GROWTH TRENDS OF PETROLEUM PRODUCTS & COST BENEFIT

ANALYSIS OF DIFFERENT PRODUCT INPUT MODES

SUMMER INTERNSHIP REPORT BY

V.ARUN KUMAR (2015-17)

ROLL NO- 15070

JUNE 2016

SUMMER INTERNSHIP REPORT ON

GROWTH TRENDS OF PETROLEUM PRODUCTS & COST BENEFIT

ANALYSIS OF DIFFERENT PRODUCT INPUT MODES

FOR

SUBMITTED BY

V.ARUN KUMAR

UNDER THE GUIDANCE OF

Mr ARNAB CHATTERJEE Deputy Manager (Operations) HPCL

Mr INDRANIL GHOSH (Assistant Professor) CBS

A PROJECT SUBMITTED IN PARTIAL FULFILMENT OF PGDM

TO

CALCUTTA BUSINESS SCHOOL

Bishnupur, 24 Parganas South, Kolkata, West Bengal -743503

JUNE 2016

Signature Of Faculty Guide Signature Of Official

DECLARATION

I hereby declare that the project report titled GROWTH TRENDS OF PETROLEUM

PRODUCTS & COST BENEFIT ANALYSIS OF DIFFERENT PRODUCT INPUT

MODES is my original work and has not been published or submitted for any degree,

diploma or other similar titles elsewhere. This has been undertaken for the purpose of

partial fulfilment of Post Graduate Diploma (PGDM) at Calcutta Business School, Kolkata

(West Bengal).

Place: Kolkata (West Bengal) Date: 30th June 2016 Signature of the Student

(ROLL N0 – 15070)

To be attached on letter head

CERTIFICATE FROM COMPANY

TO WHOM IT MAY CONCERN:

This is to certify that Mr. V.ARUN KUMAR student of PGDM of CALCUTTA BUSINESS

SCHOOL has completed Summer Project Report titled GROWTH TRENDS OF

PETROLEUM PRODUCTS & COST BENEFIT ANALYSIS OF DIFFERENT

PRODUCT INPUT MODES with us from 2/05/2016 to 30/06/2016.

He has completed the Project Work to our satisfaction.

Mr ARNAB CHATTERJEE

Deputy Manager (Operations)

HPCL, Kolkata (Budge- Budge)

Place: KOLKATA Signature of Official Name and Designation of Official

(West Bengal)

Date: 30th June 2016

ACKNOWLEDGEMENT

My project on “GROWTH TRENDS OF PETROLEUM PRODUCTS & COST

BENEFIT ANALYSIS OF DIFFERENT PRODUCT INPUT MODES” has been a great

learning experience. I was exposed to the different areas of research in understanding the

growing demand of petroleum products along with different modes of transportation of

petroleum products and gained valuable experience, which I will always recall with a sense

of satisfaction and pride.

This is to acknowledge Mr INDRANIL GHOSH (Assistant Professor) under whose

guidance I have been able to successfully complete this project and effectively come to a

very successful conclusion.

A greater share of inputs and data came from Mr. ARNAB CHATTERJEE Deputy

Manager (Operations), HPCL, Kolkata (Budge- Budge terminal) made this project report

possible to its rightful accuracy.

V. ARUN KUMAR

CALCUTTA BUSINESS SCHOOL

(STUDENT)

TABLE OF CONTENTS

1. Executive Summary………………………………………………………………………………………….1

2. Objective Of The Study…………………………………………………………………………………… 3

3. About HPCL………………………………………………………………………………………………………5

4. Background of Oil Sector (globally)………………………..………………………………………. 11

5. India’s oil demand and fiscal position……………………………………………..……………….19

6. New Exploration Licensing Policy…….……………………………………………………………….30

7. Upstream and downstream in India…………………………………………………………………35

8. India’s strategy of exporting refined products………………………………………………….38

9. Downstream Oil sector scenario in India………………………………………………………...42

10. Differentiating criteria’s for OMCs…………………………………………………………………..46

11. Volume Projection in next 10 years – Data available……………………………………….52

12. Transportation Modes Of Petroleum Products………………………………………………..53

13. Cost analysis for the two modes – Coastal vs Railway…………………………………….62

14. Proposed Two Spur Unloading Siding Of HPCL at Budge-Budge……………………...68

15. Recommendation…………………………………………………………………………………………...73

16. Bibliography………………………………………………………………………………………………….…76

1

EXECUTIVE SUMMARY

This project deals with the study of rising trends of petroleum products in India along cost

involved in transporting petroleum products through various modes. The Indian economy is

a net importer of almost all forms of energy. This fact, coupled with the growing energy

needs, has intensified discussions on energy security for the country. The government is

actively seeking private participation in the energy chain and is also promoting acquisition

of oil & gas reserves overseas.

To increase upstream investments, the Ministry of Petroleum & Natural Gas (MoPNG) has

introduced a transparent bidding process for allocation of oil & gas blocks. Six rounds of

competitive bidding under the Government policy, named New Exploration Licensing

Policy (NELP), have already been done, 162 blocks were awarded and in-place volume

estimated at 600 MMT of oil & gas have been discovered.

The recent NELP-VI was a success with 165 bids being received from both domestic and

international companies for exploration rights.

On the refining front, India enjoys significant advantages. It has lower construction and cash

operating costs. India's strategic location en route of Middle East crude for East Asian and

Pacific-rim markets is another key advantage. In fact, India possesses a surplus refining

capacity and has already turned into a net exporter of products.

Oil sector is a very dynamic sector some key factors affecting the Indian oil and gas industry

are the following:

Dominated by state controlled enterprises

Subsidies on Oil and Gas products

Environmental issues

Requirement of advanced technology for upstream segment

Petroleum products are moved by pipelines, rail & road, besides some quantity by barge &

ships along coast. Transportation requirement to carry petroleum products are projected to

increase substantially in the years to come. This would open up more opportunities for

development of pipeline network across the length and breadth of the country.

Taking into account the advantages of pipeline, it would be imperative for the country to

exploit these opportunities to the maximum.

2

About 50-60% of the primary transportation of petroleum products in developed countries

is done through pipelines – obviously, due to its above stated advantages.

Comparison done between Coastal and Railway mode of transportation on the basis of cost

and capacity. Transporting petroleum products through Coastal mode won’t be feasible in

the long run, as this mode suffers from many constraints such as in terms of draft availability,

navigational facilities, jetties etc.

Hindustan Petroleum Corporation Limited (HPCL) proposed to construct TWO SPUR

UNLOADING SIDING AT BUDGE BUDGE for which approval has been received from

railway board.

The siding is propose only for unloading POL products and no loading is proposed. The

siding is proposed to be constructed on a private land. Due to non-availability of land, the

siding has been as two spur siding.

OBJECTIVE

SCOPE

AND

LIMITATIONS

OF PROJECT

3

OBJECTIVE OF STUDY

The Primary objective of this project is to understand the growing need of petroleum

products. India’s consumption of petroleum products, including decontrolled items

like petrol and diesel and non-subsidized cooking gas, grew by 9.3 per cent in February

2015, the highest in more than two years. However, the growth may not indicate a major

revival of economic activity as it has been driven largely by the anticipated rise in crude

oil prices in coming months, besides improved port traffic and vehicle sales, both of which

are large users of fuel.

The Indian oil and gas industry, in the last decade, has seen robust growth in domestic

production. The refining sector in India, too, has witnessed a silent revolution. India has,

over the years, developed into a major export hub. The emergence of major consumers in

Asia, mainly India and China, has fundamentally changed the global energy equations. The

global nature of these challenges and the growing symbiotic connect between producing,

consuming and transiting countries require a strengthened partnership between all state

actors to enhance global energy security.

Secondary objective of this is to find the cheapest mode of transportation of petroleum

products. Most of the major consumption centres in India are land locked. This makes only

Road, Rail, and Pipeline as feasible means of the transportation. Tankers are used for

movement between coastal locations. At HPCL (Budge- Budge, terminal) we have

endeavoured to find the cheapest mode of transportation of petroleum by comparing Coastal

and Railway mode of transportation and along with we have also computed that how

PROPOSED TWO SPUR UNLOADING SIDING AT BUDGE BUDGE will help in increasing the

capacity of the petroleum products to be transported in meeting the requisite demand.

4

LIMITATIONS OF THE STUDY

Though all the efforts have been made for an in-depth study and delineating the correct

picture, but in course of doing so, there were some limitations involved with the

methodology adopted. The report has been prepared as per the latest information.

Since the oil and gas industry still accounts for the majority of the world’s energy

generation. While opponents may contest the use of such fossil fuels, the fact remains that

without them the lights would go out and our cars would stop running. Most people don’t

fully realize the incredible stress the industry is under and the risk factors affecting it.

Risk factors affecting the oil and gas industry -

1. Volatile oil and gas prices

2. Regulatory and legislative changes and increased cost of compliance

3. Natural disasters and extreme weather conditions

4. Political Unrest

5. Exchange Value of the Dollar

Research Methodology

Literature review is done through secondary data, and a greater share of inputs and data was

provided by the employees of the HPCL.

5

ABOUT HPCL

HPCL is a Government of India Enterprise and a Fortune Global 500 and Forbes 2000

Company. It holds the Navratna status, and during 2014-15, HPCL registered a gross sales

of Rs.217,061 crore. And posted its highest ever profit after tax of Rs.2,733 crore resulting

in a significant increase in the earning per share to Rs.80.72.

The market capitalization of the company increased by Rs.11,500 crore during the year.It

has 20.94% marketing share in India among Public Sector Oil Marketing Companies

(OMCs) and a strong market infrastructure. HPCL has a vast marketing network which consists of 13 Zonal offices in major cities and

101 Regional offices. This is facilitated by a Supply & Distribution infrastructure

comprising of Terminals, Inland Relay Depots & Retail Outlets, Aviation Fuel Stations, and

Pipeline networks, LPG Bottling Plants, Lube and LPG Distributorship. The total number

of employees is 10,634 as on March 31, 2015. Company continues to invest in innovative

technologies to enhance the effectiveness of employees and bring qualitative changes in

service, Business Process Re-Engineering exercises and creation of Strategic Business Units

(SBU), Enterprises Resource Planning (ERP) implementation, Organizational

Transformation, Balanced Score Card, Competency Mapping, benchmarking of refineries

and terminals for product specifications, ISO certification of Refineries and Supply Chain

Management are some of the initiatives that broke new grounds. This has helped in

improving operational and financial efficiencies.

The refining capacity has seen a growth from 5.5 MMTPA in FY 1984-85 to 15 MMTPA

presently. Company turnover has grown from Rs.2687 Crores in FY in FY 1984-85 to an

impressive Rs 2,17,061 crore in FY 2014-15.

6

7

8

9

COMPANY PERFORMANCE

Gross sales (Rs. Crores) Operating Costs (Rs. Crores)

2014-15

2013-14 2012-13

2014-15 2013-14 2012-13

PAT(Rs. Crores) Employee Wages and Benefits (Rs. Crores)

2014-15 2013-14 2012-13 2014-15 2013-14 2012-13

217,061 232,188

215,675

5,257

5,056 4,023

2,728 1,792 791

2,414 2,030 2,525

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VISION To be a World Class Energy Company known for caring and delighting the customers with

high quality products and innovative services across domestic and international markets

with aggressive growth and delivering superior financial performance. The Company will

be a model of excellence in meeting social commitment, environment, health and safety

norms and in employee welfare and relations.

MISSION

HPCL, along with its joint ventures, will be a fully integrated company in the

hydrocarbons sector of exploration and production, refining and marketing; focusing on

enhancement of productivity, quality and profitability; caring for customers and employees;

caring for environment protection and cultural heritage. It will also attain scale dimensions by diversifying into other energy related fields and by

taking up transnational operations.

QUALITY POLICY • Total customer satisfaction through quality products by doing it right the first time, every

time. • Ensure consistency of quality, and adherence to time deadlines. • Strive to achieve excellence in quality through training, motivation, team work and

continuous up gradation of technology. • To take appropriate steps to minimize wastage, increase productivity and optimize the

quality of products and services in a cost effective manner

PRODUCT COMMITMENT • To provide quality products and services this shall reflect in a growing list of satisfied

customers. • To consciously build a quality culture, through employee participation, motivation and

training. • To strive for an eco - friendly environment.

LITERATURE REVIEW

11

The oil and gas industry is one of the largest, most complex, and important

industries. The industries touches everyone’s life with products such as

transportation, heating and electricity fuels; asphalt; lubricants; propane; and

thousands of petrochemical products from carpets to eyeglasses to clothing. The

industry impacts national security, elections, geo-politics and international

conflicts. The prices of crude oil and natural gas are probably the two most closely

watched commodity prices in the global economy. In recent years the industry

has seen many tumultuous events, including the continuing efforts from oil

producing countries like Kazakhstan, Russia, and Venezuela to exert greater

control over their resources; major technological advances in deep water drilling

and shale gas; Chinese firms acquiring exploration rights at recorded high prices;

ongoing strife in Sudan , Nigeria , Chad , and other oil exporting nations;

continued heated discussions about global warming and non hydrocarbon sources

of energy; and huge movements up and down in crude prices. All of this comes

amid predictions that the global demand for energy will increase by 30% to 40%

by 2030.

Significance of oil in modern times

At the beginning of the 20th century the Industrial Revolution had progressed to

the extent that the use of refined oil for illuminants ceased to be of primary

importance. The oil industry became the major supplier of energy largely because

of the advent of the automobile. Although oil constitutes a major

12

petrochemical feedstock, its primary importance is as an energy source on which

the world economy depends.

The significance of oil as a world energy source is difficult to overdramatize. The

growth in energy production during the 20th century is unprecedented, and

increasing oil production has been by far the major contributor to that growth.

Every day an immense and intricate system moves more than 80 million barrels

of oil from producers to consumers. The production and consumption of oil is of

vital importance to international relations and has frequently been a decisive

factor in the determination of foreign policy. The position of a country in this

system depends on its production capacity as related to its consumption. The

possession of oil deposits is sometimes the determining factor between a rich and

a poor country. For any country, however, the presence or absence of oil has a

major economic consequence.

On a timescale within the span of prospective human history, the utilization of oil

as a major source of energy will be a transitory affair of a century or two.

Nonetheless, it will have been an affair of profound importance to world

industrialization.

13

A Brief History of the Industry

The world’s first oils were drilled in china around the 4th century AD. The

Chinese used simple bamboo poles to drill these wells. The dark, sticky material

they extracted was then used primarily as a source of fuel.

In later centuries, oil was found across Asia and Europe. Sometimes it

accumulates in natural pools above the ground. Travellers and settlers used the

mysterious black liquid for fuel as well as medical treatment.

The modern oil industry began in the mid-19th century. On August 27, 1859,

Colonel Edwin Drake discovered the first underground oil reservoir near

Titusville, Pennsylvania, after drilling a well only 21meters deep. The oil flowed

easily. It was also easy to work with and distil this oil known as paraffin type of

oil. Drake’s well initially produced 30 barrel of oil per day. Its successes marked

the beginning of the modern oil industry.

Oil soon began to receive more attention from the scientific community. After

some research, a variety of products were eventually developed from crude oil.

For example, kerosene for heating was one of the first products.

Soon other products ( like gasoline and diesel to run engines) were also on the

market. In 1890, the mass production of automobiles began creating a huge

demand for gasoline and pushing companies to find more oil fields.

Source: Wikipedia

14

The largest volume products of the industry are fuel oil& gasoline (petroleum).

Petroleum is vital to many industries, and is of importance to the maintenance

Source: Wikipedia

of industrial civilization in its current configuration, and thus is a critical

concern for many nations. Oil accounts for a large percentage of the worlds

energy consumption, ranging from a low of 32% for Europe and Asia, to a high

of 53% for the Middle East.

In widest sense, petroleum embraces all hydrocarbons occurring in the earth. In

its narrower, commercial sense, petroleum is usually restricted to the liquid

deposits known as crude oil, the gaseous ones being known as natural gas and

the solid ones as bitumen or asphalt.

15

Industrial Structure

Source: Google Images

Industry can be divided into three sectors:

1. Upstream - includes searching for potential underground or underwater

crude oil and natural gas fields, drilling exploratory wells, and

subsequently drilling.

2. Midstream - involves transportation, storage and wholesale marketing of

crude or refined petroleum products.

3. Downstream - involves in refining of petroleum, crude oil and the

processing and purifying of raw natural gas.

16

Global Oil Scenario

17

According to current estimates, more than 80% of the world's proven oil reserves

are located in OPEC Member Countries, with the bulk of OPEC oil reserves in

the Middle East, amounting to around 66% of the OPEC total.

OPEC Member Countries have made significant additions to their oil reserves in

recent years, for example, by adopting best practices in the industry, realizing

intensive explorations and enhanced recoveries. As a result, OPEC's proven oil

reserves currently stand at 1,206.00 billion barrels.

Crude oil prices rose by 8% month on month to $33.33 per barrel in February

2016. Prices rose after Saudi Arabia and Russia agreed to freeze oil output, in an

attempt to reduce supply gut and revive prices. However, the rise was restricted

due to continued weakness in demand from china, whose manufacturing activity

hit new lows at 49 in February 2016.

On the other hand, WTI crude prices fell 3.3% to $30.4per barrel in February

2016. Prices declined on account of rising inventory in the US, which rose 4.4%

during the month. Consequently, the spread between Brent crude and WTI crude

rose to $2.1 in February 2016 (as consequently to a negative $.6 in January

2016)Going forward, crude oil prices are expected to rise and range between $34-

39 per barrel, as output is expected to stabilize after the decision of an output

freeze by Saudi Arabia, Qatar, Russia and Venezuela as well as decline in US oil

production.

(Source: IEA)

18

Oil and Gas Sector History In India

Petroleum exploration in India dates back to middle of 19th century in a difficult

terrain of Assam.The well at Nahorpung, in 1866 - first oil well in India was

drilled up to 31 m (102 feet) but proved dry. This well was drilled by Assam Oil

Co., a subsidiary of Burmah Oil Co.

Just seven years after the famous Drake well ( 1859).The second well which

struck oil was drilled at Makum near Margherita, about 8 miles from Digboi in

1867.The first commercial oil discovery of Digboi Oil Field in 1890 brought the

dawn of modern petroleum industry in India. At the time of independence, India’s

domestic oil production was just 250,000 tonnes/annum and the entire production

was from one state – Assam.

The foundation of the O & G Industry in India was laid down in 1954 by the

Industrial Policy Resolution (IPR), when the Govt. announced that petroleum

would be the core sector industry.

After its inception, ONGC took up the task of exploration of oil & gas in the

country and started systematic geological and geophysical studies of sedimentary

basins. 1958 - First Gas & Oil pool discovered in Jwalamukhi (Punjab) and

Cambay.

1960 – A major oil field was discovered at Ankleswar followed by

successes in Assam & Tripura.

1974 - Discovery of giant Bombay High field opened up new avenues of

oil exploration in offshore areas.

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INDIA’S OIL DEMAND AND FISCAL POSITION

If the consumption of petroleum products is an economic indicator, India has

reason to cheer. The country’s consumption of domestic and industrial fuels —

petrol, diesel, cooking gas, kerosene, naphtha and others — grew 17.5 per cent in

October, the highest monthly growth rate in five years.

Consumption of petroleum products rose 17.7 per cent to 15.2 million tonnes

(MT) in October from 12.9 MT in the same month in FY15, according to data

from the Petroleum Planning and Analysis Cell (PPAC), the petroleum ministry’s

technical arm. A Business Standard review of the numbers showed this level has

not been achieved in the period since April 2010, for which data is publicly

available.

The surge in fuel consumption was led by a 16.3 per cent growth in diesel, which

alone accounts for 41 per cent of the basket, followed by 14.5 per cent growth in

petrol and 12.5 per cent in cooking gas usage.

The ministry called India “the world’s fastest growing economy”, undergoing a

“shift in economic growth to a higher gear” with “improvement in ease of doing

business”, citing recent reports from the International Monetary Fund and global

investment firm Goldman Sachs.

20

“Low oil prices have created a favourable environment for the economy and the

outlook for consumption of petroleum products looks positive in the current and

the next financial year, as Indian growth will benefit from low commodity

prices, recent policy reforms and a pick-up in investment. Growth in India is,

thus, expected to rise above other major emerging economies,” the ministry said

in its analysis of the numbers in the PPAC report.

The report attributed the spurt in fuel consumption to a range of factors. These

include higher growth, low product prices, a rise in the demand for fuel due to the

festival season and the Bihar elections, increased automobile sales, deficient

rainfall pushing the use of diesel generator sets for irrigation, start of mining

activity in Chhattisgarh and initiation of projects on national and state highways.

According to experts, the new numbers on consumption of petroleum products

are attributed to both one-off factors and a larger trend of a pick-up in the

economic activity. “It is a mix of one-off factors like low prices fuelling demand

and a subdued monsoon that increases diesel usage for pump sets, apart from a

larger and general trend. If the economy starts recovering, one would see more

consumption of petroleum products, as the Indian industry is energy-intensive,”

said D K Joshi, director and chief economist at CRISIL.

He also added the trend of high fuel consumption is here to stay mainly because

average global crude oil prices, which have a significant bearing on petroleum

product prices, are unlikely to go up in the next financial year too. Global oil

prices have slumped by more than a half since June 2014 to around $40 per barrel

currently. International benchmark Brent crude, which had touched a six year low

of $42.23 per barrel in August, fell 1.9 per cent to $43 a barrel on Friday while

US crude West Texas Intermediate (WTI) dropped 2.7 per cent to $39.97 per

barrel.

21

India’s fuel share consists of oil (32%), coal (54%), gas (8%), nuclear (1%) and

hydro (5%). The share of oil is greater than that in China. Oil consumption at 2.2

mmb/d is one-ninth that of the USA and one-third of China. By 2025, India’s oil

consumption is estimated to grow to 5.8 mmb/d, which is less than China’s

current consumption. India’s domestic crude oil production volumes remain

static. Crude oil from new fields is offsetting the decline in mature oilfields.

India’s imports are mainly from the Middle East and Nigeria, representing 77%

of total imports. In its quest for equity oil India has been a late starter compared

to China, USA and other countries. Production from ONGC Videsh’s share of

investments in Sudan and the Sakhalin Islands of Russia will in a year’s time

yield 0.11 mmb/d, representing 5% of India’s consumption, the same as China.

ONGC Videsh also has interests in Iran, Iraq, Qatar, Egypt, Libya, Syria, Cote

d’Ivorei, and most recently Cuba.

In the energy world, India is becoming the new china. The world’s second-most

populous nation is increasingly becoming the centre for oil demand growth as it’s

economy expands by luring the type of manufacturing that china is trying to shun.

And just like china a decade ago, India is trying to hedge its future energy needs

by investing in new production at home and abroad.

22

India may have the advantage its neighbour to the northeast didn’t. While china’s

binge came during a commodity super-cycle that saw WTI crude reach a high of

$147.27 a barrel in 2008 – due in no small part to its demand – India’s spurt

comes during the biggest price crash in a generation.

India is the Asia’s third- biggest economy consumed 4 million barrels of oil last

year, according to the International Energy Agency. Indian Prime Minister

Narendra Modi’s “Make In India Campaign” aims to by 2022 to create 100

million and new factory jobs and increase manufacturing’s share of the economy

to 25% from about 18% in turn will drive the usage of oil both by increasing the

amount of goods needed to be moved around on ship and trucks, and by raising

the standard of living.

India also developing its own energy resource. State owned explorer Oil and

Natural Gas Corp. recently approved $5billion more to develop a field off the

county’s east-coast.

India is the fifth-largest Liquefied Natural Gas (LNG) importer after Japan, South

Korea, the United Kingdom and Spain and accounts for 5.5 percent of the total

global trade. The LNG imports had increased by 24 per cent year-on-year in

January 2016 to1.98 Billion Cubic Meters (BCM). Domestic LNG demand is

expected to grow at a CAGR of 16.89 per cent to 306.54 Million Metric Standard

Cubic Meter per Day (MMSCMD) by 2021 from 64 MMSCMD in 2015.

23

Over the last decade, non-OECD oil demand growth, and by extension global oil

demand growth, was driven mainly by China, which accounted for half to two-

thirds of this growth. However, since the Chinese government embarked on a

deliberate policy of rebalancing, the country’s annual demand growth has slowed

to under 0.3 mb/d, compared to an average demand growth of over 0.5 mb/d in

the 10 years prior to 2013. In this new era of slower Chinese growth, a new

contender has emerged: India, which in 2015 was the main driver of non-OECD

oil demand growth. In this paper we argue that in addition to the boost from low

oil prices, structural and policy-driven changes are underway which could result

in India’s oil demand ‘taking off’ in a similar way to China’s during the late

1990s, when Chinese oil demand was at levels roughly equivalent to current

Indian oil demand. These changes include: a rise in per capita oil consumption

(reflected in rising motorization of the Indian economy), a massive programme

of road construction (amounting to 30 km per day), and a push towards increasing

the share of manufacturing in GDP by 2022 (which could increase oil

consumption by at least a third based on a conservative linear estimate). This

paper also examines the implications of a take-off in domestic demand for India’s

recently acquired status as a net petroleum product exporter.

(Source: open government data)

Source: PWC

0.0200.0400.0600.0800.0

1000.01200.01400.0

State wise per-capita consumption of petroleum products

2003-04 2004-05 2005-06 2006-07 2007-08

24

25

India’s real GDP has been growing by 5-10% per year, up $110 billion in 2014.

New Prime Minister Modi’s business reforms could expand the Indian economy

by 8% this year, beating China for the first time in decades. At 23% of total energy

supply, Petroleum is India’s second largest source, half the market share of coal.

Boosted by fallen crude prices, India is expected to overtake Japan to become the

world’s 3rd largest oil consumer, at about 4.1 million b/d. India is now where

China was a decade ago, and oil consumption is strongly linked to economic

growth. Petroleum has no large-scale substitute, so as countries develop and

install more extensive transportation systems, oil demand increases. Since 2005,

India has been responsible for 20% of incremental global oil demand increase,

versus 55% for China.

India has a population of over 1.2 billion, accounting for more than 17% of the

world’s population. It is the seventh largest country in the world, with a total land

area of 32,87,263 sq km. India is the fourth largest consumer of energy in the

world after China, the US and Russia. India’s energy consumption stood at 638

Mtoe in 2014–15, a growth of 7.1% from the 2013–14 levels. A large and growing

population, coupled with an uptick in economic activities, will only add to the

growth of energy consumption in the coming years.

While India’s energy consumption might seem to be high in absolute terms, it has

one of the lowest per capita primary energy consumption among the developing

economies of the world. India’s per capita consumption of primary energy stood

at 637 kgoe in 2012, which is significantly lower than the global average (2,500

kgoe), indicating significant growth potential of the energy demand in the

country.

26

Impact Of Oil On India’s Fiscal Position

Oil is one of the most important commodities in recent times. Much of the

economy depends on oil. This is why prices of oil matters to almost every

economy. Global crude oil prices are down nearly 40% this year to $60 per barrel-

levels from $110 barrel at the start of the year. This has caused a crisis in countries

like Russia, which depends on oil exports.

Source: PWC

India pays a heavy price for its high oil import dependency. Oil imports, as a

percentage of aggregate imports, have risen through the years, implying that a

large part of India’s foreign exchange is being consumed by oil imports. In 2011–

12, oil imports accounted for almost 30% of India’s total import bill. The oil trade

deficit of India has risen over the years and currently accounts for around 60% of

the country’s total trade deficit. India’s spending on oil imports

27

as a percentage of its aggregate GDP has increased over the years. The average

spending on oil imports as a percentage of the country’s GDP has increased over

time and is highly dependent upon crude oil prices. The inelastic nature of oil

imports implies that the higher the percentage of GDP being spent on them, the

higher is the vulnerability of the Indian economy to external shocks.

CURRENT ACCOUNT BALANCE

India is one of the largest importers of oil in the world. This accounts for one third

of its total imports. For this reason, the price oil affects India a lot. A fall in oil

prices by $10 per barrel helps reduce the current account deficit by $9.2 billion,

according to a report by Live mint. This amounts to nearly .43% of the gross

domestic product.

Oil Subsidy and Fiscal Deficit

The government fixes the price of fuel at a subsidised rate. It ten compensates

companies for any losses from selling fuel products at lower rates. These losses

are called under recoveries. This adds to the governments total expenditures’

and leads to a rise in the fiscal deficit. A fall in the oil prices reduces

companies’ losses, oil subsidies and thus help narrow fiscal deficit. The fall in

global oil prices may be beneficial to India, but it also has its downslides.

Directly, it affects the exporters of petroleum products in the country. India is

the sixth largest exporter of petroleum products in the world, according to

media reports. This helps it earns $60 billion annually. Fall in prices will

negatively affect exports. At a time when India is running a trade deficit, any

fall in exports is bad news.

About 85 per cent of India's total oil imports and 95 per cent of gas imports come from

OPEC nations. OPEC has a major role in shaping oil prices and availability.

28

29

India's oil imports have steadily climbed along with its growing economy. China,

for so many years, has been the driver of oil markets. Now, however, China is

starting to show signs of more modest GDP growth, and a slowing appetite for

crude. India offers a fast growing market for oil from West Asia and Persian Gulf.

According to the oil ministry, India's petroleum product consumption grew 3.14%

to around 163.17 million tonnes in 2014-15.

30

NEW EXPLORATION LICENCISING POLICY

New Exploration Licensing Policy is a policy adopted by Government Of India

in 1997 indicating the new contractual and fiscal model for award of hydrocarbon

acreages towards exploration and production (E&P). NELP was applicable for all

contracts entered into by the Government between 1997 and 2016.

Objective

The main objective of NELP was to attract significant risk capital from Indian

and Foreign companies, state of part technologies, new geological concepts and

best management practices to explore oil and gas resources in the country to meet

rising demands of oil and gas.

Features of NELP

The salient features of NELP are as under:

100% Foreign Direct Investment (FDI) is allowed under NELP

No mandatory state participation through ONGC/OIL or any carried

interest of the Government.

Blocks to be awarded through open international competitive bidding

ONGC and OIL to compete for obtaining the petroleum exploration

licenses (PEL) on a competitive basis instead of the existing system of

granting them PELs on nomination basis.

ONGC and OIL to get the same fiscal and contract terms as private

companies.

Freedom to the contractors for marketing of crude oil and gas in the

domestic market.

Royalty at the rate of 12.5% for the onland areas and 10% for offshore

areas.

31

Royalty to be charged at half the prevailing rate for deep water areas

beyond 400 m bathymetry for the first 7 years after commencement of

commercial production.

Cess to be exempted for production from blocks offered under NELP.

Companies to be exempted from payments of import duty on goods

imported for petroleum operations.

No signature, discovery or production bonuses.

Agreement between government and contractor is governed by a

Production Sharing Contract. A Model Production Sharing Contract is

created which is reviewed for every NELP round.

Contracts to be governed in accordance with applicable Indian Laws.

NELP- Positive results

Opened up more acreage.

Voluminous E&P data generated.

Impetus to E&P activities.

Growing competition.

Remarkable hydrocarbon discoveries.

Proven potential.

Increasing oil and gas production.

Remarkable investment in E&P and infrastructure.

32

Performance of NELP

(Source: DGH)

As at the end of nine rounds, 360 exploration blocks have been offered under

NELP, and for 254 blocks, PSCs have been signed. Presently, 166 blocks are

active and 88 have been relinquished.

The NELP bidding rounds have attracted many private and foreign companies, in

addition to public sector oil companies. Before NELP, a total of 35 E&P

Companies (5 PSUs, 15 Private sector Indian companies and 15 foreign

companies) were working in India in Nomination blocks, Producing Fields and

Pre-NELP blocks, either as Operator or Non-Operator. After conclusion of nine

rounds of NELP, the number of companies increased to 117. This includes 11

PSUs, 58 private Indian companies and 48 foreign companies. A performance

33

analysis of NELP may be seen from the Annual Reports of Director General of

Hydrocarbons and from the website of Ministry of Petroleum.

However, NELP had many problems. Presently, there are separate policies and

licenses for different hydrocarbons. There are separate policy regimes for

conventional oil and gas, coal-bed methane, shale oil and gas and gas

hydrates. Different fiscal terms are also in force for allocation of acreages for

exploration for different hydrocarbons. In practice, there is overlapping of

resources between different contracts. Unconventional hydrocarbons (shale gas

and shale oil)were unknown when NELP was framed. This fragmented policy

framework leads to inefficiencies in exploiting natural resources. For example,

while exploring for one type of hydrocarbon, if a different one is found, it will

need separate licensing, adding to cost.

The Production Sharing Contracts (PSCs) under NELP are based on the principle

of “profit sharing”. When a contractor discovers oil or gas, he is expected to

share with the Government the profit from his venture, as per the percentage

given in his bid. Until a profit is made, no share is given to Government, other

than royalties and cesses. Since the contract requires the profit to be measured,

it becomes necessary for the cost to be accounted for and checked by the

Government. To prevent loss of Government revenue, there are

34

requirements for Government approval at various stages to prevent the contractor

from exaggerating the cost. Activities cannot be commenced till the approval is

given. This process of approval of activities and cost gives the Government a lot

of discretion and has become a major source of delays and disputes. Many

projects have been delayed for months and years due to disagreement between

the Government and the contractor regarding the necessity or lack of necessity

for particular items of cost, and the correctness of the cost.

35

UPSTREAM AND DOWNSTREAM IN INDIA

Indian oil & gas industry is mainly divided into upstream (includes exploration

& production) and downstream (includes refining & marketing and distribution)

segments.

Upstream

India has 26 sedimentary basins spanning 3.14 million sq. km of which 1.35

million sqkm is deep water (beyond 200m isobaths) and 1.79mn sqkm is in on

land and shallow offshore.

Currently, ONGC &OIL are the two dominant players in the upstream segment

for around 82% share of the total domestic oil and gas production. The rest is

private/joint sector.(Cairn Energy, BP etc)

36

Source: PPAC

Source: PPAC

37

Downstream

The Indian refining industry has come a long way since the Mumbai refinery of

HPCL was set up post-independence. Over the years, the PSU refineries have

gradually increased their capacities at existing locations or constructed Greenfield

refineries at new locations. India's current refining capacity is 230 mtpa, including

the just commissioned 15 mtpa IOC refinery at Paradip. The public sector

accounts for 66 per cent (150 million tonnes or mt) of the total capacity while the

private sector accounts for the rest 34 per cent or 80 MT.. Moreover, even large

expansions are being planned by Essar and PSUs like IOL, BPCL and HPCL. The

major expansion plans include the Vadinar refinery of Essar, the IOC refinery at

Paradeep and the planned refineries at Bina in Madhya Pradesh by BPCL and

Bhatinda in Punjab by HPCL-Mittal Energy. This coupled with lower capital

costs as compared to other Asian countries are expected to enable India to emerge

as the global hub for oil refining. Besides, the ability of the latest refineries to

process heavy, low-grade crude as well as India’s closeness to other oil-producing

regions of the Middle East are expected to further help in this regard.

38

India’s Strategy Of Exporting Refined Products

India, like many other developing countries, is a net importer of crude oil.The

rising “oil import bill” has been the focus of serious concerns on foreign exchange

resources. One of reason for the 40% rise in the oil import cost has to do with

the nearly 10% fall in the value of the Rupee, the Indian currency.

India has a strong petroleum refinery sector. Even though it imports over 75% of

its crude requirements, it has surplus refining capacity and exports about 10% of

its refinery output. Oil refineries in India are operated by government-owned (or

partially owned) ‘public-sector undertakings’ or PSUs such as Indian Oil

Corporation, Bharat Petroleum and Hindustan Petroleum though the largest

refinery in India by installed capacity is owned by a non-government business

Reliance Petroleum Ltd. India’s exports of refinery products exceeded $25 billion

in 2009.

39

The principle categories of products exported by India include motor spirit (MS,

MO gas in the US) and Naphtha/NGL in the light distillates category, high speed

diesel/light diesel oil (HSD/LDO) and ATF in the middle distillates category and

furnace oil/low sulphur heavy stock (FO/LSHS) in the heavy end category.

India-The Future Refinery Hub for exports

1. Strategic Location

• Located in the major maritime route from Middle East

• Established refineries on western coast

• Geographical advantage to serve western and eastern markets

• Strong domestic demand provides an effective edge against fluctuations

in exports.

40

2. Cost Competitiveness

• Cost competitiveness driven by lower manufacturing wages.

• Low capital and cash operating costs.

• Access to large, technically skilled manufacturing base and

workforce.

3. Refinery Configuration

• For Indian companies, the surplus capacity comes at a time when

the international refining industry witnesses capacity crunch.

• New capacity creation to address the current refining challenges.

• Above measures contribute in improving the refining margins.

4. Integration: Petrochemical Industry

• Major capacity additions post 1991 have significantly reduced import

dependence.

• Petroleum Chemicals and Petrochemicals Investment Regions (PCPIR)

being set up.

• Major capacity additions done by IOC and RIL.

• Integration with petrochemicals, derivative and utility units, for

maximizing value addition.

India enjoys significant advantages. It has lower construction and cash

operating costs. India's strategic location en route of Middle East crude

for East Asian and Pacific-rim markets is another key advantage. In fact,

India possesses a surplus refining capacity and has already turned into a

net exporter of products. The expected worldwide deficit caused by the

shut down of small and uneconomical refineries around the world, bodes

well for Indian refineries. The inability of oil majors to invest in refining

assets during last decade and significant increase in the Chinese demand

has accentuated the deficit. There is a planned addition of 80 - 90

MMTPA in India in the next four to five years to the existing capacity of

around 149 MMTPA. Reliance Petroleum Limited is constructing a 28

MMTPA refinery at Jamnagar in Gujarat which is expected to become

operational during the financial year 2008-09. Hindustan Petroleum

Corporation Limited (HPCL) has entered into a partnership with Mittal

Investments, to set up a 9 MMTPA refinery-cum-petrochemical complex

at Bhatinda in Punjab.

Source: KPMG

41

42

Downstream Sector In India

India’s publicly-owned OMCs are the dominant players in the country’s

downstream petroleum sector. In fact, they are among India’s top twenty largest

corporations (by sales), and each is a member of the Fortune 500 list of the

world’s 500 largest companies. India’s largest OMC – India Oil Corporation

Limited (IOCL) – is the country’s largest corporate entity, by sales. The great

majority of Indian consumers and industries, especially the fertilizer and growing

petrochemical industries, access petroleum products through these OMCs. It is

impossible to understand dynamics within India’s downstream petroleum sector

therefore without first understanding roles and operations of India’s three OMCs

within this sector. In the same way, it is impossible to outline the potential future

of the Indian downstream sector in the medium-term without understanding the

prospects for OMC evolution and investment.

Structure of the OMC sector

India’s three key OMCs are (in order of size by sales):

• Indian Oil Corporation Limited (IOCL);

• Bharat Petroleum Corporation Limited (BPCL); and

• Hindustan Petroleum Corporation Limited (HPCL).

These three OMCs dominate the Indian downstream sector – both in retail

and (to a lesser extent) refining. These OMCs together account for over

50% of domestic refining capacity – and over 80% of this if RIL’s single

very large (and, until recently, export-oriented) Jamnagar complex is

excluded. They account for 98% of operational retail outlets. While RIL

and Essar have established a retail presence in the Indian market, as

mentioned above, these outlets were closed as crude costs increased

rapidly beyond retail prices. As crude prices fell sharply in the first half of

2009 both Essar and RIL began slowly re-opening retail outlets – however,

the rise in international crude prices since mid-2009 has effectively halted

this process for the moment.

43

Major downstream players

Table-1

As shown in Table 1, the three key OMCs share Indian refining and retail

with a very small number of other industry players. These include two

other small publicly-owned corporations. Mangalore Refinery and

Petrochemicals Corporation Limited (MRPL) is Oil and Natural Gas

Corporation (ONGC)’s downstream subsidiary, which operates a single

(although quite large) integrated refinery and petrochemicals plant in

Mangalore. Chennai Petroleum Corporation Limited (CPCL) is a

subsidiary of IOCL, and operates two small refineries in Tamil Nadu State,

as well as small petroleum product marketing operations in Southern

India.

IOCL BPCL HPCL RIL ESSAR M’LORE CHENNAI

Refining

(mb/d)

1.2 .6 .25 1.24 .22 .2 .19

Retail

outlets

18140 8389 8539 800 1200 0 0

44

Refining market share

RIL and Essar, the current private-sector players, both have highly ambitious

downstream expansion plans in refining, which seek to fundamentally change the

landscape of refining in India. The market share in refining of these two private-

sector operators has increased rapidly and markedly, especially with the

commissioning in early-2009 of RIL’s giant 580 000 bbl/d expansion to its

Jamnagar complex in Gujarat, which has since become the world’s largest

refinery complex (with a capacity of 1.24 bbl/d). Essar operates a single 220000

bbl/d refinery at Vadinar, very close to Jamnagar in Gujarat, with plans to

increase refining capacity to 680 000 bbl/d by 2012.

45

Retail market share

With extensive domestic marketing and retail networks, and a government-

determined function to meet growing domestic petroleum product demand,

OMCs’ operations are overwhelmingly centred on supplying the Indian market.

Each currently exports, on average, as little as 50 000 bbl/d of product (from total

OMC refining capacity of about 2 million bbl/d). In contrast, RIL and Essar’s

refining operations are designed to supply both international and domestic

product markets. Recent data indicate that both private-sector refineries in

Gujarat are currently producing an even balance of output supplying the Indian

market and that destined for export.

It should be stressed that, despite price controls, RIL and Essar are able to supply

Indian markets (either domestic retail markets or OMCs’ established base of

customers for industrial fuels and lubricants) by selling refined products

wholesale to OMCs from the refinery gate. Domestic refinery-gate prices are

determined on a trade-parity basis. Private-sector refiners can therefore freely

supply the Indian auto fuels retail market through OMCs while gaining market-

based refining margins and without under-recovery. By absorbing the

commercial losses inherent in the current retail system, OMCs therefore create a

space in Indian product markets in which the private-sector can conduct

commercially viable, profitable and sustainable business, despite the existence of

price controls.

Differentiating criteria for OMCs

(a) Indian Oil: IOCL is the giant of India’s hydrocarbons industry. Its refining

and retail operations are the focus of IOCL’s business, although it

maintains highly diversified commercial operations including significant

upstream Exploration and Production (E&P) (in India as well as

internationally) and petrochemicals and fertilizer businesses. IOCL’s large

size and diversified operations have meant that it has weathered the GoI’s

product pricing policies somewhat better than the smaller OMCs. In the

downstream sector IOCL has over 50% market share in marketing and

retail. It also has an impressive portfolio of refineries, making up about

32% of Indian refinery capacity. IOCL operates 10 refineries across India

with a combined capacity of about 1.2 million bbl/d.

(b) Bharat Petroleum Company: BPCL is India’s second largest OMC by

sales, marginally larger than Hindustan Petroleum Corporation, and

approximately the 300th largest corporation in the world. As shown in

Table 1(page15), BPCL operates a retail network of over 8 000 outlets –

the smallest retail presence of the major OMCs. Compared to its small

automotive fuel retailing operations, however, BPCL has large industrial

and jet fuel marketing operations. This is advantageous for BPCL as jet

fuel and other industrial products fall outside the GoI’s price controls.

BPCL maintains three refineries: its 300 000 bbl/d Mumbai refinery; the

150 000 bbl/d Numarlingarh refinery in North-Eastern India; and the 150

000 bbl/d Kochi refinery in Southern India.

(c) Hindustan Petroleum Corporation: HPCL is the smallest of India’s

three key OMCs, although it is still one of the fifteen largest corporate

entities in India. HPCL has a slightly greater auto fuels retail presence

than BPCL – also with over 8 000 retail outlets. Its large exposure to the

auto fuels retail market has meant HPCL has been significantly affected

by price controls. HPCL’s refining capacity is significantly less than both

IOCL and BPCL. It operates two refineries – one located in Mumbai and

one at Visakh on the East Coast, with capacities of 120 000 bbl/d and 230

000 bbl/d respectively. HPCL's production capacity at these two

refineries has expanded steadily through a number of recent capacity

46

expansion projects. The company’s Mumbai refinery is distinctive as a

lube-specialist refinery, with India’s highest lube production capacity

conferring HPCL a dominant market share in this unregulated product

segment.

47

Oil sector is a very dynamic sector which needs both

long term and short term strategies……

Factors affecting the Indian Oil and Gas sector

Some key factors affecting the Indian oil and gas industry are the following:

Dominated by state controlled enterprises: The sector is primarily dominated

by state controlled enterprises, with only a few foreign players. The primary

reason for this could be the country’s regulatory framework, where ventures

involving foreign players take longer to get the required approvals. Further, the

participation of foreign players has been limited during the nine rounds of

bidding for exploration rights through the NELP, while the participation of state

owned players has been high.

Subsidies on Oil and Gas products: Eliminating subsidies on oil and gas

products is proving to be a major challenge for the government, due to political

pressure. These subsidies have led to large scale under recoveries in the Indian

oil andgas sector.

Environmental issues: Offshore mining of oil and gas and deep water

exploration poses significant threats to the environment in terms of potential

threats of water contamination. Further particulate emissions of refineries and

production plants could have an adverse impact on the environment as well.

Requirement of advanced technology for upstream segment: The industry

faces a shortage of skilled labour for the mining of unconventional assets such

as shale gas and Coal Bed Methane (CBM), which offer a huge potential in

terms of ensuring sustainability.

Exploration and Production Sector

The gap between supply and availability of crude oil, petroleum products as well as

gas from indigenous sources is likely to increase over the years. The growing demand

and supply gap would require increasing emphasis to be given to the exploration and

production sector.

48

(a) Short Term Strategy

i) Continue exploration in producing basins.

ii) Aggressively pursue extensive exploration in non-producing and

frontier basins for knowledge building' and new discoveries, including in

deep-sea offshore areas.

iii) Finalize a programme for appraisal of the Indian sedimentary basins

to the extent of 25% by 2005, 50% by 2010, 75% by 2015 and 100% by

2025. Sufficient resources to be made available for appraising the

unexplored/party explored acreages through Oil industry Development

Board (OIDB) cess and other innovative resource mobilization

approaches including disinvestment and privatization.

iv) Provide internationally competitive fiscal terms, keeping in view the

relative prospectivity perception of Indian basins, in order to attract major

oil and gas companies and through expeditious evaluation of bids and

award of contracts on a time bound basis.

v) Optimize recovery from discovered/ future fields.

vi) Improve archival practices for data management.

vii) Continue technology acquisition and absorption along with

development of indigenous Research & Development (R&D).

viii) Ensure adequacy of finances for R&D required for building

knowledge infrastructure.

ix) Make Exploration and Production. (E&P) operations compatible with

the environment and reduce discharges and emissions.

x) Support R&D efforts to reduce adverse impact on environment.

xi) Acquire acreages abroad for exploration as well as production.

(b) Long Term Strategy

(i) 100% exploration coverage of the Indian sedimentary basins by 2025.

ii) Leapfrog to technological superiority.

iii) Put in place abandonment practices to restore the original base line.

iv) Conserve resources and adopt clean technologies.

49

Refining & Marketing

This is another important sector and its development is crucial for having self-

sufficiency in petroleum products and in moving towards a consumer oriented

competitive market.

(a) Short Term Strategy

i) Grant operational flexibility to refineries in crude sourcing and in

respect of risk management through hedging.

ii) Set out a timetable for achieving product quality norms to conform to

cleaner environmental standards and to global standards by 2010.

iii) Formulate a clear stable long-term fiscal policy to facilitate

investment in refining, pipeline and marketing infrastructure.

iv) Grant full operational freedom to existing PSUs to establish and

maintain marketing networks and allowing entry of new players into the

marketing sector through a transparent and clear entry criteria and

provide a level playing field for new entrants.

v) Make marketing rights for transportation fuels conditional to a

company investing or proposing to invest Rs.2000 crores in E&P,

refining, pipelines or terminals. Such investment should be towards

additionally of assets and in the form of equity, equity like instruments or

debt with recourse to the company.

vi) Set up mechanisms to enable new entrants to establish own

distribution networks for marketing without encroaching on the retail

networks of existing marketing companies.

vii) Set up a common regulatory mechanism for downstream sector and

natural gas.

viii) To take up with the States for a uniform State level taxation on

petroleum products.

ix) Provide for level tax rates for domestic products vis-a-vis imported

products.

x) Increase the ceiling of Foreign Direct Investment (FDI) in refining

sector from the present level of 49% to 100%.

xi) Provide a level playing field among all market participants.

50

51

(b) Long Term Strategy

i) Develop an optimal transportation mix keeping in view the existing rail

and port ¬infrastructure.

ii) Develop a policy for encouragement of transportation of crude through

Indian flag vessels.

iii) Develop a policy for transportation of LNG preferably through Indian

flag vessels.

iv) Provide for massive capacity expansion of the refining and marketing

infrastructure to be taken up. The total investment in refining sector upto

2025 is estimated at Rs.2, 50,000 crores while the same for the marketing

infrastructure is estimated at Rs.1, 35,000 crores.

VOLUME REQUIREMENT PROJECTIONS

Source: PPAC

Source: PPAC

52

53

Transportation Of Petroleum Products

Since independence, India has made impressive progress in creating a modern and

diversified industrial base. The percentage of urban population has increased. The

progress has brought about a significant increase in the domestic consumption of L

products and pushed up the demand in the country. The total refining capacity of the

15 refineries in the country at the end of March 1999 was 67.5 MTPA (million tonnes

per annum) & it has been 112.54 MMTPA by Sep,2001. The refining capacity is

expected to go up to 114 MTPA by 2001/ 02 (Planning Commission 1999) due to

additions in refining capacity in PSUs (public sector undertakings), joint ventures,

and private sectors units, and expansion of existing refineries.

Petroleum products are moved by pipelines, rail & road, besides some quantity by

barge & ships along coast.

Transportation requirement to carry petroleum products are projected to increase

substantially in the years to come. This would open up more opportunities for

development of pipeline network across the length and breadth of the country.

Taking into account the advantages of pipeline, it would be imperative for the

country to exploit these opportunities to the maximum.

54

No wonder that about 50-60% of the primary transportation of petroleum products

in developed countries is done through pipelines – obviously, due to its above stated

advantages. The data indicated below shows considerable potential exists for

expansion of pipeline network in India.

Following table shows share of various mode of transportation in movement of

petroleum products:

Mode Unit 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Road MMT 15.3 17.9 22.2 23.1 22.2 25.4

% 25.2 27.3 30.6 29.9 26.4 28.0

Rail MMT 26.1 28.1 29.3 29.1 31.8 33.2

% 42.9 42.9 40.4 37.7 37.7 36.5

Pipelines MMT 14.5 14.9 15.5 19.2 21.1 23.9

% 23.8 22.8 21.4 24.9 25.1 26.3

Coastal MMT 4.9 4.6 5.5 5.8 9.2 8.3

% 8.1 7.0 7.6 7.5 10.9 9.2

Source: Disaster Management Institute

Transportation of petroleum products through pipeline is safe & eco-friendly.

55

56

COASTAL MOVMENT

Source: PPAC

Since the major consumption centres of the country are located in the

hinterland, the movement of petroleum products through tankers is

somewhat limited. Tankers are used for movement between coastal

locations. Ideal way to move fuel from one location to another is via ship

or barge. Many barges transport gas and oil inland along rivers and via

oceans. Transporting crude oil view ship is one of the least costly methods

of transport.

57

58

This mode also suffers from capacity constraints in terms of draft

availability, navigational facilities, jetties etc. Functionality and safety

would be impeded by adverse weather; ice cover would narrow shipping

window.

RAILWAY

Source: google images

Traditionally, Railways have been the largest transporter of POL;

developed since earlier days and cover substantial parts of the country.

Besides petroleum products, railways also transport goods and passengers.

With an existing infrastructure that supports greater access to new

production areas and more refining locations, rail provides a wider range

of geographic options combined with faster travel times than via pipeline,

allowing producers to make rapid changes amongst delivery locations as

market demand shifts, as well as transport the oil much faster.

59

60

Capacity of railways has already been over-stretched. With continuing

growth on all spheres, railways transportation capacity would fall short of

the transportation requirements. Due to cross-subsidisation, the freight for

petroleum products is high. Rail transportation also leads to high energy

consumption, environmental pollution and transit losses.

Increases in crude-by-rail transport can produce congestion on rail routes,

crowding out capacity utilized by trains carrying other commodities, such

as grains and agricultural industry products, as well as those carrying

passengers. These effects have the potential to be compounded by lower

oil train speed limits and other regulatory safety measures.

Smoke rises from railway cars carrying crude oil that derailed in

downtown Lac-Megantic, Quebec, on July 6, 2013. A large swath of the

town was destroyed and 47 people killed in what became the worst oil

train derailment in North America. Paul Chiasson Associated Press.

Rail transportation of petroleum products is not without risks. Derailments

and serious accidents have caused major environmental damage and

deaths.

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COST ANALYSIS (COASTAL vs RAILWAY)

Source: as per HPCL(2016)

Coastal shipping is expected to offer a huge growth opportunity for

transportation of cargo within India . India has about 7,517 km of coastal

areas which is a boon for coastal shipping. Coastal shipping accounts for

an estimated 7% of total domestic cargo movement

The Railway requires large investment of capital. The cost of construction,

maintenance and overhead expenses are very high as compared to other

modes of transport. Moreover, the investments are specific and immobile.

In case the traffic is not sufficient, the investments may mean wastage of

huge resources.

7000000

7200000

7400000

7600000

7800000

8000000

8200000

8400000

8600000

8800000

9000000

COASTAL COST RAILWAY COST

COASTAL Vs RAILWAY

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Source: HPCL (It will take 8 days to complete 1 trip and per trip cost

$11250 in addition to port and bunker cost which after into currency

gives a total cost of Rs.7690881)

The act of hiring a ship to carry cargo is called Chartering. Tankers are

hired by four types of charter agreements: the voyage charter, the time

63

charter, the bareboat charter, and contract of affreightment. A completed

chartering contract is known as a charter party. The “chartering” of a ship,

in its simplest terms, is a rental agreement in which a charterer agrees to

hire a ship from its owner. Typically it is the charterer who will be the

owner of the cargo, which he needs to move to some other part of the world,

and unless he has ships of his own, he will depend on others to move the

cargo for him. The hire money for this transaction is known as “freight”

and is the reward to the ship-owner for the use of his vessel.

A Bunker Cost is a type of sea freight charge that is normally imposed

with any type of international shipping of goods from one country to the

next. The charge basically has to do with the actual loading of the goods

into the hold or bunker of the transport vessel, and is considered to cover

the costs of not only the loading but also the storage of the goods in the

bunker for the duration of the trip.

Port Charge is a fixed charge (as wharfage, towage, and pilotage) against

a ship or its cargo in port. is the reward / payment payable to the port

authority for the rendering of a service. Cost of port charges is significant

in final market price of goods. Mostly, sea transport cost including port

expenses is between 8% to15%.

64

65

Source: HPCL

Projected Coastal Cost For Next 10 Year

Source: HPCL

0

100000

200000

300000

400000

500000

600000

700000

800000

16-17 17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26

Projected Coastal Cost for 10 years

Annual volume Annual Requirement Shortfall in coastal

Source: HPCL

If the product is distributed from one state to another then tank wagon are used

as a mode. Tank wagon’s facilities are provided by Railway and it is compulsory

that 49 tank wagons are departed at one time. The capacity of 49 tank wagon is

to take 3400 KL (34, 00,000LTRS) at one time. It is also used mostly for

distribution of the product

66

PROJECTED RAILWAY COST

Source: HPCL

Source: HPCL

11620458081280575138

14113177731555354376

17142192131889267023

2082321066

2295117317

2529732719

2788352936

0

500000000

1E+09

1.5E+09

2E+09

2.5E+09

3E+09

16-17 17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26

Total Projected Railway Cost For 10 Years

67

68

PROPOSED TWO SPUR UNLOADING SIDING OF

HPCL AT BUDGE BUDGE

IN SEALDAH DIVISON OF EASTERN RAILWAY

RAILWAY SIDING

Hindustan Petroleum Corporation Limited (HPCL) proposed to construct TWO

SPUR UNLOADING SIDING AT BUDGE BUDGE for which approval has

been received from railway board. Traffic expected to handle is 16 rakes of

petroleum product per month i.e. one rake every alternate day.

The siding is propose only for unloading POL products and no loading is

proposed. The siding is proposed to be constructed on a private land. Due to non-

availability of land, the siding has been as two spur siding.

Material proposed to be handled is petroleum product of Class A, B, C, as per

petroleum act (HSDO, SKO, MS).

69

70

PAY BACK PERIOD OF THE PROPOSED RAILWAY

SIDING For 3 Years

TOTAL PROJECT COST: 6475000000

ANNUAL CASH FLOWS

YEAR RS.

1

2

3

1942500000

1942500000

2590000000

The Payback period is the time required for the amount invested in an asset to be

repaid by the net cash outflow generated by the asset. It is a simple way to

evaluate the risk associated with a proposed project.

The Payback period is useful from a risk analysis perspective, since it gives a

quick picture of the amount of time that the initial investment will be at risk. If

you were to analyse a prospective investment using the payback method, you

would tend to accept those investments having rapid payback periods, and reject

those having longer ones.

71

The formula for the payback method is simplistic: Divide the cash outlay (which

is assumed to occur entirely at the beginning of the project) by the amount

of net cash flow generated by the project per year (which is assumed to be

the same in every year).

ANNUAL CASH FLOW = 1942500000 + 1942500000 + 25900000000

3

= 47483333333

PAY BACK PERIOD = 64750000000

47483333333

= 1.36 years

72

RECOMMENDATION

Source: HPCL

Rail transport costs, unlike road, are characterised by high fixed cost of rail,

locomotives and rolling stock, and buildings, but lower per unit fuel and operating

costs, as rail can carry large volumes. Moreover, these fixed (mostly

infrastructure and some manpower) costs and variable operating costs are joint

costs that have to be allocated between several kinds of products and services to

arrive at the total cost of each service or product.

Coastal Shipping is characterized, like rail, by high fixed capital costs due to the

cost of port infrastructure and coastal vessels, and low variable cost owing to low

operations and maintenance costs accompanied by higher volumes carried. It is

thus more fuel efficient compared to rail or road.

However, unlike rail and similar to road, the costs of vehicle movement are easily

separable from the fixed infrastructure costs. As most often ships carry same type

of commodities from point to point, joint costs are minimal. Hence it becomes

easy to differentiate the fixed and moving infrastructure costs of service at

commodity level.

The costs of shipping operations, inter alia, are dependent on the size of the ship

and cargo carried, lead kilometres, empty-haulage of ship and type of cargo. In

0

500000000

1E+09

1.5E+09

2E+09

2.5E+09

3E+09

3.5E+09

16-17 17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26

PROJECTED COST COMPARISON FOR NEXT 10 YEARS

COASTAL COST RAILWAY COST

73

principle the unit cost of transport reduces for heavier ships, for longer leads,

lesser empty-haulage and for bulk type of cargo. Thus, the costs vary from

commodity to commodity, from voyage to voyage and needs to be estimated for

each of the commodities separately.

Transporting petroleum products through Coastal mode won’t be feasible in the

long run, as this mode suffers from many constraints such as in terms of draft

availability, navigational facilities, jetties etc. There are some disadvantages to

jetties. Sand starvation and retreat of the shoreline on the down drift side are

possible.

A bulk carrier requires a draft of one centimetre for 50 ton of cargo it carries and

with the average river draft falling over the last few years, ships are now not able

to carry cargo at full capacity. A 50,000 ton ship is now carrying around 18,000-

20,000 tons of cargo to enter the channel. The draft in Haldia was only 7.35m in

July this year as compared to the average river draft of 8.5m in July for the last

four years.

74

The draft situation became critical in the last three months as Dredging

Corporation of India (DCI), a central government outfit, employed only two to

three dredgers during this period.

This would directly result into shortfall of the required quantity as per the

projected short fall there will be a shortage of 424111 kilo litres and the cost for

the extra shortfall would be Rs. 2332615680 within 10 years.

Source: HPCL

Lack of proper connectivity, inadequate infrastructure, high capital cost and

unfavourable taxation facility are some of the other major hindrances faced in

coastal shipping.

Hence, Railway would be both economically and the best suited mode for

transportation of large volumes of petroleum over long period of time.

75

BIBLIOGRAPHY

ppac.org.in/

www.hpcl.com

www.business-standard.com

www.worldlpgassociation.com

www.indiastats.com

www.bp.com

www.toi.com

www.censusindia.com

www.martindia.com

www.hpanytime.com

www.wikipedia.com

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