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Raghuvir Srinivasan

IT HAS been a story of paradoxes in the oil and gas sector. Reforms unleashed private competition, yet prices of petroleum products have not fallen; on the contrary, they have doubled in the past decade.

The Government, for the record, no longer administers the industry, yet it still decides on vital issues such as price revisions of petroleum products. The sector has been thrown open to foreign companies, yet no major company has entered the refining or the marketing segments.

One has only to compare the oil sector with telecom, which also witnessed intensive reforms, to understand how much it lags behind on the reforms front.

Exploration and production

Since 1993-94, the compounded annual growth in domestic crude oil production has been a piffling 2.26 per cent. The private sector has a small presence, accounting for about 12 per cent of the total crude oil produced in the country. Production from the national oil companies, Oil and Natural Gas Corporation (ONGC) and Oil India, has been showing a falling trend in the past decade.

The Government has been trying hard to attract foreign investment in the upstream sector through some investment-friendly proposals that form part of its New Exploration and Licensing Policy. However, the results have not been impressive with the country being able to attract only small exploration companies, such as Hardy Oil, Nikko Resources and Cairn Energy. The Shells and the ExxonMobils have kept away from the upstream business in India. While the perceived low potential in the sedimentary basins in India is partly the reason for this, the main one is the better options available worldwide for these companies. After a lean patch in the late 1990s, when its output declined, ONGC is gradually getting back on the rails. It is on a massive investment programme that will see it spending Rs 8,200 crore for re-development of the Mumbai High offshore field in order to increase its output. Besides this, ONGC is also stepping up its activities in deep-water exploration and its subsidiary, ONGC Videsh, has made aggressive forays into Sudan and Russia, by acquiring equity oil.

The gush of activity at ONGC was made possible by deregulation of the industry, which resulted in more money in its hands. In the last one year, its earnings have increased manifold, thanks to the high global oil prices.

In the past decade, the most notable event in the upstream sector has been Reliance Industries' success in striking large gas reserves of gas (estimated by the company at 14 trillion cubic feet) in the deep-waters of the Krishna-Godavari basin. There is a long way to go yet before Reliance can commercialise this field.

Refining and marketing

More than ten years after the refining sector was opened up, Reliance Industries' 33-million-tonne refinery at Jamnagar remains the only one from the private sector to be up and running. That should say a lot about the attractiveness of the industry to private investment.

The Reliance refinery turned the country surplus in refining capacity. From a situation of importing petroleum products, India turned an exporter of diesel, petrol and naphtha. Given this, none of the multinationals are keen to enter the refining sector.

However, it is another story when it comes to marketing. Multinationals such as Shell are keen on entering the lucrative marketing business, but the national oil companies — Indian Oil, Bharat Petroleum, Hindustan Petroleum and IBP — present an imposing entry barrier.

In fact, even domestic private entrants such as Reliance and Essar have yet to make serious headway on the marketing front.

Indeed, if there is a weak link in Reliance's otherwise exceptionally crafted business plan it is the lack of a retail marketing presence.

Of course, the company has forged smart agreements with the national oil companies to market its output, but the latter are now turning aggressive and demanding more competitive terms of partnership.

The privatisation of Hindustan Petroleum and Bharat Petroleum was expected to be the vehicle for multinationals such as Shell and ExxonMobil to enter the Indian market, but that may have to wait till the next government takes over.

Way to go

There is a lot more to be done and the Government can start by loosening its covert grip over the industry. It will also soon have to take a call on the LPG/kerosene subsidy issue, which is messing up the possibility of an orderly growth for the sector.

The subsidy issue is one of the biggest unfinished businesses in the last decade.

Meanwhile, privatisation will unleash competitive forces that will change the face of the industry in the next few years.

And that will be the critical difference between the decade gone by and the next.

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