Ventures In Oil And Gas Sector In India

Published Date: 02 Nov 2017

FDI in Oil and Gas sector in India

Contemporary Concerns Study

Under the Guidance of

Prof. Murali Patlibanda

Corporate Strategy & Policy

Submitted By:Iimblogo

Ruchika Rohilla – 1111215

Mohnish Jaiswal - 1111198

FDI and Joint Ventures in Oil and Gas Sector in India – Current Scenario and Future Prospects along with drawing parallels with Emerging and Developed Economies

Contents

Table of Figures

Executive Summary

For the Contemporary Concerns Study, we have chosen to study the FDI in Oil and Gas Sector in India. Since FDI in Oil and Gas caused lots of successful M&A deals in India, we thought it would be exciting to study pre and Post-FDI in Oil and Gas Sector and if it is a successful and progressive step taken by Government of India. The objective of the study are to study the changes in Oil and Gas Sector post FDI in India including study of the key issues of this sector, factors that influence FDI and joint ventures in India and competitive landscape and attractiveness of the investment decisions. In order to understand the attractiveness of the industry, Porter’s five forces were analyzed.

The aim of the study was to identify the opportunities created which leads to development of the sector in long run. In the course of this study, we also studied the case of FDI in Oil and Gas Sector in other developing countries such as Kazakhstan and Uzbekistan. We even studied the strategies adopted by various PSU after their alliance with foreign players. For example, ONGC has three major strategic aims: improving its recovery factor; intensifying its exploration activities; and increasing involvement in foreign projects via OVL.

As a part of our recommendation, a comprehensive set of recommendations on opportunities and threats of these investment techniques for this sector in India were listed down and the key lessons from the other developing countries were also used to recommend the possible changes which can be introduced both in policies and strategies.

Introduction

Foreign Direct Investment and Joint Ventures are the two most commonly used methods of providing capital in an emerging market. India has seen large time periods of these investment techniques especially after the liberalization in 1991-92. The governing policies have subsequently been relaxed to make India an attractive destination for investments. With burgeoning economy, the energy requirement has grown manifolds over time and hence, investment in energy sector is deemed necessary to sustain both economy and population growth. These investments till recently have been done through private and public involvement. FDI in Oil and Gas sector was allowed in India by the Government of India in 2000.Before that there was an established monopoly of PSUs in Oil and Gas Sector. PSUs have the control over extraction and refinery of oil and gas in India which prevented other domestic and international players to enter in this oil and gas sector.

The attractiveness of the Oil and Gas sector has pulled many international players in this sector to look at India as an attractive destination to invest.

With the liberalization of the policies many foreign players like Cairn look at India as a huge opportunity. Many Merger and acquisition deals took place in this sector. There were more than 10 such deals in 2011 itself which allowed the various players in this industry to consolidate as well as prepare itself for future scenarios. Major deals includes ONGC M&A with Arrow energy in 2002.To encourage firms from other countries ,Government of India has provided provisions like reduced custom and excise duties and increased investment region.

There were other significant developments in the gas midstream and downstream segment, owing to the increasing attractiveness of India as a gas market. During the year, Indian players unveiled significant gas infrastructure plans to monetize gas and formed partnerships in the gas trading and marketing segment and on the LNG sourcing front.

Overall with the allowance of FDI, there have been an increase in access to the new technology and Indian companies are willing to give up small transaction to have access to new technology and skills. Other major development which has happened after FDI is the resources which were initially unexplored with the access to new technology.

Research Methodology

This study covers areas of strategy, economics and a bit of public policy as well. Initially, extensive literature survey was done in trying to understand the past and current scenario in the context of FDI in India. For this, we referred to case studies on Indian companies available in literature. This was followed by issue analysis for Indian companies from strategic as well as legal perspectives. For this purpose, we considered the prevalent business laws in place in countries under consideration. Through the course of the research work, we also referred to several articles and books on FDI norms and regulatory frameworks in other economies.

Oil and Gas Sector in India

Figure : Production Capacity - Geographical

Figure : Annual Production Capacity - Sector wiseOil and Gas Sector account for 2.8% of India’s GDP with revenue of US$ 30.8 billion in 2008-2009 [1] . The sector is segmented into 3 main segments-upstream segment, midstream segment and downstream segment [2] . Upstream segment consist of exploration and production while midstream consist of storage and transportation of oil and gas. Lastly, downstream consists of refining and processing. Total production of crude oil is 33.7MMT in 2009 while consumption is 160MMT. India has 20 refineries of which 17 are in the public sector and the remaining is in private sector with a refining capacity of 184.4MMTPA. Despite this, India import more than 60% of crude oil from other countries. ONGC is the largest player accounting for 73.8% of crude oil production while Oil India Ltd (OIL) accounts for 10.6% of crude oil production. The remaining is shared by joint ventures between various players.

Key domestic players include GAIL (India) Limited, Essar Oil Limited, RIL, Adani Gas and Petronet LNG while key international players includes Cairn Energy India Pty Ltd, Shell, BG Group and BP. Apart from this, there are some SEZs including Reliance petroleum SEZ, Mangalore SEZ, Gujarat SEZ and Power SEZ.

Figure : Historical data of Oil & Gas market

Oil and Gas Sector in India pre-FDI

Before FDI was allowed in Oil and Gas Sector in India, the PSUs had the major control in the extraction and refining of Oil and Gas in India with monopoly in India. Even at the time of bidding the minimum experience in the Indian market was required to be eligible to participate in bidding. As a result, there was a huge gap in the demand and supply of oil and gas in India. To deal with this issue, FDI was allowed in India through the Automatic route in India to facilitate the increase in the exploration and refining activities in India by facilitating the building of infrastructure in Oil and Gas sector.

Post FDI in Oil and Gas Sector in India

FDI POLICY IN INDIA

In April 2010, FDI in Oil & Gas sector was allowed and it attracted US$ 525 million till September 2010.

Sector

FDI Cap

Entry Route

Other conditions

E&P

100%

Automatic

According to regulations of Ministry of petroleum & Natural Gas

Refining

49% for public sector without any reduction of domestic equity

Foreign Investment Promotion Board for PSUs

Dependent on sectorial policy

Policy and regulatory framework [3] 

Licencing Policy – Under the licencing policy, 100% FDI was allowed and the administered pricing policy which was earlier adopted was abolished completely. Apart from this, 26% was opened to the government owned refineries.

Custom Duty & Excise Duty - There was reduction on custom duty for the foreign firms from 10% to 5%. Petrol and diesel was exempted completely from excise duty apart from bio diesel.

PCPIR Policy - To attract the foreign players, investment region was increased to 250 sq. km. To increase the exploration activity in India and to increase the participation of private and foreign players New Exploration Licencing Policy (NELP) was introduced by Government of India. 246 blocks were awarded under this policy in 8 bidding rounds extending from launches in 2001 to November 2010. NELP led to an in increase in the exploration of oil and gas reserves in India. Apart from this, 100% FDI through competitive bidding was allowed in small and medium sized oil fields.

Chronology of events in NELP [4] 

Under Coal Bed Methane (CBM) Policy, during the process of bidding, no upfront payment was required and the firms were relaxed from payment of custom duty on imports. Also foreign firms were allowed to sell their products in domestic markets and were given a 7 year tax holiday while operating in Indian Market.

Major M&A in India post FDI in India

Inbound Deals

Domestic Deals

1) ONGC signed a Memorandum of

Understanding (MoU) with Arrow Energy

(Australia) in 2009.

2) Vedanta Resources signed an agreement to buy 51 to 60 per cent of Cairn India’s oil and gas assets for US$ 9.6 billion.

1) IOCL has bought a 5 per cent stake

in OIL for US$ 232.9 million in 2009.

2)Reliance Power Ltd acquired

Reliance Natural Resources Ltd for US$

1,529 million in 2010.

Opportunities due to FDI in Oil and Gas sector in India [5] 

Exploration and development of new fields

•India has a huge potential to develop new oil and gas basins as around 78% of sedimentary area is yet to be explored. Recent discoveries in Krishna Godavari are indicative of the same.

•Government of India have provided various fiscal incentives to promote new development as with the introduction of 246 new blocks under the eight bidding rounds.

Development of unconventional resources

• The Government of India has also opened up opportunities development of CBM fields. 31 CBM blocks were introduced in four rounds of CBM bidding.

• With discovery of methane hydrate reserves in the Krishna, Godavari and Andaman basins, it is expected that the major source of energy will be Methane hydrates. India has recently set up the National Gas Hydrate Program (NGHP) to harness the potential of this source.

• With FDI, there is an increase in the technological advancement. For example, India has signed a MoU with the US for shale gas extraction. As a part of this MoU, there will be training and technical studies of Indian personnel in the gas domain.

Mature oil producing basins

Since majority of basins are maturing, there is a huge opportunities for companies who are specialised in extracting secondary and tertiary form of oil recovery technologies.

Increasing demand for skilled labour

With the increase in capacity across value chain, the requirement of skilled labour has also increased.

Opportunities in India

This is an existing space for global petroleum firms to establish their presence in India

Expansion of gas transmission pipelines

India’s gas pipeline coverage has increased and there is a scope of further expansion with gas pipelines network of 9,900 km and capacity of 292 MMSCMD. Domestic gas supplies are increasing their LNG capacity. Government of India is setting up infrastructure all over India to increase participation of players from the private and public sectors. For example, GAIL (India) Ltd is expected to lay 6,663 km of pipelines with cost of US$ 6.3 billion (INR 303 billion).

Augmentation of refining capacity

Domestic Refineries are increasing their refining capacity by building new refineries and capacity is expected to increase. Domestic refiners are aggressively increasing their refining capacity which is expected to increase by 62 MMTPA by 2010–2012.India is ideal for constructions of refineries in India are because of following:

Cost of construction and operation of refineries is very low as compared to other countries in India.

India has location advantages of vast coastline which provides freight advantages.

Developed countries are expected to increasingly the import of petroleum products because of stringent environment norms which gives Indian refineries an opportunity to increase their exports.

Because of relaxed FDI norms and excise duty relaxation, India is ideal in terms of government regulations.

Porter’s five forces of Indian oil and gas sector [6] 

Threat of new entrants (Low): Despite the attractiveness of oil and gas industry in India, the threat of new entrant is very low mainly because of two reasons High capital investment requirement and Economies of scale. Capital investment requirement in oil & gas industry is substantial as the investment requirement for setting up the production facilities, development of oil field requires specific technology and skilled labour. As a result of specific labour and resources requirement the entry barriers are high. Also the cost of drilling, services on the oil field and requirement of scientific research and material is also substantial.

As the unit cost of exploration and production of oil is enormous only big companies like ONGC can take the advantage of economies of scale and survive which makes it difficult for other players to enter. Access of distribution channels is very crucial for the companies in this industry .The network of pipes need to be built over time which makes it difficult for others to enter. Before the FDI allowance to the foreign companies, the resources were restricted only to national players which deterred new players.

Threat of Substitutes (Low): Oil and gas is the dominan source of enrgy and in some sectors like transportation even irreplacable. This is because among all the other sources like nuclear, wind, thermal etc., it is the cheapest and safest and with the increase in the sophistication of extraction technology, it is going to remain cheaper. Coal is already well established in the Indian market place but other alternative technologies are still far too inefficient to compete over the next decade and without significant steps in terms of policies for renewable sources usage enhancement, the threat of other source of energy will remain low.

Industry Rivalry (Low): In oil and gas sector since the entry barrier are very high, as a result of which only few players are present in the market. Most of the exploration and production activity is controlled by govrnment-owned National Oil companies (NOCs) including Oil & Natural Gas Corporation(ONGC) and Oil India Private Ltd (OIL). As a result of which, they form huge cartels which results in low Industry rivalry. India‘s Oil and Gas Sector face the dominance of PSUs in the petroleum sector. This has created monopoly in gas transmission and marketing for GAIL. Apart from this, absence of independent regulator in the upstream segment and inadequacy of PNGRB Act, 2006 in promoting competition has also facilitaed the monopoly in the industry. Entry of international companies like Hardy Oil & Gas, Santo, and players like Newbury, Cairn Energy, Petronas & Niko Resources into India is a welcome change to break this monopoly.

Power of Buyers (High): Buying process in Oil & Gas sector in India is through bidding process in which the the lowest bidder wins the bid. Initially the bidding rules were very strict and only experienced Indian companies could participate in the bidding process but later as a part of Petroleum Sector Reforms(PSR) in 1990, for the first time Indian companies with or without prior experince in exploration & production activities were allowed to participate in the bidding process. As a result of which, existing players specially PSUs are very strong in comparison to other players. Though oil industry is expected to grow in the future, however, there is going to be an oversupply of rigs as the number of rigs is likely to increase to 811. There are 45% of them which are still without contacts. This gives the buyers high bargaining power.

Power of Suppliers (Medium): Oil & Gas sector have small suppliers from various industries as a result of which the power in hands of supplier is medium. The rig builders have more bargaining power as it is directly dependant on the oil’s demand. If the demand for oil is strong then so is the demand for rigs which leads to increased power of suppliers. If the demand is low then it gives the drillers a better bargaining power.

Figure : Porter's Five forces diagram

Resource Based Analysis of O&G sector

According to the Resource Based View (RBV), by J.B Barney (1991), a firm’s competitive advantage is based on its tangible and intangible assets. A brief definition on the traditional RBV is "Firms can earn supra-normal returns if and only if they have superior resources and those resources are protected by some form of isolating mechanism preventing their diffusion throughout industry". J.B. Barney’s segmentation of resources (Valuable, Rare, Non-imitable and Non-Substitutable) is a useful tool in the identification of a company’s resources.

With respect to the above analysis in oil and gas sector, it can be derived that this framework can be applied to both the tangible and intangible resources of this sector. Tangible resources include availability of raw material, technology, scale of production and presence in the value chain or segments of the industry. Intangible resources include expertise acquired through experience, skills of the workforce and non-tacit knowledge.

Raw materials: Since the raw material is unique in this sector and also is acquired after a huge effort in terms of money and time, this resource is highly valuable as it can only be acquired in a competitive bidding process. Also since India does not have abundant gas reserves, the value increases further more along with the rarity aspect. Also there is no substitute for this raw material and hence the imitability and substitutability decreases even more. Hence, raw material can be a decisive parameter for the success of a firm in this industry.

Technology: Since technology in this sector is mature, they are imitable and available easily. However, with the exploration going out in new and unexplored areas, the technology evolution will also occur simultaneously. As a result, while acquiring old technology may be easy but to maintain market dominance, technology evolution will be a key parameter. Hence, old technology can be considered to be low on VRIN analysis but the developing technology will be highly valuable, rare, non-imitable and non-substitutable

Scale of production: Production scale will be valuable as the huge investment needed will be a challenge and further highlighted by the fact that the return will be obtained over a large period of time. Also this fact makes this resource a rare one. However, this resource can be easily imitated. But, there is no substitute for this resource.

Value Chain: Presence across the entire value chain in terms of exploration, extraction and distribution can be a highly valuable, rare, non-imitable and non-substitutable resource and this can provide a significant advantage to the firm.

Expertise: This resources can be only acquired only be acquired through experience gathered over a period of time. This makes the resource valuable, imitable to an extent, non-substitutable and rare in nature.

Major Players in Oil & Gas sector [7] , [8] 

Gas Authority of India Limited (GAIL)

It is the premier most natural gas company in India involved in engaged in the exploration, production, processing, transmission, distribution, and marketing of natural gas. GAIL operates through the following business segments: natural gas; transmission services; petrochemicals; and LPG and liquid hydrocarbons. GAIL accounts for 75% of natural gas transmitted by pipeline in India and for more than half all natural gas sold in the country.

SWOT Analysis

Strategy

GAIL’s long term strategy is to become an indomitable player in the field of natural gas production and distribution network throughout the country. This can be substantiated by their significant investments being made for past three financial years. Close to $5bn investment has been prepared for various projects. This money would be raised through bond issue, Oil Development board and EXIM bank.

Oil and Natural Gas Corporation (ONGC)

ONGC is an India-based oil and gas company, contributing 72% of India's oil and 48% of India's natural gas production. ONGC is engaged in exploration and production activities both onshore and offshore; and refining, transportation, and marketing of crude oil, natural gas, liquefied petroleum gas, natural gas liquid, ethane, propane, and other petroleum products. The company has also ventured into other areas, such as deep water exploration and drilling, exploration in frontier basins, marginal field development, optimization of field development plan field recovery, liquid natural gas (LNG) regasification, petrochemicals, power generation, as well as crude oil and gas shipping and other allied areas of service sector.

ONGC's overseas arm ONGC Videsh (OVL) is engaged in overseas exploration and production activities. It operates exploration and production business in various countries across the globe. OVL is one of the biggest Indian multinationals with 33 oil and gas projects in 14 countries including Vietnam, Sudan, Russia, Iraq, Iran, Myanmar, Libya, Cuba, Colombia, Nigeria, Brazil, Syria, and Venezuela

SWOT Analysis

Strategy

ONGC has three major strategic aims: improving its recovery factor; intensifying its exploration activities; and increasing involvement in foreign projects via OVL. The group’s long-term goals include doubling its oil and gas reserves by 2020 and increasing its overseas production to 1.2mn barrels by 2025, as well as strengthening its global recovery factor from 28% to the global norm of 40% over the next 20 years. ONGC has reportedly signed an agreement with oil major ConocoPhillips that will see the duo test India's shale and deep water potential.

Reliance Industries Limited (RIL)

Reliance Industries (RIL) is India's largest private sector enterprise. The company operates in more than 100 countries around the world. RIL operates through four business segments: refining, petrochemicals, oil and gas, and other businesses. In oil and gas exploration and production, RIL is the largest exploration acreage holder in the private sector in India. The company's domestic exploration and production (E&P) portfolio comprises 28 exploration blocks awarded under the government of India's New Exploration Licensing Policy (NELP) and pre-NELP licensing rounds and three coal bed methane (CBM) blocks.

RIL's international E&P portfolio has 13 blocks, including two in Peru; three in Yemen (one producing and two exploratory); two each in Oman, Kurdistan, and Colombia; and one each in East Timor and Australia. The total acreage for all these blocks is 99,145 square kilometre. RIL also has interests in three upstream joint ventures with Chevron, Pioneer Natural Resources, and Carrizo Oil and Gas.

SWOT Analysis

Strategy

Reliance Industries is to make a US$12bn investment to expand its petrochemicals businesses, reports Bloomberg, citing a company presentation that was made on April 20 2012. Reliance will invest US$8bn in increasing capacity, while US$4bn will be directed towards a combustible gas facility to power its refineries and petrochemicals factories in Western India. The company will not rely solely on its Indian asset base for reserves growth, but hopes to develop substantial proven resources in Colombia, Yemen, Egypt, East Timor and Russia. It also entered into two PSCs with the Kurdistan Regional Government in Iraq in 2007 and gained exposure to US shale gas in early 2010. In November 2009, Reliance said it was looking at farming-out interests in its overseas assets to reduce its participating interests from an average of 80-90% to around 40-50%. In the downstream segment, Reliance is expected to capitalise on the complexity of its integrated Jamnagar complex by diversifying its crude slate, improving margins by running heavy grades such as Russia’s Urals blend and Australia’s new Pyrenees blend. The partnership with BP across the full value chain could prove critical in taking RIL’s oil and gas arm to the next level, as it bolsters technical expertise and enhances financial strength.

Mergers & Acquisitions deals in Oil and Gas industry

Recently, the M&A environment along with joint venture activities has reached a maddening fervour in India. There were more than 10 such deals in 2011 itself which allowed the various players in this industry to consolidate as well as prepare itself for future scenarios [9] . Prominent transactions included BP's US$7.2bn acquisition of 30% stake in Reliance Industries’ exploratory and extraction activities and completion of the US$8.67bn Cairn- Vedanta transaction. The inbound deals for Indian firms were in relation to acquire technical expertise and monetization of huge capital investments while for the foreign company, the theme revolved around getting access to high–growth energy markets like India.

Access to technology was the key driver in the small to mid–size transaction space, where Heramec sold a 15% stake in its six onshore hydrocarbon producing blocks located in Cambay Basin to Stealth Ventures, a Canadian oil and gas production company. GAIL (India) acquired a 20% stake in US–based Carrizo’s Eagle Ford shale assets. Indian state owned companies struck cross–border deals ranging from Kazakhstan and Vietnam to the US. It also signed an agreement with Cheniere Energy in the US for securing long–term LNG supplies and is also a prospective buyer for other LNG sellers around the world. In addition, GAIL plans to establish its presence in the international gas trading and marketing sphere.

There were other significant developments in the gas midstream and downstream segment, owing to the increasing attractiveness of India as a gas market. During the year, Indian players unveiled significant gas infrastructure plans to monetize gas and formed partnerships in the gas trading and marketing segment and on the LNG sourcing front. RIL and BP formed a 50:50 joint venture for sourcing, marketing and transporting gas in India as part of their wider upstream transaction. The JV is related to evaluate construction of Reliance’s liquefied natural gas terminals in India.

Significant developments in the LNG space include Gujarat State Petroleum Corporation’s long–term LNG supply deal with Bharat Gas (BG) India and commencement of work on Indian Oil Corporation's LNG terminal on India’s east coast. The city gas distribution space in India also witnessed M&A activity — BG Group announced its plans to divest its stake in Gujarat Gas Company.

In the refining segment, India’s private refiner, Essar Oil acquired Stanlow oil refinery and other associated assets from Shell UK, the second–largest refinery in the UK. Through the US$350m purchase, Essar will gain direct access to the UK market and open opportunities to export its products from its refinery in India.

The oilfield services segment also saw a couple of deals in 2011. The Australian arm of US–based Newpark Resources acquired a 70% stake in Rheochem India, which is a drilling fluids and services company. In addition, Sara Sae, an India–based manufacturer of oilfield equipment, raised funds to venture into oilfield services by selling its undisclosed minority stake to an Indian private equity firm.

FDI in Oil and Gas industry in emerging countries: Case study of Kazakhstan and Uzbekistan [10] 

In this paper, the author has attempted to compare the FDI flow in the given sector subjected to different regulation and legal framework. To give a historical context, both Kazakhstan and Uzbekistan were former members of Soviet Union. Both these countries are oil & natural gas rich and have shown phenomenal growth potential once they have come out of the shackles of the communist system and let market forces decide the course of the industry. Hence, both these countries have seen continuous investment in this sector. However, the growth of both the countries is not similar and has been primarily attributed to the different approach towards legislative framework.

Figure : Growth rate of Uzbekistan and Kazakhstan

Figure : share of FDI to oil and gas industry as share of total FDI (%)

While Kazakhstan implemented its market liberalization earlier and in true spirit in all related areas of oil and gas industry, Uzbekistan first created legal environment regarding to the enhancing investment attractiveness and improvement of investment climate through adopting series of act and laws mainly starting from 1996-1997. Hence, Uzbekistan took step by step approach to liberalise its market. Consequently, the government of Kazakhstan had adopted series of legislative acts and law which has shaped its legislative framework, and improved its investment attractiveness.

Legal framework of Kazakhstan and Uzbekistan

A closer analysis of the legal acts that shaped the legal framework can point out the differences between the two countries. There are two important legal frameworks regulating the foreign investment in energy sector in Kazakhstan first being "Republic of Kazakhstan Law on Petroleum" and second being "Law on surface and use of subsurface". Both these laws have been changed since implementation as and when the economic conditions demanded.

The sub surface law outlines the rules and regulations for an investor to acquire a subsurface use right. In Kazakhstan’s legal framework, the subsurface use right is the equivalent to a license or concession in other jurisdictions. In oil and gas projects, it is grounded upon execution of a "Hydrocarbon contract" between the "Complementary body", i.e. the Kazakhstan Ministry of Energy and Mineral resources and the producer known typically as a "Contractor". Existing petroleum law is some ways an addendum to the subsurface law in that it regulates oil and gas projects only. Moreover, oil and gas companies in Kazakhstan are privatized and act independently from each other. They are characterized as horizontally integrated companies, some of which are even owned by foreign investors.

In a contrast with Kazakhstan oil and gas companies, Uzbekistan’s oil and gas producing companies are state owned and gathered in the vertically integrated "Uzbekneftegas" national holding company. It is the only actor in Uzbek legislation, which is authorized to sign oil and gas exploration contracts with foreign companies. It acts as a participant in joint ventures and supervises all petroleum operation within country. Moreover, this company is state nominated as state co-venture in exploration and production ventures with foreign investors; also it is a ‘Complementary body’, which regulates oil and gas operations. Foreign investors however, might consider this type of dual role as both producer and regulator as a conflict of interest.

Key Lessons from the case of Kazakhstan and Uzbekistan

As inferred from the above cases, both these countries earlier had a socialist model and later converted themselves into a market governed economy. Both these economies had an end goal to maximize the returns on their natural resources. However, the path taken were diametrically opposite in practice. These steps taken were in accordance with the existing regulations so that a smooth transition can take place from being a closed economy to an open one. This also implies for the paternalistic regulation of Uzbekistan and a more liberal approach of Kazakhstan. On comparing the given scenario of these countries with India, it can be inferred that India took a middle approach in which they gradually opened the entire industry for domestic private players first and then allowed foreign players to enter into this segment. As of now, Indian oil & gas industry suffers from excessive government control and the regulatory bindings along with the bureaucracy involved. In comparison, Kazakhstan brought a sweeping change by reducing the regulation overload and this led to the rapid contribution of oil and gas industry in their GDP.

Recommendations

The primary focus in order to develop this industry into a potential revenue generator and sunrise sector should be towards reducing the regulatory over-bearing. Currently, this sector is being bogged down by numerous government and regulatory department in the entire value chain of upstream, midstream and downstream segment. Some of the prominent stakeholders are Directorate General of Hydrocarbons, Oil Industry Development Board, Oil Industry Safety Directorate, Petroleum Planning and Analysis Cell and Petroleum Federation of India. The plethora of regulatory bodies results into bureaucracy and red-tapism leading into stagnation of growth and deters new proposals from becoming effective.

Pricing of petroleum products had been controlled by Government but recently the pricing structure was freed from any control and was indexed to market prices. However, the certainty of this action cannot be guaranteed as being a sensitive political issue and potential game changer, a populist action to control price can be taken to appease public. This can lead to huge losses for the entire industry.

Currently, the imports of this industry far exceed the domestic production. In order to bridge the gap, the production has to ramp up now from innovative methods such as deep sea exploration, shale gas extraction and CBM extraction. However, all these process need significant technology upgrade compared to the existing domestic ones. This leads to the rationale of going in for collaboration of foreign players who have both the technical skills as well as financial strength to support this next level of growth. However, the biggest challenge would be to prove the competency of these methods in Indian scenario. Also, with recent disaster of deep sea extraction by BP in Gulf of Mexico, the environmental issues will lead to greater resistance towards adoption in India.

The taxation applicable to this industry is also a major deterrent for evolving it to the expected potential. In India, the taxation varies state wise and this leads to an inefficient system which leads to significant price difference. Also, the level of taxation is multi-fold resulting into severe increase in the final price making this industry unattractive and products uncompetitive. A potential game changer could be implementation of Goods and Service Tax (GST) in near future which can increase the transparency of this industry.

Conclusion

In this report, Oil and Gas industry has been analysed and how it has transformed itself from the time when market was deregulated. The current situation has been looked into using tools like Porter five forces analysis and Resource based view analysis. These analyses have shown that this industry has been very attractive for investment in spite of the fact that the regulatory regime has not been conducive for them.

The report also highlights the advantage FDI and joint ventures gives to this industry. This industry is typically a high investment and high technical skill oriented and because of a marginalized sector till 1991, Indian players have not been exposed to the developments in advanced and developed parts of world. Hence, both these investment methods help in providing the necessary factors for developing this industry in India. Added to this fact, India has been suffering issues related to energy security because of galloping demand and stagnant supply, these investment methods provides a safety neck to enhance the India’s energy scenario.

The report also highlights lesson learnt from other developing economies to build upon the case of FDI in this industry in India. The countries chosen were Kazakhstan and Uzbekistan as these countries also had roots of socialism and state-control of natural resources from Soviet Union era quite similar to that of India prior to deregulation. Both these countries highlight the two radically different approaches towards determining the optimum method of evolving this sector and hence provide key lessons for India.

Finally, based on the findings and analyses, a set of recommendations have been covering areas related to regulation, effective pricing mechanism, policy stability, tax regime and advancements in extraction process and its implication on other factors such as environment, skill, technology etc.