Crude Oil & Gas: Oil Is Well!

Despite several challenges, the crude oil and gas industry has recorded a swift turnaround in the wake of the waning of the pandemic. Mandar Wagh explains how, being one of the country's eight core sectors, the government's focus and initiatives, as well as developments such as ethanol blend and use of alternative fuels, will determine the direction of the industry. 

The global economy depends heavily on oil, which affects everything from transportation to electricity as well as industrial production and manufacturing, making it one of the major economic sectors in the world in terms of dollar worth. The Indian crude oil and gas industry is a key contributor to the economy, and being one of the country’s eight core industries, it has a significant influence on decision-making for all other critical sections of the economy. The industry is responsible for a significant portion of India’s GDP and provides employment to millions of people. India is a net importer of oil and gas, but it has significant domestic reserves of both commodities. [EasyDNNnews:PaidContentStart]

As India’s economic growth is strongly tied to its energy demand, there will likely be a rise in the country’s requirement for oil and gas. Since the year 2000, energy consumption has more than doubled, with coal, oil and solid biomass still meeting 80 per cent of the demand. While India is the world’s fourth-largest refiner, it is also the world’s third-largest energy and oil consumer, as well as the fourth-largest importer of liquefied natural gas (LNG). The oil and gas sector is divided into three segments based on their stage of operation in the supply chain including upstream, midstream and downstream. 

The upstream segment is concerned with extracting oil and natural gas from the ground, whereas midstream is concerned with processing, transporting and storing. Conversion into fuels and sale of finished products occurs downstream. Each of these operations is very complicated, capital-intensive, and reliant on cutting-edge technology. Reliance Industries, Oil and Natural Gas Corporation, Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation and Oil India are a few of the major players in the industry while Hyderabad, Mangalore, Haldia, Chennai, Jamnagar and the NCR are home to the major oil and gas clusters.

Market Size

According to India Energy Outlook, primary energy demand is expected to nearly double to 1,123 million tonnes of oil equivalent as India’s gross domestic product (GDP) is expected to increase to USD 8.6 trillion by 2040. India has 26 sedimentary basins that together occupy 3.4 million sq. km. The region includes land, shallow water up to a depth of 400 meters and deep sea up to the Exclusive Economic Zone (EEZ). The country’s exploration acreage is expected to grow by 0.5 million sq. km till 2025 and by 1 million sq. km till 2030. 

While Indian domestic refiners are making every effort to boost their refining capacity, the country also plans to raise its refining capacity to 450 MMTPA by 2030. India aims to extend pipeline coverage by 54 per cent to 34,500 km by 2024-25 and connect all the states to the network of natural gas pipelines by 2027. By 2030, India aims to increase the proportion of natural gas in its energy mix to 15 per cent. The authorised CGD companies are required to install 17,700 CNG stations and 123.3 million PNG connections by 2030 in accordance with the Minimum Work Programme (MWP).

Crude Oil and Gas Stocks

Due to the strengthening economic conditions and a substantial FII inflow, Indian benchmark indices reached all-time highs and set new records over the past month. There was optimism on the sectoral front, as evidenced by the significant rallies recorded in all of the key sectoral indices. BSE Energy and BSE Oil and Gas surged more than 7 per cent each during the last month, outpacing the main indices. When the performance of leading crude oil and gas companies by market capitalisation was considered, the shares of Oil India outperformed others, gaining more than 38 per cent in just one year! 

The shares of Indian Oil Corporation and Indraprastha Gas also had significant gains whereas Petronet LNG failed to reward investors with gains over the last year. Oil exploration and drilling stocks appear to have performed significantly better than refinery stocks when top performing crude oil and gas stocks over the last month and year are considered. Refex Industries impressed investors by leading the sector in gains for the month and providing outstanding returns of more than 461 per cent in just one year! The shares of Jindal Drilling and Industries, Selan Exploration Technology and Duke Offshore recorded significant gains. 

Outlook

Benchmark crude oil prices have returned to pre-war levels as a result of increasing supply. As India recovers from a downturn in energy development brought on by the pandemic in 2020, it is re-entering a very dynamic phase. Despite the fact that new and renewable energy sources are gaining recognition, petroleum fuel remains a substantial source of energy globally. By 2035, the country’s share of global primary energy consumption is expected to double. The upsurge in demand will be driven by a spike in the population as well as improved living standards. 

On account of the significance of the industry, the government has placed a lot of emphasis and allocated Rs 35,000 crore for high-priority investments in the areas of energy transition, net zero objectives and energy security. As part of the Sustainable Alternative Towards Affordable Transportation (SATAT) Scheme, Rs 10,000 crore was also allocated for the construction of 500 compressed biogas (CBG) units. Under the Pradhan Mantri Ji-VAN Yojana, the government intends to establish 12 commercial sized 2G bio-ethanol projects with viability gap funding of up to Rs 150 crore for each project.

On account of the significance of the industry, the government has placed a lot of emphasis and allocated Rs 35,000 crore for high-priority investments in the areas of energy transition, net zero objectives and energy security.
 

The government has permitted 100 per cent foreign direct investment (FDI) in various areas of the industry, including refineries, natural gas and petroleum products. It additionally has set up a committee to develop the strategies required to supply natural gas to power plants at reasonably fair costs. Over the past few years, the total number of retail outlets of oil manufacturing companies (OMCs) has grown significantly. Companies also aim to increase their exploration efforts with the help of considerable capital expenditures, if and when required. 

Challenges

Due to strong economic growth in major consumer countries and the containment of the pandemic in key markets, the oil and gas industry witnessed a strong recovery in 2021 and 2022. Although the industry’s recovery is faster than anticipated, there is still a great deal of uncertainty surrounding its future growth. Currently, a significant portion of the fuel used for transportation is petroleum-based, and this fuel emits a lot of greenhouse gases. In order to reduce greenhouse gas emissions, alternative fuels such as biodiesel, ethanol, electricity from renewable sources, propane and hydrogen are being considered. 

India has started to increase the amount of ethanol blended into petrol and has moved closer to its goal of 20 per cent ethanol blend. The oil and gas industry will undoubtedly undergo significant changes in the future due to the rising interest in alternative fuels and the pressing need to switch to sustainable energy sources. Additionally, as vehicles begin to run on alternative fuels, it is predicted that the usage of oil in road transportation will decrease over the next decade. 

The industry has a number of challenges, including substantial fluctuations in prices for oil and gas, increased regulatory requirements, higher compliance costs, natural disasters, operational dangers, domestic and international environmental rules, and fierce industry competition. Keep a close eye on the industry as it may experience a roller-coaster ride of exciting opportunities as well as significant shifts brought on by alternative fuels.

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