets.
Deregulation: The removal of government controls from an industry
or sector, to allow for a free and efficient marketplace.
Development Drilling: It is the phase in which oil which has been

explored can be commercially extracted.
Distribution Channel: Distribution channel means the way through

which goods and services flow from vendor to the consumer.
Downstream: The main strategic assets are advantaged refineries and
significant retail positions in key markets.
E-business: E-business stands for "electronic business," which involves
communications and doing business electronically through the Internet.
(c)
Economic Design: Economic design of pipeline system involves

establishing an optimum relationship between pipeline sizes and
pumping configuration in terms of number of pumps and power
requirements.
EIA: Energy Information Administration
E-Market: An E-Market is an online business trading communities that
focus on either indirect or specific direct goods or services.
___________________
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___________________
___________________
___________________
___________________
___________________
___________________
___________________
Petro Economics
___________________
___________________
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___________________
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___________________
___________________
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FOB: Free-on-Board
Globalisation: The word 'globalisation' is so commonly used in different

context is that its precise meaning sometimes gets blurred. Literally it
means to make something worldwide in scope or application.
GPS: Global positioning system
International Energy Agency (IEA): The International Energy Agency

(IEA) was created in 1974 as a response to the threat posed by the first oil
crisis.
LDC: Local distribution companies (LDC) provide a pipeline or
distribution system and gas supply for consumers in towns and cities.
CC
EU
___________________
ERP: ERP is a structured approach to optimising a company's internal

value chain.
PE
S
Notes
___________________
Linked Retailing: Under this concept your main product is the anchor
while some other products one retailed as add on.
Logistics: Logistics means the management of business operations, such
as the acquisition, storage, transportation and delivery of goods along the
supply chain.
LPG: LPG was introduced in mid-fifties as a cooking fuel by
multinational oil companies.
MDPM: Market Determined Pricing Mechanism
New Exploration Licencing Policy (NELP): provide an equal platform
to both Public and Private sector companies in exploration and production
of hydrocarbons with Directorate General of Hydrocarbons (DGH) as a
nodal agency for its implementation.
Non-conventional Oil: It includes heavy oil, tar, sand oil and shale oil,
oil obtained by enhanced recovery.
OECD: The Organisation for Economic Co-operation and Development is
an international economic organisation of 34 countries founded in 1961 to
stimulate economic progress and world trade.
(c)
Oil Exploration: Exploration for oil begins with performance of several

kinds of geological and geophysical surveys. Seismic surveys have turned
out to be the most useful.
Oil Majors: Large integrated players in petroleum industry namely
Exxon, Royal Dutch/Shell British Petroleum (BP), Mobile Chevron and
Texaco.
OPEC: Organization of the Petroleum Exporting Countries is an
intergovernmental organization dedicated to stability in and shared
control of the petroleum.
PEL: Petroleum Exploration Licence
PPA: Price Adjustment Account
PE
S
Glossary
Notes
P-series Fuel: P-series fuel is a vegetable oil, animal plant waste sourced
fuel, used as an alternative to gasoline.
___________________
Refining: Refining is a series of physical and chemical processes that

convert crude oil into many finished oil products.
___________________
Restructuring: Restructuring as a concept may be understood as a

process by which organisations make internal changes in order to
efficiently utilise managerial synergy and meet the needs of the market."
___________________
Retailing: Retailing is defined as a business that sells products and/or

services to consumers for their personal or family use.
RGGLVY: Rajiv Gandhi Gramin LPG Vitran Yojana.
CC
EU
Security Measure: Security measure is a defence mechanism, requiring

perpetual preparedness. Security is a balancing act, it comprises making
of a rational choice amongst multiple options; both short-term and longterm.
Speculative Potential: Speculative potential is the quantity of
hydrocarbons located in unproved traps, in undrilled provinces or deeper
reservoirs underlying productive fields where geological c onditions are
believed to be favourable for the accumulation of hydrocarbons.
Statute: A formal written enactment of a legislative authority that
governs a state or city.
Strategic Assets: In petroleum industry, strategic assets include Large,

low cost oil fields, gas fields, Refineries and Ideal sites that integrate
refining and petrochemicals.
Strategic Petroleum Reserve (SPR): SPR is part of a larger effort to
coordinate responses to petroleum supply disruptions with US allies
through the International Energy Agency.
Transportation and Storage: They are not just the physical link
between the importers and the exporters and, therefore, between
producers and refiners, refiners and marketers and marketers and
consumers; their associated costs are a primary factor in determining the
economics and pattern of world trade.
(c)
___________________
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___________________
___________________
___________________
___________________
___________________
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
CC
EU
___________________
PE
S
Petro Economics
(c)
___________________

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UNIT 20: Case Study

EMBA (Oil & Gas Management)

SLM Development Team

Course Code: MDSO-821D

Course Name: Petro Economics

MPower Applied Learning Enterprise

UNIT 20: Case Study

Introduction to Petro Economics.................................................................................... 3

Global Trends in Oil Industry...................................................................................... 15

Indian Oil Industry Exploration and Production ....................................................... 39

New Exploration and Licencing Policy........................................................................ 61

Case Study .................................................................................................................... 69

Indian Oil Refining....................................................................................................... 77

Deregulation (Oil and Natural Gas) .......................................................................... 101

Indian Oil Industry Marketing .................................................................................. 113

Structure of Oil Industry............................................................................................ 179

Indian Experience in Petro Retailing ........................................................................ 255

Economics of Crude Oil .............................................................................................. 275

Trade and Transport .................................................................................................. 299

Geopolitics in Oil and Natural Gas Trading ............................................................. 311

Case Study .................................................................................................................. 335

International Hydrocarbon Economic Environment ................................................ 347

Trend and Structure of Oil and Gas Economy .......................................................... 357

Globalisation and Oil Security for Indian Oil Industry............................................ 377

E-commerce Application in Oil and Natural Gas Industry...................................... 389

Case Study .................................................................................................................. 415

Glossary ............................................................................................................................................ 425

UNIT 1: Introduction to Petro Economics

Global Oil Demand

Highly Regulated Industry

Crude Oil Reserves

UNIT 4: NEW EXPLORATION AND LICENCING

Potentials of Indian Hydrocarbon Sector

UNIT 5: CASE STUDY

UNIT 3: INDIAN OIL INDUSTRY EXPLORATION

UNIT 1: Introduction to Petro Economics

Introduction to Petro Economics

Liberalisation in the Marketing Sector

Exploration for oil in the upper Assam shelf was recommenced

Exploration and production,

Refining and marketing.

In India, the E and P companies are Oil and Natural Gas

Exploration and Production

The domain of ONGC and OIL, upstream E and P is a high risk

UNIT 1: Introduction to Petro Economics

it to the offshore areas. Discovery of oil in large quantities at

field quickly, ONGC adopted the concept of phased development.

Production from Bombay High was started initially from two

production from other platforms was also added to reach a

production rate exceeding 60,000 barrels of oil per day by October,

OIL, meanwhile, continued exploratory efforts in their licences in

discoveries. They had started exploration in Arunachal Pradesh in

decade (1967-77), the production of crude oil increased from 5.66

MTPA to 8.9 MTPA. Next decade (1977-87) began on a note of deep

petroleum products was rising and international prices were also

high. The augmentation of indigenous resources became the key

exploratory efforts yielded results in the form of discoveries of oil

In the year 2009-10, the production of Petroleum Products in the

country was 149.65 MTs as against 150.52 MTs during 2008-09, a

(2010-11), production of crude oil is estimated at 37.96 million

crude oil production of 33.69 MMT during 2009-10. The projected

higher than the production of 47.51 BCM in 2009-10. The increase

in natural gas production is primarily from the KG deepwater block.

The upstream oil and gas sector is characterised by high