Special Feature On Oil & Gas Sector

Even though the oil and gas industry remains volatile due to the impact of geopolitical tension, the refining capacity has increased significantly in recent years as a result of the expansion of several refinery projects. As a result, the downstream sector is expected to grow during the forecast period of 2022-2027. In this article, Shreya Chaware emphasizes the performance of the oil & gas industry and the key trends shaping its future. 

Oil is crucial to the global economic framework, impacting everything from transportation to heating and electricity to industrial production and manufacturing. The oil and gas industry classifies to be one of the largest sectors in the world in terms of dollar value, generating an estimated USD 5 trillion in global revenue as of 2022. As the world’s primary fuel sources, oil and natural gas are major industries in the energy market and have a significant impact on the global economy. Oil and gas production and distribution processes are highly complex, capital-intensive and require cutting-edge technology. 

Natural gas has historically been linked to oil owing to the production process or the upstream side of the business. Natural gas was regarded as a nuisance for much of the industry’s history, and it is still flared in large quantities in some parts of the world, including the United States, today. Because of the above mentioned shale gas development in the United States and natural gas’ lower greenhouse gas emissions when burned compared to oil and coal, natural gas has assumed a more significant part in the world’s energy supply. The sector is frequently broken down into three segments: upstream which deals with oil and gas exploration and production, midstream with storage and transportation, and downstream with refining and marketing. 

Market Overview

During the forecast period, the Indian oil and gas market is expected to grow at a CAGR of more than 3 per cent during 2022-2027. The pandemic had a negative impact on the market. Oil and gas companies’ revenue fell as a result of an unexpected lockdown. The demand for diesel, the most commonly used fuel in the country, has decreased due to a significant reduction in road traffic volumes. During the forecast period, factors such as increased natural gas pipeline capacity and increased demand for petroleum products are expected to drive the Indian oil and gas market. However, the Indian oil and gas market is expected to be hampered by its reliance on crude oil and natural gas imports to meet domestic demand, as well as the high volatility of crude oil prices. 

Refining capacity has increased significantly in recent years as a result of the expansion of several refinery projects. As a result, the downstream sector is expected to grow during the forecast period. The KG Basin has seen significant gas hydrate discoveries. Economically feasible extraction of gas hydrates may open up enormous opportunities for companies, potentially resulting in a surge in natural gas production. As gas imports rise, the Indian government is increasing investments in oil and gas pipelines and LNG terminals across the country. As a result, rising investment in the midstream oil and gas sector is expected to propel the market. 

Financial Performance of Oil and Gas Companies

The prices of crude oil in international markets are highly unpredictable with the inflation trend being affected by significant upside risks. The ‘zero virus’ strategy China employed affected demand and has recently increased volatility in oil prices worldwide. According to Reserve Bank of India (RBI), rising global commodity prices, notably those of oil, are being seen as one of the contributors to India’s food inflation. We extracted the data of 19 listed companies from the oil and gas sector. In FY22, on average, industry net sales improved around 77 per cent whereas operational profit zoomed in at 51 per cent over FY21.

Meanwhile, profit after tax (PAT) for the sector increased by almost 61 per cent. According to market capitalisation, Reliance Industries, Adani Total Gas and ONGC are the top players in the oil and gas sector. If we compare the performance of these companies in FY22 with FY21, Adani Total Gas recorded a stellar improvement of 89.1 per cent in net sales as compared to 74.92 per cent and 54.55 per cent recorded by ONGC and Reliance Industries, respectively. Meanwhile, in terms of growth in operating profit and PAT, ONGC stood at the front, recording an increase of 47.55 per cent and 135.34 per cent, respectively. 

Certain factors such as higher consumer spending along with global economic recovery, the easing of pandemic-related restrictions and a rebound in travel and tourism have all led to increased demand for petroleum products. On the other hand, supply has failed to keep pace due to sanctions on Russia and restricted exports from China. 

Oil and Gas Stocks in Equity Markets

The shares of oil companies are seen rallying recently after the government cut windfall taxes on fuel exports on the back of falling global prices. Petrol and diesel prices are down USD 40-50 per barrel from month-ago levels. A drop in refining margins of diesel, petrol and aviation turbine fuel (ATF) due to a cool-off in crude oil prices from their peaks in June sliced the profits of refiners. The government reduced the windfall tax on diesel and ATF by ₹ 2 per litre and cleared out the ₹ 6 per litre levy on petrol exports. The tax on domestically produced crude was also hacked off by nearly 27 per cent to ₹ 17,000 per tonne. 

If we compare the performance of the BSE Oil and Gas index and BSE Sensex, BSE Oil and Gas index has outperformed the BSE Sensex surging around 4.79 per cent in 2022 so far as compared to around 5 per cent decline in the benchmark index. Even in the past one month, when the oil prices exhibited volatility, the oil and gas index was able to marginally outperform the benchmark index by gaining 5.74 per cent in comparison with a 4.9 per cent rise in the Sensex. The oil and gas stocks that have shined through 2022 include Chennai Petroleum Corporation, Deep Energy Resources, Mangalore Refinery and Petrochemicals, Selan Exploration Technology, Jindal Drilling and Industries and Vikas Lifecare.

Reliance Industries – Oil & Gas Segment Performance for the Q1FY23

• Segment Revenues for Q1FY23 increased by 183 per cent on a Y-o-Y basis to ₹ 3,625 crore. Segment EBITDA sharply increased to ₹ 2,737 crore. This was primarily due to improved gas price realization in KG D6 and CBM, and higher production in KG D6.
• KGD6 Gas production during Q1FY23 was at 40.6 BCF (RIL’s share) vis-à-vis 33.1 BCF (RIL’s Share) in Q1FY22. Average gas price realized for KGD6 was at $ 9.72/MMBTU in 1Q FY23 vs $ 3.62/MMBTU in 1Q FY22.
• CBM gas production was at 2.4 BCF in Q1FY23 vis-à-vis 2.7 BCF in Q1FY22. Gas price realized for CBM was higher at $22.48/MMBTU(GCV), almost 3.75x of realized prices in 1QFY22.
• As part of the MA decommissioning, plug and abandonment of all MA wells was completed during the quarter. 

The shares of Chennai Petroleum Corporation and Deep Energy Resources have doubled the investors’ wealth in 2022, so far. Chennai Petrochem Corporation has posted solid numbers in the fourth quarter of 2020-21. Its operating profit and net profit zoomed 191 per cent and 331 per cent on a YoY basis. The performance was supported by supply disruptions, higher oil prices, and higher crude throughput (refining capacity). The company plans to expand its refining capacity, which will boost its earnings in the long term. On the other hand, the top oil and gas stocks eroding investors’ wealth more than 30 per cent in 2022 included SVC Industries, Hindustan Fluorocarbons, Duke Offshore, Asian Energy Services, Rain Industries and Oricon Enterprises.

Trends in the Oil and Gas Industry

Many oil and gas companies are keen to reinvent themselves by practicing capital discipline, focusing on financial health, committing to climate change and transforming business models. The trends that are likely to shape the oil and gas industry in the coming future are: 

1. A surge in energy transition plans due to high oil prices. Oil and gas companies these days are more disciplined with production and capital guidance despite high oil prices. High oil prices are making it possible for companies to fund their net-zero commitments. They also enable investment in riskier and more expensive green energy solutions, such as carbon capture, utilisation and storage (CCUS). However, each company will achieve and monetise this balance differently. 

2. A new energy era to be formed through transformation of business models. The costs in the oilfield service (OFS) sector are lowered and operations are optimised to stay in the competition. The sector is now likely to see a structural shift as rapid energy transition moves up the scales of oil and gas revenues and spending. Many OFS companies are crafting a new strategy for the future of energy as the margins depend on price cycle and reduced spending. 

3. A broader role played by ESG in merger and acquisition transactions. In order to achieve their net-zero goals, companies are either planning to acquire low carbon intensity barrels or divest the high intensity ones. Only a large resource size and an attractive offering price would not suffice for a response from a buyer aiming to meet its net-zero targets. Hence, merger and acquisition activities require companies not only to be financially sound but also to follow and support the ESG goals. 

4. The downstream sector is expected to witness decent growth. Owing to the growing world population and an improvement in living standards in developing countries, the Indian energy demand is expected to grow by 50 per cent in the next two decades. Even though new and renewable energy sources are gaining popularity around the world, petroleum fuel still holds the position of being a major energy source globally. This trend is expected to continue for the next few decades and favours the growth of the oil and gas downstream market. 

"World oil supply jumped by 690 kb/d to 99.5 mb/d in June as resilient Russian production and higher output from the US and Canada more than offset steep maintenance-related losses from Kazakhstan. Production is expected to rise by 1.8 mb/d by the end-year to reach 101.3 mb/d. Global oil supply is set to average 100.1 mb/d in 2022 before hitting an annual record of 101.1 mb/d in 2023."

-Oil market report -July 2022, IEA 

Sector Outlook

The world’s most essential commodities have shown little sign of easing until June 2022 on account of strong recovery in oil consumption. Numerous countries have begun to offer some buffers as more and more nations attempt to reduce their reliance on Russian energy on a global scale. Crude oil prices have fallen from their recent highs as the US anticipates releasing 1 million barrels per day of supplies from strategic storage over the following six months. A cautious macroeconomic outlook and fears of recession are weighing on market sentiment while there are ongoing risks on the supply side. As of now, a weaker-than-expected oil demand growth in advanced economies and resilient Russian supply has shaken the headline balances. 

India is planning to double its refining capacity to 450-500 million tonnes by 2030. The energy demand of India is anticipated to grow faster than the energy demand of all major economies due to continued robust economic growth. India’s energy demand is expected to double to 1,516 Mtoe by 2035 from 753.7 Mtoe in 2017. Moreover, the country’s share in global primary energy consumption is projected to ease two-fold by 2035. Crude oil consumption is expected to grow at a CAGR of 4.66 per cent to 500 MMTPA by 2040 from 201.26 million tonnes in 2021. India’s oil demand is projected to rise at the fastest pace in the world, reaching 10 million barrels per day by 2030 from 4.9 million barrels per day in 2021. 

Interview

Dr. Alka Mittal CMD Oil and Natural Gas Corporation Ltd 

"ONGC will remain the flag bearer of the country on energy front"

What is your outlook on the Indian energy sector? Can you highlight the emerging trends you are witnessing in the post-pandemic world?

India is the world’s third-largest energy consumer, behind China and the US. In the coming decades, while China’s economic model of expansion is expected to move away from manufacturing to services, India is expected to see more buoyant demand growth.

Energy consumption in India has doubled since 2000, due to the growing population, rapid industrialization and large-scale urbanization. In the preceding two decades, the country’s primary energy consumption growth has been quite impressive – energy consumption grew by 5.05 CAGR during 2000-2019, more than double the global energy demand growth of 2.08 CAGR. 

While the pandemic seriously hampered capacity growth in 2020 and 2021, the pace is likely to further pick up in 2022. Energy use on a per capita basis is well under half the global average, and there are widespread differences in energy use and the quality of service across states and between rural and urban areas. Over 80 per cent of India’s energy needs are majorly met by three fuels: coal, oil and solid biomass. Coal remains the largest single fuel in the energy mix. Oil consumption and imports have grown rapidly on account of rising vehicle ownership and road transport use. Domestic fuel sales have been rising since the government has been lifting COVID-19–induced curbs. 

BP Energy Outlook has envisaged that there will be a strong growth in primary energy led by renewables and, to a lesser extent, natural gas. Average growth per year would be around 2.5 per cent - 2.7 per cent. As a result of this strong growth, India would account for around 13 per cent - 14 per cent of the global primary energy consumption in 2050, up from around 7 per cent in 2019. 

The country is already the world’s fifth largest renewable energy market with an installed capacity of close to 109 GW. India has increased its COP 21 Nationally Determined Contributions (NDCs) commitment and has set an ambitious target of 500GW by 2030. 

However, the fact remains that despite the ongoing transition, oil and gas will remain central to the Indian economy over the next three decades because the newer forms of energy are not likely to meet the demands of energy that this developing country requires. 

Could you elucidate on the company’s strong pipeline of projects both greenfield as well as brownfield redevelopment schemes?

The company, being a premier National Oil Company (NOC), has a responsibility to work towards energy security of the nation. Today, we consume about 5 MMb/d of total liquids, this is expected to increase further in the coming years. 

In this scenario, ONGC has an added responsibility to not only maintain production but also bring new areas into production. We could put Bengal Basin on the production map of India. We are quite hopeful that we may be able to put Vindhyan Basin into production in near future after getting stuck in 2020. 

Currently, 20 major projects of over ₹ 100 crore are under implementation with a combined investment of over ₹ 59,000 crore. These projects are likely to have an oil and gas gain of 85.5 MMTOE. Our major development project in KG-98/2 is progressing and we have already monetized one gas field. We expect a substantial step up in production particularly of natural gas once this project is completed. 

ONGC is also actively implementing intensive exploration programs to maximize its reserve base as well as to augment the country’s prospective hydrocarbon-bearing acreage. We are planning to spend ₹ 31,000 crore during the next three years to further intensify our Exploration Campaign. It is envisaged to add around 1,00,000 Sq. Km of new exploration area annually up to 2024-25 

Given the resource base of trained manpower and the vast exploration acreage ONGC possesses, it is likely to remain the flag bearer of the country on the energy front. Considering the importance of gas in our energy needs, we are in the process of creating a new wholly-owned entity for Gas and LNG Business value chain subject to necessary approvals. 

Can you shed some light on how ONGC is increasing portfolio exposure to non-fossil fuel related growth opportunities? Which niche renewable energy segments are you targeting?

While aspiring to be a global Exploration and production (E and P) major, ONGC has embedded sustainable growth as a core value in its vision and mission and initiated many programs/ projects to build up the climate resilience of the organization. 

Considering the growing role of renewables in the energy mix of the country, ONGC is also looking beyond hydrocarbons. We are increasing our footprint in renewables; the total installed capacity of renewable energy is more than 184 MW. Another 20 MW solar projects are underway for commissioning in work centres. The company has much higher aspirations in the field of clean energies and has set up a target of 10 GW of renewable energy by 2040 in its strategic blueprint 'Energy Strategy-2040'. 

We have signed MoUs with Solar Energy Corporation of India (SECI) and Equinor recently for the growth of our renewable portfolio. ONGC and NTPC have jointly carried out a feasibility study for the development of a suitably sized offshore wind project in hybrid with onshore wind and solar as Round The Clock (RTC) Power. The collaboration with SECI will also provide support to ONGC’s JVs/subsidiaries for renewable initiatives. Our subsidiary MRPL is considering setting up of Green Hydrogen production facility at its refinery. 

ONGC Energy Centre, promoted by ONGC, has done some pioneering work in the field of Hydrogen and is now working on developing some of its technologies at a commercial scale. It has also taken up India’s maiden Geothermal Field Development Project at Ladakh. 

Presently what are your top 3 strategic objectives?

ONGC, being the country’s premier National Oil Company (NOC) has a mandate to provide energy to the country. Therefore, our top strategic objective will always remain to produce abundant and affordable energy for the developing economy. 

As part of that overarching objective, the strategic choices may differ. We may focus on domestic growth or overseas development or concentrate on our existing Basins or look for development in unchartered territories. 

Our immediate strategy is to intensify and accelerate exploration in Category- II & III Basins. We have recently found oil in areas which had no hydrocarbon presence. We would like to continue working on this strategy and bring another 2-3 Basins to the Hydrocarbon map of India. 

Another strategy that we are working on is expanding our Enhanced Oil Recovery (EOR) portfolio. Under the Enhanced Recovery (ER) policy, 211 fields of ONGC located in onshore and offshore areas were considered for screening, 33 ER proposals were submitted and approvals for 17 have already been received. 

Another strategy that we have promoted is collaborations and partnerships. In a far more connected world, we cannot remain insulated. We have reached out to global majors in this direction for joint efforts in exploration and production activities in India. We have received positive responses from some and we believe that we shall be seeing more of such collaborations in future. 

We are also seeking partnerships with domestic players for developing small and marginal fields and I think the emphasis is on building a whole new eco-system with ONGC facilitating the new players in the Indian Exploration & Production (E&P) system. 

What initiatives are being undertaken to mitigate the company’s overall carbon footprint?

ONGC is fully aware of the need to reduce its overall carbon footprints. It aims to reduce GHG emissions by focusing on improved energy efficiency. It has already reduced its scope-1 and scope-2 emissions during FY’22 to 9.136 MMTCO2e, a reduction of about 3% from the previous year. 

Some of the measures ONGC has already undertaken to reduce carbon footprints are:

• Global Methane Initiative (GMI): an action-oriented initiative that we are working with the United States Environment Protection Agency (USEPA) to reduce our fugitive methane emissions.

• Solar and Wind energy initiatives: The total installed capacity of renewable energy as on 31.03.2022 was about 184.3 MW (Solar: 31.3 MW and Wind: 153 MW).

• Replacement of conventional lights with LED lighting: During FY 22, ONGC installed 41,000 nos of LED lights making a total of around 351,000 LED lights installed so far by ONGC. This has enabled us to save around 75.9 million electricity units annually, which realizes into a monetary annual savings of ₹ 531 million.

• Micro Turbines and Dynamic Gas Blending system: As a part of the sustainability initiative, 5 Micro Turbines with an aggregate capacity of 460 KW and 2 Dynamic Gas Blending systems (in diesel engines of drilling rig) were taken up in different locations of ONGC taking the total to 7 Micro Turbines and 6 Dynamic Gas Blending Systems. 

ONGC is also evaluating options like Carbon Capture, Storage and Utilisation (CCSU) as CO2 emission abatement technology that can prevent large quantities of CO2 from being released into the atmosphere. Considering its benefits, ONGC entered into an MoU with Indian Oil Corporation Limited (IOCL) for CO2-based Enhanced Oil Recovery (EOR). 

What is your earnings outlook for H2FY23?

Our gross revenue and PAT were the highest ever in the last fiscal. With the current oil prices and upside in gas prices, we expect strong earnings in H2 FY23. Considering the extraordinary circumstances prevailing in global energy markets, the Government had imposed Special Additional Excise Duty (SAED) on Crude Oil at the rate of ₹ 23,250 per tonne (approx. USD40/bbl) wef 01.07.2022 which has been subsequently revised to ₹ 17,000/MT (approx. $28.50/bbl) wef 20.07.2022. We believe that this is a temporary measure and the government will further review the same as the crude prices stabilize, to protect the interest of domestic upstream producers.