Mogs Kendraj

8/10/2019 Mogs Kendraj

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Regulations

The extraction of hydrocarbons is an inherently hazardous activity with potential grave risks to the general environment

Environmental woes occur during all the stages of oil and gas cycle but more notable during the upstream stage of

operations. The upstream stage involves exploration, appraisals and production. This stage is accompanied by a range of

environmental issues like accidental spills and blow out during development stage, operational discharge and atmospheric

emissions like gas flaring during production stage. Major incidents like Ecuador rain forest pollution, Piper alpha offshore

disaster (1988), gas flaring in Nigeria, Montana accident (2009) and macondo blowout (2010) are but a few examples.

Command and control approach- This approach is “whereby the government „commands‟ pollution reductions (e.g, by

setting emission standards) and „controls‟ how these reductions are achieved (e.g., through the installation of specific

pollution-control technologies” available at the time .The statute sets these standards and provide enforcement

mechanisms like criminal sanctions, injunctions and civil penalties. It involves a centralised uniform determination of

controls of over numerous oil wells. The controls put in place also require uniform levels of clean up from specific polluters

In USA for instance, the essential laws regulating upstream operations are the Outer Continental Shelf Lands Act , Nationa

Environmental Policy Act and Clean Water Act . Environmental Protection Agency (EPA) is obliged to ensure compliance

with the set standards .The Clean Water Act which regulates the quality standards for water surface, EPA has enforced

pollution control programs such as setting waste water standards for industry.Market-based regulatory approach- This approach develops incentives for the upstream operators to integrate pollution

abatement and control into their routine production decisions. Operators will ordinarily reduce emissions as long as it

makes economic sense. The concept behind this approach is the creation of a “price‟ for pollution. The market price o

pollution is either indirectly in form of a pollution tax or indirectly through establishment of a cap- and- trade system,

subsidies, levies and charges. For instance UK introduced Landfill tax under the Finance Act of 1996 as a tool for waste

management. The tax operates by applying standard rate for active waste and lower rate for inert materials. The spirit is

to encourage alternative means of waste disposal. USA has also applied market incentives like emissions reduction credits

whereby polluters earn credits by reducing emissions below their specified rate. It also employs capped allowance systems

whereby a cap and trade system sets a maximum allowable cap on total emissions. The allowances are “distributed

amongst the individual polluters and the number of allowances held by each firm sets the limit on the amount of pollutionthey have the right to emit. This creates an incentive for the operators in the upstream sector to integrate pollution contro

measures into their production decisions to the extent that companies are ably motivated to innovate and apply the

methods that are cost effective. Some scholars have argued that environmental tax does not create an incentive to reduce

emissions per se.

Bidding -

Acquisition of data allows the government to set up a bidding round,This means: Defining areas for exploration and

production that will be opened up for bidding Setting up a data room where potentially interested companies can view or

acquire the information.Defining the parameters for adjudication of licences.It is possible to avoid a bidding round andenter into direct negotiations with a specific company or consortium of companies.This is more frequently the case when

the government has very little understanding of the prospectivity and the company initiates the process.This is almost

invariably an inferior solution, as the government’s bargaining position is undermined.It is also a much less transparent

approach

Parameters:

Areas to be allocated-Generally it is preferable to allocate numerous small areas to different players – but obviously

companies prefer larger areas. A balance needs to be struck.Rules about relinquishment are essential: after a set period



of time companies must relinquish all areas where they have made no commercial discoveries, allowing for re-bidding.Do

not allocate all promising areas in a single bidding round – the government learns in the process

Minimum obligations -Certain minimum obligations may be imposed on the company concerning investment in further

data collection, and minimum number of exploratory wells to be drilled.

Generally the company is required to share with the government all collected data and geological information

Type of license-The decision on the kind of contractual relationship that will be established with the foreign company is

the most important item in the list.There are Three main types of contract:

• Concession

• Production sharing agreement

•

Service contract

Choosing the type of contract-The choice of contract typology depends on circumstances:How well technically versed is

the government,Is there a national oil company and how competent is it,What does the government wish to

achieve(Maximise short term revenue vs extending the life of reserves? Exporting vs maximising domestic value

added?).Preferably a model contract should be prepared by the government containing a good many details.Afte

choosing the contract bidding takes place and after further negotiations contract is being awarded according to the bids

under the wholesome regulations.

Fiscal System: since each country is characterized by variations in economic priorities, administrative capacities,

mineral/petroleum endowments, and levels of political risk, it is impossible to identify one type or mix of fiscal instrument

as best for all countries across the board.There are several types of fiscal instruments

Bonuses. A one-time payment made upon the finalization of a contract, the launch of activities on a project, or the

achievement of certain goals laid out in the law or contracts. Sizes vary, ranging from tens of thousands to even hundreds

of millions of dollars for a few large petroleum projects.

Royalties. Payments made to the government to compensate it for the right to extract (and purchase) a non-renewablenatural resource. Most royalties are either ad valorem (based on a percentage of the value of output, e.g., 5% of the value

of the minerals produced) or per unit (based on a fixed amount, e.g., $10 per ton). When examining the likely financia

impact of a royalty, it’s important to consider not just the percentage or per-unit value, but also the base against which

that figure will be applied.

Income Tax. In some cases, oil, gas and mining companies are subject to the general corporate income tax rate prevailing

for all businesses in a country; in other cases, there is a special regime for these extractive sectors. Because petroleum

and mining projects require heavy capital and operational investments, rules on how the tax system handles costs and

deductions – the deductibility of interest payments, the depreciation of physical assets, the ability to count losses from

one tax year to offset profits in a future tax year, etc. – play a major role in determining how governments and companiesbenefit.

Windfall Profits Taxes. Some countries have set up special tax instruments designed to give the government a greater

share of project surpluses, through additional tax payments, when prices or profits exceed the levels necessary to attract

investment.

Government Equity. In some cases, petroleum and mining projects are set up as locally-incorporated entities for which

shares are divided between a private company and a state-owned company or another public body. Holding these equity

stakes can give the state access to a portion of dividend payments.



Upstream Oil & Gas Supply Chain Management:

The oil and gas industry is involved in a global supply-chain that includes domestic and international transportation,

ordering and inventory visibility and control, materials handling, import/export facilitation and information technology

Thus, the industry offers a classic model for implementing supply-chain management techniques. In a supply-chain, a

company is linked to its upstream suppliers and downstream distributors as materials, information, and capital flow

through the supply-chain. The purpose of this paper is to investigate the role of supply-chain management in the oil and

gas industry. This paper also discusses the application of the Uniform Commercial Code (UCC) to supply-chain

management issues. Then, several strategies are examined for improving supply-chains in the oil and gas industry. Finally

two case studies are introduced to show how improving supply-chain logistics in the oil and gas industry can improve

efficiency and the bottom line.

Exploration → Production → Refining → Marketing → Consumer

The links shown above represent the major supply-chain links in the oil and gas industry. The links represent the interface

between companies and materials that flow through the supply-chain. As long as oil companies have needed a phalanx of

vendors to keep their systems continuously re-supplied, there has been a supply-chain. Within each stage there are many

operations. For example, exploration includes seismic, geophysical and geological operations, while production operationsinclude drilling, reservoir, production, and facilities engineering. Refining is a complex operation and its output is the input

to marketing. Marketing includes the retail sale of gasoline, engine oil and other refined products. Each stage of the link

can be a separate company or a unit of an integrated firm. The common issue along the links in the oil and gas industry

supply-chain is economics; weighing benefits versus costs along the chain. Very few industries can benefit from maximizing

supply-chain efficiencies more than the oil and gas companies. In this industry, the types of shipments made vary widely

from gloves to pipes, valves, cranes, chemicals, cement, steel, and drilling rigs, just to mention a few. In addition, very few

industries require this immense array of supplies to be moved daily and frequently in large quantities domestically,

globally, onshore and offshore. In exploration and production, most of the work and activities are repetitive. The

companies drill a lot of oil and gas wells every year. A drilling contractor is required and as many as 45 or more different

services are required to drill and complete each well.

In the oil and gas industry, almost all significant and important operations are planned in advance. Thus, the whole process

can be massaged and fine-tuned into a high performance money making machine. The goal of supplychain management

is to provide maximum customer service at the lowest possible cost. In the industry supply-chain link, exploration

operations create value through seismic analysis and identifying prospects. Production operations become the customers

that use the output of exploration. In like manner, refining is the customer of production while marketing is the customer

of refining and the consumer of refined products such as gasoline is the ultimate customer. There is a need to ensure that

each company or operator along the supply-chain can respond quickly to the exact material needs of its customers, protect

itself from problems with suppliers and buffer its operations from the demand and supply uncertainty it faces. For oil and

gas companies, the profit margin can be greatly enhanced if the companies manage their purchasing dollars throughout

the entire supply-chain. One of the weaknesses of a supply-chain is that each company is likely to act in its best interests

to optimize its profit. The goal of satisfying the ultimate customer is easily lost and opportunities that could arise from

some coordination of decisions across stages of the supply-chain could also be lost. If suppliers could be made more

reliable, there would be less need for inventories of raw materials, quality inspection systems, rework, and other nonvalue

adding activities, resulting in lean production. Tubes and tubular goods are among the important goods supplied to the

oil and gas industry on a daily basis. These goods are very crucial and form part of the supply-chain link. The supply-chain

in tubular goods is the process through which oil field tubular goods such as pipes, tubing, and casing are ordered,

manufactured, transported, stored, prepared, and then delivered to the website for installation into a well. Managing this

part of the supply-chain can be both an operational and logistics nightmare for most oil and gas companies. Delays in the



arrival of pipes, casing, tubing, and other accessories, can result in extensive rig downtime and consequently high

operating costs

Strategies for supply-chain coordination- Supply-chain management requires an oil and gas company to integrate its

decisions with those made within its chain of customers and suppliers. This process involves relationship management by

the company. Both customer relations and supplier relations are key to effective coordination of supply-chains. Often, the

interaction between suppliers and their customers are adversarial in nature, based on a negotiated contract that spells

out all the terms and conditions by which all parties are required to comply. Instead, a firm can create long-term strategic

relationships with their suppliers. In most cases, it is a collaboration process between the oil and gas operating company

and its suppliers. Sole sourcing is a practice whereby a company commits to buy all of a particular type of its services or

goods from one vendor. This is also known as a requirements contract. In exchange, the vendor becomes a partner in the

design of new product-service bundles. Vendor expertise and knowledge can be shared and leveraged for product process

improvements. Therefore, the costs of negotiating and administering contracts can be significantly reduced. However, it

is important to note here that liability issues can arise from such arrangements. If the vendor is a partner in new product

design and there is a design or manufacturing defect which causes harm or injury, who will be liable for the harm done

the firm or the supplier-partner? Such liability issues can be part of the initial discussions between a firm and its partner-

supplier. Ultimately, such arrangements or relationships require supply chain partners to trust each other and conduct

their business with integrity. Without the ability to trust supply-chain partners, such a strategy as discussed here would

be very difficult. Relationship management is not all about customers dictating requirements for suppliers. It is a two way

traffic. Rather than following a sales-intensive strategy, suppliers may benefit from relationship marketing techniques

Instead of focusing entirely on negotiating the optimal conditions for individual orders or contracts, suppliers need to

demonstrate their strength and capabilities to gain the trust of their customers.

Vertical integration- Recent developments highlight the need to manage a company‟s supply-chain in an integrated and

cohesive manner. These developments include the increased demand for better and faster customer service, globalization

of the oil and gas business, competition, and the availability of information technology to facilitate information exchange

Therefore, integration and cohesiveness will reduce costs if it leads to a more efficient system.

In the oil and gas industry recent developments also prevail. Depleting the existing oil and gas assets is forcing manycompanies to find new oil and gas in new frontiers. These new frontiers are often found in more challenging environments

thereby forcing firms to drill deeper and further offshore. These recent developments have increased not only the

technical and operational difficulties, but also the costs and risks associated with the development of new assets. In

response to these changes, many forward-thinking oil companies are moving away from being just oil drilling companies

to seeing themselves as reservoir development and resource management companies. Supporting this necessary and

important shift in strategy requires or calls for a need to visualize, link, and manage the acquisition, exploration, and

production functions of an oil company in a more integrated, cohesive, and balanced manner. A supply-chain configuration

strategy for oil and gas companies involves the development of boundaries and parameters that determines the

relationships within its chain of customers and suppliers. Acquisition, exploration and production functions are strongly

interrelated, yet traditionally; they are usually conceptualized and managed as independent areas.



Business Models of LNG Business:

Historically, the LNG business has been a collection of independent, disparate projects. It originated in an environment

with few potential customers and no existing receiving terminals. When trying to bring remote, stranded gas reserves to

market, it was logical and unavoidable to develop each business opportunity as a stand-alone project, essentially

emulating a long-distance pipeline project. Each project was designed to bring reserves to a dedicated overseas market

through a chain of separate but integrated stages: upstream gas production and pipeline, liquefaction, shipping and re-

gasification terminals. These steps were inter-connected by long-term contractual relationships with very limited

flexibility. The companies involved as suppliers and customers formed an exclusive club and LNG sales and marketing

were very much a relationship business. There were relatively few buyers but they bought large quantities. When the

long-term sales deals were completed, most of the project’s capacity was committed and if any new capacity was

developed this was often sold to the existing buyers. After the hectic and sometimes drawn-out negotiation process to

establish the SPA's, the remaining 20 years could be devoted to maintaining these relationships, and punctuated by the

occasional price renegotiation. Consider the Atlantic Basin market: between 1964 and 1999 Algeria’s Sonatrach

essentially represented the only supplier. For most of this time there were only four real buyers, all market monopolies,

in France, Spain, Italy and Belgium. The US LNG market, looking so promising in the late 1970s, came to a halt when

price de-regulation resulted in lower gas prices, which in turn led to the abrogation of large SPA’s. Japanese buyers

dominated the Pacific Basin until 1986 when Korea entered the market, followed by Taiwan. All these customers werelocal or national monopolies. The Japanese buyers all followed closely the contractual model established in the early

1970s of long-term take or pay contracts with crude oil related prices, and Korea and Taiwan were happy to follow this

example. Whilst there were eight Japanese buyers, these were effectively led by only two. There were only seven supply

projects with only 13 nongovernment energy companies involved as shareholders. The generally used business model

consisted of a “project company” delivering LNG to gas and power utilities with monopolistic franchise areas. Off -take

terms were rigid, contracts were 20+ years and delivery was by dedicated ships. Effectively, in this environment the final

LNG buyer takes the volume risk; project owners and developers take the price risk, with LNG in most markets priced on

the basis of oil or oil products. In most projects, the commercial department of the Joint Venture liquefaction company

was responsible for marketing and sales and dealt with a limited number of well-known utility-type companies in a very

limited number of markets. This model was highly successful as it led to the development of stranded gas reserves,secured long-term contracts with credit worthy buyers, developed technically challenging new technology for plants and

ships and attracted the necessary funding from shareholders and lenders. New projects therefore tended not to deviate

too far from the existing model.

With costs going down and the number of producers and off-takers on the rise, the LNG industry is quickly becoming

more commercialized. Change has been most evident in the Atlantic, but is spreading to the Asia-Pacific region as well.

With Middle East suppliers active in both regions, the historic split between the “Pacific” and “Atlantic” markets is being

replaced by global competition and arbitrage between these regions. But export projects need to be geared up if they

are to profit from this more global and dynamic business environment. This means a substantial strengthening of the

commercial teams and the acquisition of new expertise in marketing, trading, logistics and financial risk management. As

markets open up, competition for sales is increasing. Oil and gas majors are beginning to take important positions in

these downstream markets. Open access to import terminal and pipeline capacity allows companies (in many cases also

shareholders in LNG supply projects) to buy LNG for their own account, to import LNG and to compete for end-use sales.

However, potential conflicts of interest can arise when individual companies or their affiliates function as both the seller

and the buyer of the same LNG. As explained above, in Asia the model is different, with large LNG buyers taking equity

position in supply projects, e.g. China’s CNOOC in Australia’s North West Shelf, Japanese utilities in Bayu Undan, various

Korean interests in Oman LNG and Qatar’s RasGas. While the process is different from that in the Atlantic, the result is

the same: buyers now have a potential conflict of interest by being involved in both sides of a deal. The increased size of

LNG trains means that sales to more buyers are needed to establish an economic basis for a new project. Projects have



to chase multiple buyers in a relatively short period of time to meet project schedules. Some of these buyers will

negotiate very slow build-up times for their contracts, thus leaving substantial volumes of LNG unsold in the crucial early

years of the project.

Projects are also proceeding with only a portion of their capacity sold to long-term buyers. In order to enhance cash

flow, marketers must find multiple customers throughout the world for short-term and medium term sales. These

marketing efforts are ongoing and the project must deal with complex shipping and logistics issues on a continuous

basis. Within the ‘classical’ model of an integrated project company buying gas and selling LNG, whether FOB or

delivered to third parties, all participants and the host government had mutual interest in maximizing the profitability of

the project. One could argue that this is no longer always the case and that deals now are often less transparent to

Governments or other participants in the project. Potential conflicts of interest can arise when a project partner

provides marketing advice and expertise while at the same time participating as a buyer, shipper or marketer of the

LNG. In a tolling facility, there may be no ‘arm’s length’ transactions from wellhead to market. Independently of the high

standards of individuals and companies, a more professional and ‘arms-length’ relationship seems to be required. From

a situation of long-term sales to third party utilities, the business has changed with many new sales to international

majors, often themselves shareholders in the project. These sales are often structured as an entitlement to upstream

gas, produced by the same international companies. Producers and buyers of LNG are increasingly carving out

downstream and marketing roles for themselves. This leads to the LNG plant company becoming a tolling vehicle, either

through specific design or de facto, for the gas from the producers to their marketing companies. As a result, the

liquefaction company no longer fulfills its central role in the LNG chain. It changes the need for, or at least the

complexion of, a ‘project’ marketing organization with activities shifted to individual gas producers. But it also creates a

new tension with the host country and between project shareholders.

In addition, project companies need to acquire more expertise and may need more impartial advice from third parties

such as consultants or brokers instead of from shareholders under service agreements. Hence, the shareholders may

need to give up some influence and control if they wish to be both seller and buyer.

CONCLUSIONS: A bright future is forecast for LNG, but the path is not without obstacles. The industry must continue to

innovate and reduce costs. Lenders and the shipping sector must keep pace with market developments. Equally asimportant, the industry must develop new approaches to sales and business structures, recognizing major new

commercial challenges. With green field projects and expansion trains being implemented without purchase

commitments for the full base load, risks and exposure are increasing for project developers. IOC’s are developing their

own LNG portfolios, leading to the concept of ‘branded’ LNG and to investments in downstream assets and markets. On

the other hand, we see gas and power companies seeking additional value upstream. Both trends lead to increasing

integration throughout the LNG chains. Security for project finance is shifting from that provided by highly rated utilities

to those provided by tolling arrangements and with flexible sales contracts to supply increasingly competitive markets.

Market analysis will need to be augmented by credit analysis of the market and the buyer. The tolling concept, either de

jure or de facto, will increasingly replace the classical LNG project model, creating more flexibility. Arrangements

between project developers who are also buyers and marketers will need to change and potential conflicts of interest

resolved. Marketing organizations will have to become more independent, with a global reach, and more accustomed to

short-term trading and risk management.



Investments in overseas Oil & Gas assets by Indian Oil & Gas companies:

India continues to expand its portfolio of overseas oil and gas assets. But the country faces difficulties in ramping up

production from its far-flung fields India’s state-run ONGC Videsh Ltd (OVL) was granted permission to invest US$1.45

billion in an Iraqi oil block that was originally awarded by the Saddam regime in November 2000. The details of the

service agreement for Block 8, which is located in southern Iraq, have been agreed and will be signed in the next couple

of months. The Iraqi deal is one of a number of foreign oil and gas undertakings that Indian companies have been

involved in recently. OVL, Reliance Industries (Ltd) RIL and Indian Oil Corporation (IOC) are in talks to invest in a US$16billion heavy oil project in Venezuela. The consortium is bidding for a 40% stake in the project in the Orinoco belt.

Venezuela’s state-owned PDVSA will hold the remainder. The potential of the field under consideration is vast, but will

produce heavy oil that would require upgrading. However, given the vulnerable state of IOC’s finances, and size of the

undertaking, the national oil company will only take a 4% share. It is likely that both OVL and RIL will take 15% each and

OIL will come in for the remainder. OVL, IOC and OIL are also planning to invest US$4 billion to start production from a

large gas field discovered off Iran’s coast. The Farzad gas field has recoverable reserves estimated at 362.5 billion cubic

meters, which the consortium hopes to convert to liquefied LNG and ship to India.

These developments are part of a twin pronged strategy by the Indian government to ease energy security concerns.

The first prong of the strategy involves expanding domestic production. The bringing on-stream of RIL’s deepwater gas

field off the east coast is the latest manifestation of this strategy, which is starting to bear fruit. Investment in previous

NELP licensing rounds is estimated at around US$8 billion and so far 49 discoveries have been made, accruing

approximately 4.73 billion barrels of oil equivalent. The second prong of the strategy revolves around acquiring overseas

assets in oil and gas. The production from overseas assets can then swapped, sold or brought to Indian refineries on a

commercial basis. To date, Indian companies have assets in 21 countries around the world, encompassing 41 blocks,

which are shown in the table below. OVL, a subsidiary of state-run Oil and Natural Gas Corporation (ONGC), is the main

participant in overseas equity developments, with 31 projects ongoing in 16 countries. During the financial year that

ended in March 2007, production from OVL was 7.95 million tonnes of oil equivalent.

Difficulties: Yet, however promising developments may seem in overseas assets, there are several difficulties associated

with this policy. India is one of several countries competing for equity in exporting nations and competition is intense.

On several occasions Indian companies have lost out to their Chinese counterparts in acquiring assets. It has been

argued that Indian companies are losing out for variety of reasons, including general tardiness in the competitive bidding

process, naivety in what potential clients require and lack of resources to compete with the likes of China. Unless these

issues are addressed, India is not likely to win the blocks where the best natural resources are likely to reside. There are

also political complications linked with several of India’s client nations. These complications range in scope from

domestic questions to problems of political strategy. For example, OVL has recently published it is quitting Block 5B in

Sudan and writing off US$90 million worth of investments, citing disputes between federal and regional governments

over allocation of resources. Other problem clients include Myanmar, whose suppression of democratic rights in recent

times has caused international condemnation and threats of isolation. So far, New Delhi has resisted taking a tough

stance over Myanmar for fear of losing out on its considerable natural resources to China.

The international condemnation of Iran because of its radical political ideology and stance on its nuclear power

programme has also been widely reported. As a client of Iran, India is under considerable pressure from the US to isolate

Tehran. How this triangular relationship develops in the future will be crucial in determining India’s stance in the world

as well as its pursuit of energy security.

Skepticism There ultimately remains considerable skepticism regarding the effectiveness of New Delhi’s energy strategy

Collectively, India receives crude oil and petroleum products from 30 countries around the world but the contribution of

the countries is asymmetric. Saudi Arabia, the United Arab Emirates (UAE), Kuwait and Iran account for over 75% of



India’s oil imports. Unless there are multiple significant discoveries in India’s overseas assets, this reality is likely to

continue and equity oil will be of marginal significance. Nevertheless, to date, there seems to be no slacking in India’s

efforts to tap the overseas market. It remains to be seen whether the benefits will be worth the effort.



India’s strides towards becoming a regional ‘refining hub’

Refining Capacity

The refining capacity at the beginning of the 10th Plan was 114.67 MMTPA. 10th 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 up gradation 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, increase in capacity was expected to be in the range of 23.33 MMTPA to

40.33 MMTPA

Refining Capacity Additions

Compared to the above projections, the likely achievement in refinery capacity at the end of the 10th Plan will be 148.97

MMTPA or an increase of 34.30 MMTPA. Clearly, the targets have been adequately met.

Some planned additions did not materialize during the 10th Plan due to change in demand supply dynamics (IOCL

Gujarat,2.0MMTPA and KRL Kochi refinery, 2.0 MMTPA) while others faced shortage of land requiring relocation of

existing facilities (HPCL Mumbai refinery, 2.4 MMTPA).

The mid-term appraisal of the 10th Plan indicated a refining capacity of 141.70 MMTPA at the end of 10th plan, against

which the likely achievement is 148.97 MMTPA i.e. an increase of 7.27 MMTPA

Refining and Marketing

Out of the total targeted 10th Plan investment of Rs. 36,572 crore for Refinery and Marketing, Rs. 26,445 cores are to be

invested in refining for capacity augmentation, quality up gradation, de-bottlenecking and revamps in various refineries

while the balance of Rs. 10,127 crore is for marketing and pipelines projects. An investment of Rs. 17,674.75 crore is likely

to be realized in the refining sector in the 10th Plan period. The major shortfalls in investment are due to deferment of

the following projects.

Though part expenditure has been incurred on the major projects indicated above, some of these projects are now slated

for implementation during the XI Plan period. Investments in grassroots Paradip Refinery (IOCL), Punjab Refinery (HPCL/

GGSRL), Bina Refinery (BPCL/BORL) and KRL Kochi were deferred because of delays in finalization of tax concessions by

the state governments, demand supply considerations and Auto Fuel Policy requirements. If these projects are excluded

from the analysis, the likely investment at the end of the X Plan is about 95 percent of the targeted investment. It may benoted that the targeted/likely investment amounts mentioned here do not include investment in respect of private secto

refineries.

TARGETS:

Refining Capacity Additions

At the beginning of 11th Plan (2007-08), the domestic refining capacity is expected to be 148.97 MMTPA. Considering the

projects under implementation and the project under various stages of approval, the refining capacity in India is expected



to go up to 235 MMTPA during the 11th Plan based on the information furnished by the various companies. The capacity

addition in 11th Plan period is expected to be about 92 MMT

However, 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. However, in

view of the likely surplus scenario, the companies depending upon the commercial viability of the project may review thei

projects and capacity additions. We could expect the refining capacity to turn out to be in the range of 190 MMT to 200

MMT leaving a scope of exports in the range of 45 MMT to 55 MMT. However, the factors like setting up in SEZ areas

differential in sweet and sour crude and import of crude oil and petroleum products being handled through large vessels

to bring down the cost of transportation may also add to the viability of the export oriented refineries. Keeping this in

view the refineries will have to make processing facilities for processing of 100 percent heavy/sour crude.

Focus on R&D:

The need for self-reliance in the petroleum sector led to the creation of engineering, design and R&D institutions like EIL

and national laboratories (IIP, NCL). Subsequently R&D centres were created in major Public sector oil companies like

IOCL, EIL, CPCL and BPCL to enhance the technological knowledge base. Other institutions like Oil industrial Development

Board (OIDB), Centre for High Technology (CHT) were created to ensure effective coordination and planning. All thiscontributed significantly towards technological self-reliance in the petroleum refining industry. Investment Requirement

India’s 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 oi

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 refining and marketing

companies in the public sector would require an investment of about Rs. 92,000 crore in refining, marketing and associated

infrastructure under their Plan expenditure.

Conclusion:

Competitive Market: In the oil sector currently there are mainly four companies in the marketing of products namely IOC,BPC, HPC and RIL besides players like Essar and Shell. The Herfindahl-Hirschman Index (HHI) for India with the existing

companies is higher than the desired number of HHI. However, with the pricing becoming free the market share will align

itself in some desired ratios, which is expected to bring HHI to a reasonable level. Most competitive markets have five

strong players. Thus, the current structure of the oil sector could continue. In a suitable environment, the current structure

will deliver a competitive market.



Increasing Role of Renewable Energy in Oil & Gas Basket :

Energy security becomes more and more of an issue in the face of worldwide increasing energy demand and uncertainty

about the stability of prices, the availability of resources and delivery conditions. For Europe, the gas troubles between

Russia and the Ukraine and more recently suggestions of large energy projects abroad such as Nabucco or Desertec

intensified the discussion on energy security. For a long term strategy, diversification is suggested as a possibility to

enhance energy security. A mere increase in import countries, however, does not do the trick. Stirling (1998) suggested

the use of the Shannon – Wiener index a simple and robust quantitative index to measure diversity. Other authors have

extended the index to include import country stability, resource availability. This paper also includes portfolio cost

efficiency. The thus extended index can improve the information on a country’s current energy security situation and on

a long-term strategy to increase energy security. The index is applied to the historic energy mix in Germany (1995-2007)

and two future development paths are compared. The Shannon Wiener index can serve as a tool to assess long-term

energy security strategies, though some aspects of a countries energy mix cannot be included, such as combinability of

certain electricity generation sources. Application of the indicator to the German energy mix shows a long term strategy

with significant shares of renewable energy is superior to putting “all eggs in fewer baskets”.

Energy security increasingly becomes an issue in the face of rising worldwide energy demand and dwindling resources.

Threats to energy security are seen in political instabilities of resource exporting countries, decreasing reserves,

geostrategic and geopolitical factors and the structure of the relevant energy markets in terms of market power,

monopolies, cartels and trusts. The European Commission has issued two Green Papers (European Commission 2000

and 2008) secure stable and sustainable energy supply and on a strategy for the security of energy supply, supporting

competitive international energy market. The large infrastructure and gas pipeline development project Nabucco

through Turkey, Bulgaria, Romania, Hungary and Austria that recently has been launched is motivated by the assumed

increase in energy security. A much discussed (IEA 2007, 2003) hedge against uncertainty is the diversity of energy

supply. However, as intuitively appealing the concept of not putting all the apples in one basket seems as difficult it has

been to quantify diversity. Lately some work on diversity indices has been published in the literature. Diversity indices

especially provide useful measures to distinguish between different energy supply structures either for the future within

one country or across countries. Future development of the energy supply structure of a country is an important policy

issue; therefore, the development of resilient indicators can provide an important decision tool. Renewable energy as

part of the energy strategy of a country is predominantly discussed in the climate change policy framework.

Consideration within the energy security context has been scarce and without any further quantification as of yet, even

if it is obvious that domestic renewable energy sources can lessen a country’s import dependence or diversify the

selection of countries from which imports originate. Though decreasing imports as such do not bear any positive

message for the economy, the shift from risky sources to less risky sources will strengthen the energy security of a

country. The following tries to add to the literature by supplying a quantitative analysis of the changes in energy security

by shifting to a more sustainable fuel mix. This contribution is organized as follows. The next section (chapter 2) will

provide an overview of different measures of energy security suggested in the recent literature. Chapter 3 then develops

the set of indicators used in the remainder of this contribution. Chapter 4 shows applications to the current energy

portfolio in Germany and to different future development paths from the literature, which differ with respect to the

targets for renewable energy.



4A Framework:

Availability: One strand of the literature reports on availability issues, mostly estimating reserves and resources, the

relation between natural resource prices and economical viable reserves and the development of recovery technologies

Accessibility: Accessibility looks into technical questions of the resource extraction as well but also comprises

geopolitical and geostrategic aspects of access to resources, such as ownership, markets, oligopolies and property rights

The import/domestic sources distribution is part of the accessibility question, such as technological development within

a country and the development of human resources for energy questions.

Acceptability: Environmental acceptability connects the energy security issues with the broader concepts of

sustainability. Different fuels interfere with sustainability concepts differently. While coal, and to a lesser extend oil and

gas, combustion is in conflict with climate change policies on GHG emission targets due to large CO2 emissions, nuclear,

and all fossil fuel extraction is associated with environmental damages such as toxic contamination to land and water

resources or hazards during the mining process. Biogenic resources impact land use and compete with food production,

which is more related to social acceptability as an extended concept of environmental acceptability.

Affordability: Affordability, as the last aspect mentioned, is related to the price risk of resources as well as the costs of

exploring alternative sources. A rather recent comprehensive treatment of the energy security issue has been published

by the Asia Pacific Energy Research Center. The countries in this region are facing growing energy demand due to

economic and population growth and heavily rely on energy imports because of resource scarcity in their own countries.

Energy Policy (forthcoming) publishes a special issue on energy security this year. The contributions in this issue range

from the theoretical discussion on the economics of energy security to an analysis of the policy process in the United

States that thus far has led to very little policy results on improving energy security

Conclusions:

Energy security is a concern to many governments in the face of worldwide increasing energy demand and uncertainty

about the stability of prices, the availability of resources and delivery conditions. Though the economic externalities are

hard to quantify, decision makers vindicate several actions and projects with improvements of energy security. A

quantifiable indicator can contribute to better policy choices. The Shannon-Wiener index can serve as a tool to assess

long-term energy security strategies. In its most simplistic form, this indicator is a measure of diversity, i.e. the number

of energy sources and the distribution of the fuel mix. Since energy security strongly hinges on the performance of

energy imports, the indicator has been extended to include the number of exporting countries and the political stability

of these exporting countries. Renewable energy is rather new to the debate on energy security. Since the use of more

renewable energy sources means tapping more strongly into domestic potentials, supporters of RES claim, they will

enhance energy security. However, the use of renewable energy will be coming at greater cost for some foreseeable

time. To include this trade off, the additional cost component is included in the construction of the indicator.



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