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India's Petrochemical Industry

The Upstream-Downstream Imbalance: Insights in India's Hydrocarbon Economy

| Author / Editor: Satyendra Kumar Singh / Dominik Stephan

As per the Indian Petroleum and Natural Gas Statistics 2013–14, the total refining capacity of India is estimated to increase to 307.4 MMT in 2016–17.
As per the Indian Petroleum and Natural Gas Statistics 2013–14, the total refining capacity of India is estimated to increase to 307.4 MMT in 2016–17. (Source: depositphotos.com)

An insight into the demand-supply gap within India’s petroleum industry – The Indian petroleum industry comprises of both the upstream sector, which involves oil exploration and production, and the downstream sector, which includes oil refining. However, the industry is marked by an imbalance between the two sectors in respect of the crude oil required by the downstream and that supplied by the upstream.

2013–14, the upstream sector produced just 37.8 million metric ton (MMT) of crude as against the downstream requirement of 222.4 MMT of crude, thus indicating a gap of 83 per cent.

This gap between the downstream requirement and the upstream supply has been increasing over the years in absolute as well as relative terms (figure 1, figure 2). The gap is bridged by the import of crude, which has ramifications not only on the petroleum industry but also on the Indian economy as a whole. The refining industry is affected in terms of its susceptibility to international crude prices, exchange rate fluctuation and geo-political situation in the supplier countries. Whereas, the economy as a whole is affected in terms of foreign exchange loss and consequential impact on the balance of payment.

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With the gap between upstream supply and downstream requirement increasing, the import of crude has also been increasing over the years, and today almost 85 per cent of the crude processed by Indian refineries is imported crude.

Reasons Behind the Imbalance

The main reason for the upstream-downstream imbalance in India’s petroleum industry is the country’s low investment in oil exploration and production. The New Exploration Licensing Policy (NELP) was introduced by the Government in 1997 and came into effect in 1999 with an objective to attract more investments in oil exploration and production by providing a level playing field to national oil companies such as Oil and Natural Gas Corporation Ltd (ONGC), Oil India Ltd (OIL) as well as private companies.

Figure 1: Trend of demandsupply gap in the Indian petroleum industry. Source: IndianPetroleum and Natural Gas Statistics 2013–14, Ministry of Petroleum & Natural Gas, Governmentof India.
Figure 1: Trend of demandsupply gap in the Indian petroleum industry. Source: IndianPetroleum and Natural Gas Statistics 2013–14, Ministry of Petroleum & Natural Gas, Governmentof India. (Source: Ministry of Petroleum & Natural Gas, GoI)

So far, nine rounds of bidding have been completed under NELP, but they have only been met with moderate success. According to Directorate General of Hydrocarbons, about 254 exploratory hydrocarbon blocks were awarded under all the nine rounds of bidding till March 31, 2014, out of which 114 were relinquished and only 139 are in operation. Under the NELP, an investment of $14.2 billion has been made by the contractors on exploration activities. In addition, an investment to the tune of $9.0 billion has been incurred on development activities by the contractors.

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Thus, investment in the exploration and production of oil is still quite low despite the introduction of open global competitive bidding processes with attractive terms and conditions under NELP.

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