We start by looking at the developments happening at the global level in the industry with one eye looking out into the future. Then, we take a deep dive into the Indian Oil & Gas sector, analyse how the sector is structured in the country and what the future of the Industry looks like in India.
Oil & Gas @ Global
Let’s look at the Oil & Gas sector at the global level with two different perspectives. First, the short-term and next, the long-term.
View @ short term
Here we will share the short-term developments taking place in the sector. The overwhelming effects due to the COVID-19 pandemic cannot be overlooked. It has affected most industries across the globe. The Oil & Gas sector too was not spared. For the first time in history, oil trade at a negative price. The WTI (West Texas Intermediate – a type of crude oil) futures contract of May expiry fell by over 300% to trade at less than negative US$39 per barrel on the NYMEX (New York Mercantile Exchange) on the 20th of April. The Indian counterpart, MCX (Multi Commodity Exchange), accordingly had to settle the price at just INR 1 per barrel. The Indian market wasn’t prepared for such an unusual volatility in the international markets.
One of the main reasons why the price plummeted is due to the lack of fuel demand across the globe because of the lockdowns. The global storage capacity for oil filled up as demand slowed. However, the price of Brent Crude at the same time did not go negative and traded around the US$20 mark. One of the reasons being that Brent crude which is extracted from the North Sea region is easier to transport and ship across the globe in shipping vessels.
The WTI which is extracted from the ground has to be piped to storage centres before it can be transported to the buyers. This posed a unique problem for the traders of WTI Crude. Oil is traded on its future price and May futures contracts were due to expire. Traders were keen to offload those holdings to avoid having to take delivery of the oil and incur storage costs. Although, June prices for WTI were also down, but trading at above $20 per barrel.
This however is a freak occurrence due to the sudden demand shock to the global economy, Once the lockdowns open and the engine of the global economy starts to chug along in full steam, oil shall again be required to keep it going. Thus, prices may not be as low as they are now. India could benefit from this situation by stocking up and filling her reserves with this oil, currently available at a cheaper rate. The Government is expected to rack up pretty huge bills as it has declared a hefty stimulus package to boost the economy that has come to a halt due to COVID-19. The profits by selling the now bought cheaper oil may help the Government to generate some much-needed cash. Although, if you are the consumer, please do not expect any rate cuts any time soon. The Government will desperately try to turn a profit by selling the cheap oil at a higher price later. In fact, it is increasing the price of fuel. Petrol has already been raised by INR 6.02 and diesel by INR 6.4 till 17th of June, 2020.
View @ Long Term
In this section we look at the global scenario for the Oil & Gas Industry. As the oil & Gas markets are extremely volatile, the above scenario being one such example, it becomes relatively difficult to predict the developments with pinpoint accuracy. There are a multitude of factors like technological advances, supply and demand, prices, business models, sustainability, demographic change, armed conflicts and geopolitical disputes that constantly keep effecting the Oil and Gas markets. Thus, we can refer to certain possibilities that might emerge in the long term. There are certain trends like awareness of a need to reduce carbon emissions and overall global warming levels, that are gaining traction. The rapid advance of alternative sources of energy like solar and wind power may reduce the global dependence on oil. Investments by industry juggernauts like Shell and BP into renewable sources of energy like off shore and on shore wind farms as well as solar power generating plants show a trend in the changes that may come in the long term. However, in the medium term the world shall remain dependent on oil as we keep perfecting alternate sources of energy before making the shift eventually.
Having shared some insights about the global oil and gas markets and development trends, let us now look at the industry in the Indian context.
Oil & Gas Industry @ India
In this segment we will discuss some of the key aspects of the oil & gas industry in India and how the industry is structured in the country. Below are some facts that you might find interesting.
Next, we look at the Oil & Gas market. It can be classified into three segments from a supply chain perspective.
- State-owned ONGC dominate the upstream segment.
- It is the largest upstream company in Exploration and Production (E&P) segment, accounting for approximately 58.26 per cent of the country’s total oil output (FY18).
- IOCL operates a 13,391 km network of crude, gas and product pipelines, with a capacity of 1.896 MBPD (Thousand barrels per day) of oil and 9.5 MMSCMD (Million Metric Standard Cubic Meter Per Day) of gas.
- This is around 30 per cent of the nation’s total pipeline network.
- IOCL is the largest company, controls 10 out of 22 Indian refineries, and has a combined capacity of 1.31 MBPD.
- Reliance launched India’s 1st privately owned refinery in 1999 and has gained considerable market share (30 per cent).
- Nayara Energy Limited’s (NEL’s) Vadinar refinery has a capacity of 20 MMTPA.
Oil & Gas Future @ India
The Indian Oil & Gas sector is dominated by Government owned PSUs. The table shows some of the major players in the country.
However, the government has been steadily reducing its ownership in these entities either through divestment (ONGC Videsh, HPCL) or planning strategic sales of some entities (BPCL). One of the key developments that we need to keep in mind is that the government has opened up the sector and allows 100% FDI in the Oil and Gas Industry. It is also making policy changes to boost the growth of this sector and attract foreign investors. There is a political view that believes “the government has no business being in business”. That is, the government’s role is to facilitate a healthy business environment but the core competence of a government does not lie in selling fuel or steel at a profit. This could be one of the reasons why governments look to divest their stakes in businesses and we may very well be seeing the manifestation of such an ideology. We end the discussion by sharing a chart that shows the amount of FDI Inflows into the sector from April 2000 to December 2019.
We hope that you have found the information useful and it has helped you to understand the state of the Oil & Gas industry globally as well as in India. Please share the article with your friends who might find the information useful. Comment below if you have any doubts or queries. Until the next read, अलविदा.