CHAPTER Ill
HISTORICAL OUTLINE OF THE GROWTH OF
PETROLEUM INDUSTRY IN INDIA
Any study of the petroleum pricing policy would be incomplete without
an appreciation of the developments in the oil industry over the years. The present
chapter gives a brief account of the oil scenario that existed at the time of India's
independence and the developments in the areas of exploration and production,
refining. marketing and distribution, imports, production and distribution of natural gas,
and oil conservation.
Petroleum Industrv in 1947
Perhaps no other sector of Indian economy was so much neglected during
the British regime as oil. It was widely believed that excepting Digboi in Assam, there
was no oil elsewhere in India. Even Digboi remained neglected till 1921 when Burmah
Shell became its owner. The first refinery was built by the Assam Railway and Trading
Company in 1883 at Margherita. After the discovery of oil in the Digboi field, a new
refinery was commissioned in 1901 and the first kerosene from it was marketed in
December 1901. On the marketing side the Asiatic Petroleum Company entered the
Indian market in 1903 and later in 1921 the Burmah Oil Company (BOC) started
marketing in India. The Burniah Shell Company which was formed in January 1928
and the Standard Vacuum Oil ('on~pany (SVOC) which commenced its operations
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September 1933 built extensive networks of distribution facilities throughout lndia.
Esso came to India on March 31, 1962 when the SVOC was reorganised and named
Esso Standard Eastern India, wholly owned by the Standard Oil Company (New
Jersey). The other major marketing companies were the Caltex Company (jointly
owned subsidiary of Standard Oil Company of California and Texas Oil Company), the
BOC (India Trading) Ltd, the latter operating exclusively in Assam and later known
as the Assam Oil Con~pany(AOC).' Thus the entire oil industry in India was under
the control of one or the other major international company. This was the position in
the entire non-Communist world, where seven companies known as the "Seven Sisters"
ruled the oil industry. These companies, also referred to as the international majors,
were the five US giants, Exxon, Gulf, Texaco, Mobil and Socal (Standard Oil of
California, later renamed Chevron), one British company (British Petroleum) and one
Anglo-Dutch company (Royal DutchiShell).
On the eve of independence, India's demand for petroleum products was
to the tune of about 2.2 million metric tons (mmt), of which roughly 0.2 mmt were
produced in the country and the balance was imported. In 1947 the production of
crude was 2,51,100tomes.
1
Est~mates ('onunittee; Fiftieth Report to the Fourlh Lok Sabha on the Ministy of
Petroleutrr and Chemicals. 1968
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Independence and the declaration of the Industrial Policy Resolution of
1948 produced little qualitative change in India's oil policy. During the first three years
following independence, the share of local production of oil products ranged from 5
per cent to I0 per cent and, in the subsequent years, it fell to less than 5 per cent until
the beginning of a new phase in refinery construction in 1954.
Ex~loration and Production
For a long time even after Independence, the Government of India took
no serious interest in oil exploration. Somehow, the planners had very little faith in the
possibility of a substantial oil discovery and the nascent nation's technical expertise was
considered inadequate to undertake any exploration. More attention was therefore
given to refineries where there was no risk element. The balance of payments problem,
the growing level of oil consumption and the need for self-reliance in the major
petroleum products during the years following the Second World War made the
Govenunent
to assign a significant role to refinery construction in the nationai
economic agenda.
When K.D.Malaviya joined Nehru's cabinet and was given the charge of
Mineral Oil, a change in thinking took place in the Government that only if Indian
technicians were unable to prospect for oil, should the Government consider inviting
foreign companies for prospecting new areas. An Oil and Natural Gas Division was
created as a part of the Ministry of Natural Resources & Scientific Research in 1955.
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As suggested by N.A.Kaliin, the Soviet oil exploration consultant, and in pursuance
of the new Industrial Policy Resolution of 1956, oil exploration became a monopoly
of the Central Government. Consequently, the Oil and Natural Gas Commission
(ONGC) was set up in August 1956 as a Government department. The very structure
of ONGC rendered it incapable of undertaking exploration for oil on a scale that
would ensure self-reliance. It was only in October 1959 that ONGC became a statutory
Commission owned wholly by the Govenunent of India. Despite its limitations, ONGC
struck oil in Cambay in 1958. In 1972, the first offshore wells were drilled in Bombay
High, where too ONGC met with early success.
Table 3.1 which reveals a reasonably stable reserves1 production ratio
over the years is a record of ONGC's efforts to match the pace of exploration with the
increasing production and consumption. There has been a significant augmentation of
the recoverable reserves of both crude oil and natural gas, particularly after 'he
discovery of Bombay High. Although production has also been steadily on the rise, the
reserves1 production ratio has remained more or less constant around 25 because of
the discovery of new reserves. The physical significance of the ratio lies in the fact that
if production continues at the current level and no more reserves are found, the
current reserves will last only for 25 years. The need for accelerated exploration
cannot be overemphasized.
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Table 3.1
Reserves and Production of Cmde Oil and Natural Gas
Year
1947-48
1950-51
1960-6 1
1966-67
1970-71
1975-76
1980-81
1985-86
1990-91
1991-92
1992-93
1993-94
1994-95
Balance of
recoverable reserves
N.Gas
Crude
mmt
bcm
4.00
4.00
45.00
153.00
127.84
143.90
366.33
499.51
738.80
806.1 5
801.05
779.06
765.00
3.00
2.00
22.00
63.15
62.48
87.67
35 1.31
478.63
686.45
729.79
735.46
717.95
707.00
Production
Crude
mmt
0.25
0.26
0.45
4.65
6.82
8.45
10.51
30.17
33.02
30.35
26.95
27.03
32.23
RIP Ratio
N.Gas
bcm
N.A.
N.A.
N.A.
N.A.
1.45
2.37
2.36
8.13
18.00
18.65
18.06
18.34
19.38
Crude
Oil
16.00
15.38
100.45
32.92
18.74
17.03
34.87
16.56
22.37
26.57
29.72
28.82
23.74
Natural
Gas
43.24
37.02
148.99
58.84
38.14
39.14
40.7?
39.1:)
36.48
-
Note:
Reserves as on 1st January of initial year
mrnt = Million metric ton
bcrn = Billion cubic metres
N.A. = not available
Compiled from Indian Petroleum & Natural Gas Statistics, various issues
Source:
(Latest 1994-95)
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Oil India Ltd. (OIL), the other public sector enterprise involved in
exploration and production, started as a joint venture of the Government of India with
Assam Oil Company/ Burmah Oil Company to exploit the oil fields of NaharkatiyaMoran- Hugrijan (Assam), discovered in 1953 by the latter. The Government's share
was increased to 50 per cent in early 1961 and OIL became a fully owned company of
the Government of India with effect from 14 October 1981.
Until the early 1970s. the oil exploration and production policy reflected
a desire to have a strong, national oil industry with all the necessary infrastructure.
With the oil crisis of 1973-74,the gravity of the situation was further emphasized. The
Fuel Policy Committee observed in 1974:
The oil policy of our country will have to be based on the
perspective that oil prlces are likely to prevail at a significantly higher
level than that anticipated in early 1973 and that India's dependence on
import of oil is likely to continue right upto 1990-91.. .
At the present price of crude in the international market, oil
exploration in India is an economically viable activity even if the risks
are rated high. ..All evidence points towards the need for speeding up
exploration activities particularly in the off-shore areas and selected onshore areas.
...there is urgent need to augment the capabilities of the ONGC
by providing them with more modem equipment and seismic exploration
vessels and off-shore rigs, and training our men in new technologies of
exploration. '
1
Report of the Fuel Policv Committee, 1974, paras 8.17.8.27
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Shocked by the oil crisis of 1973, the policy makers in India renewed
their faith in coal, but in order to meet the demand for oil products and to reduce the
cost in terms of foreign exchange, the Committee recommended stepping up of oil
exploration, augmenting the capabilities of ONGC and participating in crude
production in the Middle East. Still, the planners emphasized reduced dependence on
oil and aspired for a self-reliant growth strategy based on coal. But such optimism soon
gave way to euphoria over oil when Bombay High was discovered.
Global bidding for oil prospecting and production was started in July
1980. Initially the exploration work was confined largely to the proven petroliferous
basins, while the demand was increasing steadily during the Sixth Plan period.
Therefore, a widening of the exploration base was considered necessary. The Economic
Survey, 1984-85 observed:
In order to stabilize the present reserves1 production ratio, it is
necessary to widen the area of exploratory drilling to cover sedimentary
basins with known occurrence of hydrocarbons, but from which no
commercial production has yet been obtained.
During the Sixth Plan period, the level of self- sufficiency rose from
about 35 per cent in 1979-80 to about 67 per cent in 1984-85. New discoveries during
this period, however, fell short of expectations, in spite of the 'accelerated' programme
of production of ONGC. This programme, approved in July 1982 envisaged speedier
development of Bombay High and satellite fields in the offshore during the Sixth Plan
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to get an additional production of 12.04mmt. Acknowledging this failure, the Seventh
Plan made the following recommendation:
The individual discoveries and finds made were, in general, small,
suggesting that a similar pattern could prevail in the Seventh Plan as
well. Hence the need for intensifying exploration to inadequately
explored and unexplored basins.
Results obtained during drilling indicate the need for more
meticulous planning and preparation for drilling in those areas where
due to either greater depths or abnormal conditions, high pressures and
temperatures may be encountered. Since future exploration would
involve deeper drilling as well as drilling in such abnormal areas, it is
expected to be both costlier and time consuming.
With encouraging results obtained from water injecting
technology, its application to other areas is desirable. If not effective
application of other suitable enhanced oil recovery (EOR) techniques
would be required.'
While the first two bids for exploration in 1980 and 1982 did not attract
many international companies, the international companies showed encouraging
interest in the third round of bidding in 1986. Thanks to a more liberal package and
the prevailing international
environment, five foreign companies entered into
production sharing contracts (PSCs) for nine offshore blocks. However, this did not
result in any new hydrocarbon discovery.
During the Seventh Plan period, the national oil companies, ONGC and
OIL, yielded relatively more encouraging results. The total accretion in geological
Seventh Five Year
plat^.
1985-90, Vol 11, p. 129
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resource during this period was 1536 mmt of oil and oil equivalent of natural gas,
exceeding the target of 1453 mmt in spite of the exploratory drilling meterage being
only 82 per cent of the target.
The fourth round awards were basically 'seismic options', wherein the
companies were required to commit only a small amount of capital to make a further
assessment and perhaps acquire a limited volume of geophysical data. They were not
required to give a firm commitment for drilling.
The 'rounds' system as practised in India during the 1980s has been very
cumbersome and it meant a delay of at least four years during which no new
exploration contracts could be granted to any one. These were the very years when
India's Balance of Payment problem became very alarming on account of heavy oil
import bills. A continuous process of bidding, whereby interested parties can be offered
suitable contracts without losing valuable time would have prevented
the delay.
Malaysia and Indonesia had reaped considerable benefits by giving up the policy of
'rounds' and replacing it with a policy whereby blocks were continuously offered round
the year.
Following the new investment policy announced by the then Finance
Minister Manmohan Singh in his budget speech of 29 February 1992, the Government
in July 1992 decided to offer oil blocks for exploitation to foreign and private
companies on a round-the-year basis. Under this liberalized policy, small discovered
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oil and gas fields too were opened on a production sharing basis. Initially, 28 such
fields were offered for collaboration. T h ~ swas expected to result in an additional
production of approximately 8-9 mmt of oil during the Eighth Plan. The total
investment required for development of these 28 fields was estimated to be around
$450 million. The total oil reserves were estimated to be 57.62 mmt. of which 11.52
mmt were recoverable. The gas reserves in these fields were estimated at 7202 million
cubic metres (mcm) of which 5000 mcm were recoverable.
According to the Eighth Plan estimates, India has 21.31 billion tonnes
prognosticated
geological resources of hydrocarbons, which, by more intense
exploration efforts may perhaps be raised to 50 billion tomes or more. Of this, only
5.32 billion tomes have been established so far. Out of this, the recoverable oil
amounts to only 806 rnmt. The annual demand for petroleum is Likely to grow to about
120 mmt by the year 2000 AD. It is, therefore, possible for India to meet a major part
of her petroleum requirements for several decades to come, but it calls for a level of
investment unthinkable in the present economic conditions of the country.
The Eighth Plan strategy for exploration envisaged intensive exploration
of Category I basins, limited exploratory drilling with emphasis on close-grid seismic
data acquisition in the other basins, increased participation in overseas exploration
ventures, and greater emphasis on 3-D seismic surveys.
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The Rs.65,000 crore accelerated programme of exploration (APEX),
intended to make up for lost petroleum exploration efforts, has virtually remained on
paper. The focus of APEX, which was to be implemented over a three year period
1994-95 to 1996-97, was intensification of the efforts to add to crude oil reserves during
the Eighth Plan period through enhanced exploration in areas known to have crude oil,
upgradation of areas for formulating strategy for the Ninth Plan and beyond and
greater participation in overseas projects. However, an evaluation by the Planning
Commission has shown considerable slippage in the seismic surveys planned for 199495.'
Predominantly
smaller size discoveries were being made, which either
individually o r collectively did not promise any substantial and sustainable incremental
production of oil. If this trend persists, the domestic crude oil production may stagnate
or even decline in the Ninth Plan.
ONGC was restructured
on the lines suggested by the P.K.Kau1
Committee to relieve the resource crunch and to give greater autonomy. It was
converted into the Oil and Natural Gas Corporation Limited, a public limited company
with effect from 1 February 1994.
To attract foreign investors and to provide a level playground for the
national exploring companies, the Government on 18 March 1997 announced a New
Exploration Licensing Policy (NELP), with the following initiatives:
...5
The Times of India, 3 January 1995
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Companies, including ONGC and OIL, will be paid the international price of
oil for new discoveries made under the NELP;
Royalty payments will be fixed on an ad valorem basis instead of the present
system of specific rates;
Royalty payment for exploration in deep waters would be charged at half the
rate of 10 per cent for offshore areas for the first seven years after
commencement of commercial production. For onland areas, the rates would
be 12.5 per cent:
Half the royalty from the offshore area would he credited to a hydrocarbon
development fund to promote and fund exploration-related activities such as
acquisition of geological data on poorly explored basins, promotion of
investment opportunities in the upstream sector, institution building, etc;
Freedom for marketing of crude oil and gas in the domestic market;
Tax holiday for seven years after commencement of commercial production for
blocks in the North-East region;
ONGC and OIL will get the same duty concessions on import of capital goods
under the NELP as private PSCs;
Cess levied under the Oil Industry Development Act, 1974 will be abolished for
the new exploration blocks; and
A separate petroleum tax code will be put in place as in other countries to
facilitate new investments.
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The exploration blocks will be allotted on the basis of an open acreage system
which would allow companies to apply for exploration blocks without being
restricted to bidding rounds. '
This policy, based on the recommendations of the R-Group (See Chapter
12) is likely to be a major step towards dismantling the regulated regime in the
petroleum sector.
Refining
Action to establish refineries was initiated as early as July 1947 when the
Interim Government asked Burmah Shell, Standard Vacuum and Caltex to examine
the feasibility of setting up oil refineries in India. At that time they were primarily
interested in marketing and could meet their requirements with their own cheaper
products from the Middle East. They took advantage of the widespread belief that the
Indian geology outside Assam was not favourable to oil accumulation. They demanded
extraordinary assurances. includmg a guarantee against nationalisation, before any
refining or prospecting would be undertaken. The international companies changed
their stand on refinery construction and agreed to build refineries without insisting on
the "cost conditions" only when compelled by the Abadan crisis in Iran, where the
Government of Prime Minister Mohammad Mossadeq took over the 25 million ton
Excerpted from the Economic Times, 19 March 1997 and the Finance Minister's
Budget speech. 1997.
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giant Abadan oil refinery after disputes between the Anglo-Persian Oil company and
the Government could not be resolved through negotiations. Burmah Shell and
Standard Vacuum agreed to set up a refinery each in Bombay and Caltex agreed to
set up a refinery at Visakhapatnam.
It was only in the mid-fifties that the idea of public ownership of
refineries was translated into action. The immediate provocation was perhaps the
suicide of President Getulio Vargas of Brazil in 1954 which deeply stirred Nehru. In
a message to the nation released after his death, President Vargas had explained how
he was driven to such a desperate act by the pressure of the oil cartel which had a
complete grip on the main sectors of the economy. The American investors had been
reaping a return of as high as 500 per cent per annum on their Brazilian investments.
It was after considerable delay and consequent loss to the exchequer that
the work on the Barauni and Guwahati refineries could be started. The first public
sector refinery at Nunmati (Guwahati) went on stream on 1 January 1962 and in July
1964, the Barauni Refinely was commissioned. The Indian Refineries Ltd was already
registered in August 1958 to manage them. Later when the Koyali refinery was built,
the new company was entrusted with its management also. In September 1964, the
Indian Oil Company and Indian Refineries Ltd were merged into the Indian Oil
Corporation (IOC).
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In September 1963, the Cochin Refineries Ltd (CRL) was incorporated
as a public limited company under a tripartite agreement between the Government of
India holding 51 per cent of the shares, Philips Petroleum Company of USA 25 per
cent, Duncan Brothers & Company Ltd of Calcutta two per cent and the balance held
by others. CRL went on stream in September 1966.
The Fom~ationAgreement of the Madras Refineries Limited (MRL) was
concluded on 18 November 1965 between the Govemment of India with 74 per cent
participation
III
the initial equity capital, and the National Iranian Oil Company
(NIOC) of Iran and Amoco India Inc of USA. This refinery was commissioned in
September 1969.
Only after the 1973-74 oil crisis was the need to match refinery
configuration to the quality of available crude and the production demand mix
recognized. Simultaneously, refinery location and the consequent distribution costs also
became important issues. The Fuel Policy Committee, 1974 recommended that:
...in
each plan period, there should be a very careful examination
u l the relinery locations, the product mix required in each refinery, the
extent of secondary processing to be established, and the feedstock
choiccs for the fertilizer industry should be examined by considering
these options s~multaneously,if necessary, with the help of programming
models. '
I
Relxw' ( 1 1 rhf, Fuel Po1ic.i. ( 'otnmitree. 1974, para 8.25
~
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- --
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By late 1970s, it became evident that middle distillates, particularly
kerosene and high speed diesel (HSD) would continue to account for a major portion
of the petroleum product consumption mix. The Working Group on Energy Policy
observed:
In view of the fact that the demand for middle distillates is large
in our country, process technologies to upgrade heavier fractions such as
LSHS to distillate products is of considerable importance.. . The Group
would like to emphasize the need for R&D which is directed towards
optimizing such process technologies. '
With debottlenecking,
the throughput capacity of several existing
refineries was increased since 1975. The Sixth Five Year Plan foresaw substantial
deficits in middle distillates. To increase the production of middle distillates, fluidized
catalytic cracker (FCC) facilities were installed in several refineries in the Sixth Plan
period. Soon. this technology was also found inadequate to meet the long-term
demands and the emphasis shifted to hydrocracking.
In order to meet the demand pattern, it is necessary to install
more of hydrocracker units instead of fluidized catalytic crackers. Till
such hydrocrackers come up, import of middle distillates may have to
~ontinueeven though there may be a surplus in somz of the petroleum
products like naphtha and bitumen.
The policy of establishing new refining capabilities also needs a
closer look.. .. The goal of total self-sufficiency to meet the entire
requirctnent of petroleum products .... and the argument that there is
-
Kr,poti
0/
rhe Working (;roup on Energy P o l i o . 1979, p 101
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security of supply through national refining capacity does not hold good when
the crude has to be imported.. . OPEC is also expanding its refining capacity,
and in the none too distant future (by 1990), it is anticipated that at least 30 per
cent of its oil exports would be in the form of refined products. Capital costs
of new refineries have also gone up more than three-fold in the last five years
or so ...T
Even though the Panipat and Mangalore refineries did not take off
during the Seventh Plan period as planned, the refining capacity increased from 45.55
mmt in 1984-85 to 51.85 mmt at the end of the Seventh Plan period, due mainly to
capacity expansions of the existing refineries. It reached 56.4mmt per annum (mmtpa)
by 1 April 1995.
In recent years we are witnessing a complete reversal of the Government
policy towards setting up of refineries. While the philosophy in the late sixties led to
the take-over of the refining and marketing operations of the private companies, by
the late 1980s private companies were being encouraged to set up new refining
capacity in joint ownership with the national oil companies. Simultaneousiy, the
establishment of a number of refineries in other Asian countries opened up the issue
relating to crude oil versus product import. According to the Eighth Plan document:
In determining the refining capacity that needs to be added during
the Eighth and Ninth Plan periods, due consideration will be given to the
region-wise pattern of demand, the source of indigenous crude oil and
optimal choices regarding the location and technology of new refining
capacity.. . .Considering that indigenous crude availability in 1996-97 has
Econorr~ic.Survev, 3984/85. Chapter 7 , pp.2 1 -24
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been targeted at 50 million tonnes and that in addition to this quantity, a minimum of
about 15 million tonnes of imported crude oil of appropriate quality needs to be
processed specially to meet the domestic requirement of lubricants and bitumen, it is
necessary to augment the refining capacity to about 65 million tonnes by 1996-97. Any
further addition to refining capacity will depend upon the relative economics of import
of crude oil vis-a-vis petroleum products.. ... In planning additions to the refining
capacity, highest priority will be accorded to cost-effective debottlenecking schemes
and low cost expansions. lo
In July 1992, the Government of India decided to allow private and
foreign investment in the refining sector. The public sector oil companies and the coventurers would have 26 per cent equity each and the balance 48 per cent would be
offered to the public. In line with this policy, the Government cleared the setting up
of three grassroot refineries with a capacity of 6 mmtpa each during the Eighth and
Ninth Plans. These are to be located in the Eastern, Central and Western India, with
IOC, the Bharat Petroleum Corporation 1,td (BPCL) and the Hindustan Petroleum
Corporation Ltd (HPCL) respectively as the public sector companies involved. The
Government also gave investment approval to set up the Assam accord refinery at
Numaligarh at a cost of Rs. 1830 crores. with a capacity of 3 mmtpa. The public sector
company involved is the indo-Bumah Petroleum (IBP).
At 6 per cent annual increase in product demand, India's product demand
in 1999-2000 will be 90.6mmt. At 7 per cent increase per year it will be 97.7 mmt. On
this basis India would need to build 45-52 mmtpa additional capacity to fully meet the
projected demands. Even assuming that al: of the planned 18 mmt of existing refinery
1"
Eighth Five Year Plan, 1992-97. L 01 11. p. 171
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expansions go ahead, a minimum of 4 large scale refineries would need to be
completed by the year 2000. However, any new entrant in the refining sector has to
face significant barriers to entry on account of heavy depreciation advantage of the
existing refineries, marketing monopoly of the public sector and the restrictive
Government policies.
The Oil Industry Planning Group set up in 1994 under the Chairmanship
of U.Sundararajan, Chairman and Managing Director, BPCL estimated that the current
refining capacity deficit of 9.8 mmt would increase to 12.5 mmt by 2006-7. It was
projected that the demand for POL products would be 124.1 mmt vis-a-vis the present
level of 64 mmt. The investment required to develop the infrastructure for handling
this volume of products is in the range of Rs.42,000 crores to Rs.58,000 crores.
According to the Committee estimates, in 2006-7, the total refining capacity would be
11 1.6 mmt, conlprising of 67.3 mmt in the public sector, 27.6 mmt in the joint sector
and 16.7 nimt in the private sector.
Marketine and Distribution
At the time of independence,
the import of products and their
distribullon were mainly controlled by three foreign oil companies. Well over half this
trade was held by Burmah Shell, the other two being the Standard Vacuum Oil
Compaiiv 2uid Caltex.
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The Government entered the sphere
the Indian Oil Company was formed. The main objective was to supply oil products
to the state enterprises, which accounted for 10 per cent of the total oil consumption
in Inda. Subsequently, the Company's role was broadened to take over at least half
the import trade of the country and to market the products of state refineries. When
refineries, like CRL and MRL, partly controlled by the Government in collaboration
with foreign companies came into being, their products were also to be sold through
IOC, now the Indian Oil Corporation. In 1965, the Government prohibited import
trade by private oil companies and it became IOC's monopoly and by 1967, IOC
became the market leader with 35.5 per cent market share.
Distribution of petroleum products is a major area of concern as it adds
to the cost the consumer has to bear. The most economic means of long distance
transportation
is the pipeline, which is a relatively neglected area. The cost of
transportation per unit volume of oil by pipelines is roughly one-tenth of that by rail
or road tankers. Environmental and safety considerations also weigh heavily in favour
of pipelines. As the laying of pipelines is a capital intensive project, the Eighth Plan
stressed the need for attracting private investments in marketing operations.
To improve the supply conditions and to reduce the fiscal burden owing
to the sale of subsidised petroleum products and in line with the liberalised economic
policies, the Government
has set up Parallel Marketing System for Liquefied
Petroleum Gas (LPG), Superior Kerosene Oil (SKO) and Low Sulphur Heavy Stock
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(LSHS, used as boiler fuel) since February 1993. Under this system, private parties are
allowed to import these products and market them through their own distribution
network at market determined prices. Safeguards were incorporated into the system
to prevent diversion of the kerosene and LPG marketed by the public sector
companies. "
India's foreign exchange reserve was dwindling over the years. The value
of imports of major oil products increased from Rs.309 million in 1947-48 to Rs.833
million in 1953-54 as a result of higher prices of oil, a higher level of consumption and
the currency devaluation of 1949. Although the Government took timely decisions to
bring oil imports under a licensing system, and also to prohibit imports of oil from the
dollar area, with which the balance of trade was very unfavourable, the position of the
foreign exchange fund was still precarious.
There was no import of crude till 1954 as there was no refining capacity
excepting the Digboi refinery with a capacity of 0.45 mmt only. Under the refinery
agreements the coastal refineries had been importing crude on their own and the
indigenous supply was limited to a small quantity from Ankleswar. Establishment of
I,
Economic Survey, 1995-96
~
~
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33
refineries at Cochin, Madras and Haldia did not change this position. The gap between
indigenous production and demand kept on widening during the 1960s and 1970s.
To reduce dependence on the oil majors and to ease the balance of
payments problem, the Government in 1960 entered into an agreement with the USSR
to import crude. As the refineries refused to process Russian crude and the
Government lacked the will to retaliate in strong terms, the agreement was broken off.
The Government also imported HSD from the Soviet Union in August
1961, but it led to a price war between the oil companies and the newly born Indian
Oil Corporation as the former refused to handle Russian products in their marketing
networks. As the IOC did not have any retail outlets of its own, it could only sell to
the bulk consumers, particularly the state transport enterprises. The majors, in a bid
to retain their business, offered prices even lower than those quoted by IOC for its
Russian products. As a result, a large part of IOC's supply was unsold for a period of
time which also created storage problems. IOC then offered even lower prices which
were below economic level in order to secure some business. However, the price war
did not last very long as the oil companies were fully conscious of the serious risks to
which their large investments in India were exposed by these conflicts with the
Government.
Unlike the refineries, the marketing companies were not protected
against nationalisation through any agreement. The main objective of the price war was
apparently to put pressure on the Government to reject the proposals of the Oil Price
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34
Enquiry Committee of 1961, which prescribed a lower schedule of prices for imported
products.
From May 1965, under pressure of the foreign exchange crisis, the
Government prohibited import of products by private oil companies and it became
IOC's monopoly. IOC could import oil from USSR and Rumania at cheaper than
world average prices, the price payable in rupees.
The first oil price increase of 1973-74 was associated with a balance of
trade deficit of Rs. 1,190 crores in 1974-75 which was 1.63 per cent of GDP and Rs.
1,229 crores in the next year (1.56 per cent of GDP). Correspondingly. the share of oil
imports in export earnings nearly doubled from 10.5 per cent in 1972-73 to 21.4 per
cent in 1973-74 and jumped to 33.4 per cent in 1974-75. (See Table 3.1). The
corresponding figures for the second oil crisis of 1979-80 were a terms-of-trade
deterioration of Rs. 2,725 crores or 2.38 per cent of GDP in 1979-80 and Rs. 5,838
crores or 4.3 per cent of GDP in 1980-81. The rise in the share of oil imports in export
earnings was from 28.4 per cent during 1978-79 to 50.9 per cent in 1979-80 and 78.5
per cent in 1980-81. Table 3.2depicts the impact of oil imports on India's balance of
trade. Thanks to the discovery of new petroleum reserves, the index of self-reliance
(Percentage share of indigenous production in total demand) had been steadily rising
in the 1970s and the 1980s. but this index has been falling in recent years.
U
Dasgupta; The Oil Industry in India, Some Economic Aspects, 1971, p.71
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Table 3.2
I
ofP r I m
1
Year
Crude
Rs.Cr.
Products
Rs.Cr.
Total
Rs.Cr.
CIF
Value of
c~de
India's Total
imports Imports Exports
Rs.lMT Rs.Cr. Rs.Cr.
Note : Figures for 1994-95 are provisional.
Source : Indian Petroleum & Natural Gas Statistics (Latest 1994-95).
Economic Survey, Various issues.
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Balance
of
Trade
Rs.Cr.
Gross POL
imports
as %age
of total
exports
lndex
of Self
Reliance
% age
Table 3.3
Consumation of Major Petroleum Products: 1950-95 ('OW tons)
Year
1950-51
1955-56
1960-61
1965-66
1970-71
1974-75
1975-76
1980-81
1985-86
1990-91
1991-92
1992-93
1993-94
1994-95
LPG
.
8
46
176
289
336
405
1,241
2,415
2,650
2,866
3,113
3,434
MS
624
850
859
1,102
1,453
1,264
1,275
1,522
2,275
3,545
3,573
3,595
3,834
4,141
Total
704
850
983
1,370
2,697
3,423
3,596
4,388
6,776
9,801
10,115
10,310
10,570
11,637
SK
HSDO
Total
899
1,404
2,024
2,455
3,283
2,828
3,104
4,228
6,229
8,423
8,377
8,478
8,704
8,964
185
43 1
1,270
2,410
3,837
6,450
6,595
10,345
14,886
21,139
22,680
24,293
25,878
28,261
1,499
2,263
4,297
6,225
9,040
11,354
11,653
17,056
23,948
33,106
34,404
36,152
38,146
40,976
Grand total does not include refinery fuel and losses.
Note:Source: Govt. of India, Ministry of Petroleum & Chemicals: Petroleum &
Natural Gas Statistics. (Latest 1995-96)
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Heavy
Ends
GRAND
TOTAL
37
Table 3.3 shows that from 17.9mmt in 1970-71, oil consumption rose to
30.9 mmt in 1980-81 and 55 mmt in 1990-91. This table presents the figures of
consumption of the major petroleum products from 1950 to 1995. It also gives the
break-up of total consumption in terms of light and middle distillates and heavy ends.
While illustrating the trends in consumption growth, this table also highlights the fact
that this growth was more pronounced in the case of the middle distillates. This'
important aspect of oil consumption will be analyzed in detail in Chapter 5. With
domestic oil production growing at a much slower rate, this rising consumption has
necessitated increasingly larger imports of crude oil and petroleum products. The
import bill of c ~ d eand petroleum products skyrocketed from Rs. 136.63 crores in
1970-71 to Rs. 5,266.49crores in 1980-81 and more than doubled during the next 10
years as a result of the increased volume of import as well as a rise in international
price of crude oil and petroleum products. (See Table 3.1)
The total demand for petroleum products in the terminal year of the
Eighth Plan has been estimated to be about 81 mmt. Even if the ambitious crude oil
production target of 50 mmt in 1996-97 is achieved, the level of self-sufficiency will be
below the 60 per cent level achieved at the end of the Seventh Plan period.
lndia has been a net importer of petroleum products from the very
beginning. There appears no improvement in this status at least for several years to
come, as the production is not likely to keep pace with the demand in the near future.
The countries from where India has been importing oil include Iran, Iraq, Saudi
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38
Arabia, UAE and the erstwhile USSR. Most of these countries have been facing
internal problems or international hostilities in the recent past and this has created
difficulties for India both in terms of availability and price. The import policy,
therefore, will always remain influenced by international politics including oil politics.
At the same time, since the oil imports bill constitutes nearly 2 per cent of the GNP
(as in 1990-91) and 25-30 per cent of the total import of the country, the fluctuations
in international market prices seriously affect the balance of payment situation and
bring inflation and other pressures on the economy.
Assuming that the ratio of oil imports to total export earnings continue
to remain at around 32 per cent and the price of oil in the international market would
not be higher than $22 per barrel by the year 2010-1 1, India's POL import bill is likely
to reach a level 3 or 4 times the present level, depending on which of the various
projections of demand comes true. (See Chapter 4 for demand projections). Apart from
the balance of payments problem, this will make the country more vulnerable to
sudden hikes in oil prices.
Natural Gas
Natural gas is often found in its free form as well as in association with
oil. Table 3.4depicts the relation between production and utilization of oil and natural
gas. While it had been possible to utilize the entire crude oil produced, a substantial
portion of the natural gas produced
i11
the well had either to be re-injected or flared
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Crude in rnmt
Natural Gas in bcm
Year
1947-48
1950-51
1960-61
1966-67
1970-71
1975-76
1980-81
1985-86
1990-91
1991-92
1992-93
1993-94
1994-95
Refinery
crude
thruput
0.25
0.26
6.13
12.71
18.38
22.28
25.84
42.91
51.77
51.42
53.48
54.30
56.53
Production
0.23
0.23
5.78
11.88
17.11
20.83
24.12
39.88
48.56
48.35
50.36
51.08
52.93
Production
na
na
na
na
1.45
2.37
2.36
8.13
18.00
18.65
18.06
18.34
19.38
Natural Gas
ReFlared
injected
0.04
0.16
0.07
0.07
0.10
0.13
0.09
0.07
0.23
Source: lndian Petroleum & Natural Gas Statistics (Latest 1994-95)
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0.76
1.08
0.77
3.12
5.13
4.07
1.85
1.92
2.02
Net
Production
0.65
1.12
1.52
4.95
12.77
14.44
16.12
16.34
17.34
40
due to technical reasons or lack of infrastructure. The production of gas increased from
1.45 billion cubic metres (bcrn) in 1970-71 to a mere 2.36 bcm in 1980-81, of which
only 1.52 bcm was used. Thereafter the production and utilisation of natural gas has
grown faster.
Gas is not merely a source of energy. It is also an excellent raw material
for several petrochemicals. Each component of its fractionation has its own use. The
lightest component methane can be used to manufacture urea, for power generation
and in the manufacture of several industrial products like sponge iron. It can also be
converted to methanol which is increasingly being used as a fuel and as a raw material
in the chemical industry. It can even be converted to diesel oil. The other constituents
like ethane and propane can be used to manufacture ethylene and propylene, the basic
building blocks of the petrochemical and synthetic fibre industries.
Another major component of natural gas is LPG. LPG consumption in
India increased from 1,76,000 tonnes in 1970-71 to 4,05,000 tonnes in 1980-81 and
24.15.000 tons in 1990-91. Since India is a net importer of kerosene, it is necessary to
reduce our dependence on kerosene. For heating purposes, LPG is a better substitute
but there is need to make it more easily avdable to domestic consumers. The reduced
dependence on kerosene is a remedy for our middle distillates problem. Since there
are different uses for gas, the distribution will have to depend on its opportunity cost.
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41
During the Seventh Plan period great emphasis was laid on the increased
exploitation of Natural Gas. Recoverable reserves of Natural Gas went up by about
40 per cent during the Seventh Plan period, while production went up by almost 2.5
times during the same period. Gas utilisation has also become more varied. In the early
eighties, Natural Gas was kept reserved only for fertilizer plants.
increased
.domestic availability, gas based power plants, petrochemical units and other industries
could also be set up. In spite of this emphasis and the fact that the total production of
Natural Gas during the Seventh Plan was 59.65 bcm, against a target of 59.68bcm, the
actual despatches to consumers were only 40.41 bcm. About one-third of the gas
produced had to be tlared due to technical constraints, non-lifting by consumers, nonavailability of down-stream facilities for utilising gas and also inadequacy of
compression and transportation facilities for associated gas. The Eighth Plan, therefore,
emphasised the need to eliminate the flaring of natural gas at the earliest, in any case
not later than 1996-97. Still, the Eighth Plan projected a natural gas demand of only
25 bcm against an estimated domestic availability of 30.18 bcm by 1996-97. The
planners observed:
It is assumed that half of the prognosticated reserves represents
natural gas, of which only 12 per cent has been till now established. The
possibility of discovering significant reserves of natural gas in the future
will need to be kept in view for the purpose of planning. *
LT
Eighth Five Year Plan, 1992-97, Vol 11, p. 161
- --
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-.
42
The Gas Flaring Reduction Project of ONGC requiring an investment
of Rs. 7500 crores is funded by ONGC from its own resources to the tune of Rs. 2860
crores, the rest coming from World Bank (US $450 million), ADB and Japan Exim
Bank. By the end of the Eighth Five Year Plan, gas utilization is expected to go up to
about 80 million cubic metres per day which is about 27 mmt of oil equivalent. By
1995, the gas flaring has come down to 6.4per cent. (See Table 3.4).
Unless natural gas is extensively used as a fuel in vehicles or in power
generation, its availability is not going to make any substantial difference to the level
of crude or product imports. The Advisory Board on Energy had recommended that
in view of the abundant availability of gas,particularly in the Western Region, and in
view of the emerging bottlenecks in the transportation of coal along with a drop in
coal quality. we have to rethink past gas utilization policy and plan for the greater use
of gas in power generation, at least till such time that we are able to sort out coal
transportation problems and improve efficiency of coal use. With an improvement in
the use of gas for power generation, industrial production would increase, and to that
extent imports of some commodities could decline and exports of some commodities
could increase. As an efficient substitute for diesel, natural gas can reduce dependence
on HSD for use in generating sets in industry, and in agricultural pumping operations.
As will be shown in later chapters, our hydrocarbon problem is
essentially a liquid fuel problem and if we are to use our gas reserves to alleviate this
problem, we will have to consider the use of gas (a) to substitute for diesel in vehicles;
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43
@) directly in homes as cooking fuel; and (c) as boiler fuel in industry. So far, very
little headway has been made along these lines. The Advisory Board on Energy
pointed out that if we assumed that by 2004-05, a gas supply of 60 mcmd could be
possible and of this one-brd would be used to substitute for liquid fuels, then about
6 mmt of crude equivalent could be saved.
India's balance of recoverable reserves of natural gas is estimated to be
over 700 bcm, which at the current rate of production of nearly 20 bcm is expected to
last over 35 years. (See Table 3.1). More intensified exploration is required to maintain
thls RIP ratio at least at this level.
Oil Conservation
Oil conservation became an important part of our economic agenda only
after the oil crisis of 1973. The Economic Survey, 1973-74 stated:
In order to mlnimise the impact of outback in oil availability, it
is important that use of fuel oil in industry is economised, and that cuts
are introduced in a planned and phased manner so as to derive the
optimum combination of industrial output from a given amount of oil
supply.
There is a strong correlation between GDP and energy consumption as
may be seen from Table 3.5 and Figure 3.1. Here GDP at factor cost has been shown
at 1980-81 prices. Consumption figures include refinery fuel and losses.
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G D P - C ~ ~ ~ u m ~ tCorrelation
ion
(A11 Petroleum Product&
Year
GDP at Factor
Cost (Rs.Crs)
1980-81 prices
Consumption
in mmt
42,871
45,117
49,895
54,086
57,487
62,904
66,228
74,858
72,856
80,841
90,426
91,048
96,297
106,280
120,504
122,427
133,915
150,433
163,271
188,943
209,791
221,168
238,900
Sources:
Compiled from:
1. Economic & Political Weekly, 10 October 1992
2. Indian Petroleum & Natural Gas Statistics,
various issues (latest 1994-95)
3. Economic Survey, Various issues
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46
Figure 3.1 shows that for every one per cent increase in our national
income, our demand for petroleum increases by more than 1 per cent. Thus the
demand, which stabilized around 23 mmt after the oil crisis of 1973 could not be
suppressed for long. It picked up again to 29.65 mmt in 1979-80 and reached 54.1 mmt
by 1989-90, the terminal year of the Seventh Plan, showing an annual average growth
rate of 6.9 per cent. Thereafter, during 1990-91 and 1991-92, it was around 1.7 per cent
due to demand containment. Realising this dependence of development on oil, the
Sixth Plan conceded that.
...giventhe stage of development of the country and the limited
technological options specially in the transport sector, holding the
demand for petroleum products to a manageable level will pose a
formidable challenge. "
Several measures have been adopted by the Government to promote
conservation of petroleum products in the transport, industrial, agricultural and
household sectors. These include practices to increase fuel efficiency, training
programmes in the transport sector, replacement of inefficient boilers and furnaces
with efficient ones, promotion of fuel-efficient technologies and equipment in the
industrial sector, standardisation of fuel-efficient irrigation pump sets in the agricultural
sector, promotion of fuel-efficient stoves in the domestic sector, etc. The Petroleum
Conservation Research Association (PCRA) was set up to develop and promote new
oil conservation measures and to create awareness among oil users.
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47
Other potential methods of oil conservation include quality upgradation
of lubricants and inter-fuel substitution. Examples of inter-fuel substitution include
replacement of kerosene in the textile pigment printing with synthetic thickeners, use
of compressed natural gas (CNG) as automotive fuel, blending methanol and ethanol
with petrol (Motor Spirit or MS), promotion of non-conventional sources of energy,
battery-operated vehicles, encouraging the use of coal in boilers, etc.
The strategy recommended for demand management in the Eighth Plan
are :
(a)
lmprovement in the efficiency of use of petroleum products in different
sectors of the economy,
@)
Promotion of demand management programmes aimed at reducing the
011-intensity of the consuming sectors, and
(c)
kncouraging substitution of petroleum products by coal, natural gas,
electnclty, etc.=
-
IS
-
-
Eighth P,vr Year Plan, 1992-97, Vol 11, p.169
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