MANAGEMENT DISCUSSION AND ANALYSIS
Indian economic scenario
The year 2009 witnessed the harsh fallout of the unprecedented global economic turmoil.As per IMF estimates (January 2010), global economic growth contracted around 0.8%, led byadvanced economies. This led to a sharp decline in global crude price from US $80per barrel in October 2008 to US$51in April 2009.
The cumulative efforts of most governments curtailed the depth, span and intensity ofthe economic catastrophe, although the possibility of some economies defaulting continuesto haunt the world. More importantly, had it not been for China and India, the intensityof the global meltdown in 2009 could have been harsher.
Double-digit industrial growth saw the Indian economy expanding 7.4% in 2009-10 (6.7%in 2008-09), despite drought and global slowdown. This was largely owing to theimplementation of the broad-based, counter cyclical policy package to respond to thenegative fallout of the global slowdown.
The Indian economys strong performance was driven by the manufacturingsectors robust performance on the back of government and consumer spending. Thesector emerged as the best performer, growing 10.8% in 2009-10 as against 8.9% in 2008-09,outpacing the previously fastest growing services sector.
Fiscal 2009-10 was affected by the worst drought in three decades, followed by floodsin some areas, adversely affecting kharif crop production. Despite this, the agriculturesector grew 0.2% during the year as opposed to a 0.2% estimated decline.
Government estimates suggest that the Indian economy will grow 8.5% in 2010-11, drivenby better farm output and global recovery. The International Monetary Fund (IMF) raisedits India growth forecast for 2010 to 9.4% from 8.8% estimated in April
Oil and the Indian economy
As India depends upon crude oil imports to the extent of excess of 70%, adversegovernment policies would definitely translate into further price inflationary pressure onthe economy; rising import bill has already put the countrys current account balancein a fix.
India's trade deficit was US$117.3 billion in 2009-10, down from US$118.7 billion in2008-09 and is further expected to widen to US$132.70 billion in 2010-11 and US$154.50billion in 2011-12, leading to pressurising the partially convertible rupee, havingalready lost around 5% from its 2010 peak levels (Source: Reuters). The primaryreason being Indias rebounding economy that is expected to raise demands formanufacturing activity and oil imports. Oil imports in 2009-10 were US$85.5 billion, lowerthan US$93.7 billion in 2008-09; with domestic crude refiners being the biggest importers.
Indian oil scenario (US$ billion)
India has an estimated US$5.5 billion oil subsidy accounting for 2.5% of its budget. Inthe fiscal year that ended March 31, 2010, the government spent Rs. 260 billion topartially compensate state-run refiners for selling fuel below cost
An analysis by Standard Chartered indicates that every increase of US$1 per barrel inIndian crude basket prices pushes up the annual import bill by US$1.2 billion.
(Source: www.economictimes.com published in 2 July, 2010)
The oil industry value chain
The major components in the oil industry is upstream, midstream and downstream. Theupstream industry includes exploration and production activities; hence it is alsoreferred to as the exploration and production (E&P) sector. The midstream industryprocesses, stores, markets and transports commodities including crude oil, natural gas,natural gas liquids (NGLs) like ethane, propane, butane and sulphur. The downstreamindustry includes oil refineries, petrochemical plants, petroleum products distributors,retail outlets and natural gas distribution companies.
Global oil and gas industry
The year 2009 marked the worst year for oil demand since the oil crisis of the1980s. Oil consumption was severely hit across all regions. The economic downturnthat followed resulted in unprecedented demand destruction. The bulk of the decreaseduring 2009 occurred in industrial fuel and fuel/kerosene. These two products account for75% of the total decrease in world oil demand this year. The industry is on a path ofrecovery due to fiscal measures announced by various governments.
Led by North America and Europe, all OECD regions recorded reductions in industrialfuel. Various stimulus plans across the globe managed to increase energy demand in thefourth quarter of 2009. China, the Middle East and India consumed more oil, leading tototal growth of 0.6 mb/d in 2009. As a result of a massive decline of 1.9 mb/d in theOECD, total world oil demand declined 1.4 mb/d to an average 84.4 mb/d in 2009.
The only product showing a y-o-y increase during 2009 was gasoline, with the entiregrowth taking place in the non-OECD region, specifically in China. Furthermore, LPGconsumption was also slightly positive compared with 2008, due to demand from Asia.
World oil consumption by products, 2009
(Source: OPEC) Total
The International Energy Agency (IEA), in its World Energy Outlook, 2009, estimatesthat by 2030, global energy demand will increase 49% from its current level. Oil andnatural gas are expected to remain primary energy sources and are expected to meet 51% ofthe global demand. Increasing concern for climate change augurs well for natural gas as itis an environmentally benign fuel with carbon emissions far lower than other fossil fuels.IEA estimates that the world requires investments to the tune of US$11 trillion in the oiland gas sector over the next 20 years, implying an annual investment of over US$5,000billion.
The fiscal FY10 was one of steady growth. Oil prices rose from an average of US$46 perbarrel (bbl) in January 2009 to touch US$75 per bbl vis--vis US$86/bbl for the previousyear. The year also saw the global oil demand slip to 84.93 MBPD, a decrease of 1.5% over2008. IEA forecasts that the global oil demand is set to increase by 1.67 MBPD or 2% to86.60 MBPD in 2010.
Indian oil and gas industry
Production: 36.7 MMT in 2009-10
Imports: 153 MMT in 2009-10 (75% of annual consumption)
Production: 9th largest globally
Consumption: 6th largest globally
Impact on economy
Import bill: US$85.5 billion
Wealth below the surface
The Indian oil and gas sector is one of the six core industries in India withsignificant linkages with the entire economy. The oil and gas sector meets more thantwo-thirds of the total primary energy needs in the country. The sector was instrumentalin putting India on the world map. Currently, India is the worlds sixth-largestcrude oil consumer and the ninth-largest crude oil importer.
In India, more than 77% of total oil consumption is met through imports. During2009-10, crude oil production stood at 36.7 MMT, about 11% higher than the crude oilproduction of 33.5 MMT in 2008-09.
Oil intensity the ratio of oil consumed per unit of GDP in India isalmost three times higher than that of the OECD countries while that of China is a littlehigher than twice the oil intensity of OECD countries (Integrated Energy Policy, PlanningCommission). However, according to the FICCI estimates of oil intensity based on GDP (onpurchasing power parity basis), India and China had the lowest oil intensity across mostmajor developing and developed countries.
Exploration and production (E&P)
Despite an exploration history of over 100 years, India remains vastly unexplored withonly 20% of its acreage explored adequately. Even the well density remains low in theacreage awarded so far.
Since 2000, private E&P players conducted extensive exploration work, achieving ahigher success rate than National Oil Companies (NOCs). This is due to a simple realityuncertainty over Indias subsidy mechanism will limit the public sector (PSU)E&Ps from achieving their full potential.
Indias exploration status
| || |
|Unexplored ||50 ||41 ||22 ||15 |
|Exploration initiated ||18 ||27 ||37 ||44 |
|Poorly explored ||17 ||17 ||22 ||21 |
|Moderate to well explored ||16 ||16 ||19 ||20 |
Success rate of major basins (%)
Indias sedimentary basin
|Category I (16%) ||Category II (5%) ||Category III (20%) ||Category IV (14%) ||Deep waters |
|Proven Commercial Productivity ||Identified Prospectivity ||Prospective Basins ||Potentially Prospective ||(45%) |
|Cambay (Gujarat Offshore) ||Kutch ||Himalayan Foreland ||Karewa ||Kori-Comorin |
|Assam Shelf ||Mahanadi NEC ||Ganga ||Spiti-Zanskar ||Narcodam |
|Mumbai Offshore ||Andaman Nicobar ||Vindhyan ||Satpura-South Rewa - Damodar || |
|Krishna Godavari || ||Saurashtra ||Narmada || |
|Cauvery || ||Kerala-Konkan- Lakshadweep || ||Decan-Syneclise |
|Assam-Arakan Fold belt || ||Bengal ||Bhima-Kaladgi || |
|Rajasthan || || ||Cuddapah || |
| || || ||Pranhita-Godavari || |
| || || ||Bastar || |
(Source: DGH; Elara Securities Research)
New Exploration Licensing Policy
The New Exploration Licensing Policy (NELP), unveiled in 1999, has concluded eightbidding rounds till date. The NELP system allowed players to bid for blocks offered by thegovernment.
Salient features of NELP are:
NOCs such as ONGC and Oil India have to compete for obtaining the petroleumexploration licenses on competitive basis
NOCs get the same fiscal and contract terms as available to private companies
No cess on crude oil production
A seven-year tax holiday from the date of commencement of commercial production
Royalty at 12.5% of sales for onshore areas and 10% for offshore areas. Toencourage deepwater exploration, royalty at 5% for the first seven years for deepwaterareas (400 m+ depth)
Of the 326 blocks offered so far, 245 blocks were actually awarded to participants. Thearea awarded under the NELP till 2009 for exploration constituted 46% of the Indiansedimentary basin. The positive impact of private players can be gauged from the fact that68% of the discoveries since 1990 have been in NELP blocks.
Under the recently concluded NELP VIII, 1.62 sq. km of area comprising 70 blocks wereput up for bidding. But this round saw a poor response with bids for only 36 blocks of the70 blocks on offer. However, seen from a global perspective, this is higher than theglobal average bidding rate of 1/6, in 2009.
Since 1997, when the government launched the NELP, it awarded 239 blocks. Of these, 68discoveries of oil and gas were made in 19 blocks, establishing reserves of 500 milliontonnes of oil and oil-equivalent gas. An investment of over US$10 billion was committed inthe first eight rounds of NELP.
| || |
| || |
|2D seismic survey (LKM) ||24,091 ||109,305 |
|2D seismic survey (CKM) ||5,304 ||67,773 |
|Exploratory wells (nos) ||167 ||199 |
| || ||(until NELP V) |
|Development wells (nos) || ||313 |
| || ||(until NELP IV) |
|PSC blocks ||28 ||149 |
|Number of discoveries ||25 ||180 |
|(upto April 15, 2009) || || |
|Investment in exploration ||781.65 ||1,823.17 |
|(US$ mn) || || |
Discoveries in Pre-NELP and NELP regime
Low well density
Despite an exploration history of over 100 years, India remains vastly unexplored. Thewell density and the measure of the extent of exploration in India, remains poor. Theoffshore density is only 1.3 wells per thousand sq. km, almost nondescript in comparisonwith developed nations such as the US and those in the Middle East. The Gulf of Mexico hasa well density rate of 10 wells per sq. km, indicating attractive E&P prospects.
Well density in India
|Basin || |
| || || || |
(wells/000 sq kms)
| || || || |
|Assam ||116,000 ||2,551 ||21.99 |
|Cambay ||51,000 ||5,527 ||108.37 |
|Bengal ||57,000 ||36 ||0.63 |
|Ganga valley ||186,000 ||21 ||0.11 |
|Vindhyan ||162,000 ||22 ||0.14 |
|Rajasthan ||126,000 ||168 ||1.33 |
|Total ||698,000 ||8,325 ||11.93 |
India average well density 5.73
East coast the new E&P epicentre
Indias east coast is expected to emerge as the new hub of Indian upstreamactivities in the coming decades. It is observed that basins on the east coast haveexperienced a higher success rate than other basins. Also, the Indian E&P scene isfurther expected to be boosted with the commencement of the
|Basin || |
| || || || |
(wells/000 sq kms)
|Shallow water || || || |
|East Coast ||98,715 ||79 ||0.80 |
|West Coast ||19,078 ||1,034 ||54.20 |
|Total ||117,793 ||1,113 ||9.45 |
|Deepwater || || || |
|East Coast ||478,209 ||70 ||0.15 |
|West Coast ||377,023 ||67 ||0.18 |
|Total ||855,232 ||137 ||0.16 |
|Total ||973,025 ||1.250 ||1.28 |
Open Acreage Licensing Policy (OALP) in CY11 which would provide foreign players theflexibility to explore the countrys basins. When RIL's K-G D6 gas output ramps up,the country's gas output is expected to jump 98% and when CIL's oil output ramps up in2011-12 and 2012-13, the country's oil output will rise 29-33%.
Consumption expected to grow: Indias per capita energy consumption is 383 kgof oil equivalent (KGOE) against the worlds average of 1,737 KGOE, which indicates asignificant potential for growth in energy demand. As per the Integrated Energy Policy ofthe Planning Commission, Government of India, the countrys energy need is expectedto grow four-fold from 433 million tonnes of oil equivalent (MTOE) to around 1,856 MTOE by2032. However, India depends largely on imports with over 75% of oil and 16% of gasconsumption being imported.
Auto sector accelerating fuel demand: The Indian automobile industry is geared upto invest up to Rs. 800 billion in fresh capacity in the next four years. Carmanufacturing capacity is set to rise to 5.7 million units by 2015, according toconsultants Ernst & Young the growth momentum in the industry will continue at10-15% compounded annual growth rate (Source: The Economic Times June 4, 2010) .
Indias demand-supply mismatch: Despite an enormous increment in the domesticgas supply, Indias demand-supply gap is expected to continue, owing to a negation ofnew production by a decline in maturing oil fields and a higher rise in demand fromconsumer sectors. It is expected that majority of the demand growth will come from thepower sector which may seek a bigger share from the current 80 mmscmd to around 127 mmscmdby FY12.
NELP IX: The government is planning to launch the NELP IX in the latter part of2010 to auction up to 45 oil and gas blocks. Some of these blocks will be from the eighthround for which no bids were received.
Open Acreage Licensing Policy a new catalyst: India is now planning to moveto a new acreage licensing system Open Acreage Licensing Policy (OALP) from thecurrent NELP system where oil firms can choose the blocks they want to explorewithout waiting for the government to put them on offer. The move towards OALP is expectedto accelerate the pace of oil and gas exploration activities.
The open-door policy is expected to attract investments from global oil giants. Westernoil majors such as Chevron, BP, ExxonMobil and Shell, among others, have so far stayedaway from India, but with OALP becoming operational soon, these majors with their priorityoutlays for emerging oil economies, are likely to invest in Indias E&P story ina big way.
The key feature of this system will be the establishment of a centralised knowledgedatabase known as the National Data Repository (NDR) which will hold importantgeoscientific data acquired from all E&P companies. All players, domestic and foreign,will have access to this database at a nominal cost. NDR is expected to hold data for5,000 wells and seismic data for 2,00,000 sq. km by March 2010. In the next five years,the DGH plans to expand this database to 3.2 mn sq. km and 8,500 wells.
Shale blocks new kid on the block: India is planning its first-ever offer ofshale gas areas for exploration in 2012. Shale gas (gas locked in sedimentary rocks) is anemerging area. It has become an important source of energy in a few countries, becoming animportant focus area in the US, Canada and China, among others. India has so far onlyexplored oil and gas. These unconventional deposits raised estimates for the US gasreserves from 30 years to 100 years at current usage rates.
Indias hydrocarbons resource potential
| ||Type ||Resources ||In-place reserves |
|Conventional ||Oil & Gas ||206 bn bbl ||68 bn bbl (32%) |
|UnconventionalCBM || ||50 tcf ||8 tcf (16%) |
| ||Gas Hydrate ||66.9 tcf ||Nil |
| ||Oil shale ||Under evaluation || |
Alphageo executed six projects cumulating Rs. 783.3 million during the year underreview. In 2009-10, the contracts executed were largely for the private sector unlikeearlier years. The other important factor was that of the projects executed, fivecomprised 3D projects (90% of business execution) while only one was 2D data collection.
During 2009-10, sales to ONGC, one of the Companys largest clients, representedabout 50% of the earning during the year. The Company believes that its relationship withthis client is well founded for continued contractual commitments for the foreseeablefuture in multiple basins across India.
Revenue by client segment
| || |
| || |
Percentage of total
Percentage of total
Percentage of total
| || |
| || |
| || |
|NOC ||386.3 ||49 ||232.5 ||36 ||564.1 ||35 |
|Private ||397.0 ||51 ||288.7 ||45 ||73.1 ||4 |
|Foreign ||- ||- ||117.6 ||18 ||178.6 ||61 |
|Total ||783.3 ||100 ||638.8 ||100 ||542.9 ||100 |