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2011

Oil Exploration market in India

Industry Report
Analyst Report

Table of Contents
Executive Summary................................................................................................................................. 5 Industry Overview .................................................................................... Error! Bookmark not defined. Usage segment...................................................................................................................................... 10 Usage behavior trend............................................................................................................................ 12 Market Size ........................................................................................................................................... 13 Illustrations .......................................................................................... Error! Bookmark not defined. By Geography .................................................................................................................................... 14 Market Structure & Segmentation ....................................................................................................... 15 Types of Products /Services /Solutions ............................................................................................. 15 Market share ......................................................................................................................................... 16 Key Players ........................................................................................................................................ 16 Competition situation ........................................................................................................................... 22 Key Drivers ............................................................................................................................................ 23 Key Challenges / Barriers ...................................................................................................................... 26 Distribution System & structure ........................................................................................................... 27 Key Distributors........................................................................................ Error! Bookmark not defined. Supply system supply situation ............................................................. Error! Bookmark not defined. Key Opportunities ................................................................................................................................. 29 Market Entry Strategy .............................................................................. Error! Bookmark not defined. Key Success factors .................................................................................. Error! Bookmark not defined. Financial Analysis .................................................................................................................................. 30 Top players ........................................................................................... Error! Bookmark not defined. Country Advantage .................................................................................. Error! Bookmark not defined. Regulatory Advantage & legal frameworks .......................................................................................... 33 Recent Mergers & Acquisitions............................................................................................................. 35 Activities in the industry ................................................................................................................... 35 Major Deals ....................................................................................................................................... 35 Names of industry bodies ..................................................................................................................... 37 Industry SWOT ...................................................................................................................................... 39 Market forecast with Macroeconomic assumptions ............................................................................ 40 PEST Analysis ......................................................................................................................................... 42 Government Stimulus packages to boost the industry .................................................................... 43

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Global & Regional market for the products in the industry .................... Error! Bookmark not defined. Success stories ...................................................................................................................................... 44 Annexure ............................................................................................................................................... 46 List of charts & tables.................................................................................................................... 46 Industry associations..................................................................................................................... 46 Certifying authorities .................................................................................................................... 46 Bibliography .................................................................................................................................. 46

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Executive Summary
Indias oil sector is dominated by state-owned enterprises, although the government has taken steps in recent years to deregulate the hydrocarbons industry and encourage greater foreign involvement. The most important steps in that regard has been the initiation of NELP (New Exploration License Policy) in 97 under the purview of DGH (Directorate General of Hydrocarbons) to attract significant private investment by offering them level playing field as well as growth opportunity.

Key Points:
India is facing a huge demand supply gap in terms of hydrocarbon resources Government is inclined towards more investment from the private players along with PSUs

Another way of securing energy resources have been identifying and acquiring important reserves overseas. This has been mainly achieved by ONGC (overseas investment arm OVL). There remain some grey areas in the regulatory section in spite of Govt offering a liberal FDI policy and other assistance. They are mainly related to Production sharing contract and significant Govt subsidy in downstream sector. As the overall economy is gearing up for a sustainable and healthy GDP growth in near future it has become crucial for Govt to ensure steady and increasing supply of crude oil and gas along with some alternative sources of energy. So in near future lots of activities and investment are expected from both state owned and private organizations in Indian E & P (Exploration and Production) sector.

Basin areas in India

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Industry Overview:
Indian Petroleum Industry started its journey during the fiscal year 1890 in the north-eastern provinces of India especially in the place called Digboi. The production of petroleum along with the exploration of new sites was primarily restricted to north-eastern India up to the 1970s. But the scenario changed drastically with the discovery of Bombay High. Indian Petroleum Industry was entirely state sponsored and was under the management control of all the industries involved in it were entirely with the government. After the inception of the Liberalization-Privation-Globalization (L-P-G) policy in the month of July, 1991, the government had started allowing the Indian Petroleum Industry to go into private as well as government-private joint ventures. The deregulation process in the Indian Petroleum Industry got a boost in the year 1997 when it was decided that the process of liberalization and deregulation would be accelerated in this industry and all the regulations would go away from the month of April in the year 2002. Actually from 1979 onwards, the ministry of Petroleum began to invite international bids for exploration and development from time to time. Nine rounds of bidding were held till 1997; 32 blocks were awarded for exploration and 30 for development. In 1997 they produced 3 mtpa of crude and 7 mcmd of gas. But since refining and distribution were government monopolies, the licensees had to sell their oil and gas to the government. Negotiations with the government were protracted and time consuming. So the rounds attracted little international interest. In the meanwhile, the government monopolies could not increase production and refining capacity to keep up with demand. But after the serious balance of payments crisis in 1991, the socialist approach of govt was changed significantly and a new government elected in 1991 overhauled many of the policies. Govt appointed two committees in order to examine replacement of administered by market-determined prices and restructuring the organization of the industry. As a result NELP (New Exploration Licensing Policy) was announced in 1997. Under the New Exploration Licensing Policy, six rounds were held and 162 production-sharing licences (PSC) were given till 1 April 2007, against 28 before the introduction of NELP. Of the licenses, 77 per cent were offshore, and 53 per cent were to government companies. In the next round (7th round) of NELP a six multinational companies (Chevron and Conoco-Philips of the US, Britain's BG (British Gas) and BP (British Petroleum), Canada's Niko and Anglo-Dutch Shell) wrote to the government to say that they would not bid if the regulatory framework remained uncertain and the government did not adhere to contractual arrangements as some such instances had already taken place. But the government did not respond to the six companies concerns; consequently, they did not take part in the bids.

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In the event, of the 57 blocks on offer, 12 received no bids, and 19 received only one bid. Of the 45 winning bids, one was rejected by Cabinet Committee on Economic Affairs, resulting in 44 production sharing contracts. ONGC and its associates got 20 concessions. Thus, the round confirmed a decline in interest amongst international companies, especially experienced ones. The eighth round of NELP received 76 bids for 36 of the 70 blocks on offer. State-owned Oil and Natural Gas Corp. Ltd (ONGC), as part of a consortium, bid for 25 blocks and won 17. Single bids were received for 20 blocks. The government is likely to offer about 34 blocks under NELP-IX for which Last date for bidding will be March 18, 2011. In the eight rounds of NELP since 1999, 235 blocks have been awarded till date. This has resulted in enhancement of exploration coverage from 11 per cent to about 58 per cent of Indian sedimentary basin between 2000 and 2010.

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Table 1: Indian Petroleum Industry at a glance (Source: DGH)

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Table 2: International Petroleum Industry at a glance (source: DGH)

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Usage segment
Oil consumption is increasing throughout the world but the significant growth rate is noticed in emerging economics especially in China and India because of the prominent sizes of these economics along with their impressive GDP growth rates. India currently stands as 4th largest petroleum product consumer in the world. The consumption of petroleum products during 2009-10 were 138.196 million metric tons (including sales through private imports) which is 3.60% higher than the sales of 133.400 million metric tons during 2008-09. Main petroleum products and their key consumption sectors are as follows: Products LPG Major End Use Domestic fuel. Also for Industrial application where technically essential. Now permitted as auto fuel. Feedstock/ fuel for Fertilizer Units feedstock for petrochemical sector and fuel for Power Plants. Fuel for passenger cars, taxies two & three wheelers Fuel for aircrafts. Fuel for cooking & lighting. Fuel for transport sector (Railways/Road), Agriculture (tractors, pump sets, threshers etc.) and Captive power Generation. Fuel for agricultural pump sets, small industrial units, start up fuel for power generation Secondary fuel for Thermal Power Plants, Fuel/feedstock for fertilizer plants, industrial units. Surfacing of roads. Lubrication for automotive and industrial applications Feedstock for value added products.

Indias energy consumption potential is steadily increasing which is causing widening gap between demand and supply. So steady growth in Exploration and Production (E & P) activities in Oil and Natural Gas sector has become urgently required.

NAPTHA / NGL

MS (Petrol) ATF SKO (Kerosene) HSD (Diesel)

LDO

FO/LSHS

BITUMEN LUBES Minor Products (Benzene, Paraffin Wax)

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The primary energy segment is still now dominated by coal but oil usage is steadily increasing. Below is the energy source of Indias total energy production:

Fig 1: Total Energy Consumption in India (Source: International Energy Agency)

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Usage behavior trend


The recent usage behavior trend of petroleum is as primarily dominated by transport sector. Other sectors are mainly Industrial, commercial and domestic.

Consumption by sector(%)
4 18 Transport (Petrol, Diesel, CNG, Aviation Fuel) Industry (Petrol, Diesel, Fuel Oil, Naphtha, Natural Gas) 51 13 Commercial & Others Domestic (LPG & Kerosene): 14 Agriculture (Diesel)

Chart 1: Oil/Natural consumption by sector

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Market Size
The domestic exploration and production section is getting more importance because of Indias growing energy needs as well as fluctuation of crude price in International market and various geopolitical complications.

Growth of Indian Petroleum Industry at a Glance:


300000

250000 146550 130110 156100 160770

160030

200000

Crude Oil consumption 150000 Natural Gas Production Crude Oil Production 100000 47510 50000 32202 32190 0 2005-06 2006-07 2007-08 2008-09 2009-10 31747 33988 32417 34118 32849 33506 33691

Chart 2: Petroleum Prod vs Consumption (in 000 tons for Oil and Million Cub Mtrs for Natural Gas)

The oil and natural gas reserves:

1500 1101 1000 786 1075 756 1055 725 1050 769 1074 775

1437 1201

Crude Oil (MMT) Natural Gas(BCM)

500

0 2005 2006 2007 2008 2009

2010

Chart 3: The oil and natural gas reserves (proved and indicated) data relate to 1st April of each year

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By Geography:
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 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. In recent years, Indian national oil companies have increasingly looked to acquire equity stakes in E&P projects overseas.

Though Indias traditional E & P hub has been western offshore and secondly in north eastern state of Assam growing requirement is moving away the exploration activities into newer destination like KG basin in Andhra Pradesh or Rajasthan

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Market Structure & Segmentation

Types of Products /Services /Solutions:

Products:
The main products available for exploration is o o Crude Oil Natural Gas

This are the traditional products used as the main source of energy along with coal. But depleting reserve and growing requirement is shifting the focus on some unconventional source of fuel or energy. Some of these sources are: 1. Coal bed methane (CBM): Coal Bed Methane coal bed gas is a form of natural gas extracted from coal beds. 2. Shale Gas

Solution:
The Technical activities (Solution) in the E & P sector is basically 1. Exploration: Hydrocarbon exploration (or oil and gas exploration) is the search by petroleum geologists and geophysicists for hydrocarbon deposits beneath the Earth's surface, such as oil and natural gas. This is done with the help of various technical surveys. Some of them are: Gravity survey, magnetic survey, passive seismic survey regional seismic reflection surveys

2. Drilling: An oil well is a general term for any boring through the earth's surface that is designed to find and acquire petroleum oil hydrocarbons. Usually some natural gas is produced along with the oil

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Market share
As already discussed the Indian oil E & P sector is dominated by PSUs but with introduction of NELP in 1997 private players have started showing interest. Still as of now the lions share of Indian production as well as resources are allocated to PSUs only.

Key Players:
PSU: ONGC: This is the largest state owned Oil and Gas Company in India. It is 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 second highest profit making corporation in India. It was set up as a commission on 14 August 1956. Indian government holds 74.14% equity stake in this company. ONGC is Asia's largest and most active company involved in exploration and production of oil. Since 1960 It has made its presence noted in most parts of India and in overseas territories. ONGC found new resources in Assam and established the new oil province in Cambay basin (Gujarat). In 1970 with the discovery of Bombay High (now known as Mumbai High), ONGC went offshore. With this discovery and subsequent discovery of huge oil fields in the Western offshore, a total of 5 billion tonnes of hydrocarbon present in the country was discovered. In the post liberalization scenario also it has maintained its leading position. ONGC has made 134 discoveries since 2002 and 58 of them has been prepared to production. Some others are on the development board. In NELP VIII round it has been awarded 17 of the 31 awardees blocks. Apart from the significant domestic operations ONGC also has an international arm for bidding and operating foreign assets: ONGC Videsh Ltd (OVL) which currently has around 40 projects in 15 countries. Its production for the FY10 was 8.87 MTOE. ONGC has made major investments in Vietnam, Sakhalin (Russia), Brazil and Sudan. Beyond core E&P activities, ONGC is also ramping up for alternative sources of energy. It has started production of CBM (Coal Bed Methane) in Jharia in 2010 and planning for an substantial investment in a JV with SCHLUMBERGER in Damodar valley for production of Shale gas.

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30000 25000 20000 15000 10000 5000 0 FY '06 FY FY '07 '08 FY '09 FY '10 5751 5876 5877 5753 5633 Crude Oil Gas 26051 25941 25364 24856 24404

[INDIAS E & P SECTOR IS STILL


SIGNIFICANTLY DOMINATED BY STATE OWNED COMPANIES THOUGH LIBERIZATION TREND HAS BEEN ATTRACTING SOME MAJOR PRIVATE PALYERS RECENTLY

Chart 4: ONGC Oil and Gas Production (Domestic)(source: ONGC)

Oil India Ltd: 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 the pioneer in exploration and production of hydrocarbons in India, and traces its roots back to Oil India Private Ltd. formed in 1959 with The Burmah Oil Company Ltd. holding two-thirds of equity and Government of India holding one-third. Oil India Private evolved into Oil India Ltd., which was an equal partnership between Burmah Oil and Government of India. In 1983 the company became a public sector undertaking of the Government of India. Apart from ONGC it is second biggest player in the E&P industry in India. The Company presently produces over 3.6 MMTPA (million tons per annum) of crude oil, over 2400 MMSCUM of Natural Gas and over 50,000 Tones of LPG annually. Most of this emanates from its traditionally rich oil and gas fields concentrated in the Northeastern part of India and contribute to over 65% of total Oil &Gas produced in the region. The search for newer avenues has seen OIL spreading out its operations in onshore / offshore Orissa and Andaman, deserts of Rajasthan, plains of Uttar Pradesh, riverbeds of Brahmaputra and offshore Saurashtra. In Rajasthan, OIL discovered gas in 1988, heavy oil / bitumen in 1991 and started production of gas in 1996. 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. The company has over 100,000 square kilometres of license areas for oil and gas exploration. It has emerged as a consistently profitable international company with exploration blocks as far as Libya and sub-Saharan Africa.

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Figure 5: Crude Oil Production by OIL Source: Oil India Ltd 3. GAIL (Gas Authority of India Ltd):

Figure 6: Gas Production by OIL

The production of crude oil in the Cambay On land Block in Gujarat is in progress, where the company holds 50% participating interest. At present, GAIL has participating interest in 27 E&P blocks of which 3 are overseas (2 in Myanmar and 1 in Oman). GAIL is the Operator in one block in Cauvery Basin awarded during NELP-VII bidding round and the Joint Operator in one on land block in Rajasthan Basin awarded during NELP-VI bidding round. Hydrocarbon discoveries have been made in 9 E&P blocks including 3 overseas blocks. Out of these 9 blocks, commercial production is in progress from one block, Cambay On land Ahmedabad, Development activities are in progress in blocks A-1 and A-3 in Myanmar and appraisal activities are in progress in other 6 blocks. GAIL is also participating in 3 Coal Bed Methane blocks. Core hole sample analysis is in progress in these blocks. Test wells are planned to be drilled in one block.

Private Organization: 1. Reliance Industries Ltd: Reliance Industries Ltd (largest firm in India according to Market cap valuation) is the most important player among the private sector players. The key field of RIL establishment is Krishna Godavari (KG) basin blocks which were also the world's largest gas discovery of 2002. a. KG basin:

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It is spread across more than 50,000 square kilometers in the Krishna River and Godavari River basins in Andhra Pradesh. 1. KG-D6: Current Gas production from KG-D6 is 60 MMSCMD from 16 wells. The design capacity of the KG-D6 deepwater gas production facilities were assessed and achieved a flow rate of 80 MMSCM. During FY 2009-10, total gas production was 14,397 MMSCM. 2. D26: Six wells from the D26 oil field in the block are under production. During the FY 2009-10, total oil production from this field was 4.04 million barrels. RIL has made four discoveries during the year 09-10 and submitted commerciality for some other blocks also. b. Panna-Mukta and Tapti Fields: Panna field comprises 430 sq. kms of area, located 50 km east of the giant Bombay High field and is 95 km NW of the Mumbai city. Panna-Mukta fields produced 1.8 million tonnes of crude oil and 1,965 MMSCM of natural gas in FY 2009-10, registering a growth of 9% and 18% respectively over the previous year.
Tapti field covering an area of 1471 sq.kms lies 160 km north-north west of the Mumbai city. It lies approximately in a water depth of 20 M on the northeast flank of Surat depression, of Bombay Offshore Basin. The block comprises of two fields South Tapti and Mid Tapti, which occur in two large structural culminations.

Tapti fields produced 187,000 tonnes of condensate and 3,102 MMSCM of natural gas for FY 200910, a decrease of 31% and 26% respectively as compared to the previous year. The decrease in production was due to a natural decline in the reserves. 2. Essar Oil Ltd: The main operating fields under Essar Oil Ltd are: Ratna and R-series fields near the Mumbai High field in the Mumbai offshore basin o o 50 percent interest in one shallow water offshore exploration block MB-OSN2005/3, near the Mumbai High field in the Mumbai offshore basin 70 percent operating interest in Mehsana oil and gas block that has started crude production

3. Cairn India Ltd (Indian subsidiary of Cairn Energy Ltd, Europe): Cairn India is the operator of the Rajasthan block with a 70% participating interest and its joint venture (JV) partner ONGC has a 30% participating interest. Main fields of Rajasthan blocks are: i. ii. Mangala, Aishwariya, Raageshwari and Saraswati (MARS) fields; Bhagyam and Shakti fields; and

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iii.

Kaameshwari West fields.

Cairn Indias operations in this area are centered on the Rawa oil and gas field in the KrishnaGodavari Basin. Developed in partnership with ONGC, Videocon and Rawa Oil, Cairn became the operator of the block in 1996, working under a Production Sharing Contract (PSC) that runs until 2019. As part of the initial development program, alongside its JV partners, Cairn operates eight unmanned offshore platforms and additional sub-sea pipelines. Originally estimated to produce 101 million barrels of crude oil, Ravwa has now produced around 225 million barrels.

4. British Gas:
BG Group has held a 30% interest in the Mid and South Tapti gas fields and the Panna/Mukta oil and gas fields since 2002. In 2009, the combined fields produced 13.7 mmboe (net to BG Group). BG Groups aim is to optimize recovery from the PMT fields through ongoing existing field development (including well intervention and infill drilling) as well as new projects. Panna has had a program of 46 infill wells drilled in the last six years. Panna K started production in 2009 and the Panna L installation is scheduled to be completed by the end of 2010, with first production in early 2011. Future developments will focus on the next phase of the Mukta reservoir (Mukta B) as well as a final decision on the viability of water injection. The total gas from the mid and south Tapti complex peaked at 450 mmscfd along with 7 000 bbls of condensate. Current production is around 300 mmscfd of gas and around 4 100 bbls of condensate. During 2010, three development wells have been completed in Mid and South Tapti. Further infill drilling opportunities across Mid and South Tapti are possible in 2011. Under Indias New Exploration Licensing Policy (NELP) 6 licensing round, BG Group acquired a 45% interest in exploration block KG-OSN-2004/1 in the Krishna Godavari (KG) Basin, in 2006. The shallow water block, which covers an area of approximately 1 131 square kilometers, is located off the east coast of India. Oil and Natural Gas Corporation Limited (ONGC) holds the remaining 55% and is operator. Following a successful bid in the NELP-8 licensing round, a consortium led by BG Group (30% and operator), was awarded an exploration block (KG-DWN-2009/1) in deep water in the KG basin in June 2010. BG Group has also been making efforts to expand its position in India via farm-ins. In 2008, BG Group entered a farm-in agreement with ONGC to acquire a 25% interest in exploration block MN-DWN2002/2 in the Mahanadi Basin on the east coast of India.

5. Niko:
Since 1997 the government has implemented the New Exploration Licensing Policy (NELP) that has provided a framework for companies to invest in Indias oil and gas potential. Niko Resources Ltd. has participated in most of the NELP rounds and has acquired working interests in 6 exploration

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blocks. Three of these blocks are producing and comprise the majority of the Company's production. Exploration and evaluation work continues on the other three blocks and one of the producing blocks. 6. Shell: Currently Shell is not working in E & P sector in India. Its main operations consist of LNG terminal in Gujarat. 7. Total: Total is currently working in LPG sector only so not directly involved in E & P operations.

Chart 7: Total Oil production ('000 tons) (Source: DGHC statistics)

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Competition situation
The major policy shift towards an open and more globally integrated economy since 1991 and subsequent formation of Directorate General of Hydrocarbon and initiation of NELP (in 1997) have been able to attract some major foreign players. We have also seen significant growth in Indian private sector in terms of Reliance and Essar. But when the Govt on one hand is trying to attract more top level players from the international field by promising more transparency and fairness or better quality data about blocks offered, problems still remains with the regulatory ambiguity over the contracts. So, it can be concluded that exploration and production sector in India still remains an oligopoly market with PSUs dominating. As Indian downstream section of Oil and Gas is heavily regulated and
had an almost Govt monopoly it is tough for private players to earn a profit from the complete supply chain (up to Retailing in the domestic market).

Production
5263 3572 ONGC OIL 24856 PVT/JV

Chart 8: Production break-up in 2009-10 (000 tons) (Source: DGHC Statistics)

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Key Drivers

Govt Initiative Rising Demand

Refinigng Capacity

Exploration& Production

Less Supply

Unexplored Reserve

Export Potential

Alternative Fuel

There are some important positive points about this sector. 1. Rising demand and supply gap: Along with GDP growth Indias primary energy requirement is jumping up very fast. Currently India is the fourth largest Oil and Gas consumer in the world but continues to import around 70 % of its requirement.

Chart 9: Relative Demand Supply Situation in India

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2. Reserve: But India does have a significant proven reserve for both Oil and gas. India has total

reserves (proved & indicated) of 1201 million metric tonnes of crude oil and1437 billion cubic metres of natural gas as on 1.4.2010. But Just over 60% of potential in oil sector has been explored so far.

Exploration
moderate to wellexplored 14% 22% poorly explored Exploration just initiated still remaining unexplored

44%

20%

Chart 10: Explored reserve (source: ONGC)

3 Govt Initiatives: To meet growing demand and contain the problem of foreign exchange Govt of India has already initiated NELP as part to attract large multinationals. Though some issues remain about the clarity of the PSC(Production Sharing Contract) with the Govt so far many global players is being interested. Some significant domestic players are also coming up with the E & P operation in a large scale. e.g: RIL. 4. Growing Refining activity: Indias refining capacity has been steadily growing. Few points are: 1. ONGC has acquired MRPL in order to boost reefing capacity. 2. Other PSUs are also investing heavily in upgrading refining capacity. 3. Largest refinery capacity in the world has been installed in Jamnagar, Gujarat by RIL 4. Strategic petroleum reserve: To support Indias energy security, India is constructing a strategic petroleum reserve (SPR). 1. Visakhapatnam will hold approximately 9.8 million bbls of crude (1.33 million tons) and is scheduled for completion by the end of 2011. 2. Mangalore will have a capacity of nearly 11 million bbls (1.5 million tons) and is scheduled for completion by the end of 2012.

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3. Padur, also scheduled to be completed by the end of 2012, will have a capacity of nearly 18.3 million bbls (2.5 million tons).

Refining Capacity(in MMT)


250 200 150 114.6 100 62.2 50 0 Refining Capacity(in MMT) 127 127.4 132.5 149 235

Chart 11: Refining capacity trend in India (source: IBEF) 5. Strong Export potential: Though India is net importer (and by huge margin) of Crude oil it is a net importer of Petroleum products as it has surplus refining capacity. Actually due to highly subsidized rates in downstream retailing of product like Petrol, Diesel and Kerosene private players generally do not find it very attractive to retail in India. They rather concentrate on export. 7: Alternative fuels scenario: Coal Bed Methane (CBM): Methane trapped in coal seams. 26 blocks awarded in three rounds of bidding. Production potential of over 25 MMSCMD Underground Coal Gasification (UCG): Huge potential in India to get natural gas through UCG. ONGC has signed agreement with Sckochinsky Institute of Mining, Russia to harness world class technology to tap this energy source Gas Hydrates: National Gas Hydrate Program and Steering Committee in place

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Key Challenges / Barriers:


Absence of statutory framework in the upstream industry Incidence of cross subsidy due to social obligations Domestic reserves/production will not be sufficient Cross-border gas pipelines facing uncertainty, but attracting interest Inability to take international prices

Though India is rapidly moving towards more integration with global economy, its serious socio economic obligation against freeing up downstream oil products may deter some potential investment in near term

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Distribution System & structure


India has a gas distribution pipeline system but that is mostly concentrated into the west to the northern part of the country. The present natural gas transportation infrastructure in the country is around 10,800 km with a capacity to move 270 million standard cubic meters of gas per day. Govt will add over 7,450 km of gas pipeline network over the next 2-3 years to ramp up its supply lines to keep pace with the growing demand from the consumption centers in the country.

Fig 9: Indias existing and proposed pipeline system

Key Distributor: GAIL (India) Limited is the largest state-owned gas transportation company in India, integrating all aspects of the natural gas value chain 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.

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Apart from pipeline india has a significant investment for Oil and gas transportation through rail and road. The approximate break up is shown below:

18% 40% 12%

30%

Railways

Pipelines

Coastal Tankers

Road

Figure 12: Transportation breakup of Oil/Gas by medium (source: IBEF)

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Key Opportunities Oil:


Investments under NELP Destination India as refining hub Increased investment in fuel quality up gradations Building strategic petroleum reserve public private partnership Acquisition of overseas oil assets

Gas
Domestic exploration of NG, development of Liquefied Natural Gas (LNG) markets Coal Bed Methane (CBM), Underground Coal Gasification, Gas Hydrates Development of National Gas Grid

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Financial Analysis:
The Oil and Gas sector has been maintaining an almost steady fraction of GDP with the growth of the overall GDP. GDP data from the Petroleum and Gas sector is as follows:
70000 60693 60000 50541 50000 40000 30000 20000 10000 0 2005-06 2006-07 2007-08 2008-09 GDP value(in Rs crore) 56520 65491

Chart 13: GDP value from Petroleum sector (source: DGHC)

Major Players:
The E & P sector is clearly dominated by the State control firms namely ONGC and OIL but on the basis of overall performance (throughout the supply chain) Reliance Industries Ltd also has a very significant presence. ONGC: ONGC is the most prominent PSU in India with a with a market capitalization of 2,553,525.77 Million Rs (as of 7th Feb, 2011 on BSE ) and listed in both Bombay Stock Exchange and National Stock Exchange. Govt of India holds around 74% stake in the organization. It is one of the most profitable companies in India as well Asia.

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Oil India Ltd: In the E & P sector in India, Oil India holds the second key position with a market cap of 31931.76 crore Rs (as of 7th Feb, 2011 on BSE). It is also listed in both Bombay Stock Exchange and National Stock Exchange. Reliance Industries Ltd: It is the key private player in E & P sector in India. Apart from e & P it has very significant presence in the refining and downstream marketing sector in India also. This is one of the key exporters of refined petroleum product for India. It operates worlds largest Refinery-cum-petrochemicals complex in Jamnagar, Gujarat with an annual refining capacity of 27-million tonnes per annum. It had a total investment of Rs 25,000 crore (about US$ 6 billion). RIL has the largest market capitalization India with value of 3,053,902.83 Million Rs (as of 7th Feb, 2011 on BSE).

Though petroleum sector in India has traditionally remained a sector dominated by state players introduction of liberalization has brought some fruit- a significant amount of investment are being made by Indian as well as foreign private players throughout the value chain.

Profit(Rs Crore) RIL (consolidated) OIL ONGC Income(Rs crore)

50000

100000

150000

200000

Figure 13: Income and Profit statement (source: Company websites)

2. Essar Oil Ltd: It has significant presence in CBM extraction apart from exploration and Production. In FY 2008-09 it had a sales turnover of Rs 37,652.00 crore with a Operating Profit of 1,154.00 crore.

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3. Cairn India: It is basically the Indian arm of European energy firm Cairn Energy Ltd (listed in London Stock Exchange). It operates a JV with ONGC in Rajasthan. In FY 2008-09 it had a sales turnover of Rs 282.46 crore.

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Regulatory Advantage & legal frameworks


The main regulator body for E & P section in Oil sector is Directorate General of Hydrocarbons. The Directorate General of Hydrocarbons (DGH) was established in 1993 under the administrative control of Ministry of Petroleum & Natural Gas through Government of India Resolution. Objectives of DGH are to promote sound management of the oil and natural gas resources having a balanced regard for environment, safety, technological and economic aspects of the petroleum activity. Several key tasks done by DGHC are as follows: 1. Implementation of New Exploration Licensing Policy (NELP) 2. Production Sharing Contracts for discovered fields and exploration blocks

To expedite the activities in E & P sector of India, DGH was formed in late 90s. Since then it has been working as the nodal agency for all E & P related regulation. Recently DGH is trying at many international levels to market Indias strong E & P potential.

3. Promotion of investment in E&P Sector and monitoring of E&P activities including review of reservoir performance of producing fields 4. Opening up of new areas of unconventional energy sources like CBM, Shale gas etc. NELP: The New Exploration Licensing Policy, better known as NELP, was formulated by the Government of India in 1997-98 to provide equal opportunities to both public and private sector companies in the exploration and production of oil and gas in the country. So far 8 rounds of NELP have been completed. Some highlighting points of currently going on NELPIX round is: There will be only one Exploration phase of 7 years for Onland and Shallow water blocks and 8 years for Deep water blocks and Frontier Area blocks. There will be no compulsory relinquishment after Initial Exploration Period (when mandatory and committed program are to be completed) and operators will have option to relinquish entire area after completion of Minimum Work Program or retain the Block by committing to carry out drilling of one well per year in case of Onland and Shallow water Blocks or one well in 3 years in case of Deepwater Blocks. In any case, the entire area (leaving aside the Discovery Area and Development Area) would require to be relinquished at the end of 7 or 8 years of exploration, as the case may be. Up to 100 percent participation by foreign companies. No signature, discovery or production bonus. No mandatory State participation. No carried interest by National Oil Companies (NOCs). No customs duty on imports required for petroleum operations. Income Tax Holiday for seven years from start of commercial production of Mineral Oil. Biddable cost recovery limit: Up to 100 percent.

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Option to amortize exploration and drilling expenditures over a period of 10 years from first commercial production. Sharing of profit petroleum with Government of India based on biddable Pre-Tax investment multiple achieved by the contractor.

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Recent Mergers & Acquisitions

Activities in the industry: In pre-liberalization era, there was not much scope of M & A as the complete field was overly dominated by state players. But after 91 reforms and subsequent initiation of liberal FDI policy, NELP etc some significant M&A have taken place. Though the no is not much as far other sectors are concerned, but an upward trend is inevitable. Major Deals:
A. ONGC Videsh Ltd: ONGC Videsh Limited (OVL), a wholly owned subsidiary of ONGC, was rechristened on 15th June 1989 from the erstwhile Hydrocarbons India Private Limited, which was incorporated on 5th March, 1965. The primary business of OVL is to prospect for oil and gas acreages abroad including acquisition of oil and gas fields exploration, development, production, transportation and export of oil and gas. In recent times OVL has tried to pursue acquisition or joint ventures in some strategically important international oil and gas fields with some of the global leaders. 1. Acquisition of Imperial Energy Corporation Plc. OVL acquired Imperial Energy Corporation Plc., an independent upstream oil Exploration and Production Company having its main activities in the Tomsk region of Western Siberia, Russia on 13th January, 2009 at a total cost of USD 2.1 billion. Imperials interests comprise of seven blocks in

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the Tomsk region i.e. Block 69, 70, 74, 77, 80, 85 and 86 with a total licensed area of approximately 16,800 square kilometers. The Production licenses were granted to the Company during 2005 to 2008 and are valid till 2028 to 2031. As on 1st April 2010, OVLs share of 2P reserves in the project was 112.871 MMT (O+OEG). The post acquisition developmental plans of Imperial Energy, which included the drilling of 32 wells and construction of facilities, has resulted in the ramping up of its oil production to above 16,000 bopd in December 2009 from around 6,000 bopd at the time of acquisition. On the exploratory front, Imperial is focused on evolving a complete geological understanding of its fields through various geological and geophysical studies. During the year 2009-10, Imperial Energy drilled 12 exploration and appraisal wells which have led to four new discoveries. The Exploration and Developmental program for the year 2010 envisages drilling of 43 wells in addition to construction of facilities coupled with infusion of new technologies / techniques. OVLs share in the oil production was 0.543 MMT during 2009-10 as against 0.076 MMT during 2008-09. The Company has invested approx USD 2,335 million till 31st March 2010 in the project.

2. MRPL acquisition by ONGC:

Though MRPL (Mangalore Refinery and Petrochemicals Ltd) is not a direct E & P player, ONGC acquired it in 2003 from AV Birla group (it was a JV between HPCL and AV Birla group) and further infused equity capital of Rs.600 crores thus making MRPL a majority held subsidiary of ONGC. Currently ONGC's holding in MRPL is 71.62 percent.

3. Acquisition in Private sector: a. RPL with RIL (Intra organization merger): The merger of Reliance Petroleum Limited (RPL) with Reliance Industries Limited (RIL) in 09 has enabled seamless integration of operational scale and financial synergies that existed between the two Companies. Shareholders of RPL received 1 share of RIL in lieu of every 16 shares of RPL held by them, as per the scheme of merger. b. In 2008, in the Refining & Marketing business, Reliance took over majority control of Gulf Africa Petroleum Corporation (GAPCO) and started shipping products to the East African markets. c. IPCL acquisition by RIL: Indian Petrochemicals Corporation Limited (IPCL) an erstwhile PSU in the refining and polymer business was acquired by RIL in 2002 as a Govt of India divestment process. d. Cairn Vedanta deal on the table: Cairn India ltd (the Indian public arm of the London stock exchange listed company Cairn Energy ltd) has working in the Indian E & P sector for past few years. The most notable operating asset of the entity is the Barmar Oil field in Rajasthan where it holds a 70% stake .The rest is with Indian PSU ONGC.

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Apart from that it has interest in Cambay basin block and eastern offshore Rawa oil and gas fields and has also owned some of new fields in the recent licensing round held by Govt of India. Recently the parent arm has planned to sell up to 51% of its Indian subsidiary to Vedanta Resources Ltd (a London based mining and metal giant) for an estimated $ 9.6 bn deal. But, till now the deal has not reached any significant headway because of some reasons such as: Govt intervention because it had a PSC (Production sharing contract) with Govt of india and its current partner is already a Govt owned firm. Apart from this as crucial natural resource like Oil and Gas is under question, some political opposition may also create some issue apart from legal or procedural ones.

Names of industry bodies


The basic administrative task in the sector is done by Govt of India - Ministry of Petroleum and Natural Gas through the entity called The Directorate General of Hydrocarbons (DGH). It was established in 1993 under the administrative control of Ministry of Petroleum & Natural Gas through Government of India Resolution. Objectives of DGH are to promote sound management of the oil and natural gas resources having a balanced regard for environment, safety, technological and economic aspects of the petroleum activity. Other prominent industry bodies are: 1. Oil Industry Development Board (OIDB) : Statutory body which receives grants from the government out of the cess collected on crude oil production in the country funded through The Oil Industry (Development) Act, 1974. 2. Petroleum Conservation Research Association (PCRA): promotes awareness of energy conservation and good practices in the use and application of energy. It is originally formulated as Petroleum conservation action group in 1976 after Oil shock in 1970 and subsequently turned into PCRA in 1978. 3. Oil Industry Safety Directorate: endeavors to lay down norms for the industry, based on requirements to be complied with under various applicable statutes. 4. Centre for High Technology: provides a central place for data on technology etc. to prevent repetitive acquisition of technology by the industry

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6. Petroleum India International: an industry body to pool the expertise available with the various petroleum companies and to commercially exploit it overseas through offer of various petroleumrelated services. 5. Petroleum Planning and Analysis Cell: Subsequent to the dismantling of the Administered Pricing Mechanism (APM) in the petroleum sector with effect from 1st April, 2002 Oil Coordination Committee was abolished and a new cell, Petroleum Planning & Analysis Cell (PPAC) was created w.e.f. 1st April, 2002 under the Ministry of Petroleum and Natural Gas. As per Governments directives, the expenses of the cell are borne by OIDB by way of grant. The functions of the PPAC are, administration of subsidy on PDS Kerosene and domestic LPG, administration of freight subsidy for far flung areas, maintenance of Information data bank and communication system to deal with emergencies and unforeseen circumstances, analyzing the trends in the international oil Market and domestic prices, forecasting and evaluation of petroleum import and export trends, operationalizing the sector specific surcharge schemes, if any. 6. Petrofed: Petroleum federation of India is a federation of various organizations in the petroleum sector established in 2002 in Delhi. Some of the basic objectives of this fed are Function as a facilitator for the oil industry in India. Coordinate with governments, regulatory agencies and other representative bodies in the petroleum industry. Work for global competitiveness of the petroleum industry. Optimize resources and integration effort. Promote Safety, Healthy Environment and Energy conservation. Coordinate with oil marketing companies for ensuring compliance of Good Business Practices. Provide forums for deliberating issues of common interest to industry members. Organize Seminars, Conferences, Training programs, lectures and publication of Technical papers & newsletters. Some of the prominent international member of this federations are BP, Cairn energy etc.

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Industry SWOT

SWOT
Internal factors

Positive Strength
1. Developing economy: Economic development will continue to create huge requirement for primary energy and subsequently Oil and Natural gas demand will continue to grow. 2. Liberal attitude of Govt: Though huge amount of subsidies are in place Govts overall inclination is in boosting infrastructural expenditure and participation from more MNCs in the sector for fast growth. 3. Surplus Domestic Refining capacity 4. Strong export potential 5. Soaring Crude oil prices

Negative Weakness
1. Capital intensive and highly technical nature of investment and long period before commercial production starts. 2. Risk of inadequate technical data about blocks being allocated which may cause inaccurate prediction about commercial usage of Oil/Gas 3. Govt intervention: This is supposed to continue in the near future as it is very crucial and economically sensitive sector. Some clause of NELP also may not be very encouraging for MNCs. 4. Dominance of PSUs: It may be a deterrent for investment from MNC point of view.

External factors

Opportunity
1. Huge Unexplored/under explored blocks2. Proven reserve and continuation of primary exploration activity3. Increasing focus on alternative energy source (like CBM and Shale gas)4. More investment in downstream transmission facility (like long distance pipelines)5. Formation of Strategic Petroleum reserve by Govt.

Threats
1. Subsidy: Downstream sector (retailing) is highly subsidized by Govt so it is very tough to compete for private players in the domestic retail sector. 2. Govt intervention through NELP: There have been some issues in the past with between GOvt and few MNCs about various clauses of NELP. As the energy security of the country is a strategically very important Govt regulation is expected to continue. 3. Stringent environmental regulations

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Market forecast with Macroeconomic assumptions


Some basic macroeconomic expectation from Indian economy can be summarized as follows: 1. GDP growth will continue in a decent rate (around 8% Y-2-Y) for next decade. 2. Population growth will continue to grow for near future fuelling Indias increasing energy need. 3. Service sector and Industry will be growing at healthier rate than the agricultural sector thus requirement of primary energy will rise. 4. Continuous trend of urbanization will remain in the Indian economy.

Chart 14: Estimated energy outlook The latest India Oil & Gas Report forecasts that the country will account for 13.23% of Asia Pacific regional oil demand by 2014, while providing 10.26% of supply.

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1400 1200 1000 800 consumption 600 400 200 0 2009 2014 production

Chart 15: Natural Gas Consumption/Production estimate (BCM/Day) 40 35 30 25 20 15 10 5 0 2001 2009 2014(forecast) consumption production

Chart 16: Crude oil prod/consumption (MN barrel/day)

Source: BPCL

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PEST Analysis
Political a. FDI policies

Item
All activities other than refining and including market study and formulation, investment/financing, setting up infrastructure for marketing in Petroleum and Natural Gas Sector Refining

Approval Route
FDI up to 100% through Automatic route

FDI up to 49% in case of Public Sector Undertakings - Through Foreign Investment Promotion Board (FIPB) FDI up to 100% in case of private companies - Automatic

b. Policy regimes favorable for investments: Administered Pricing Mechanism (APM) dismantled officially from April 2002 b. NELP: NELP policies are inclined towards liberalization of the E & P Activities through favorable FDI route and other steps like: No customs duty on imports required for petroleum operations. Income Tax Holiday for seven years from start of commercial production of Mineral Oil. c. Disinvestment of PSUs is focused (disinvestment of some major Oil sector PSUs are in the list ONGC etc) Economical a. Healthy GDP growth expected to continue in near future b. overall Liberalization trend is also expected to continue in the capital market c. Easier way of foreign capital especially FII through partial current account convertibility is available d. Indian capital market is becoming integrated with world market and domestic participation in various IPO and FPO is also encouraging

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Social 1. Growing population growth is expected to boost energy requirement 2. More affluent lifestyle will cause significant growth in Automobile and related transport sector thus encouraging primary energy requirement.

Technical 1. Access to modern technology is required in order to set up operation in this sector a. Carrying out exploration activities b. Drilling production

2. Lack of technically skilled manpower may be one of the technical impediments in fast E & P activities. 3. Recently alternative sources of energy are being given much importance because of the continuous exhaustion of the traditional resources like Oil and Natural Gas. They are: CBM - Methane trapped in coal seams. 26 blocks awarded in three rounds of bidding. Production potential of over 25 MMSCMD Shale Gas Underground Coal Gasification (UCG) Gas Hydrates 3. Strict environmental regulation can hike up the cost of technical installation significantly.

Government Stimulus packages to boost the industry:


Though Indian government has not provided any direct stimulus package directly planned outlay is reaching significant amount. This is the planned outlay in XI th planning commission in Indian oil sector:

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Category Upstream: Refining: Gas: Marketing: Crude pipelines/ Crude Oil Terminal: R&D: Others: Total

Planned Outlay (Rs Crore) 1,59,161 81545 13079 6,080

4,230 1,418 3,536 2,69,049

Success stories
1. Krishna Godavari Basin: Krishna-Godavari basin is a peri-cratonic passive margin basin in India. It is spread across more than 50,000 square kilometers in the Krishna River and Godavari River basins in Andhra Pradesh. The site is known for the D-6 block where Reliance Industries discovered the biggest natural gas reserves in India in 2002. It was also the world's largest gas discovery of 2002. 2. Cairn India Rajasthan oil field: In January 2004, Cairn discovered the largest onshore oilfield in India since 1985 the Mangala field in Rajasthan. Currently, the Mangala field in the RJ-ON-90/1 block is currently producing 100,000 bopd. Cairn India and its JV partner ONGC have set up the Mangala Processing Terminal in Barmer to process the crude from the Rajasthan fields. A continuously heated and insulated pipeline has also been constructed to transport the crude from Barmer to Bhogat in the coast of Gujarat. The pipeline section from Barmer to Salaya is operational and sales have commenced to Essar, RIL and IOC. 3. ONGC Videsh LTD: In recent years, Indian NOCs have looked to acquire equity stakes in E&P projects overseas. The most active company is ONGC Videsh Ltd., the overseas investment arm of ONGC. As of January 2007, ONGC Videsh holds interests in 25 oil and natural gas projects in 15 countries, spanning Africa, Asia, Latin America, and the Middle East. One of ONGC Videshs most high profile investments is its share in the Greater Nile Petroleum Operating Company (GNPOC), which has engaged in E&P work

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in Sudan since 1997. ONGC Videsh acquired a 25 percent equity stake in the company in 2003, with the balance held by the China National Petroleum Company (CNPC, 40 percent), Petronas (30 percent), and the Sudan National Oil Company (Sudapet, 5 percent). The GNPOC acreage in Sudan holds proved crude oil reserves of more than one million barrels, and current production levels from the 8 main GNPOC fields exceeds 300,000 bbl/d. In addition to the upstream activities, the GNPOC companies operate a 935-mile crude oil pipeline that pumps oil to Port Sudan for export (see the Sudan Country Analysis Brief for more information). ONGC Videsh also holds a 20 percent stake in the ExxonMobil-led consortium that operates the Sakhalin-I project in Russia. According to company estimates, the oil fields associated with Sakhalin-I hold recoverable crude oil reserves of 2.3 billion barrels. Production at Sakhalin-I started in October 2005, and is expected to reach 250,000 bbl/d in early 2007. Oil from the Sakhalin-I project will be piped westward to the DeKastri terminal on the Russian mainland for export, while some crude oil will also be pumped into Russias domestic pipeline system for local consumption.

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Annexure
List of charts & tables

Industry associations

Certifying authorities Bibliography 1. Ministry of Petroleum and Natural Gas (http://petroleum.nic.in) 2. Director General of Hydrocarbon (www.dghindia.org) 3. ONGC (www.ongcindia.com) 4. OIL (www.oil-india.com) 5. RIL (http://www.ril.com/) 6. IBEF (http://www.ibef.org)

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