Indian petroleum industry in the post independent period (1947-2001) it may be divided into three distinct phases

• (i) early phase (1947 to 1969)- when the government consolidated its control over the industry with Soviet assistance;
• (ii) development phase (1970 to 1989)- in this period the US companies played dominant role replacing the Soviets and
• (iii) the economic liberalisation phase of 1990s.

Historically, the Indian petroleum industry was controlled by few Anglo-American companies. They maintained their dominance till end of 1950s. After independence (1947), the newly independent state wanted to play significant role in this vital industry. The industry policy resolution of 1948 and 1956 have clearly documented the government's aspiration and future plans for core industries like petroleum. All future development of petroleum industry was reserved for public sector undertakings. But foreign assistance was a necessity at least in the early stage. As collaboration with Anglo- American oil majors were ruled out, other alternatives were explored.

At that time the government considered four options as under for the development of its petroleum industry.

1. seek assistance of a great power like Soviet Union,
2. collaborate with a small country like Rumania
3. explore the possibility of a government to government co-operation with other small but neutral countries like Austria which had developed sufficient technical expertise in petroleum industry by that time;
4. try and develop the industry through self-help by employing technicians and bringing necessary machinery from which ever source available.

Of the above four alternatives, though co-operation with a small but neutral power like Austria was thought the best option, the government went for the first alternative. Thus the Soviets took charge of the nascent oil industry. However, their influence diminished over the years. Subsequently, US companies and multilateral funding agencies like World Bank played increasingly significant roles in this sector.

In the early seventies, the government of India nationalised the refinery and marketing facilities of three foreign oil companies. Out of those three Burmah -Shell -, the British company desperately tried to stay in India even as junior partner to a joint venture with a national oil company . At that time Cochin and Madras refineries were running under joint venture between the govt. of India and foreign oil companies. But the government did not accept Burmah-Shells' proposal. The other two American companies - namely Caltex and Standard Vaccum were themselves eager to leave the country due to their internal organisational restructuring and domestic compulsions. The government of Indias decision to nationalise them had nothing to do with their departure from the marketing and refining sector. However, they kept their linkages alive with the industry through crude supplies.

Apart from nationalisation of foreign companies, there were other important developments during seventies and eighties which needs to be mentioned here to understand the liberalisation process of this industry.

• i) As offshore exploration got more importance (though substantial areas of onshore sedimentary basins were unexplored), involvement of US companies increased replacing the Soviets. In offshore exploration and exploitation, India's dependence on American and other Western companies were almost total.
• ii) In 1974, the government offered 7 million acres of Bay of Bengal to Natamas Carlsburg Co. of USA for offshore exploration and production. A contract was entered into between the US company and Oil and Natural Gas Commission (ONGC) for the same. Subsequently another contract between Readings and Bates, USA and ONGC for Kutch basin(Gujarat) was signed. It was agreed that initially the foreign company would have 61% share in the joint venture and the price of the crude if produced would be based on Indonesian and Persian Gulf crude. 40% of the total crude would go to the US company as "Cost Oil" towards recovery of their expenses. 65% of the remaining crude would be ONGCs share and rest 35% would go to the US company. However, the venture was unsuccessful.
• iii) Since 1980, the government started to offer in a systematic way different sedimentary basins to foreign oil companies for exploration and production. Better basins with liberal terms were offered in successive rounds. For example, in the third round (1986) where few major foreign companies participated, the government exempted them from paying any royalty payment. Moreover, no minimum expenditure commitment were to be made and ONGC/OIL was given the option to take minority stake (40%) in the joint venture, if the fields were found viable. However, there was no breakthrough in exploration by the foreign companies.
• iv) Till 1990, the government had invited four proposals for bidding. Due to political changes finalisation of contracts against the fourth round of bidding was deferred. One noticeable feature of the fourth round was that, Indian private companies (along with foreign partners) were allowed to participate for the first time. As no major field was discovered by foreign companies, the government over exploited the existing fields. At a time when the global crude price was declining, Indias crude production was increased steeply from 10.51 MMTPA in 1980-81 to 34.00 MMTPA in 1989-90. The oil bearing wells were 'flogged to death' and as a consequence, production fell to 26.92 MMTPA in 1992-93.
• v) In the eighties, the government allowed Indian private companies to enter into refining sector initially as a joint venture partner with a public sector refining company. Later, Reliance Industries Ltd.(RIL) was allowed to build on their own the largest refinery in the country.
• vi) For refining technology, the the public sector refineries, during 1980s, were almost completely dependant on one American company M/s Universal Oil Products (UOP).UOP did not transfer their technology to the refineries.They 'leased' it simultaneously to more than one Indian refineries at a time. Thus, the technology could not be absorbed.
• viii) The marketing policy followed by the public sector companies has made the economy and the society completely dependent on petroleum products. It has successfully replaced/barred entry of other alternative energy sources including natural gas.

Against this background, we shall discuss the effect of post 1991 economic liberalisation on this vital industry. Our analysis will focus on (a) exploration and production (b) refining (c) marketing.

a) Exploration and Production:

i) To begin with, the government in early nineties has changed the much awaited legal status of the Oil and Natural Gas Commission (ONGC) by converting it into a Corporation there by giving it more autonomy. Oil and Natural Gas Corporation Ltd (ONGCL) - a limited company governed by the Indian Company Acts was formed. Earlier, ONGC was governed by the Acts of the Parliament.

ii) As the government decided in favor of more involvement of private sector in exploration and production, there was a need to establish an independent regulatory body that could effectively supervise the activities of all the companies - private and public. Thus the Directorate General of Hydrocarbon (DGH) was set up in April 1993.Since then, the privatisation process of the exploration and production activities have been accelerated.

iii) The most noteworthy policy shift was the decision of the government to involve private and foreign companies in the development of already discovered fields.In the first offer of such fields in August 1992,contracts for 5 medium sized and 13 small- sized fields have been awarded. Enron Oil and Gas Company, Reliance Industries Ltd, Command Petroleum, Videocon Petroleum Ltd, Ravva Oil Pte Ltd were few such major foreign and Indian private companies . ONGCL and OIL's share in those JVs were limited to 40% only.The estimated oil and gas production from these fields were 360 billion barrels and 50 billion cubic meters respectively.The most promising fields of Panna, Mukta and Mid & South Tapti which had been successfully explored earlier by ONGC were offered to Enron -Reliance consortium without reimbursing the past exploration expenses to ONGC.More over the government agreed to purchase the produced crude from the consortium at the international price plus a premium of $4 per barrel as the sulphur content was low.

In the second offer for the development of 8 medium and 33 small size fields, negotiations for the award of contracts are at an advanced stage.

iv) From 1991 to 1996, the government had held five rounds (fourth, fifth, sixth, seventh and eighths) of bidding for exploration acreages offering as many as 126 blocks, ranging in sizes from a few hundred square kilometers to over 50,000 sq kilometers.11 contracts have been awarded. Some of the important companies which have been either awarded contracts or participated in the exploration round were: Shell, Occidental, Amoco, Enron). However,all these efforts could not improve the crude and gas reserve of India. In 1990-91, the crude oil reserve was 739 MMT which has declined to 658 MMT in 1999-2000.The corresponding natural gas reserve figures were 686 bcm and 628 bcm respectively. In that period, the crude production also declined from 33.02 MMT to 31.95 MMT and in 1999-2000, India had to import 44.99 MMT crude. The above figures clearly indicates that the government policy of involving the private parties- both Indian and foreign offering liberal terms did not help the upstream petroleum sector. On the contrary, reserves and production have drastically fallen in the post liberalisation period.

v) Alarmed with this situation, the government decided to further liberalise its terms to lure Indian and foreign companies to exploration and production. A new Exploration Licensing Policy (NELP) was formulated by the government in 1997-98 to provide a 'level playing field' in which all parties (including national oil companies) would compete on equal terms for the award of exploration acreage. A Model Production Sharing Contract (MPSC) was framed for the finalisation of the contract.

Some of the incentives announced by the government were:

• No custom duty on imports required for petroleum operations.
• No minimum expenditure commitment during the exploration period.
• No mandatory state participation.
• No carried interest by National Oil Companies
• Freedom to sell crude crude oil and natural gas in domestic market at market related prices.
• Biddable cost recovery limit upto 100%
• No cess on crude oil production
• Royalty payment: 12.5% for onland areas,10% for offshore and 5% for deep water areas.
• Liberal depreciation provisions
• Seven years tax holidays from the commencement of production.

If we compare the fiscal incentives offered in the NELP with the incentives declared in earlier production sharing contracts ( ref to the third round of bidding,1986), these are not more liberal than those already offered. But in all the earlier contracts, participation of national oil companies in the JV was mandatory in the event of successful crude/gas find during exploration. This clause has been deleted in the new policy. More over as per the new policy, ONGCL and OIL will have to compete at par with the private companies for exploration and production of new acreage.

vi) The new exploration license policy (NELP-I) was finally launched in January 1999.Record numbers of blocks had been offered for exploration including 10 in onland,26 offshore upto 400 meters depth and 12 deep offshore off the east coast.Out of these, 24 blocks were awarded to different parties. ONGCL on its own bagged 5 blocks and with GAIL and IOCL one and two more blocks respectively. Among the private parties, RIL-NIKO consortium got the maximum 12 blocks. In December, 2000, government again announced NELP-II and invited proposals for 25 blocks. For the first time,8 deep water blocks on west coast and prolific blocks of Assam and Gujarat had been included under NELP. 23 blocks have been awarded to different companies of which ONGC consortia has bagged 16 oil and gas blocks while Reliance-Hardy Oil combine won 4 blocks. ONGCL on its own bagged 6 blocks and OIL one block.

vii) And, for the first time in April 2001, the government has offered 7 blocks for competitive bidding for the exploration and production of Coalbed Methane (CBM).The incentives package has been framed in line with those already offered in NELP.

The liberalisation policies followed so far has not shown any positive result in exploration and production sector. In a desperate bid, the government has accelerated the space of reform. How the national oil companies adjust to this rapid changing situation is to be watched closely.

b) Refining

In the eighties, the government decided to invite private companies in the refining sector.

The private company Reliance Petroleum Ltd (RPL ) has become the second largest player in oil refining sector with 27 MMTPA state of the art refinery at Jamnagar, Gujarat. Apart from approving new refineries in the private and joint venture(involving Indian and foreign companies) there has not been any major policy change in the establishment of new refineries in the nineties. However, from June 1998, the refining sector has been delicensed. Moreover, private and joint sector refineries have been permitted to import crude oil freely without import license for actual use in their own refineries. This will have adverse effect on the operating cost of public sector refineries should international crude price falls below the domestic crude price.

c) Marketing

In the nineties, major policies as under in the marketing of petroleum products with far reaching implications have been announced by the government.

i) To attract private investment in exploration, the government has announced that any company investing nearly US$400 million (Rs20 billion) in exploration and production or other specified avenue, would be eligible for marketing rights for petroleum products in India. This will allow the international oil majors to enter into the lucrative marketing sector.

ii) In September 1997,the government has decided to dismantle Administrative Pricing Mechanism (APM) in phased manner.By April, 2002 it will be fully dismantalled and prices of petroleum products will be determined on the basis of import parity system.

The existing system of petroleum pricing which is also called APM (natural gas was kept out of this pricing mechanism) has its roots in the early seventies when Shipping Corporation of India (SCI) took loan from the World Bank to purchase oil carriers. The World Bank then recommended a 'cost plus' pricing formula to SCI for freight calculation. The same principle in the name of 'retention concept' was later(1976) introduced to crude and petroleum products pricing system. Accordingly, the price of indigenous crude was based on operating cost plus 15% post tax return on capital employed. And oil refineries and marketing companies calculated the price of their products on the basis of operating cost plus 12% post tax on net worth.

The other important component of APM - a complicated pricing formula is 'cross subsidisation mechanism' which has enabled the Indian oil industry to establish its dominance in the energy sector in the last few decades.

Cross subsidised petroleum products competed with other energy sources like coal , and penetrated into their domain. Thus low priced kerosene has replaced vegetable oil for illuminating lamps and coal for coocking, subsidised LPG has become an essential household fuel, long distance trucks fed with cheap diesel easily competed with the railways in freight movement and subsidised naptha made the coal technology unviable for fertiliser production. This pricing policy backed with elaborate distribution system has made the entire economy almost completely dependent on petroleum products.

The 'retention concept' on the other hand did not allow the PSUs become sick. Thus investors' ( mainly multilateral funding agencies like World Bank, ADB etc) fund were safe.

Now APM has lost its relevance.The economy has become dependent on petroleum and private parties are not happy with 12-15% assured return. They want more. Hence APM is dismantled in a phased manner.

In this changed situation, the refining and marketing PSUs with old refineries and decades of 'retention' culture might find it difficult to face competition in the post APM phase. And if international crude price falls as we saw during late eighties, ONGCL and OIL will also become uncompetitive unless they adjust themselves quickly with the changing situation.

Our research shows that in the past four decades, ONGCL and OIL have increasingly become dependent on foreign companies in all major operational activities. Moreover, there was no major breakthrough in any oil or gas fields in the last thirty years though till last year, most prolific fields were kept reserved for national oil companies. With the introduction of NELP, those privileges have been withdrawn and chances of success by national oil companies have also decreased. Thus operational expenses will rise with stagnant/falling production. Added to this, private sector refineries will not be bound to purchase crude oil from national oil companies. They will search for better quality crude at cheaper rates from alternative sources. In such a situation, ONGCL and OIL will find it difficult to survive in the competitive market. However, if the government compels the public sector oil refineries to purchase ONGCL/OIL crude at a higher rate, those refineries will be uncompititive vis-a-vis private sector refineries. Existing public sector refineries will also face many more hurdles in the de-regulated economy. The disadvantages of the economy of scale and finding matching crude at competitive price for old refineries will be the major challenges before the refinery sector.

Economy of Scale: Except one in Koyali (Gujarat) all other fourteen public sector refineries are small in size (less than 8MMTPA capacity).Their capacities ranges between 0.65 MMTPA at Digboi (Assam) and 12.50MMTPA at Koyali(Gujarat).And most of these refineries were built before 1980s.Compared to this, the Reliance refinery built in 1999 with state of the art technology has a capacity of 27MMTPA. It is estimated that a new complex of 6.0 MMTPA refinery with Hydrocracker and delayed Coker as the major secondary processing units and inhouse power/hydrogen production will have a net margin of about US$5.8/bbl.If the capacity is increased to 9.0MMTPA, the net margin will improve to around US$6.3/bbl.However, this estimate varies depending on the price of crude and petroleum products.

In September 2001,the refining margins of IOCL refineries was only 30 cents per barrel compared to RPL's margin of US$1 per barrel. In 2000-01, IOCL had to forgo over US$400 million on account of lower refining margins compared to the earlier years. The effect of de-regulation is clearly visible now.

Matching of crude oil: Under the deregulated market, the refineries will have to pay import parity prices for the crudes and any fluctuations in the actual crude price will not be absorbed as before by the 'oil pool account' (a part of APM).Hence selection of proper crude oil for a particular refinery will of vital importance. In the emerging scenario of lower availability of sweet crude, dependence on heavy and sour crude oil is bound to increase.Selecting and sourcing matching crude for fifteen different refineries for optimum production to meet stringent environmental regulations and international quality standards, will be a major challenge to public sector refineries.

Abbreviations:

MMTPA= Million Metric Ton per Annum
One Ton= 1,000 Kilogram
BCM = Billion Cubic Meter
ADB= Asian Development Bank
APM= Administered Pricing Mechanism
GAIL= Gas Authority of India
IOCL= Indian Oil Corporation Ltd
RIL = Reliance Industries Ltd
RPL= Reliance Petroleum Ltd
OIL= Oil India Ltd
ONGC = Oil and Natural Gas Commission
ONGCL = Oil and Natural Gas Corporation Ltd
PSU = Public Sector Undertakings

References:

www.dghindia.com
www.india-nelp2.com
www.petroleum.nic.com
PIRG Update, November 1997
The Statesman,18th July,2001
The Economic Times, 26th September,2001
T he Hindu Survey of Indian Industries,1999
M.A Pathan, Chairman, IOCL,3rd Annual Indian Oil and Gas Conference,2-4 December,1998, New Delhi
Dipanakr Dey, State and Foreign Involvement in the Development of Indian Petroleum Industry between 1970 and 1989, PhD thesis, University of Calcutta,1999.