Indian Hydrocarbons Industry

Hydrocarbons In organic chemistry, a hydrocarbon is an organic compound consisting entirely atoms of hydrogen and carbon. The majority of hydrocarbons found naturally occur in crude oil, where decomposed organic matter provides an abundance of carbon and hydrogen which, when bonded, can catenate to form seemingly limitless chains Hydrocarbons: Classification The classification for hydrocarbons defined by IUPAC are as follows - Saturated Hydrocarbons: Most simple form of hydrocarbons and are formed of single bonds saturated with hydrogen. These are the basis of petroleum fuels and are either found as linear or branched species - Unsaturated Hydrocarbons: Have one or more double or triple bonds between carbon atoms. Those with double bonds are called alkenes and those having triple bonds are known as alkynes - Cycloalkanes: These are hydrocarbons containing one or more carbon rings to which hydrogen atoms are attached - Aromatic Hydrocarbons: These form of hydrocarbons have at least one aromatic ring. Also known as arenes Hydrocarbons can be gases (methane, propane), liquids (hexane and benzene), waxes or low melting solids (paraffin wax and napthalene), or polymers (polyethylene, polypropylene and polystyrene)

India is endowed with a vast sedimentary cover having a thick pile of sedimentary rocks both onland and offshore. Total 26 sedimentary basins have been identified which are categorized based on their hydrocarbon prospectivity as under: Prospectivity Categories Category IProven commercial productivity (Cambay, Mumbai Offshore, Assam Shelf, Krishna- Godavari, Cauvery, Assam-Arakan Fold Belt and Rajasthan basins) Category IIIdentified prospectivity (Kachchh, Andaman-Nicobar and Mahanadi basins) Category IIIProspective basins (Himalayan foreland, Ganga Vindhyan, Konkan-Kerala- Lakshadweep and Bengal basins) Category IVPotentially prospective (Karewa, Spiti- Zanskar, Satpura, South Rewa, Damodar, Narmada, Deccan Syneclise, Cuddapah, Bhima-Kalagdi, Pranhita-Godavari, Bastar and Chhatisgarh basins

Extensive discoveries have been made in recent years Pre-NELP ( ) – 13 yrs.NELP I, II and III, IV, V ( ) – 6 years 2D Seismic Survey (LKM)24,0911,09,305 3D Seismic Survey (SKM)5,30467,773 Exploratory Wells (No.)16793 PSC Blocks28138 No. of Discoveries (Up to 15 April 2007) 2540 Investments made on Exploration (US$ MM) Source: Directorate General of Hydrocarbons ONGC and OIL are the largest players with about 83 per cent share of the total domestic oil and gas production In the last four years, private sector / joint venture companies have made 32 significant hydrocarbon discoveries

Place of Hydrocarbons Industry in the Indian Economy Hydrocarbons industry plays quite a significant role in the overall growth of an industry and Indian economy Hydrocarbons industry accounts for about 41% of GDP Proceeds from hydrocarbons exports cover 95% of hard currency revenues More than half of the state budget is funded by oil and gas tax revenues Hydrocarbons industry segment employs some 150,000 personnel Inferences Indian oil and gas industry is worth US$ 110 billion GDP*: US$ billion

Indian crude oil import scenario Major exports are done from the Middle East In May 2010, India imported US$ 8,844 million worth of crude oil India to become the fourth largest crude oil importer by 2025, only after USA, China and Japan India imports 80% of its annual oil requirements Source: World Trade Atlas Under the new exploration regime in India the hydrocarbon resource potential of Indian sedimentary basins, exploration by the national oil companies viz. ONGC and OIL, and covered by different JV and NELP blocks, has been reported by the Directorate General of Hydrocarbons (DGH) to be around 28 billion tons (Oil + Oil Equivalent Gas), including around 7 billion tons Hydrocarbon potential of India Inferences

Domestic Production Woefully Short of Demand India presently imports 70% of its hydrocarbon needs Current shortfall is around 1.41 MM BOPD Potential Demand is anticipated to grow to 2.25 MM BOPD in 7 years Domestic Hydrocarbon Potential Largely Unexplored India has 26 basins Only 7 has been commercially exploited 19 basins (73% of the basins) are relatively unexplored Organic matter maturation studies for hydrocarbons were carried out recently by the Lucknow-based BSIP on a rich assemblage, comprising algae, acritarchs and larvae of the petroleum fly from the Gotan Limestone, Marwar subgroup in Rajasthan, revealed the micro fossil indicator Algae of Type I Liptinite. Gotan Limestone divulges an entirely new basin for hydrocarbon exploration High impact studies on the source rock evaluation, palynostratigraphic and palaeoenvironmental data on Western offshore (including Bombay offshore) and Krishna Godavari (K-G) basins have also been carried out. Forty three dinoflagellate (marine micro-organism) biohorizons have been identified in the Tertiary subsurface of Mumbai offshore, facilitating a high resolution correlation of Oil Bearing horizons In the K-G basin, 82 dinoflagellates biohorizons have been identified. A very fine dinoflagellate-based stratigraphic resolution has been achieved by BSIP scientists at most levels making it useful in geological modeling for hydrocarbon exploration in both Western offshore and K-G Basin. Currently, outsourcing is largely done to foreign laboratories. The proposed centre will also serve national oil companies like Oil and natural Gas corporation (ONGC) and Oil India (OIL) by providing alternate opinion and multiple data sets for reducing exploration risk, and also outsource their spill-over work Source: Business Standard, July 18, 2010

Major changes in Hydrocarbons Sector: A Review Fast growth of global demand in petroleum Continued tense geopolitical situation in the main producing areas Physical constraints in the petroleum service industry Inadequacy of the global refining capacity Weather impact and natural disasters At the International Level Consuming Countries Producing Countries Companies (NOC / IOC) Human Factor Players

The value delivery system vs. the traditional model Traditional product-oriented system Value delivery system Product design Process design Create the product Procurement Manufacturing Service Make the product Marketing Research Advertising Promotion Price Sales & Dist. Sell the product Understand value drivers Select target Define benefits, price Choose the value Product, process design Procurement, manufacturing Distribution Service Price Providing value Sales message Advertising Promotion Communicating the value to the customer Source: McKinsey & Company, Center for Energy Economics, UT-Austin

The Value Chain Petroleum Resources Exploration and Appraisal Reserves Development Petroleum Production Transport & Storage Oilfield Services & Equipment Oil Refining Gas Processing (NG, LNG, GTL, etc.) Transport & Storage Oil Marketing & DistributionGas Marketing & Distribution Petrochemicals Other services and inputs Trading Financing Research & Development Process Chemicals Etc.

Oil and Gas Value Chain

CompanyRevenue ($ billion) FY 07 UpstreamMidstream Pipelines Downstream RefiningRetail Outlets Public Sector IOC50.8 BPCL26.9 HPCL22.1 ONGC15.2 Domestic Private Players Reliance Industries 27.2 International Private Players Shell (FY 06)355.8 British Gas (Centrica) (FY 06) 32.9 Cairn Energy (FY 06) 0.29 Major Players and Presence in Value Chain Source: BP Statistical Review of World Energy – 2007 Capitaline Fortune, Ministry of Petroleum and Natural Gas, Government of India Source: Directorate General of Hydrocarbons, Ministry of Petroleum and Natural Gas, BP Statistical Review of World Energy

Involvement of Government in this sector The Government of India has made an effort to increase exploration activities and increase private sector participation in the Oil and Gas Exploration Sector implemented in NELP in 1999, for the hydrocarbon sector, Coal Bed Methane (CBM) in 2001 for the gas sector The government is trying to mitigate supply-side risks by encouraging domestic exploration and production activities, acquiring oil equities abroad and building strategic petroleum reserves The NELP regime introduced numerous benefits to the industry players. Some of them are seven-year income tax holidays for the production of mineral oil, no custom duty on imports required for petroleum operations, removal of signature bonds, and biddable cost recovery up to 100 percent The Indian Oil Corporation has formed a joint venture with the Government of Chhattisgarh for jatropha plantation across 36,000ha, while Hindustan Petroleum Corporation is also planning a joint venture with Maharashtra State Farming Corporation for a jatropha biodiesel venture Would the Government look favorable on Indian Supply-side Companies acquiring Foreign Technology? The Government of India would be interested to acquire technology as it has yielded success in other countries such as Russia, Ethiopia, and Ecuador. Further to this initiative, Energy Security is a major concern for a fast-changing and rapidly growing country like India What kind of assistance will Indian Government provide Continue exploration in producing basins. Aggressively pursue extensive exploration in non-producing and frontier basins for knowledge building and new discoveries, including deep-sea offshore areas

Optimize recovery from discovered / future fields. Improve archival practices for data management. Continuous technology acquisition and absorption along with the development of indigenous Research and Development capability. Ensuring adequacy of finances for R&D activity essential for building knowledge infrastructure Make Exploration and Production (E&P) operations compatible with the environment and reduce discharges and emissions. Support R&D efforts to reduce adverse environmental impact. Acquire acreages abroad for exploration along with production activities British Proprietary Technologies Hydrocarbons Technology is an international procurement and reference resource providing a one-stop shop for professionals and decision makers NuTech Petrophysical Technology:This technology accurately pinpoints and quantifies all producible reserves utilizing NuLook Technology, a proprietary petrophysical tool that accurately detects all hydrocarbons in any oil or gas field Solid Waste Treatment:Worldwide distribution of Global Landfill Solutions proprietary technology for solid waste treatment and management Waste Water Management:EuroGenBio Inc., technology for waste water treatment and management NuTech Energy Alliance:The most advanced petrophysical analysis technology to quantify all producible hydrocarbons reserves Butler Tech USA:High-speed pipeline construction utilizing mechanical pipe joint systems and pipe calibration equipment

GOI plans for developing exploration and supply side ONGC Videsh is the international arm of ONGC. The company has made major investments in Vietnam, Sakhalin and Sudan and earned its first hydrocarbons revenue from its investments in Vietnam Oil India recently formed a 50:50 strategic alliance with Indian Oil Corporation Ltd. (IOC) to jointly pursue exploration and production opportunities Will government favor Indian companies acquiring Foreign Proprietary Technologies The mismatch between consumption and domestic production has made India very much dependent on exports Before new exploration licensing policy (NELP) was introduced in 1997, only four major oil fields were given commercial exploitation to private sector players. The roll out of NELP has ensured a level playing field for private and international companies to participate in the process of exploration and production General Electric Company (GE), for illustration, offers “Intelligent Drilling” technology, while a variety of engineering and seismic services firms offer the latest in technology to explore oil (e.g., 3D, seismic mapping) Recommendation Keeping all above-stated facts into consideration, the government will favor Indian companies to acquire foreign proprietary technology for better exploration and production facilities, in turn improving upon energy resources

Indian Companies to whom Acquiring British Proprietary Technology might be of Interest Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) Cairn India British Petroleum Gas Authority of India Limited (GAIL) Aban Offshore Limited Hindustan Oil Exploration Company Limited (HOEC) Indian Oil Corporation (IOC) Reliance Industries Biecco Lawrie Limited Bharat Petroleum Since the IP value of the proprietary technologies or invention of these industries is high, foreign investors may prefer investing in a wholly-owned foreign venture in Hong Kong, forming a joint venture on the mainland To enhance bilateral co-operation in Hydrocarbons sector, the Joint Working Groups with the following countries can be formed: Australia, Norway, Romania, Turkey, South Africa, Venezuela, Kuwait, Turkmenistan, Kazakhstan, and Russia Source:

Hydrocarbon Vision 2025 A ministerial group, set up by the Prime Minister, to give focus on a long-term energy security for India has developed the following vision, for the next 25 years: - To ensure energy security by achieving self-reliance through, increased indigenous production and investment in equity oil abroad - To develop hydrocarbon sector as a globally competitive industry, which can be benchmarked against the best in the world, through technology up gradation and capacity building in all facets of the industry - To ensure oil security for the country, keeping in view strategic and defence considerations The hydrocarbon vision has been converted into prioritized action agenda for medium and long term implementation in the medium and long term. In brief the main thrust of the activities would be: - Focus on oil security, through intensification of exploration efforts and achievement of 100 per cent coverage of unexplored basins in a time bound manner to enhance the domestic availability of oil and gas - Secure acreages in identified countries having high attractiveness for ensuring, the sustainable long- term supplies - Maintain adequate levels of self sufficiency in refining (90 per cent of consumption of middle distillates) - Establish adequate strategic storage of crude and petroleum products in different locations. Create additional infrastructure for distribution and marketing, of oil and gas - Open up the hydrocarbon market, so that there is a free and fair competition between public sector enterprises, private companies and other international players - Have a rational tariff and pricing policy, which will ensure the consumer getting the petroleum products at the most reasonable prices and requisite quality, eliminating adulteration

- Announce a long-term fiscal policy, to attract required investments in hydrocarbon sector - Restructure the oil sector PSUs, with the objective of enhancing shareholder value and disinvest in a phased manner, in all oil sector PSUs - To develop regulatory and legislative framework, for providing oil/gas security for the country - Create a policy framework for cleaner and greener fuels