Business Report

Challenges in Oil & Gas Industry

INDIA
Siddharth Srivastava

2011

Challenges in Oil & Gas Industry

Oil & Gas Industry in India

With a GDP of US$1.53 trillion, India is currently the worlds fourth-largest economy. The countrys oil and gas sector has contributed significantly to the GDP, and the sector is expected to become increasingly critical for Indias economic development, since it fuels the growth of other sectors. India is already the fifth-largest energy consumer in the world, with oil and gas accounting for 45% of the countrys energy needs. However, the proportion of natural gas consumption in India to total energy consumption in the country (around 9%) is one third compared with the proportion of natural gas in the worlds primary energy consumption. With a 53% share in the primary energy sector, coal remains the dominant fuel, but its share is projected to decrease with the thrust on gas and other renewable sources increasing. With Indias growing population and rising living standards, the demand for energy is expected to increase in future. Indias fuel needs are likely to grow at a significant rate, considering the growth pattern of the countrys GDP in the past few years. Currently, Indias per capita consumption of energy is well below that of the world average (around one fourth). To keep up to the rising demand the Government of India has initiated policies that have helped investors in the sector and also facilitated exploration and production of oil and gas in the country. And even though the Mumbai oil fields are still not exhausted, the Government realised the need to explore more areas and introduced New Exploration Licensing Policy (NELP) to encourage the private sector to invest in exploration of oil. NELP was introduced in March 1997. Currently, about 58 per cent of the prospective Indian sedimentary basins have been explored and till the ninth round of NELP, there were 34 oil and gas blocks on offer. India naturally has about 138 billion

Challenges in Oil & Gas Industry

barrels of oil and oil equivalent gas and bulk of this has not been found yet. India will account for 12.59 per cent of Asia Pacifics regional oil demand by 2014. Sector Organization Though the government has taken steps in recent years to deregulate the hydrocarbons industry and encourage greater foreign involvement, Indias oil sector is dominated by state-owned enterprises. Indias state-owned Oil and Natural Gas Corporation (ONGC) is the largest oil company and dominates Indias upstream sector. State-owned Oil India Limited (OIL) is the next largest oil producer. Other major state-run players include the Indian Oil Corporation (IOC) and the Gas Authority of Indian Limited (GAIL). In addition, the private Indian firm, Reliance Industries Limited, is becoming a significant operator in the oil sector and is the largest private oil and gas company in the country. Cairn India, a branch of UK-based Cairn Energy, and BG Exploration are also important private sector operators in the industry. Indias downstream sector is also dominated by state-owned entities. The Indian Oil Corporation (IOC) is the largest state-owned company in the downstream sector, operating 10 of Indias 18 refineries and controlling about three-quarters of the domestic oil pipeline transportation network. Reliance Industries opened Indias first privately-owned refinery in 1999, and has gained a considerable market share in Indias oil sector. Exploration and Production Most of Indias crude oil reserves are located offshore, in the west of the country, and onshore in the northeast. Substantial reserves, however, are located offshore in the Bay of Bengal and in Rajasthan state. Indias largest oil field is the offshore Mumbai High field, located north-west of
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Mumbai and operated by ONGC. Another of Indias large oil fields is the Krishna-Godavari basin, located in the Bay of Bengal. Block D6 in the Krishna-Godavari basin, operated by Reliance Industries, began oil production in September 2008. The primary mechanism through which the Indian government has promoted new E&P projects has been the NELP framework. NELP VIII was launched in April 2009 and attracted nearly $1.1 billion in investment.

Policy Making

Ministry of Petroleum & Natural Gas

Planning

Ministry of Petroleum & Natural Gas Planning Commission Petrolreum Planning and Analysis Cell(PPAC) ATE(Seperate Bench to hear Petroleum & Natural Gas cases) Directorate General of Hydrocarbons(DGH) Petroleum and Natural Gas Regulatory Board(PNGRB)

Regulation

Challenges in Oil & Gas Industry

Public Sector
ONGC

Private Sector
Cairn Hardy

Upstream(Exploration & Production)

OIL OVL GSPC(State) CPCL

RPL Essar

Refineries

BRPL NRL MRPL GAIL

Marketing Companies

IGL MPL

Integrated Oil Companies Financial Institutions

IOCL HPCL BPCL OIDB

RIL EOL Shell

Challenges in Oil & Gas Industry

1.1 Production1
According to the provisional production data released by the Ministry of Petroleum and Natural Gas, dated January 2011

Crude Oil production from the period April-January 2011 was 31.411 million metric tonne (MMT), as compared to the 28.072 MMT in the past corresponding period.

Natural Gas production during April-January 201 1 was 44030 million cubic metres, as compared to 38490.7 million cubic metres in the corresponding period in 2010.

From April-January 2011, 136.46 MMT of crude oil was refined, compared to 133.26 MMT in the corresponding period in 2010.

India will account for 12.59 per cent of Asia Pacifics regional oil demand by 2014, while providing 10.13 per cent of supply, according to the Business Monitor Internationals India Oil and Gas Report Q4 2010. The regional oil production was estimated at 8.82mn barrels per day (b/d) in 2010 compared to 8.35mn b/d in 2001. The projected production for crude oil in 2010-11 is 37.96 (MMT), which is about 12.67 per cent higher than the actual crude oil production of 33.69 MMT during 2009-10. The projected production for natural gas (including coal bed methane or CBM) for 2010-11 is 53.59 billion cubic metres (BCM), 12.8 per cent higher than the actual production of 47.51 BCM in 2009-10.

Source: Ministry of Petroleum and Natural Gas

Challenges in Oil & Gas Industry

Oil & Natural Gas Corporation (ONGC) produced maximum domestic oil in 2010, averaging to 830,000 b/ with the production of oil in India will be as high as 950,000 b/d by 2012. Natural gas production in India grows at an average annual rate of 4.0 per cent over the projection period, the fastest growth in non-OECD Asia. Most of the growth in India's natural gas production is expected in the near term, averaging 11.7 per cent per year as total production grows from 1.1 trillion cubic feet in 2007 to 2.7 trillion cubic feet in 2015. Natural gas production from the KG-D6 block is ready to flow at its plateau rate of just over 1 trillion cubic feet per year as soon as the government-designated customers are ready to receive it. In January 2011, ONGC created an exploration landmark when gas flowed out from the Barren Measure shale at a depth of around 1700 m, in its first research and development (R&D) well RNSG1 near Durgapur at Icchapur, West Bengal. This breakthrough is significant as India is the first Asian country where gas was discovered from shale outside U.S and Canada. The well RNSG-1 drilled down to a depth of 2000 m. The Barren Measure Shale, which is the main target, was encountered from 985 to 1843 m. The gas transmission domain was dominated by Gas Authority of India Ltd (GAIL) till, in April 2009, GAIL (India) Limited has set a target of transmitting 118.2 MMSCMD of natural gas from domestic sources and through liquefied natural gas (LNG) route during 2011-12 under the annual memorandum of understanding (MoU) signed with Ministry of Petroleum & Natural Gas for performance targets for the financial year 2011-12. For the FY 2011-12, the target for Gas Marketing is 85.5 MMSCMD and for production of 422 TMT of Polymers (HDPE & LLDPE) and 1,350 TMT of Liquid Hydrocarbons.
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Indias oil product demand rose 4.2% YoY to 3.09mbpd in April 2011. The growth was supported by higher LPG, gasoline, and jet fuel use. FY11 product demand rose 3.3% YoY.
- Reuters, PPAC

1.2 Consumption1
The consumption of petroleum products during 2009-10 were 138.196 MMT (including sales through private imports) an increase of 3.60 per cent over sales of 133.4 MMT during 2008-09, according to the Ministry of Petroleum. Indias current petroleum products consumption rate from April 2010 to February 2011 was 128.827 million tonnes (MT), as per the estimates of the Planning and Analysis Cell (PPAC). Diesel consumption in the country grew at 4 per cent annual rate to 4.96 MT in October 2010 while petrol sales were up 7.3 per cent at 1.21 MT. Jet-fuel consumption was up 10 per cent at 434,100 tonnes. Overall fuel sales in the country were up one per cent at 11.647 MT in October 2010 against 11.538 MT in the same month in the previous year.

Source: PPAC

Challenges in Oil & Gas Industry

Gas consumption is set to rise from an estimated 63 BCM in 2010 to 110 BCM, with domestic supply up from around 45 BCM in 2010 to at least 70 BCM by 2014.

The demand-supply gap is set to widen in future with a consumption increase of 47% between 2008 and 2018 and with production poised to increase by around 12% in the same period.
BMI India Report Q4 2010

Supply Demand Outlook

Source: Indian Oil Corporation

Challenges in Oil & Gas Industry

1.3 Investments
Essar Oil has started pumping gas trapped in seams of coal in its Raniganj CBM (coal bed methane) acreage in West Bengal. The acreage is expected to produce gas for 15 years and Essar Oil is investing US$ 300 million for CBM gas production. The company is producing 90,000-100,000 million cubic metres per day of gas and will touch a peak output of over three million cubic metres. Oil & Natural Gas Corporation (ONGC) plans to invest over US$ 3.82 billion on onshoreoperations in Gujarat over the next five years. ONGC will also set up a 10 megawatt (MW) solar power project in the state with an investment of US$ 33.73 million. Under the programme, the company has earmarked over US$ 1.79 billion for revamping its 90 installations, including 200 km-long pipeline network and 65 tanks in the state. It is also commissioning 850 km of new pipelines at an investment of US$ 150 million. International Finance Corporation (IFC) would make an equity investment of US$ 25 million in Bhagyanagar Gas Ltd (BGL), a company floated by HPCL and GAIL for setting up city gas distribution (CGD) projects in Andhra Pradesh. The proposed investment would support BGL's capital expenditure of US$276 million to create gas distribution infrastructure in the major cities of the state. ONGC and GAIL have agreed for mutual business growth covering natural gas as well as petrochemicals. This over-arching understanding was documented in the form of various agreements and exchange of letters, which were initiated in the office of GAIL. BP will be paying US$ 7.2 billion for a 30 per cent stake in 23 oil and gas blocks of Reliance Industries Ltd (RIL). The amount will be paid to RIL, for the interests it would acquire in the
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23 production sharing contracts. Future performance payments up to US$ 1.8 billion could be paid based on exploration success resulting in development of commercial discoveries. The two will also enter into a 50:50 joint venture (JV) for sourcing and marketing of gas. These payments and the combined investment could amount to US$ 20 billion.

1.4 Government Initiatives

The NELP opened Indias oil and gas sector to private-sector participation through international competitive bidding for blocks under a production-sharing contract with the GoI. National Oil Companies (NOCs) continue to account for a major share of crude oil and natural gas production, but there has been a significant increase in private participation. All 10 oil discoveries in 2007-08 were made by private oil companies like Reliance Industries Ltd. (RIL), Cairn and Essar Oil Ltd. (EOL). The GoI is examining the possibility of introducing the Open Acreage Licensing Policy (OALP) to allow year-round bidding for blocks to explore rather than waiting for the government to identify blocks for exploration. Recently, there has been a thrust towards NOCs acquiring hydrocarbon assets abroad to meet the countrys need for energy security and accelerating demand. The Government of India has implemented NELP, by which 100 Per cent FDI is permitted for small and medium sized oil fields through competitive bidding. The refining sector is open to public-private partnerships (PPP) as well as only private investments. In case of an Indian private company, FDI of 100 per cent is permitted. 100 per cent FDI is allowed for petroleum products and pipeline sector as well as natural gas/LNG pipeline, for infrastructure related to marketing of petroleum products, market study of formulation and investment financing.
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For trading and marketing, minimum 26 per cent equity is recovered over five years. With the increasing presence of private players and the move towards increasing the extent of gas distribution in the country, the Petroleum and Natural Gas Regulatory Board (PNGRB) was set up under the PNGRB Act 2006. The PNGRB regulates the refining, processing, storage, transportation, distribution, marketing, and sale of crude oil, petroleum products, and natural gas. It also protects the interests of consumers and entities engaged in specified activities in these areas. It is responsible to ensure uninterrupted and adequate supply of crude oil, petroleum products, and natural gas to all parts of the country and to promote competitive markets. The PNGRB issued guidelines relating to city gas distribution network and natural gas pipelines in 2007-08 and 2008-09. However the upstream oil and gas business continues to be regulated by the Directorate of Hydrocarbons (DGH). The DGH operates under the Ministry of Petroleum & Natural Gas (MOP&NG) as a regulator to advise the MOP&NG on exploration strategies and production policies. Oil and natural gas exploration and production, refining, and distribution, as well as the marketing, import, export, and conservation of petroleum products and liquefied natural gas fall under the responsibility of the MOP&NG. The government continues to regulate prices for kerosene and natural gas through the Petroleum Planning & Analysis Cell (PPAC), attached to the MOP&NG.

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The New Exploration and Licensing Policy (NELP) introduced by the government in 1997-98 brought about major changes in the structure of the Indian oil industry as well as increased the rate of exploration of the sedimentary basin area of the country. Unexplored sedimentary area of 50% in 199596 reduced to 15% in 2009.
Sedimentary Basins, DGH website

Future Insight1
Between 2010 and 2020, there might be a fall in Indian oil production of 1.84%, with crude volumes peaking in 2013 at 950,000 b/d, and then falling steadily to reach 800,000b/d in 2020. Oil consumption between 2010 and 2020 is set to increase by 43.30%, with growth slowing to an assumed 3.0% per annum towards the end of the period and the country using 4.69mn b/d by 2020. Gas production is expected to rise from an estimated 45bcm in 2010 to a possible 85bcm by 2020. With demand-growth of 182.1%, India is likely to be importing up to 70bcm per annum of gas by the end of the period, largely in the form of LNG.

BMI India Report Q4 2010

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The outlook for India's oil and gas industry is stable for 2011. Unless crude oil prices rise significantly, the market-linked petrol pricing regime that was implemented in 2010 will continue to operate in 2011. However, the agency does not expect diesel price reform in 2011 as the fuel has a higher impact on reported inflation, which is one of the government's key economic concerns."
Fitch Ratings India

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The Upstream Sector

The upstream sector involves explorationthe search for sufficient reserves. Production is the process of getting the oil out of the ground. Most of the oil is found underground using extremely sensitive and highly technical equipment. Oil trapped underground needs to be pumped out. To extract as much oil as possible, carbon dioxide, other gases, and water or chemicals are often injected to maintain well pressure. An assembly of complicated pipes and valves control the flow at the wellhead. Exploration This is the first stage of oil industry supply chain which involves locating new oil resources using technology means. Once an oil resource is located, well is drilled to extract oil out. This is a very expensive process. Production Once a well has been drilled, a wellhead such as a Christmas tree is put in place (collection of valves) to enable oil to be extracted. This regulates and controls the flow. Depending on the pressure inside the field it is determined whether additional pumps need to be utilized.

Challenges
The upstream Oil & Gas (O&G) sector is facing fresh challenges. Exploration & Production (E&P) is increasingly moving to deep waters, to challenging geographies like the Arctic areas, and to previously unexplored locations and alternate sources of energy. O&G fields are scattered, production and information systems across fields are not integrated and the regulatory environment is becoming strikingly stringent.
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The industry faces key challenges: With operations in remote geographies digital oilfields are seeing rapid growth, leading to an explosion in data Skills deficit in new geographies is adding velocity to the adoption of remote monitoring and management practices The regulatory environment combined with competition is bringing pressure to produce clean and affordable energy. Today, the emphasis on E&P Data & Information Management is unprecedented. Restricted access: In many resource-rich countries, the best, if not all, opportunities go to NOCs. IOCs are left out, despite their expertise and access to capital and markets. There is also climate change legislation pending in key countries. This creates uncertainty over what the rules and costs will be. Investment flees uncertainty. Fossil fuels are unpopular because of their price volatility and perceived carbon impact. So governments are promoting renewable sources. At best, they are ignoring oil and gas policy while overlooking how natural gas could ease the transition to a low-carbon economy. The sector is facing issues around the availability of a solid talent pool from universities and institutes that typically contribute to its talent base.

2% of students join oil & gas sector from Level-I institutes (IIT/ NIT/ ISM etc). 60% of level-II institute (oil & gas institute / university). 38% from level-III (other institute).
Source: E & Y Manpower Report 2010

Aging Workforce: Key HR Challenge The avg. age of workforce employed in Indian oil & gas sector is high particularly in upstream sector.
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Around half of the current workforce is estimated to retire in the next five years. The sector will witness 34% of retirement at the middle management level.

Maximum shortfall in upstream sector: In refining and petrochemical sector, the requirement is estimated around 6000 and 2700 professionals respectively. City Gas Distribution (CGD) is projected to require around 4500 people in next five years, due to exponential growth in pipeline infrastructure & network. Marketing sector will require 3600 people.

Source: ONGC

75% of the retired people are expected from technical or core functions such as geosciences, reservoir, production, maintenance, technical services and R&D.
Ernst & Young Report 2010

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Trends in the Sector

Demand-supply outlook favourable for domestic crude oil and natural gas producers
Demand for crude oil in the country has increased at a compounded annual growth rate (CAGR) of around 8.6% during the period 1998-99 to 2008-09, primarily because of two factors: (i) establishment of new refining capacities; and (ii) steady growth of 5-6% in annual product demand. It is expected that the countrys dependence on imported crude oil to increase further, given the secular growth trend in product demand and in the crude oil requirement of the new refineries commissioned and planned. As a result, domestic demand-supply levels are expected to continue favouring E&P firms in India over the long term. Domestic gas producers should remain in a favourable position over the medium term as far as demand-supply dynamics are concerned, although the deficit should significantly decline in the long term following commercialisation of new discoveries.

Domestic E&P players benefit significantly from recent rise in crude oil prices
Domestic E&P companies have benefited significantly from the rise in energy price in the recent past, although the PSU players among them could not benefit to the extent they could have if the subsidy sharing burden were not imposed on them by GoI. Because of the sharp rise in net realisations, the cash generation reported by most domestic E&P players has been robust. The uptrend in oil and gas prices has also considerably enhanced the investment attractiveness and

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viability of E&P projects, including deep-water, marginal fields and enhanced recovery projects, as is evident from the entry of private players and multinationals in the business.

Capex plans largely intact for domestic players, despite volatility in oil prices
E&P activity by its very nature is characterised by high capital intensity and a long gestation period. As a result, the level of E&P capex tends to be influenced by expectations on future crude oil and gas prices. Because of the significant crash in crude oil prices and the associated volatility during the recent past, E&P capex has been curtailed by some global E&P players, especially the smaller independent E&P companies who are reliant on capital markets for fund raising. Research reports indicate that national oil companies and integrated oil companies have however not materially altered their capex programmes, as their projects are driven more by long term considerations. The scale of activity in the Indian E&P sector has remained largely intact even in the face of the steep decline in crude oil prices during the last fiscal, mainly because of the presence of a limited number of players, most of which have a strong credit risk profile and the ability to sustain their capex programmes even in a weak pricing environment. A substantial portion of the capex in the domestic E&P sector is accounted for by the two public sector entities ONGC and OIL, both of which have a strong risk profile and whose capex plans are driven by multiple objectives apart from current profitability of operations. The other major players in the Indian E&P sector including the likes of RIL, Cairn India Limited (Cairn) and Gujarat State Petroleum Corporation Limited (GSPC) are also financially strong entities with adequate fund raising capabilities; these are hence in a position to continue with their capex as planned.

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Limited success in overseas acquisitions

As for overseas acquisitions, the track record of Indian E&P players has been fairly modest so far despite the Governments stated intent of increasing the equity interest of Indian companies in overseas E&P projects. Although Indian E&P players have now increased their presence to cover around 22 countries abroad, most of the assets that have been acquired so far are fairly modest in size and largely at exploratory stages. Some of the factors constraining the success of Indian companies abroad have been the relatively conservative bidding policy followed and the somewhat long drawn process of internal approval, particularly in the case of public sector companies.

A few policy related uncertainties continue to prevail; may have a dampening effect on fresh investments particularly from the private sector
The E&P sector in India faces a few policy related uncertainties on taxation and fiscal aspects. On the taxation front, there has been a lack of clarity on eligibility of E&P activities for income tax benefits with a distinction being made between oil and natural gas. According to the earlier provisions the income tax holiday for E&P, was allowed only to companies engaged in development and production of mineral oil excluding natural gas. However, for the oil and gas blocks already under exploration and development, there is still a lack of clarity on the applicability of the tax concessions on a retrospective basis, which has been left subject to judicial interpretation on a case-to-case basis. Also, there is a lack of clarity on whether each field would be treated as a separate undertaking for the purpose of the tax
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concession or all fields in a block allocated under a single contract would be taken as one undertaking for the tax benefit. Further, the gas pricing dispute between RIL, RNRL and NTPC, and the role of the government in the fixing of the gas price and allocation of E&P resources has created some uncertainty on the applicable fiscal regime and sanctity of terms of the Production Sharing Contract. There has also been lack of clarity on the quantum of cess to be paid on crude oil production and the extent of the liability on PSU E&P companies who may have carried interest, in some of the pre-NELP blocks. Having regard to the potential impact of these external environment uncertainties on the cash flows and returns, coupled with the high capital intensity and long gestation period associated with E&P efforts, fresh investments in the sector particularly from private players and global majors may get hampered to some extent, despite an overall favourable business potential. It has recently been demonstrated through a not so encouraging response in NELP IX round of auction.

Private sector set to play increasing role in domestic production, but would have to face some challenges
With the liberalisation of the oil and gas sector, the role and contribution of the private sector has been on an increasing trend. This is reflected by the growing prominence and role of the private sector in Indias E&P activities is further corroborated by the fact that the recent two major events in the E&P history of India (since ONGCs Mumbai High discovery in 1974) have both been the contribution of the private sector: commencement of gas production from RILs KG basin (April 2009), and start of crude oil production from Cairn Indias Mangala field in Rajasthan (August 2009).

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Because of competition from private players, the PSU E&P players have been forced to offer more liberal terms, such as profit petroleum, cost recovery and minimum work programme commitment, to improve their competitiveness in NELP bidding rounds. Drawn by the success of some private sector players, several other private players have also shown interest in participating in E&P activities in India. Private participation in the domestic E&P sector faces some challenges, including the following: Technological risks associated with a more challenging geology as E&P activities move into more difficult terrain, including deep-water locations and unexplored basins. Tying up transportation and logistics infrastructure to enable timely commercialisation of E&P potential. In many cases, delays in completion of pipeline infrastructure because of problems related to land acquisition, adequacy of compensation, etc., have delayed revenue generation despite the potential being favourable. Ability to complete projects without significant time and cost overruns in an environment in which availability of manpower, services and equipment remains scarce.

Subsidy sharing likely to continue weighing on the risk profiles of PSU E&P players
The marketing of petroleum products was freed from APM in 2002 with the prices of all petroleum products being linked to market dynamics, barring the subsidy for Special Kerosene Oil -SKO (sold through the Public Distribution System- PDS) and Liquefied Petroleum Gas- LPG (sold for domestic use). However, despite the stated intent to free the pricing of other petroleum products, the GoI has continued to have a role in the pricing of some sensitive products like High Speed Diesel (HSD)
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besides giving subsidy support on SKO (PDS) and LPG (domestic). The prices of these products have been kept lower than the market-linked prices in order to safeguard consumers, especially in a scenario of high crude oil prices, as seen during the last few years. As a result of the control in sale prices of these four sensitive petroleum products [HSD, SKO (PDS) and LPG (domestic)] on one hand, and the rising crude oil prices on the other, the public sector oil marketing companies (OMCs) have had to suffer significant under-recoveries on the sale of these products. GoI has instituted a new under-recovery sharing mechanism, in which public sector upstream companies will bear the under-recoveries on auto fuels HSD] while under-recoveries on cooking fuels [SKO (PDS) and LPG (domestic)] would be borne by GoI. In addition, GoI has also appointed an Expert Group to advise it, inter alia, on a viable and sustainable system of pricing petroleum products. Considering these steps, the under-recovery sharing burden on the public sector upstream companies could reduce in the short to medium term. Nevertheless, it is expected for the regulatory risk to continue weighing on the financial profiles of the PSU upstream companies.

Gas pricing in a state of flux; PSU E&P companies to gain if APM is phased out
At present, there are broadly two gas pricing regimes applicable to gas produced and sold from domestic blocks (i) Gas priced under APM; and (ii) Non-APM or free market gas. APM is applicable to the blocks awarded to ONGC and OIL on a nomination basis by the GoI. Under this mechanism, GoI fixes the price at which gas from these blocks is sold to specified categories of customers. For blocks operated under pre-NELP and NELP, the free market or non-APM regime is applicable.

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F&D costs rise, but recent fall in oilfield services costs should mitigate pressure on the cost structure of E&P players over the near to medium term
Finding and development (F&D) costs are an indicator of the cost efficiency of a companys exploratory and development activities and of its vulnerability to an uncertain price environment. The F&D costs of Indian E&P players have been on a rise in the last few years in line with the global trend. Indian E&P companies have faced significant cost pressures arising from a host of factors: a tight contracting and rig market environment; increasing manpower costs, driven by scarcity of technical personnel and by upward revisions in salary; rising costs of key inputs like steel; and increasing orientation of E&P activities towards deep-water blocks for which the operating costs are higher vis-- vis onshore and shallow water blocks. Despite a significant rise in F&D costs during the last few years, domestic E&P companies remain competitive (against their global peers) primarily on the strength of their large owned infrastructure (which limits dependence on hired rigs), and lower labour and logistics costs; besides, they also operate in a less complex geological environment.

The increase in the private sectors share in production of oil and oil equivalent gas (O+OEG) from nil during the early 1990s to 13% in the early 2000s and further to 18-19% until 2010. The increase in production share of the private sector and joint ventures (JVs) is more pronounced for natural gas (25%) than for crude oil (14%).
ICRA Study, 2010

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Founded Headquarters Products Revenue Operating Income Net Income Employees Website

14 August 1956 Dehradun, India Petroleum, Natural Gas, Petrochemicals US$ 22.599 billion (2010)

US$ 6.752 billion (2010)

US$ 4.381 billion (2010) 32,826 (2010) www.ONGCIndia.com

Oil and Natural Gas Corporation Limited (ONGC) is an Indian state owned oil and gas company, a Fortune Global 500 company ranked 413, and contributes 77% of India's crude oil production and 81% of India's natural gas production. It is the highest profit making corporation in India, according
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to filings with the BSE of latest quarter results. Indian government holds 74.14% equity stake in this company. ONGC is mainly engaged in the oil exploration and production activities. It has two segments: exploration and production, refining. During the fiscal year ended March 31, 2010 (fiscal 2010), the Company had a crude oil production of 32.95 million metric tons and natural gas production of 27.98 million metric tons. As of March 31, 2010, the Company operates more than 22,000 kilometres of pipelines in India, including nearly 4,500 kilometres of sub-sea pipelines.

Challenges E&P business due to inherent uncertainties has always been highly risky. Strict regulations of off-shore E&P is the one of the biggest threats for E&P operations globally. New technologies and solutions for new plays require concerted efforts with substantial investment; however volatile price regime is emerging as a drag for the industry where focus is more on reducing costs all the while responsibly addressing infrastructure and environmental issues. Depleting field in most of the matured basin is a concern for; however designed solutions in present market conditions and uncertainties appear to be elusive. This has a direct impact on future supplies. As far as India is concerned, seventy-eight percent of the offshore acreage is in deep waters and ultra-deep waters. The success in deep waters especially in the East Coast has opened up vast area for active exploration; but capital & technology intensive exploration drive can only unleash potential from these deeper challenges.
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Sharing of under recoveries on ad-hoc basis remains a concern for ONGC. Besides there is always a challenge in terms of health & safety of workers owing to very nature of E&P operation and geographic location of its operation like high seas. Geophysical Challenges such as Imaging below gas cap area, thin layer problem Volatility of Oil price due to speculative environment External challenges due to geopolitics & stock market collapse Internal challenges due to recessions and brain drain Attrition: Attrition is another major reason for loss of talent in Indian oil & gas sector. In next five years, it is estimated that around 7% of the current workforce will leave oil & gas sector in India. 75 % attrition is expected at senior management level.

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Founded Headquarters Products Revenue Profit Website

February 18, 1959 Duliajan, Assam Fuels, Lubricants, Petrochemicals 8,072.80 crore (US$1.8 billion)(2009-10) 2,619.52 crore (US$584.15 million)(2009-10) OilIndia.nic.in

Oil India (OIL) is a large state-owned oil and gas company in India under the administrative control of the Ministry of Petroleum and Natural Gas of the Government of India. OIL is engaged in the business of exploration, development and production of crude oil and natural gas, transportation of crude oil and production of liquid petroleum gas. The story of Oil India Limited (OIL) traces and symbolizes the development and growth of the Indian petroleum industry. From the discovery of crude oil in the far east of India at Digboi, Assam in 1889 to its present status as a fully integrated upstream petroleum company, OIL has come far, crossing many milestones. The Company presently produces over 3.2 MMTPA (million tons per annum) of crude oil, over 5 MMSCMD of
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Natural Gas and over 50,000 Tonnes of LPG annually. Most of this emanates from its traditionally rich oil and gas fields concentrated in the North-eastern part of India and contribute to over 65% of total Oil &Gas produced in the region. The company has accumulated over a hundred years of experience in the field of oil and gas production, since the discovery of Digboi oilfield in 1889. It is possibly the only company to do so. From well completion to wellbore servicing, installation, operation and maintenance of modern surface handling facilities, the company has the skill and expertise to manage the entire range of operations required for onshore oil and gas production.

Challenges Oil does not have adequate infrastructure to carry out r&d work in the area of microbiological prospecting. Oil is facing hole instability problem in drilling deep eocene wells. Oil requires appropriate work-over fluid formulations for highly depleted reservoirs to arrest heavy fluid loss. Development of techniques/chemicals to tackle paraffin deposition problem, srb problem. Managing the E&P sector has become a challenging job as it is coupled with uncertainty at each step. The current scenario shows that to achieve oil & gas production, one has to explore in logistically difficult areas with state of the art technology. It requires huge inputs owing to the capital intensive nature of the investments. As per the Govt. of India directives, Oil India Limited is also required to share the subsidy (under-recovery) burden. Though it has been decided that Upstream companies will not
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share the under recovery on account of transportation fuel, it remains an area of concern as it directly impacts the cash flows of the company. In the E&P Industry, Health, Safety and Environment issues are always an area of concern since the operations are in difficult terrain and carry the risks of unknown down hole problems. Current events in the wake of the Louisiana oil spill may lead to more stringent environmental legislations thereby increasing both operating and insurance costs. The fluctuations in the crude oil prices directly impact the prices and availability of goods and services required in the E&P sector. Crude oil prices too are dependent on economic recovery, despite their inelasticity. Investments in improved recovery drive up the marginal costs and lower success ratios tend to hit the bottom lines. Due to its relatively smaller size as also due to a number of other countries supporting such opportunities through sovereign funds it would be a challenge to compete for producing properties overseas. The probability of success in our exploration ventures would require incremental resources for investment in development and since the Company is presently inadequately geared, these would be met at the appropriate time from other sources of funding, if necessary.

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Founded Founder(s) Headquarters Area served Products Revenue Operating Income Net Income Employees Website

1966 As Reliance Commercial Corporation Dhirubai Ambani Mumbai Worldwide Oil & Gas, Petrochemicals, Petrol, Polyester US$ 58.55 billion (2011) US$ 3.86 billion (2011) US$ 4.50 billion (2011) 23,365 (2010) RIL.com

Reliance

Industries

Limited (RIL)

is

the

largest private

sector conglomerate company

headquartered at Mumbai, India. The company is largest by annual turnover of US$58.5 billion
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and market capitalization of US$78.2 billion for the fiscal year ending in March 2011 making it one of the largest India's private sector companies, being ranked at 264th position in the Fortune Global 500 (2009) and at the 126th position in the Forbes Global 2000 list (2010). KG-D6 was the single largest source of domestic gas in the country for FY-11 and accounted for almost 35% of the total gas consumption in India. The gas from KG-D6 catered to demand from 57 customers in critical sectors like fertilizer, power, steel, petrochemicals and refineries. The gas from KG-D6 accounted for about 44% of the total domestic gas production paving the way for increased energy independence for the country.

Challenges It faced technical issues at D6 (Reliances and Indias largest natural gas find) as a result of which its plan to step up gas production was shot to pieces. In fact, the production began to fall. Sustaining production even at levels achieved in March-April 2010 became tough. The company that had brought to production Indias biggest gas field was finding its management and technical bandwidth stretched to the limit. RIL was also lagging behind in exploration of its portfolio of 20 other blocks that it had bid for and won over the years. There was bad news from drilling in KG D9 that everyone had hoped would be another D6. The well turned out to be dry. Exploration at NEC-25, the third prospective block in the Mahanadi Basin had not really developed. For these and the earlier problems between Ambani and his brother Anil, investors were punishing the stock. RIL has lagged the benchmark Sensex for three consecutive years
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The company has cash and cash equivalents of $7 billion on its books and is estimated to generate cash profit of $8 billion in 2011-12. Add to this the infusion of $7.2 billion from BP and it has sizeable wallet to shop with. It has already lined up investment of $7 billion that includes a few projects that are yet to take off. The problem of finding enough large investments is something that the company will have to continue grappling with for some more time unless of course, the RIL-BP combo is able to find the next big one very quickly. The real challenge for the alliance comes in the marketing of gas. When RIL first struck large amounts of gas, everyone started speaking of Indias transition to a gas economy. Nearly 10 years later, there is still a huge shortage of gas. As far as its refining and marketing business is concerned, RIL competes globally with a number of large energy companies some of who also produce crude oil and are integrated in their refining operations. Global sourcing involves inventory, logistics and pricing risks and this necessitates the need for significant risk mitigation strategies. The merchant nature of its refining business means that RIL faces extensive competition ininternational markets for the sale of key transportation fuels. Over the past three years, a large number of new low-cost ethylene capacities have come on stream in the Middle East region, which has resulted in margin pressure in the ethylene chain. Reliance struggled to recruit, retain, and develop sufficient manpower to sustain operation. Manpower deficits are leading to project delays and cost overruns in oil & gas upstream sector.

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The Midstream
The bridge between oil and gas producers and end users

The midstream sector is primarily involved with the transportation of oil and natural gas from the extraction site to the refineries. This midstream sector is often included as an extension of either the upstream or downstream sector, depending on the source.

Midstream companies typically own raw gas pipelines and processing plants to gather and process the raw natural gas before it is injected as sales gas into long-distance pipeline systems for transportation to end-use markets. The midstream sector also includes facilities for the fractionation, storage and transportation of natural gas liquids, or NGLs, which are by-products of natural gas processing, and include ethane, propane, butane and condensate. The Midstream Sector can include, but not be limited to, the following functions: Gas Gathering, Treating and Processing Natural Gas Pipelines (Primarily Intrastate) Product Pipelines (Mainlines and Distribution or Purity Lines) Fractionation Natural Gas and Product Storage Product Terminals Import/Export Facilities

Challenges
The midstream energy sector faces unique challenges. The complexity with transmission and distribution, coupled with additional permitting requirements and a relatively fixed margin business model, requires operators to streamline all aspects of the operation, including Environmental
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Health & Safety, Risk, and Compliance. Refiners, traders, terminals, and other midstream participants face unique challenges in energy taxes. Regulations vary by jurisdiction and change frequently. Midstream taxes, if calculated incorrectly, can result in fines, fees, and penalties. Or worse, they can eliminate margins on bulk movement or trades especially if cross-state, crossborder, or multi-party. Specific midstream challenges include: Diverse asset profile (pipelines, storage terminals, processing, treating, and compression systems)

Overlapping regulatory jurisdictions Permit Management & Compliance Project Management Geographical expanses Maturing assets and infrastructures Extensive permitting and compliance requirements Sensitive public perception

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Founded Headquarters Products Revenue Net Income Employees Website

1984 New Delhi Natural Gas, Petrochemical, Lubricant, Fuel US$ 5.702 billion (2010) US$ 739 million (2010) 3,703 (2010) GailOnline.com

GAIL (India) Limited is a Natural Gas processing and distribution company in India. The company was previously known as Gas Authority of India Ltd. It is India's principal gas transmission and marketing company. It was set up by the Government of India in August 1984 to create gas sector infrastructure. It has six segments: Transmission services of natural gas and liquefied petroleum gas (LPG), Natural gas trading, petrochemicals, LPG and Liquid hydrocarbons, GAILTEL and Others. As of March 31, 2010, the Company's business portfolio included 7,850 kilometres of natural gas high
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pressure trunk pipeline with a capacity to carry 150 million metric standard cubic meter per day (MMSCMD) of natural gas across the country; seven LPG gas processing units to produce 1.4 million metric ton per annum (MMTPA) of LPG and other liquid hydrocarbons; 1,900 kilometres of transmission pipelines network with a capacity to transport 3.8 MMTPA of LPG; 13,000 kilometres of Open File Connection (OFC) network for telecom service providers, and 27 oil and gas exploration blocks and one coal bed methane blocks. GAIL commissioned the 2800-km Hazira-Vijaipur-Jagdishpur (HVJ) pipeline in 1991. During 1991-93, three liquefied petroleum gas (LPG) plants were constructed and some regional pipelines acquired, enabling GAIL to begin its gas transportation in various parts of India. GAIL began its city gas distribution in New Delhi in 1997 by setting up nine compressed natural gas (CNG) stations.

Challenges
With the deregulation many new players may come into market leading to increased competition. It may lead to future gas transmission charges being lower as new players would try to outbid each other to win the contracts from the Government to lay new pipelines The change in composition of gases (ONGC has been allowed by the Petroleum ministry to extract C2-C3 from imported LNG for its gas based gas cracker at Dahej ) could lead to C2+ content depleting below minimum desired level.

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The prices for petrochemicals have been made market determined. Since price of gas is linked to the international price of a basket of internationally traded fuel oils, there may be a continuous increase in gas input prices, this could result in pricing at significant level higher than the current price and depleted gross margins. Company cannot charge marketing margins to its customer for the APM gas supplied by it as the Company has to comply with the regulatory requirements. Company may face financial risk as it has to operate without charging market margins. The new manpower coming through fresh recruitment or through corporate transfer policy may not be adequately equipped with the process knowledge required to operate the plant and this may in turn lead to potential production loss. Lack of empowerment with the organisation to other competitive compensation on packages and higher levels of designation to deserving candidates may lead to company not being able to manage its talent pool eventually leading to compromise on the quality of candidate. Sourcing of natural gas from other countries involves socio-political risks. Political relations transit country may affect the business activities. A secure transit of natural gas from producing countries to (end) consumer countries is a successful part of the gas chain. Since the producers and importers are highly dependent on the transit countries, absence of increased cooperation by producers and importing countries with transit countries, on basis of the transit fees and terms, may disrupt the gas supply. Identification of E&P blocks for which company intends to bid, requires thorough analysis and interpretation of information and data available from DGH. Data acquired may be redundant or too old; decisions made on the basis of such data may lead to inaccurate
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analysis on the blocks available for bidding, which may lead to acquisition of blocks with lower potential of availability of hydrocarbon reserves. The agreement for transmission of Gas between Gail and OMCs require transporter to arrange insurance against loss of LPG. Company has taken insurance for the Gas flowing within the pipelines for a specific block, in event of nay mishap /pipeline rupture/fire the loss may not be restricted to these specific blocks, leading to unrecoverable financial losses. Instances of encroachment, soil erosion, growth of trees near pipelines, external damage to aboveground pipeline, etc. may result in harm to the pipeline and consequent environmental and safety issues. Over investment, under-utilization of capacity and inefficient operation of pipelines may lead to unreasonable tariff as the company sets the tariff to gain 12% post tax return. Competitors may be more efficient and may change lesser tariff leading to dissatisfaction among customers of the company. Due to frequent changes in natural gas prices,(Prices of Natural Gas are highly volatile). Company may not able to enter into long term commitments for the supply of gas. Not having long term commitments leads to increased uncertainty in the business. RIL, along with IPCL has a share of over 60% of the Indian polymer market for all forms of polyethylene (PE): LDPE, LLDPE, HDPE, PP and PVC. Gails product range is limited to LLDPE and HDPE, not having diverse range of products might result in loss of market share in long run. Non availability of raw material or feed stock will also delay the project flow and will lead to increase in cost of the project and thereby delay the project

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The Downstream
Transportation, storage, distribution along with refining comes under downstream sector. Transportation Once crude oil has been extracted, it is transported to oil refineries through pipeline or transportation like tanker, train and road transportation. Refining Crude oil extracted direct from the well is not useful for most situations to be used as fuel in its original form. This crude oil is therefore refined through fractional distillation to separate it into different products such as gasoline, diesel, aviation gas, kerosene, paraffin and tar. Naphtha extracted is used as a base element for synthetic rubber and plastic. Distribution Various fuels and lubricants are distributed to gas stations, retail shops and relevant industries through a distribution chain. In case of Natural Gas supply chain flows like below Exploration Production Processing - Transportation Distribution Out of which processing stage is important and most involved. During processing stage, unwanted gaseous elements such as water, hydrogen sulphide and nitrogen are removed. The gas which is supplied to end customer is mainly methane. In Downstream sector storage and marketing play extremely critical role and contribute as one of the important deciding factors in sales and profits under tight competition scenarios. Refining industry is characterized by stiff competition, stricter environmental regulations, heavier, sourer and costlier crude oil, accompanied by possible disruptions caused by various factors that
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companies cannot control. Therefore, to maintain the profit margins in this ever-changing market environment, refiners need to have smarter strategies for flexible and adoptive operations. Also the refining industry deals with one of the worlds longest and most complex supply chains, beginning at a natural resource in the ground and continuing all the way through to the end-users.

Trends
Energy downstream companies need to deploy technology to contain costs, remain flexible and improve margins With the economy on its way to recovery oil majors in the downstream Oil & Gas sector are continuing to invest in integrating advanced technologies. The goal is to exploit new opportunities and deliver better corporate performance. The focus for downstream O&G companies is on improving margins, meeting complex trading and regulatory requirements and creating real-time visualization of data for improved decision making. And at the top of the list of the new priorities is the need to adopt sustainable and environmentally responsible practices. The key objectives of retail businesses are: High average throughput per pump Emulate high volume oil and gas retailers in providing service and managing operations Value added services to maximize return on locked up real estate value Alternate operating models like franchisee to bring down investment and operating costs
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Improve bottom line as margins are reducing As a combined result of public-sector and private-sector refinery investments in the recent past, India will emerge by 2012 as Asias largest refined product exporter, surpassing Singapore. India will remain one of Asias two largest refined product exporters for the foreseeable future. Indias sudden emergence as a global petroleum producing hub is likely to have far-reaching implications for regional product markets, increasing the depth of product flows and strengthening supply chains, especially for high-end industrial product and clean transport fuels. The establishment of Indias large-scale export-oriented refining sector marks the acceleration of a fundamental shift in the configuration of global refining in which mature economies increasingly look to production hubs in Asia and the Middle East to supply incremental refined product demand. While the GoIs downstream policies are likely to achieve their ambitious objectives in the medium term, they have done so at a tremendous fiscal cost.

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Founded Headquarters Products

1964 Mumbai, India Oil, Petroleum, Natural Gas, Petrochemical, Fuel, Lubricant

Revenue Operating Income Net Income Employees Website

US$ 51.81 billion (2010) US$ 3.74 billion (2010)

US$ 2.44 billion (2010) 34,363 (2010) IOCL.com

Indian Oil Corporation Limited (Indian Oil) is an oil company. It is Indias largest commercial enterprise, ranking 125th on the Fortune Global 500 list in 2010. IndianOil and its subsidiaries
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account for a 47% share in the petroleum products market, 34.8% share in refining capacity and 67% downstream sector pipelines capacity in India. The Indian Oil Group of Companies owns and operates 10 of India's 19 refineries with a combined refining capacity of 65.7 million metric tons per year. IndianOil operates the largest and the widest network of fuel stations in the country, numbering about 17606 (15557 regular ROs & 2049 Kissan Sewa Kendra). It has also started Auto LPG Dispensing Stations (ALDS). It supplies Indane cooking gas to over 47.5 million households through a network of 4,990 Indian distributors. In addition, IndianOil's Research and Development Centre (R&D) at Faridabad supports, develops and provides the necessary technology solutions to the operating divisions of the corporation and its customers within the country and abroad. Its portfolio of brands includes LP Gas, SERVO lubricants, XTRAPREMIUM petrol and XTRAMILE diesel. In exploration and production, IndianOil's domestic portfolio includes nine oil and gas blocks and two coal bed methane blocks while the overseas portfolio consists of nine blocks spread across Libya, Iran, Gabon, Nigeria, Timor-Leste and Yemen.

Challenges
Uncertain oil and gas market risks and venture risks in the backdrop of the financial crisis and the global economic slowdown. Sharp interest rate fluctuations are an area of concern for the corporations in the context of raising debts for projects as well as raising money through sale of oil bonds. The flaring inflation is hardening the interest rates The extant pricing policy of the government, especially with reference to the retail selling prices of diesel, kerosene and LPG act as the major constraint on the corporation. The
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tradition of using retail oil pricing as a subsidy tool to subsidize has many a team has endangered the financial health of the OMCs. Such a policy environment, only accentuates the risks associated with uncertainties of international oil market. The oil bonds issued by the government to compensate for the under recoveries has their own limitations. The delay in issuance of oil bonds leads to interest loss for the Corporation. To meet its cash requirements often the Corporation has to sell these bonds. Their relatively lower demands (one of the reason being their non-SLR status) gets them sold at a discount. This practise which is beyond the control of the management has a significant impact on the financials of the Corporation despite a sound physical performance. The Corporation is facing challenges in getting skilled manpower for some of its new verticals such as E&P & petrochemicals, which require manpower with specialised skill-set which are different from those of its downstream petroleum business. Given the nature of the crude oil market, supply disruptions emanating from geo-political tensions pose a risk to the smooth operations of the Corporation. As a cushioning strategy against possible disruptions, the Corporation has been widening its crude basket to make it more geographically diverse. The unfortunate fire accident at the Corporation Jaipurs Terminal, has highlighted the fact that safety concerns need greater attention. The Corporations Refineries, Marketing & Pipelines Infrastructure is spread across the length and breadth of the country. With a rise in security threats, both internal and external, this is a major threat.

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Strong product demand and high crude oil prices had kept Gross Refinery Margin (GRM) at a higher level for last few years. However with fluctuating prices of crude oil and dwindling demand of petroleum products in the foreseeable future, refinery margins will be uncertain. With material costs (especially crude) are beyond the control of the Corporation, and price realisation from the high volume products is administered; minimising operational costs is a key challenge for the Corporation for maximisation of margins. The Corporation believes in running it operations reasonably today to build a dependable and sustainable energy system for tomorrow. Development of techno-economically viable and environmentally friendly products services for the benefits of its consumers is another challenge for the Corporation.

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Founded Headquarters Products

1976 Mumbai, India Oil, Petroleum, Natural Gas, Petrochemical, Fuel, Lubricant

Revenue Operating Income Net Income Employees Website

US$ 26.178 billion (2009) US$ 814 million (2009)

US$ 138 million (2009) 13,974 (2009) www.bharatpetroleum.com

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Bharat Petroleum Corporation Limited (BPCL) is one of the largest state-owned oil and gas company headquartered at Mumbai, India, with Fortune Global 500 rank of 307 (2010). It is involved in the refining and retailing of petroleum products. Bharat Petroleum is considered to be a pioneer in Indian petroleum industry with various path-breaking initiatives such as Pure for Sure campaign, Petro card, Fleet card etc. BPCL was also one of the foremost organizations to implement ERP successfully across its business domain. It helped to centralize data and subsequent analysis to meet the challenging market scenario and is still termed as a landmark in the sector. BPCL is a member of the elite group, which SAP consults for further improvements in its Oil & Gas related products. BPCL's growth post-nationalisation (in 1976) has been phenomenal. One of the single digit Indian representatives in the Fortune 500 & Forbes 2000 listings, BPCL is often referred to as an MNC in PSU garb. During the fiscal year ended March 31, 2010 (fiscal 2010), the aggregate refinery throughput at BPCL's Refineries at Mumbai and Kochi and that of its subsidiary company, Numaligarh Refinery Limited (NRL) was 23.03 million metric tons (MMT). The Company is engaged in downstream petroleum sector, which consists of refining and marketing activities. BPCL holds 61.65% interest in NRL as on March 31, 2010. Bharat PetroResources Limited (BPRL) is a 100% subsidiary of the Company. The exploration and production activities of BPRL and its subsidiary companies extend to 26 exploration blocks where they hold participating interests (PI). Of this, nine blocks are in India and 17 are abroad. Besides India, BPRL has blocks in Australia, Brazil, East Timor, Indonesia, Mozambique and the United Kingdom.

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Challenges
As the country is largely dependent on imported crude oil, the price volatility is a major concern. The control of pricing of auto fuels will significantly enhance the level of competition of private oil companies resuming their marketing operations. At the same time, if the under recoveries continue on products like SKO and LPG, the public sector marketing companies could face constraints on the liquidity front. The product specifications for MS and HSD have become more stringent with effect from April 1, 2010, and a road map has been laid down for these specifications to become effective across the country. Oil companies have to ensure adequate supplies of products meeting the specifications. Although refineries have geared up to meet the new requirements, there are logistic challenges involved in handling and moving products of different specifications. The degree of competition is expected to go up with the major private players coming back into the market. The overall demand is also likely to be affected based on the movements in the prices. Due to regular violent activities and threats, in some very sensitive parts of the country, ensuring site security of the outlet is a major challenge. The LPG business continues to be impacted by the burden of under-recoveries on the sale of domestic LPG. Although the decision of the Government of India to provide cash in lieu of the under-recoveries was welcome, the fact remains that a part of the burden had to borne by the BPCL, as the entire quantum of under-recoveries was not reimbursed.

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There is still no clarity on the mechanism that will be adopted in the coming years and at current levels, the marketing companies continue to sell domestic LPG at prices which are lower than the costs. This business has a found a new vertical in the form of International Bunkering Market. This being an extremely challenging business in the days to come and the overall industrial and economic growth will hold the key for the growth of the business. The Lubricant market in India has many players, thus making the sector highly competitive. Availability of the base oil, tie-ups with some of the leading automotive companies and focusing on Research & Development to offer better products to customers is itself a big challenge. The Indian aviation scene is characterised by domestic airlines having serious cash flow problems which are posing major challenges to the oil marketing companies. Consequently the company is grappling with the issue of high levels of outstanding dues from their airline customers. At the same time there is intense competition for retaining and acquiring customers. The company had announced oil discoveries in two blocks in Brazil and Mozambique in the year 2009. Developing this business involves considerable investments during the exploration and development phases.

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