Oil and Gas Industry analysis brief

Considered to be the biggest sector in the world in terms of dollar value, the oil and gas industry is a global powerhouse
employing hundreds of thousands of workers worldwide as well as generating hundreds of billions of dollars globally
each year. In regions which house the major NOCs (National Oil Companies), these oil and gas companies are so vital
they often contribute a significant amount towards national GDP. The oil and gas together account for about half of
words energy consumption.

Along the supply chain, The Oil and Gas industry can be divided into 3 parts:

Upstream: It is commonly referred as E&P (Exploration and Production). This involves search for underwater
and underground natural resources (oil and gas fields) and drilling of exploration wells and recover oil and gas.
Midstream: This involves transportation of oil and gas by pipelines and tankers from production fields to
refining facilities.
Downstream: It refers to the filtering of the raw materials obtained during the upstream phase. This means
refining crude oil and purifying natural gas. The marketing and commercial distribution of these products to
consumers and end users are done in a number of forms including: natural gas, diesel oil, petrol, gasoline,
lubricants, kerosene, jet fuel, asphalt, heating oil, LPG (liquefied petroleum gas) as well as a number of other
types of petrochemicals. Midstream is generally classified under the downstream category.

The world produces and consumes around 96.5 million barrels of crude oil per day. Total proven reserves in the world
are roughly 1.5 trillion barrels. The 12 members of OPEC hold around 80% of worlds total oil.
The following tables show the top producers and consumers of Oil and Natural gas.

Production Consumption
Rank Producer Worlds share Consumer
(MMbbl) (MMbbl)
1 Russia 10.5 10.90 % United States 19.39
2 Saudi Arabia 10 10.36 % China 11.96
3 United States 9.2 9.53 % India 4.15

Production Consumption
Rank Producer Worlds share Consumer
(bcm) (bcm)
1 United States 769 23.08 % United States 778
2 Russia 650 19.51 % Russia 391.5
3 Iran 177 5.31 % Iran 191.2

MMbbl = Million barrels per day; bcm=Billion cubic meters

Globally, the top 5 companies by revenue in Oil and Gas sector are:
Name Country Revenue (US $ billion 2015)
Saudi Aramco Saudi Arabia 478
Sinopec China 455
CNPC- China Natiaonal Petroleum Corp. China 428
PertoChina China 367
ExxonMobil US 268

Crude oil is classified by sulphur content and is termed Sweet id sulphur content is relatively low (<0.42%) and sour
id sulphur content is high (>0.42%). The three primary benchmarks are
Brent Blend Roughly two-thirds of all crude contracts around the world reference Brent Blend, making it the
most widely used marker of all. These days, Brent actually refers to oil from four different fields in the North
Sea: Brent, Forties, Oseberg and Ekofisk. Crude from this region is light and sweet, making them ideal for the
refining of diesel fuel, gasoline and other high-demand products.
West Texas Intermediate (WTI) WTI refers to oil extracted from wells in the U.S. and sent via pipeline to
Cushing, Oklahoma. The fact that supplies are land-locked is one of the drawbacks to West Texas crude its
relatively expensive to ship to certain parts of the globe. The product itself is very light and very sweet, making
it ideal for gasoline refining, in particular. WTI continues to be the main benchmark for oil consumed in the
United States.
Dubai/Oman This Middle Eastern crude is a useful reference for oil of a slightly lower grade than WTI or
Brent. A basket product consisting of crude from Dubai, Oman or Abu Dhabi, its somewhat heavier and has
higher sulphur content, putting it in the sour category. Dubai/Oman is the main reference for Persian Gulf
oil delivered to the Asian market.

Conventionally, Oil is extracted by drilling oil wells deep into earth (onshore and offshore) and then recovering the oil
from the where oil is trapped in large amount beneath a layer of non-permeable rocks. This method is in use from the
times when oil was first extracted. Sometimes, the oil is trapped into rock formations which are generally not porous
and hence, oil is trapped in small pockets which are disconnected along a vast area. Shale Fracking is used to extract
oil from these disconnected pores of shale rocks. The process involves high-pressure injection of 'fracking fluid'
(primarily water, containing sand or other proppants suspended with the aid of thickening agents) into a wellbore to
create cracks in the deep-rock formations through which natural gas, petroleum, and brine will flow more freely. When
the hydraulic pressure is removed from the well, small grains of hydraulic fracturing proppants (either sand or
aluminium oxide) hold the fractures open leading to smoother flow of oil and gas.
With advancement technologies, shale fracking and extraction of oil by unconventional means (shale oil through
pyrolysis, hydrogenation and thermal dissolution) became economically viable in early 2000s. For example, In Saudi
Arabia, oil extracted through conventional means break even at $ 10/bbl Brent price whereas Shale Fracking evens
around $ 60/bbl Brent price. High Brent crude oil trading price of around 100$ in June 2014, led to increase in oil
extracted through shale and unconventional means and hence, resulted in oversupply of Oil and gas in the market
forcing the crash of crude oil prices in 2015. Historically, WTI traded more expensive that Brent as it is sweeter but
Fracking has completely reversed the situation as WTI production exploded as a result of shale fracking. Now WTI is
approximately cheaper $ 10/bbl cheaper than Brent.

Major factors contributing to recent fall in Oil prices are

Oversupply of oil due to increased production through shale fracking and other unconventional means which
became economically profitable and viable
Refusal of OPEC to cut down oil production as oil exports formed major chunk of the GDP of member nations.
Increased domestic production in United States, almost doubling in last few years, pushing out oil imports that
need to find another home.
Slowdown in Chinas oil and gas import demand. China is considered to be single largest consumer of Oil and
Gas, but recent slowdown in China has shaken the earlier forecasts of China importing around 30 MMbbl in
the next decade based on its growth.

INDIAN SCENARIO:

Oil and gas sector (Energy) is one of the six core sectors of Indian economy. India consumes around 4.15 MMbbl/day
and produces around 0.85 MMbbl/day, importing the rest (mainly from Saudi Arabia). Among the key petroleum
products, diesel and petrol are deregulated. Kerosene and LPG still operate under regulated pricing regime.

Demand: Demand for petroleum products is line with economic growth. In current market scenario, oil is
oversupplied while demand is relatively muted due to slowdown in global economy.
Supply: Upstream: Indian domestic players cater 20-25% of total domestic demand for crude oil. Domestic gas
supplies are on decline and imports of gas are increasing. Downstream: Refining and petroleum product sector
is witnessing significant capacity addition.
Barriers to entry: Govt. permission is required to start operations in upstream sector. Exploration,
development and production cost of oil fields are significant. Requirement of highly skill workforce and poor
success of exploration (10% commercially viable) leads to higher entry barriers.
Bargaining power (suppliers): Crude prices are globally determined and are highly susceptible to geopolitical
events, economic growth, policies and demand factors. Since, the domestic players cater to only about 20%-
25% of the requirement, India can be considered as a price taker. India has surplus capacity in the petroleum
product segment and hence, the bargaining power is low.
Bargaining power (customers): Despite the fact that oil price has crashed, price of petroleum products in India
have not declined by the same extent due to govt.s interference in controlling the price through in excise
duties etc. Bargaining power of customers is not very strong as PSUs control most of the market. This scenario
might change as private players start to gain a higher share in the market.
Competition: Upstream: GOI has enacted various policies (new exploration licensing policy [NELP], coal bed
policy methane [CBM]) to encourage investments and competition across the industry's value chain. However,
in the current scenario, companies may hesitate in making fresh investments in exploration. Downstream:
Companies are upgrading refineries and adding capacities which is likely to lead to more competition. With
new reforms announced in energy and power sector, more players are likely to enter oil and gas sector. Hence,
increase in competition is expected.

Facts (Financial year):

Crude oil production stood at 37.5 MMT in 2014-15 (37.8 MMT in 2013-14), Production of Petroleum products
stood at in 2014-15 220.7 MMT, almost flat on a year on year basis
Consumption of Petroleum Products stood at 165.5 MMT, up 4.5% YoY.
Domestic refinery capacity as on April 2015 stood at 215.1 MMT
 Gross production of natural gas stood at 33,656 mmscm in 2014-15 (P), while imports stood at 51,320 mmscm.
Total recovery burden in 2014-15 stood at Rs 763 bn, down 47% YoY. Upstream shared 56%, Government
shared 41% while oil marketing companies shared 3% of the burden.
Volume wise, the consumption of petroleum products grew by 3.4% YoY for sensitive products (SKO & LPG),
9.3% YoY for major decontrolled products and 8.8% YoY for minor decontrolled (petroleum coke) products.
For the first 9 months of FY16 (9MFY16), Motor spirit/MS has grown by 14.2% YoY, driven by auto sector.
High speed diesel (HSD) consumption for the year grew by 6.2% YoY in 9MFY16.LPG consumption in 9MFY16
grew by 7.5% YoY.
The cumulative gas consumption declined by 3.1% YoY in 9MFY16, mainly on account of reduction in domestic
gas production and lower off take of gas in core sectors. However, gas pooling policy has compensated to
some extent the slowdown in demand for gas. CGD consumption in 9MFY16 declined 4.5% YoY. The
cumulative gas production for the year declined 2.76% YoY in 9MFY16, while cumulative imports for the period
were higher by 8.3% YoY.

Future Prospects:

After being a victim of regressive policies such as regulated price regime for Petroleum products, the
oil and gas sector has seen some relief on this front with moves such as deregulation of diesel, direct
benefit transfer, etc.
Decline in the crude oil price has helped in reducing the import bill and under recoveries. As such,
subsidy burden of upstream companies has come down. More importantly, the working capital
situation has improved for oil marketing companies leading to lower debt.
Lower oil prices may make oil production unviable in some areas and can impact production plan and
balance sheet health of some of the oil exploration and production companies.
In the downstream segment, there is likely to be a lot of competition from the private players. One
must also be cautious about capacity addition in refining space. The same is likely to lead to
oversupply, thus putting pressure on product margins.
The sector is quite vulnerable to global threats like slowdown in the US/ Europe/China, tensions
between Iran and US region, Removal of exports restriction on Iran etc. Going forward, higher
domestic production, regulatory reforms across the value chain and pipeline, refining and gas
infrastructure will be the driving factors for the sector.
Major Players:

ONGC: (Upstream): It is an Indian multinational oil and gas company headquartered in Dehradun,
Uttarakhand, India. ONGC was founded on 14 August 1956 by Government of India, which currently
holds a 68.94% equity stake. It is a Public Sector Undertaking (PSU) of the Government of India, under
the administrative control of the Ministry of Petroleum and Natural Gas. It is India's largest oil and
gas exploration and production company. It produces around 77% of India's crude oil (equivalent to
around 30% of the country's total demand) and around 62% of its natural gas. ONGC videsh operates
in 17 countries worldwide.
BPCL: (Downstream): Bharat Petroleum Corporation Limited is an Indian state-controlled oil and gas
company (55% stake) headquartered in Mumbai, Maharashtra. The Corporation operates two large
refineries of the country located at Mumbai and Kochi. It has capacity of refining 31.5 million metric
tonnes per year.
HPCL: (Downstream): Hindustan Petroleum Corporation Ltd. is an Indian state-owned oil and natural
gas company with its headquarters at Mumbai, Maharashtra. It has about 25% marketing share in
India among PSUs and a strong marketing infrastructure. The Government of India owns 51.11%
shares in HPCL. HPCL operates two major refineries producing a wide variety of petroleum fuels &
specialties, one in Mumbai (West Coast) of 6.5 Million Metric Tonnes Per Annum (MMTPA) capacity
and the other in Visakhapatnam, (East Coast) with a capacity of 8.3 MMTPA.
 IOC: (Downstream): Indian Oil Corporation is Indias flagship national oil company and is the leading
Indian Corporate in Fortunes prestigious Global 500 listing of worlds largest corporates at 161st
position for the year 2016. IndianOil accounts for nearly half of India's petroleum products market
share, 35% national refining capacity and 71% downstream sector pipelines through capacity. The
IndianOil Group owns and operates 11 of India's 23 refineries with a combined refining capacity of
80.7 MMTPA.
Reliance Industries: Reliance Industries Limited (RIL) is an Indian conglomerate holding company
headquartered in Mumbai. Reliance owns businesses across India engaged in energy,
petrochemicals, textiles, natural resources, retail and telecommunications. Reliance is the second
most profitable company in India, the second-largest publicly traded company in India by market
capitalization and the second largest company in India as measured by revenue after the
government-controlled Indian Oil Corporation. In oil and gas business, they have upstream
components like gas fields in KG-D6 (Krishna Godavari basins) and shale holdings in the US.
Concerning downstream, they own the largest refinery by throughput in the world in Jamnagar,
Gujrat which can process 0.6 million bbl in a day, the total throughput of BPCL or HPCL!
Cairn India: Cairn India is an oil and gas exploration and production company, headquartered in
Gurgaon, India. It is a subsidiary of Vedanta Resources and is one of the largest independent oil and
gas exploration and production companies in India. Cairn and its JV partners account for more than
a fifth of Indias domestic crude oil production. It has been operating in India for more than fifteen
years. Cairn Indias producing assets are in Rajasthan, Cambay and Ravva. Cairn India has a portfolio
of nine blocks, that it operates, which are located in four strategically focused areas: one in Rajasthan;
two on the west coast of India; five on the east coast of India (including one in offshore Sri Lanka)
and one in offshore South Africa.

Key financials for FY ending Mar 2016:

ONGC BPCL IOC Cairn India
Total Assets 3562.1 937.9 2420.2 565
Long Term Debt 459.1 260.4 269.2 0
Net Sales 1315 1886.5 3559.3 78.8
Operating Income 236.3 127.3 190.7 (2.4)
Operating Cash Flow 527.8 135.7 270.2 41.30
Net Income 141.2 79.8 112.2 (95.7)
Return on Assets 4.3 % 8.8 % 5% 0.3 %
Market
2152.5 891.7 1436.8 377.4
Capitalization