ENERGY SECTOR IN INDIA

SUBMITTED TO: DR. GARGI BANDYOPADHYA (H.O.D) MA ECONOMICS AMITY UNIVERSITY, UTTAR PRADESH
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SUBMITTED BY: DEEPIKA VERMA A6030110002

SESSION: 2010-2012

ACKNOWLEDGEMENT
Success is not a destination, but a journey it is often said. I realized it better during my preparation for this project when I started this journey, I may not have come this far without help, guidance and support of certain people who acted as guides, friends, and torch bearers along the way. I would like to express my sincere gratitude to DR. GARGI BANDYOPADHYA (HOD) for giving me the opportunity to work on this project. I would like to thank for her valuable support throughout the project. It was very enriching and enlightening experience to work under her valuable guidance. Without her support this project would not have been possible. I am also thankful to those who helped intellectually in preparation of this project directly or indirectly.

DEEPIKA VERMA

CONTENTS
Title Page No

Introduction Objectives Literature Review Data and Analysis Energy Sector in India Petroleum Industry Petroleum Industry In India Linear Regression Analysis of Consumption Of Crude Oil in India Linear Regression Analysis of Crude Prices In India Conclusion and Key Findings List of Tables References

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INTRODUCTION
Indian energy sector: an overview
Energy has been universally recognized as one of the most important inputs for economic growth and human development. There is a strong two-way relationship between economic development and energy consumption. On one hand, growth of an economy, with its global competitiveness, hinges on the availability of cost-effective and environmentally benign energy sources, and on the other hand, the level of economic development has been observed to be reliant on the energy demand. Energy intensity is an indicator to show how efficiently energy is used in the economy. The energy intensity of India is over twice that of the matured economies, which are represented by the OECD (Organization of Economic Co-operation and Development) member countries. Indias energy intensity is also much higher than the emerging economiesthe Asian countries, which include the ASEAN member countries as well as China. However, since 1999, Indias energy intensity has been decreasing and is expected to continue to decrease. The indicator of energyGDP (gross domestic product) elasticity, that is, the ratio of growth rate of energy to the growth rate GDP, captures both the structure of the economy as well as the efficiency. The energyGDP elasticity during 19532001 has been above unity. However, the elasticity for primary commercial energy consumption for 19912000 was less than unity (Planning Commission 2002). This could be attributed to several factors, some of them being demographic shifts from rural to urban areas, structural economic changes towards lesser energy industry, impressive growth of services, improvement in efficiency of energy use and inter-fuel substitution. The energy sector in India has been receiving high priority in the planning process. The total outlay on energy in the Tenth Five-year Plan has been projected to be 4.03 trillion rupees at 2001/02 prices, which is 26.7% of the total outlay. An increase of 84.2% is projected over the Ninth Five-year Plan in terms of the total plan outlay on energy sector. The Government of India in the mid-term review of the Tenth Plan recognized the fact that under-performance of the energy sector can be a major constraint in delivering a growth rate of 8% GDP during the plan period. It has, therefore, called for acceleration of the reforms process and adoption of an integrated energy policy. In the recent years, the government has rightly recognized the energy security concerns of the nation and more importance is being placed on energy independence. On the eve of the 59th Independence Day (on 14 August 2005), the President of India emphasized that energy independence has to be the nations first and highest priority, and India must be determined to achieve this within the next 25 years. Demand and Supply scenario In the recent years, Indias energy consumption has been increasing at one of the fastest rates in the world due to population growth and economic development. Primary commercial
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energy demand grew at the rate of six per cent between 1981 and 2001 (Planning Commission 2002). India ranks fifth in the world in terms of primary energy consumption , accounting for about 3.5% of the world commercial energy demand in the year 2003. Despite the overall increase in energy demand, per capita energy consumption in India is still very low compared to other developing countries. India is well-endowed with both exhaustible and renewable energy resources. Coal, oil, and natural gas are the three primary commercial energy sources. Indias energy policy, till the end of the 1980s, was mainly based on availability of indigenous resources. Coal was by far the largest source of energy. However, Indias primary energy mix has been changing over a period of time. Despite increasing dependency on commercial fuels, a sizeable quantum of energy requirements (40% of total energy requirement), especially in the rural household sector, is met by non-commercial energy sources, which include fuel wood, crop residue, and animal waste, including human and draught animal power. However, other forms of commercial energy of a much higher quality and efficiency are steadily replacing the traditional energy resources being consumed in the rural sector. Resource augmentation and growth in energy supply has not kept pace with increasing demand and, therefore, India continues to face serious energy shortages. This has led to increased reliance on imports to meet the energy demand. Coal India now ranks third amongst the coal producing countries in the world. Being the most abundant fossil fuel in India till date, it continues to be one of the most important sources for meeting the domestic energy needs. It accounts for 55% of the countrys total energy supplies. Through sustained increase in investment, production of coal increased from about 70 MT (million tonnes) (MoC 2005) in early 1970s to 382 MT in 2004/05. Most of the coal production in India comes from open pit mines contributing to over 81% of the total production while underground mining accounts for rest of the national output (MoC 2005). Despite this increase in production, the existing demand exceeds the supply. India currently faces coal shortage of 23.96 MT. This shortage is likely to be met through imports mainly by steel, power, and cement sector (MoC 2005). India exports insignificant quantity of coal to the neighbouring countries. The traditional buyers of Indian coal are Bangladesh, Bhutan and Nepal. The development of core infrastructure sectors like power, steel, and cement are dependent on coal. About 75% of the coal in the country is consumed in the power sector (MoC 2005). Power Access to affordable and reliable electricity is critical to a countrys growth and prosperity. The country has made significant progress towards the augmentation of its power infrastructure. In absolute terms, the installed power capacity has increased from only 1713 MW (megawatts) as on 31 December 1950 to 118 419 MW as on March 2005 (CEA 2005). The all India gross electricity generation, excluding that from the captive generating plants, was 5107 GWh (gigawatt-hours) in 1950 and increased to 565 102 GWh in 2003/04 Energy requirement increased from 390 BkWh (billion kilowatt-hours) during 1995/96 to 591 BkWh (energy) by the year 2004/05, and peak demand increased from 61 GW
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(gigawatts) to 88 GW over the same time period. The country experienced energy shortage of 7.3% and peak shortage of 11.7% during 2003/04. Though, the growth in electricity consumption over the past decade has been slower than the GDPs growth, this increase could be due to high growth of the service sector and efficient use of electricity. Per capita electricity consumption rose from merely 15.6 kWh (kilowatt-hours) in 1950 to 592 kWh in 2003/04 (CEA 2005). However, it is a matter of concern that per capita consumption of electricity is among the lowest in the world. Moreover, poor quality of power supply and frequent power cuts and shortages impose a heavy burden on Indias fastgrowing trade and industry. OIL AND NATURAL GAS The latest estimates indicate that India has around 0.4% of the worlds proven reserves of crude oil. The production of crude oil in the country has increased from 6.82 MT in 1970/71 to 33.38 MT in 2003/04 (MoPNG 2004b). The production of natural gas increased from 1.4 BCM (billion cubic metres) to 31.96 BCM during the same period. The quantity of crude oil imported increased from 11.66 MT during 1970/71 to 81 MT by 2003/04. Besides, imports of other petroleum products increased from 1 MT to 7.3 MT during the same period. The exports of petroleum products went up from around 0.5 MT during 1970/71 to 14 MT by 2003/04. Indias consumption of natural gas has risen faster than any other fuel in the recent years. Natural gas demand has been growing at the rate of about 6.5% during the last 10 years. Industries such as power generation, fertilizer, and petrochemical production are shifting towards natural gas. Indias natural gas consumption has been met entirely through domestic production in the past. However, in the last 4/5 years, there has been a huge unmet demand of natural gas in the country, mainly required for the core sectors of the economy. To bridge this gap, apart from encouraging domestic production, the import of LNG (liquefied natural gas) is being considered as one of the possible solutions for Indias expected gas shortages. Several LNG terminals have been planned in the country. Two LNG terminals have already been commissioned: (1) Petronet LNG Terminal of 5 MTPA (million tonnes per annum) at Dahej, and (2) LNG import terminal at Hazira. In addition, an inprinciple agreement has been reached with Iran for import of 5 MTPA of LNG. RENEWABLE ENERGY SOURCES Renewable energy sources offer viable option to address the energy security concerns of a country. Today, India has one of the highest potentials for the effective use of renewable energy. India is the worlds fifth largest producer of wind power after Denmark, Germany, Spain, and the USA. There is a significant potential in India for generation of power from renewable energy sources, small hydro, biomass, and solar energy. The country has an estimated SHP (small-hydro power) potential of about 15 000 MW. Installed combined electricity generation capacity of hydro and wind has increased from 19 194 MW in 1991/92 to 31 995 MW in 2003/04, with a compound growth rate of 4.35% during this period (MoF 2005). Other renewable energy technologies, including solar photovoltaic, solar thermal, small hydro, and biomass power are also spreading. Greater reliance on renewable energy sources offers enormous economic, social, and environmental benefits. The potential for power production from captive and field-based biomass resources, using technologies for distributed power generation, is currently assessed at 19 500 MW including 3500 MW of exportable surplus power from biogases-based cogeneration in sugar mills
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(MNES 2005). FUTURE SCENARIO Increasing pressure of population and increasing use of energy in different sectors of the economy is an area of concern for India. With a targeted GDP growth rate of 8% during the Tenth Five-year Plan, the energy demand is expected to grow at 5.2%. Driven by the rising population, expanding economy, and a quest for improved quality of life, the total primary energy consumption is expected to about 412 MTOE (million tonnes oil equivalent) and 554 MTOE in the terminal years of the Tenth and Eleventh Plans, respectively. The International Energy Outlook 2005 (EIA 2005b) projects Indias gas consumption to grow at an average annual rate of 5.1%, thereby reaching 2.8 trillion cubic feet by 2025 with the share of electric power sector being of 71% by that time. Coal consumption is expected to increase to 315 MT over the forecast period. In India, slightly less than 60% of the projected growth in coal consumption is attributed to the increased demand of coal in the electricity sector while the industrial sector accounts for most of the remaining increase. The use of coal for electricity generation in India is expected to increase by 2.2% per annum during 200225, thus requiring an additional 59 000 MW of coal-fired capacity. Oil demand in India is expected to increase by 3.5% per annum during the same time. It is quite apparent that coal will continue to be the predominant form of energy in future. However, imports of petroleum and gas would continue to increase substantially in absolute terms, involving a large energy import bill. There is, therefore, an urgent need to conserve energy and reduce energy requirements by demand-side management and by adopting more efficient technologies in all sectors.

India follows an energy policy which is divided into short term, medium term and long term measures. These can be summarised as follows: Short term initiate measures for reducing technical losses in production, transportation and end-use of all forms of energy. initiate action to reduce the energy intensity of the different consuming sectors of the economy and promote conservation and demand management through appropriate organisational and fiscal measures. maximise satisfaction of demand for energy from indigenous resources. Medium term initiate steps towards progressive substitution of petroleum products by coal, lignite, natural gas and electricity so as to restrict the quantum of oil imports to the 1991 level. initiate action for accelerated development of all renewable energy resources, especially the available hydro-electric potential.
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 initiate appropriate organisational changes in the case of different energy sub-sectors consistent with the overall energy strategy. Long term promote an energy supply system based largely on renewable sources of energy promote technologies of production, transportation and end-use of energy that are environmentally benign and cost effective. These policies are formulated on the basis of the performance of the sectoral energy intensities in India from 1980s. Most important concern is oil price hike. Though after 70s the hike of oil prices happened frequently but the severe hike again occurred in 2004 after 90s. As we have noticed from our study that till 1998-99 the sectoral oil intensity dominates to a large extent. It also implied that the alternative technology has not yet been captured the Indian market upto required level. One of the basic reasons behind these oil price hikes is oil dependence economy. The first and foremost strategies should be to introduce alternative fuel like CN.G, Natural gas and bio gas fuel instead of oil to cover up the extra strain arising due to hike.

Objectives

To serve the national interests in oil and related sectors in accordance and consistent with Government policies. To ensure maintenance of continuous and smooth supplies of petroleum products by way of crude oil refining, transportation and marketing activities and to provide appropriate assistance to consumers to conserve and use petroleum products efficiently. To enhance the country's self-sufficiency in crude oil refining and build expertise in laying of crude oil and petroleum product pipelines. To further enhance marketing infrastructure and reseller network for providing assured service to customers throughout the country. To create a strong research & development base in refinery processes, product formulations, pipeline transportation and alternative fuels with a view to minimizing/eliminating imports and to have next generation products. To optimise utilisation of refining capacity and maximize distillate yield and gross refining margin. To maximise utilisation of the existing facilities for improving efficiency and increasing productivity. To minimise fuel consumption and hydrocarbon loss in refineries and stock loss in marketing operations to effect energy conservation. To earn a reasonable rate of return on investment. .

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Indias Energy Profile

The following table indicates various trends in production, consumption, net imports and reserves of commercial sources of energy: Petroleum Various trends in production, consumption, net imports and reserves of crude oil in 2005-2006 are given in table 1.1:

Table 1.1: Production, Consumption & Net Imports of Crude Oil (million tonnes) Year Crude oil production Crude oil consumption Net exports/ imports Proved reserves 2005 32.19 130.11 -99.41 786 2006 33.99 146.55 -110.86 756

Source: Ministry of Petroleum and Natural Gas

Natural Gas Various trends in production, consumption, net imports and reserves of natural gas in 20052006 are given in table 1.2:

Table 1.2: Production, Consumption & Net Imports of Natural Gas (Billion cubic Feet) Year 2005
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2006

Production Consumption Net exports/ imports Proved reserves

1056 1269 -213 32525

1067 1349 NA 38880

Source: Ministry of Petroleum and Natural Gas

Coal Various trends in production, consumption and net exports of coal in 2005-2006 are given in table 1.3:

Table 1.3: Production, Consumption & Net Exports of Coal (Million Short Tons) Year Production Consumption Net export(trillion btu) 2005 473.172 507.315 1018.832 2006 497.181 542.787 1075.331

Source: Ministry of Petroleum and Natural Gas

Electricity Details of net energy generation, net consumption and installed capacity are given in table 1.4:

Table1.4:Generation,Consumption& Installed Capacity of Electricity (billion kilowatt hours) Year Net generation Net consumption Installed capacity(Gwe) 2005 661.64 488.53 137.578
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2006 NA NA NA

Source: Ministry of Petroleum and Natural Gas Tables 1.1 - 1.4 shows that energy consumption in India is growing at a rate faster than the production and will continue to grow with increasing population which is projected at about 1.20 billion by the end of XIth plan (2011-12). To sum up, challenges faced by the Indian energy sector are:

Coal depletion and pollution, Rising oil imports. Natural gas demands. Inefficient electric systems. Energy-related water shortages. Limited nuclear energy.

Hence, considering the linkage between GDP growth rate and energy consumption growth, there is an urgent need to switch over to a fresh approach, which emphasizes:

Innovative and inter-disciplinary research targeting breakthroughs in new technologies and processes. Energy conservation through public education Reducing leakages and losses by an appropriate mix of policies and technologies. Adequate, affordable and environmentally sustainable supply of energy is one of the fundamental parameters for the economic growth of any country. At the same time, the separation of the world between developed and developing countries reflects the division between those who have a high per-capita usage of energy and those who either do not have sufficient energy or cannot harness it. Sincere efforts are needed to be made to create a global environment wherein every nation gets equitable opportunities to grow and the gap in terms of energy resource between developing and developed countries is reduced.

II.

PETROLEUM INDUSTRY

Economic growth in the past was accompanied by growing oil consumption. But in recent years the growth of the supply of oil has been slowing and production has now practically reached a plateau. This has happened despite historically high oil prices. According to many experts, in
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2006-2007 worlds oil industry had hit peak production and has entered the first phase of transition to an uncertain future that is world oil production will start to decline at initially probably increasing rates. Crude oil is a mineral oil of natural origin comprising a mixture of hydrocarbons and associated impurities, such as sulphur. Crude oil is the most important energy carrier at a global scale. In 2006 -2007, about 35 percent of the worlds primary energy consumption is supplied by oil, followed by coal with 25 percent and natural gas with 21 percent. Transport relies to well over 90 percent on oil, be it transport on roads, by ships or by aircrafts. Therefore, the economy and the lifestyle of industrialised societies relies heavily on the sufficient supply of oil, moreover, probably also on the supply of cheap oil. Because of the importance of oil as an energy source, and because of the difficulties of substituting oil by other fossil or renewable energy sources, peak oil will be a singular turning point. This will have consequences and repercussions for virtually every aspect of life in industrialised societies. World Scenario Table 2.1 gives a brief picture of World top Oil Producers, Consumers, Exporters, Importers as in FY 2006-07.

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Table 2.1: World Top Oil Producers, Consumers, Exporters, Importers (2006-07) (thousand barrels per day)

Oil Producers Saudi Arabia Russia United states Iran China Mexico Canada UAE

Production Oil Consumers 10665 9677 8330 4148 3845 3707 3288 2945 United states China Japan Russia Germany India Canada Brazil Korea,South Saudi Arabia

Consumption 20687 7201 5159 2811 2665 2572 2264 2217 2174 2139

Oil Exporters Saudi Arabia Russia UAE Norway Iran Kuwait

Exports Oil Importers 8525 6866 2564 2551 2462 2340 United states Japan China Germany

Imports 12357 5031 3356 2514

Korea,South 2156 France India Italy Spain Taiwan 1890 1718 1568 1562 940

Venezuela 2183 Nigeria Algeria Mexico 2131 1842 1710

Venezuela 2803 Norway 2786

Source: OPEC bulletin

Organization of the Petroleum Exporting Countries (OPEC)

Members: Algeria (1969), Indonesia (1962), the Islamic Republic of Iran (1960), Iraq (1960), Kuwait (1960), the Socialist Peoples Libyan Arab Jamahiriya (1962), Nigeria (1971), Qatar (1961), Saudi Arabia (1960), United Arab Emirates (1967), Venezuela (1960). OPEC Basket: the OPEC Reference Basket price which was introduced on January 1, 1987 is the arithmetic average of seven selected crudes. These are: Saharan Blend (Algeria); Minas (Indonesia); Bonny Light (Nigeria); Arab Light (Saudi Arabia); Dubai (United Arab Emirates), Tia Juana Light (Venezuela), and Isthmus (Mexico). Mexico is not a Member of OPEC.
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OPEC, with close to 80% of world crude oil reserves, has a keen interest in exploring the possible futures for oil, from both demand and supply perspectives, to help establish the nature, scope and scale of the challenges and opportunities that may lay ahead.

Source: OPEC Annual Report.

It has acted as a challenge before the global economic scenario. Demand for energy is set to continue to grow and oil is expected to maintain its leading position in meeting the worlds growing energy needs for the foreseeable future. OECD countries, currently accounting for close to 60% of world oil demand, see a further growth of 4 mb/d by 2030, reaching 53 mb/d. Developing countries account for most of the rise in the reference case, with consumption doubling from 29 mb/d to 58 mb/d. Asian developing countries account for an increase of 20 mb/d, which represents more than two-thirds of the growth in all developing countries. Nevertheless, energy poverty will remain an important issue over this period. By 2030, developing countries will consume, on average, approximately five times less oil per person, compared with OECD countries. There is fast growing oil consumption in the non-OECD Asian countries. The non-OECD Asia (Including both India and China) accounts for around 40 percent of the
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total increase in world oil use. From estimation it is found that to meet the projected increase in world oil demand the total petroleum supply in 2030 is required to reach 118 million barrels per day from 80 million barrels per day as of the year 2003. The world oil consumption has increased by 1.2 million barrels per day in the year 2005-06, even after the increase of 2.6 million barrels per day as in the year 2004-05. The transportation sector will be the main source of future oil demand increases. Growth in the OECD is expected to continue to rise, although saturation effects should increasingly have an impact upon the growth in passenger car ownership. The potential for growth in the stock of cars, buses and lorries, however, is far greater in developing countries.

Of the non-transportation oil use, the main expected source of increase will be in the industrial and residential sectors of developing countries, which see a combined growth to 2030 of over 11 mboe/d in the reference case. Oil use in households is closely associated with the gradual switch away from traditional fuels. This trend is expected to continue, especially in the poorer developing countries of Asia and Africa, with the urbanisation movement throughout the developing world central to the shift towards commercial energy. Despite the expected continued growth in electricity production and consumption, oil demand in this sector will experience no significant growth.

Global Price Scenario

The last six months have seen steep rise in the oil prices. Till early September last year oil was trading below $70 a barrel in the wake of US sub-prime mortgage fiasco. As a consequence of some half hearted US measures, the sub-prime pressures eased and the oil prices resumed upward flight. The measures did not prove effective enough and the crises erupted again pushing the US economy in turmoil. The depreciating dollar made the speculators move to some more attractive markets like gold and silver. The investment in the world oil sectors could not keep pace with the rising global demand for oil. Oil has broken through the landmark $100 a barrel in early 2008 rather is setting new records almost everyday, driven by a slumping dollar, geopolitical instability and worries over a winter fuel supply crunch. The continuous rises are causing worries in importing countries about the economic cost of higher energy prices. Higher fuel prices cause rise in inflation, restrict economic growth and are considered as unpopular decision among voters. Major oil exporters are divided between those such as Saudi Arabia and Kuwait that favour lifting output in an attempt to ease prices, and those such as Venezuela that argue against such moves will benefit big consumers, principally the US. The first few months of 2008 saw crude oil prices breach one barrier after another. They topped $100 a barrel for the first time on Feb. 19, then rose past $103.76 about two weeks
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later, surpassing the previous inflation-adjusted peak, established in 1980. In April and early May, oil prices pushed past $110 and then $120 a barrel and then $130 a barrel and beyond. These milestones reflect a new era in oil markets. After the tumult of the early 1980s, prices remained relatively tame for two decadesin both real and nominal terms. This long stretch of stability ended in 2004, when oil topped $40 a barrel for the first time, then embarked on a steep climb that continued into this year.

Modern economies run on oil, so its important to understand how recent yearswith their surging pricesdiffer from the preceding two decades. A good starting point is strong demand, which has pushed world oil markets close to capacity. New supplies havent kept up with this demand, fueling expectations that oil markets will remain tight for the foreseeable future. A weakening dollar has put upward pressure on the price of a commodity that trades in the U.S. currency. And because a large share of oil production takes place in politically unstable regions, fears of supply disruptions loom over markets.

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These factors have fed the steady, sometimes swift rise of oil prices in recent years. Their persistence suggests the days of relatively cheap oil are over and the global economy faces a future of high energy prices. How they play out will shape oil marketsand determine prices for years to come. Reasons for Oil Price Hike 1) Dollar Weakness:

Most of the dollars price impact occurred toward the end of the period. When it comes to adjustments in oil consumption and production, a declining dollar takes time to reshape crude oil prices because expectations dont shift quickly. Factors that push up expectations of future prices, however, also put upward pressure on spot prices because markets will adjust until investors are indifferent between holding and selling the marginal barrel of crude oil on the spot market. 2) Demand: Robust demand for crude and a weak dollar have fuelled the rally from a dip below $50 at the start of 2007. 3) Funds: Since the Federal Reserve cut US interest rates in mid August last year and central banks pumped billions of dollars into financial markets to ease a credit crunch, oil and gold have risen.

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III.

PETROLEUM INDUSTRY IN INDIA

At Independence, India 's domestic oil production was just 250,000 tonnes per annum. The entire production was from one state-Assam. Petroleum exploration & production was controlled by the Government-owned National Oil Companies (NOCs, ONGC and OIL) in pursuance of the Industrial Policy Resolution, 1954. They had "the run of the country". They found significant quantities of oil and gas reserves. In the early 70s, they supplied nearly 70% of the domestic requirement. However, by the end of the 80s, they had reached the stage of diminishing returns. Given the rather depressing scenario on the fiscal and crude output fronts, the Government launched various Petroleum Sector Reforms (PSR) in 1990. GOI has taken a number of initiatives to improve oil security of the country. These include encouraging the domestic players to acquire equity oil abroad, strategic storage of crude oil and dialogues at political level with oil producing countries etc., apart from giving a major thrust for domestic exploration. The domestic exploration is being given major thrust under New Exploration and Licensing Policy, 1998. National Auto Fuel Policy has been announced in 2003, which provided policy framework for encouraging alternate fuels such as ethanol and bio diesel. Since April 2002, the domestic crude oil producers have been allowed to fix prices in line with international crude oil price movements. Since April 2002, the prices of all petroleum products, except kerosene and domestic LPG under PDS have been decontrolled.

Domestic Scenario

Present Indian Oil sector can be classified into two segments viz., Oil Exploration and Production (E&P), Oil Refining and Marketing. In both the segments, private as well as public sector companies have been operating though the share of public sector is dominant. Oil and Natural Gas Corporation Ltd. (ONGC) and Oil India Ltd. (OIL) are the public sector units
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engaged in E&P, of which ONGC accounted for 77% of total oil production while Oil India accounted for 10%. The private sector companies include viz., Reliance Industries, Essar Oil, Cairn Energy, Videocon, Hindustan Oil Exploration and a number of small companies and these have accounted for 13% of total production. Initiatives for private sector participation in E&P which commenced in FY1979, received a big boost under New Exploration and Licensing Policy (NELP). The oil refining and marketing segment is dominated by four public sector undertakings viz. Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd. (BPCL) and Oil & Natural Gas Corporation (ONGC) and two private sector company viz. Reliance Industries Ltd. and Essar oil ltd. As of April, 2007 there are a total of 19 refineries in the country comprising 17 in the Public Sector, two in the private sector. The company-wise locations and capacity of the refineries are given in table 3.1:

Table 3.1: Company-Wise Location and Capacity of Refineries in India (thousand tonnes) S.NO. REFINERY LOCATION INSTALLED CAPACITY AS ON 1.4.2007 105468 Guwahati Barauni Koyali Haldia Mathura Digboi Panipat 1000 6000 13700 6000 8000 650 12000 47350 Mumbai Mumbai Visakhapatnam 12000 5500 7500 REFINERY CRUDE THROUGHOUT 2006-2007 108172 839 5469 12953 5836 8883 586 9435 44001 12030 7419 9377

a) 1 2 3 4 5 6 7

Public sector IOC IOC IOC IOC IOC IOC IOC Total IOC

8 9 10

BPCL HPCL HPCL

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Total HPCL 11 12 13 KRL CPCL CPCL Total CPCL 14 15 16 17 b) 18 19 BRPL NRL ONGC MRPL Private sector RPL Jamnagar Bongaigaon Numaligarh Tatipaka Mangalore Kochi Manali Narimanam

13000 7500 9500 1000 10500 2350 3000 78 9690 43500 33000 10500 148968

16796 7742 9784 618 10402 2067 2504 94 12536 38379 36616 1763 146551

ESSAR oil ltd. Vadinar Total(a+b)

Source: Ministry of Petroleum and Natural Gas

NOTE: CPCL and BRPL are subsidiaries of IOC. KRL and NRL are subsidiaries of BPCL. MRPL is subsidiary of ONGC.

Marketing segment is dominated by IOC, BPCL, HPCL and IBP in public sector while RIL has opened retail outlets recently. Permission has also been granted to Reliance Industries, Essar Oil, Numaligarh Refineries Ltd. and to ONGC to enter the marketing segments by opening retail outlets. Domestic Consumption of Petroleum Products and Crude Oil Details of domestic consumption of petroleum products and crude oil are given in table 3.2: Table 3.2:Domestic consumption of petroleum products and crude oil Year Crude oil (million tones) Petroleum products (excl.

(in terms of refinery crude RBF)

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throughput) 2000-01 103.44 2002-03 112.56 2003-04 121.84 2004-05 127.42 2005-06 130.11 2006-07* 146.55 Source: Ministry of Petroleum and Natural Gas

100.07 104.13 107.75 111.63 113.21 119.55

India boosts a growing economy and is increasingly a significant consumer of oil and natural gas. According to EIA estimates, India was 5th largest consumer of oil in the world during 2006-07. Over years domestic consumption of crude oil has increased and is increasing steadily. Consumption of crude oil has increased from 103.44 million tonnes in 2000-01 to 146.55 in 2006-07. Domestic Production of Petroleum Products and Crude Oil

Production of Crude Oil

India ranks as 25th greatest producer of crude oil. The domestic production of crude oil remained rather stagnant for the last five years at 33 million tonnes. Details of domestic production of crude oil are given in table 3.3:

Table 3.3: Domestic Production of Crude Oil (million tonnes) Year 2000-2001 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007* Crude oil 32.43 33.04 33.37 33.98 32.19 33.99

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Source: Ministry of Petroleum and Natural Gas

Production of Petroleum Products

Details of domestic production of petroleum products are given in table 3.4:

Table 3.4: Domestic Production of Petroleum Products (Thousand tonnes) Year 2000-2001 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 Light distillates 25048 28619 31971 32865 32427 38104 Middle distillates 52445 55937 60018 62509 64432 71225 Heavy ends 18121 19584 21474 23205 22891 25931

Source: Ministry of Petroleum and Natural Gas

During the last five year period, the domestic production of petroleum products increased significantly i.e. from 95.61 million tonnes in FY 2000 to 135.26 million tonnes in FY 2007. The increase in production was mainly accounted by private sector refinery, Reliance Industries Ltd. while there was increase in the production from public sector as well. However, the domestic production of crude oil has remained stagnant over years.

Imports of Crude Oil

India is a growing net importer of oil. In order to meet the increasing demand, the country had to resort to import of crude oil. Presently India is dependent upon the import of crude oil to the
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extent of around 72%. Crude oil is imported mainly from Saudi Arabia, Abu Dhabi (Sour Crude) and Venezuela and Malaysia (Sweet Crude) under term tenders and monthly tenders. Details of net imports of crude oil are given in table 3.5:

Table 3.5: Net Imports of Crude Oil (Million tonnes) Year 2000-2001 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007* Net imports 74.10 81.99 90.43 95.86 99.41 110.86

Source: Ministry of Petroleum and Natural Gas Imports/ Exports of Petroleum Products

Gross Imports The details of gross imports of petroleum products are given in table 3.6:

Table 3.6: Gross Imports of Petroleum Products (Thousand tonnes) Year 2003-2004 2004-2005 2005-2006 2006-2007 Light distillates 4529 5391 6074 8651 Middle distillates 906 1027 1615 2344 Heavy ends 2566 2410 3988 5971

Source: Ministry of Petroleum and Natural Gas

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Exports The details of exports of petroleum products are given in table 3.7:

Table 3.7: Exports of Petroleum Products (thousand tonnes) Year 2003-2004 2004-2005 2005-2006 2006-2007 Light distillates 5448 6288 7565 12296 Middle distillates 7841 9973 11366 15457 Heavy ends 1331 1950 2576 4641

Source: Ministry of Petroleum and Natural Gas

Exports of petroleum products have increased substantially during last five years and reached 32394 thousand tonnes in FY 2006 as against 14620 thousand tonnes in FY 2003. The increase was accounted by middle distillate, HSD, and by gasoline and naphtha among light distillates. Reliance Industries has been the major exporter of petroleum products with exports constituting around 40% of its production. PSUs have been exporting naphtha mainly because of low domestic demand. Indian products are being exported to USA, Singapore, Iran, Brazil, Malaysia, Mexico, Sri Lanka, Japan, etc. Net Imports

The details of net imports of petroleum products are given in table 3.8:

Table 3.8: Net Imports of Petroleum Products (thousand tonnes) Year 2003-2004 2004-2005 2005-2006 2006-2007 Net imports of petroleum products -6619 -9383 -9830 -15428
25

Source: Petroleum Planning and Analysis Cell, New Delhi.

Figures indicate that India is not a net importer of petroleum products rather India is net exporter of petroleum products. This means that Indias export grew at a faster rate than Indias imports of petroleum products. Domestic Oil Reserves Indias prognosticated hydrocarbon resource base is approximately 29 billion metric tonnes, spread over 26 sedimentary basins. These basins include onshore as well as offshore areas, upto 200 metre depth. The major onshore fields are located in Gujarat, Assam, Nagaland, Tamilnadu, Andhra Pradesh and Arunachal Pradesh while offshore production is mainly concentrated in the Bombay offshore region. In FY 2004-2005, Of the 26 basins, seven basins are under commercial production, two basins are with occurrence of hydrocarbons, where production is yet to commence, seven basins are considered prospective and the balance are deemed to be prospective based on similar basins globally. The reserves of the seven basins under commercial production have been estimated to be 6.8 billion metric tonnes (23% of the total resource base). Area-wise, 16% of the area can be considered as well/moderately explored, while exploration has been initiated in 27% of the area. The balance area continues to be under unexplored (41%) or poorly explored (16%) indicating significant scope for exploration and production activity (E&P) in the country.

Oil Reserves

Details of oil reserves in India are given in table 3.9:

Table 3.9: Details of Oil Reserves in India (million metric tonnes) Year 1990 2000 2002 2003 Onshore 307 317 332 339 Offshore 432 386 409 422 Total 739 703 741 761

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2004 2005 2006 2007

357 376 387 357

382 410 369 369

739 786 756 726

Source: ONGC, OIL, DGH. Domestic Exploration and Production (E & P) The exploration activity is mainly concentrated with public sector oil companies, viz. Oil & Natural Gas Corporation Limited (ONGC) and Oil India Limited (OIL). ONGC accounted for lions share of production while OIL and private sector contributed for the balance domestic supplies in rather small way. ONGC has been undertaking onshore exploratory activities in the Himalayan foothills, the north-eastern states, Gujarat, Andhra Pradesh, Tamil Nadu and Rajasthan. The onshore oilfields are located at Cambay and Ankaleshwar in Gujarat and at Rudrasagar and Galeki in Assam. ONGC has been undertaking off-shore exploratory activities in both the Eastern and Western coasts. The off-shore field is located on the Western Coast at Bombay High. ONGC has set strategic goals to be achieved by FY2020 envisaging doubling reserve accretion to 12 billion tonnes. OIL has been carrying out exploration in the sedimentary basins of Assam, Arunachal Pradesh, Rajasthan, Orissa (both onshore and offshore), the Andamans (offshore), Saurashtra (offshore) and the Ganga Valley (Uttar Pradesh). Its production is confined to the oilfields of Assam and Arunachal Pradesh. Private Sector Participation in E & P GOI opened E&P sector including oil field equipment and drilling services to private sector participation in 1979 itself, which gained momentum since 90s. Under different rounds of bidding, blocks were awarded to various multinationals and some like Chevron were not successful in their exploratory efforts while Shell struck oil in Rajasthan in 1999 and consortium of Cairn Energy, Tata Petrodine and ONGC discovered oil and gas in four fields in Gujarat (off-shore) in 2001. Cairn discovered oil in Krishna Godavari basin as also in Rajasthan. In respect of small and medium sized fields, which showed presence of recoverable reserves, GOI actively encouraged private participation, especially in early 90s. In case of small sized fields, private participation was invited envisaging production sharing contracts with GOI and with no equity participation from ONGC/OIL and in case of medium sized fields, private participation was encouraged with equity participation upto 40% by ONGC/OIL. In two rounds of offers, 24 small sized fields and six medium sized fields were awarded to a consortia of Indian/multinational companies such as Ravva fields in AP to Videocon lead consortium, Mukta/Panna fields to a consortium of Reliance/ONGC, PY-3 offshore field at Pondicherry to a consortium led by Hindustan Oil Exploration Company.

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A major change in the policy was brought about by the New Exploration and Licensing Policy (NELP) announced in 1998 whereby the national oil companies viz. ONGC and OIL were also required to bid for various blocks alongwith private sector. The Directorate General of Hydrocarbons, a government body, would be identifying the blocks for offer to various bidders unlike the earlier position wherein national oil companies decided upon the area to be offered to private players. Under four rounds of bidding an aggregate of 91 blocks were offered to various bidders including deep water blocks viz. NELP-I 24 blocks, NELP-II and III 23 blocks each and NELP IV - 21 blocks. According to GOI, 9 commercial discoveries had been made during 2002-03 by public/private participants including those reported by Cairn Energy and Reliance. The discovery of natural gas at deep water block at Krishna-Godavari Basin by Reliance is considered to be very significant (which was awarded under NELP-I) with the total in-place volume being estimated at 7 trillion cubic feet equivalent to 185 million tonnes of crude oil. Strategic Storage of Crude Oil The gap between domestic crude availability and demand for crude indicates the vulnerability of the Indian economy to oil imports. At present the country is highly import dependent, importing 70% of the requirement and out of these imports, lions share ( about 67%) comes from the Middle East region and general political instability in this region is a further cause of anxiety from the oil supply security perspective. Taking into account this oil security concern, GOI decided o set up 5 million metric tonne (MMT) of strategic crude oil storage at various locations in the country. This strategic storage would be in addition to the existing storage of crude oil and petroleum products with the oil companies and would provide an emergency response mechanism in case of short term supply disruptions. The proposed facility would be managed by a Special Purpose Vehicle (SPV), 100% owned by one of the oil PSUs. The proposed strategic crude oil storage would be in underground rock cavern/concrete structures and is projected to come up by 2009-2010.

Contribution of Oil Sector to Central and State Exchequer

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The figure shows that the contribution of oil industry to central and state exchequer has increased over years from Rs. 73800 crores in 2001-02 to Rs. 163970 crores in 2007-2008. Till 2006-2007, of the total contribution the major contribution was from excise duty. However in 2007-08, the major contribution was from sales tax. Share of dividend has increased till 20062007 but has declined in 2007-2008. Share of others and custom duty in total contribution to central and state exchequer have increased over years except in 2005-2006.

Indian Basket of Crude Oil The composition of Indian Basket of Crude represents Average of Oman and Dubai for sour grades and Brent(Dated) for sweet grade in the ratio of 62.3:37.7 w.e.f 1st April, 2008,

29

61.4:38.6 for 2007-08, 59.8:40.2 for 2006-07, 58:42 for 2005-2006 and 57:43 for the prior period

Conclusion The last six months have seen steep rise in the oil prices. The continuous rises are causing worries in importing countries about the economic cost of higher energy prices. Higher fuel prices cause rise in inflation, restrict economic growth and are considered as unpopular decision among voters.

Consequences of soaring fuel prices

30

Oil prices are threatening to touch $150 per barrel. And according to experts it could even reach $200. This massive volatility is already having a negative impact on global economy and is likely to retard growth and development. Impact on

Economy: Inflation has gone up to 11.42%. Government borrowings going up. FRBM target under pressure. Transporters raised freight rates by 10-15%. The diesel price hike will add a burden of Rs. 560 crore on the railways.

Fiscal Situation:

As a result of increased burden of oil bonds, governments off- budget liabilities would increase to 1.8% of GDP as shown in the above table.

Companies: Auto demand to be impacted. Cost of steelmakers to go up 2-3%. Cost of cement cos to go up 0.5-1%.

Investors:
31

No immediate recovery in the market valuation of PSUs.

Key Changes Announced by the Government on June 4, 2008

Price hike:

Rs 5/ltr hike petrol Rs 3/ltr hike diesel Rs 50 hike in LPG cyclinder except Delhi( Rs 10 increase) Source: CRISIL estimates.

Duty cut on crude, bringing it down to zero from 5% Duty cut on petrol and diesel to 2.5% from 5% Duty cut on other petroleum products to 5% Excise duty cut of Re. 1/ltr on petrol to Rs. 13.35/ltr Excise duty cut of Re. 1/ltr on diesel to Rs. 3.60/ltr.

**************

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IV. LINEAR REGRESSION ANALYSIS OF CONSUMPTION OF CRUDE OIL IN INDIA

Model Objective The purpose is to see how consumption of crude oil depends upon production of crude oil, income, alternative fuel consumption (renewable), price of crude oil, index of industrial production. Data

Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Consumption Production IIP 478540.55 515843.55 574754.55 613535.8 644403.85 763195.05 741406.25 776515.6 797061.45 826155.6 856410.45 886811.3 889870 194910 215313.5 256759.25 237625.95 246239.95 241418.3 238220.9 235914.1 234476 242633.75 240910.95 249335.15 242600.9 100 109.1 123.3 130.8 139.5 145.2 154.9 162.6 167 176.6 189 204.8 221.5

Price Alternative Oman 69.86 82.08 72.34 69.07 74.85 83.19 82.2 76.6 76.82 67.77 79.79 89.96 106.68 15.77 15.12 16.34 19.12 18.52 12.02 17.27 26.5 22.75 23.94 27.14 34.35 50.48

Income 53318 56863 61166 65796 68463 72696 78071 81229 85457 88639 96069 104077 113673

Unit: Consumption and Production in Thousands Barrels

33

Price in Dollars Alternative Fuel Consumption in Billion Kilowatt hours Income in Billion Rupees.

Methodology
The method used for regression analysis is estimation by least squares. Consumption of crude oil depends upon production of crude oil, income (GDP), price, consumption of alternative fuel, index of industrial production, no. of vehicles registered in India and net imports. However because of unavailability of data and sampling fluctuations we are not taking into account no. of vehicles registered and net imports. Hence in the model, consumption of crude oil is the dependent variable and price Oman (price Oman, sour crude, is used as a proxy for the price of Indian crude basket as Indian crude basket consists of sweet and sour crude, of which sour crude has a major share), production of crude oil, income (GDP), consumption of alternative fuel, index of industrial production are independent variables. However to prevent the error of autocorrelation, we will run a separate regression wherein consumption of crude oil will be the dependent variable and income that is GDP will be the independent variable. We have taken a time series annual data from 1993 to 2005.

Results (Consumption of crude oil as dependent variable and IIP, alternative fuel consumption, production of crude oil, price as dependent variable.)

Total Observations 13 R Squared 0.9839

Degree of freedom 8

Adjusted R Squared 0.9759 3.7921e+09 122.54

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Sum of Squared Residuals Regression F (4, 8)

Significance Level of F

0.00000000

Source

SS

df

MS

Number of obs = F( 4,

13

------------------------------------------Model 2.3235e+11 4 8 5.8087e+10 474015104

8) = 122.54 = 0.0000 = 0.9839

Prob > F R-squared

Residual 3.7921e+09

------------------------------------------Total 2.3614e+11 12 1.9678e+10

Adj R-squared = 0.9759 Root MSE = 21772

-----------------------------------------------------------------------------consumption Coef. Std. Err. t P>|t| [95% Conf. Interval]

----------------------------------------------------------------------------production iip -0.4958196 .5170738 5574.248 416.6307 -0.96 13.38 0.366 -1.688194 .6965547 0.000 4613.496 6535

alternative -204.4483 899.2901 -0.23 0.826 -2278.215 1869.318 priceoman -7084.591 1421.646 -4.98 0.001 -10362.91 -3806.27 _cons 320200.8 184141.4 1.27 0.240 -121719.6 419759.9

Interpretations

The sign of IIP coefficient is positive which means that as industries flourish, more of crude oil is required and hence consumption of crude oil increases. A negative coefficient of price indicates that there is a inverse relation between price and consumption that is as price increases, consumption falls and vice versa. The sign of alternative fuel consumption coefficient has a negative sign which means that there is an inverse relation between consumption of crude oil and consumption of alternative fuel that is when consumption of crude oil increases, consumption of alternative fuel goes down. R Squared is 98.39% indicating that 98.39% of changes in consumption of crude oil are explained by the changes in the independent variables taken in the model.
35

(Consumption of crude oil as dependent variable and income as independent variable)

Total Observations 13 R Squared 0.8946

Degree of freedom 11

Adjusted R Squared 0.8850 2.4892e+10 93.35 0.00000000

Sum of Squared Residuals Regression F (1, 11) Significance Level of F

Source |

SS

df

MS

Number of obs =

13

------------------------------------------Model 2.1125e+11 1 2.1125e+11 2.2629e+09

F( 1, 11) = 93.35 Prob > F R-squared = 0.0000 = 0.8946

Residual 2.4892e+10 11

------------------------------------------Total 2.3614e+11 12 1.9678e+10

Adj R-squared = 0.8850 Root MSE = 47570

-----------------------------------------------------------------------------consumption Coef. Std. Err. t P>|t| [95% Conf. Interval]

----------------------------------------------------------------------------income _cons 7.217351 .7469852 150999.1 60385.56 9.66 0.000 2.50 0.029 5.573247 8.861454 18091.38 283906.8

Interpretations
36

 The sign of income coefficient is positive which means that as countrys GDP increases, that is, as country experiences positive growth rate, countrys consumption of crude oil increases. R Squared is 89.46% which means that 89.46% of changes in consumption of crude oil are explained by changes in the independent variable taken in the model.

*******************

V. LINEAR REGRESSION ANALYSIS OF CRUDE OIL PRICES

37

Objective To see how price of crude oil depends upon demand and supply of crude oil. Data (million barrels): Demand Supply 1996-1 1996-2 1996-3 1996-4 1997-1 1997-2 1997-3 1997-4 1998-1 1998-2 1998-3 1998-4 1999-1 1999-2 1999-3 1999-4 2000-1 2000-2 2000-3 2000-4 2001-1 2001-2 2001-3 2001-4 6679.4 6360.9 6541.2 6780.4 6633 6570.2 6725.2 6946 6687 6615.7 6789.6 7010.4 6903 6724.9 6900 7130 6997.9 6806.8 7056.4 7120.8 7029 6925.1 7047.2 7148.4 6561.1 6552 6660.8 6762 6678 6743.1 6890.8 7001.2 6939 6943.3 6881.6 6955.2 6813 6688.5 6808 6881.6 6888.7 6970.6 7120.8 7231.2 7020 6952.4 7120.8 7102.4 Price WTI 19.64 21.8 22.43 24.75 22.84 20.04 19.83 19.91 15.98 14.64 14.11 12.9 13 17.65 21.77 24.64 28.81 28.84 31.76 32.01 28.72 27.88 26.78 20.36
38

2002-1 2002-2 2002-3 2002-4 2003-1 2003-2 2003-3 2003-4 2004-1 2004-2 2004-3 2004-4 2005-1 2005-2 2005-3 2005-4 2006-1 2006-2 2006-3 2006-4

6993 6943.3 7130 7304 7182 7052.5 7268 7442.8 7489.3 7380.1 7544 7728 7641 7516.6 7654.4 7746.4 7668 7571.2 7737.2 7866

6885 6934.2 7102.4 7185.2 7146 7152.6 7323.2 7525.6 7471.1 7516.6 7691.2 7774 7569 7716.8 7755.6 7783.2 7668 7716.8 7856.8 7838.4

21.57 26.29 28.27 28.32 34.19 29.11 30.25 31.17 35.18 38.36 43.81 48.22 49.47 53.31 62.96 60.15 63.23 70.41 70.44 59.9

Methodology
The method used for regression analysis is estimation by least squares. Price of crude oil depends upon World crude oil demand and World crude oil supply. Hence in the model, price of crude oil( Price of WTI is taken as proxy for price of crude oil as WTI is US crude oil and US crude oil is largely traded ) is the dependent variable and demand for crude oil and supply of crude oil are independent variables. We have taken a time series quarterly data from 1996 to 2006.

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Results

Total Observations 44 R Squared 0.7836

Degree of freedom 41

Adjusted R Squared 0.7731 2370.38 74.25 0.00000000

Sum of Squared Residuals Regression F (2 , 41) Significance Level of F

Source

SS

df

MS

Number of obs = F( 2, 41) = 74.25 Prob > F R-squared

44

---------------------------------------------------Model 8585.57723 2 41 4292.78862 57.8141616

= 0.0000 = 0.7836

Residual 2370.38062

-----------------------------------------------------Total 10955.9579 43 254.789718

Adj R-squared = 0.7731 Root MSE = 7.6036

-----------------------------------------------------------------------------pricewti Coef. Std. Err. t P>|t| [95% Conf. Interval]

----------------------------------------------------------------------------demand .0043154 supply .0322373 .0102576 .0102228 0.42 3.15 0.676 0.003
40

-.0164002

.025031

.011592 .0528827

_cons

-229.1491

21.59551 -10.61 0.000

-272.7621 -185.5361

41

Interpretations

The coefficient of demand is positive highlighting that there is a positive relation

between demand and price. The reason can be much of the demand for crude oil is coming from developing countries like India and China, and these countries are experiencing a positive growth rate hence higher demand for crude oil irrespective of the prices, that is, demand for crude oil is price inelastic. R Squared is 0.7836 which means that 78.36% of changes in price of crude oil are explained by movements in demand and supply of crude oil. Other factors affecting the price of crude oil can be speculation, reserves etc. US at this time has the maximum oil reserves in the World, however they do not use all their reserves, none of their refinery is into operation. Hence artificially raising their prices could help them in longer run. The coefficient of supply of crude oil is positive indicating a positive relation between supply and price of crude oil that is as price increases, supply also increases.

*******************

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Conclusion and key findings

In keeping with the ambitious goals of the 11th Five-Year Plan, India will emerge by 2012 as Asias largest refined product exporter, and a major global producer of petroleum products. Indias emerging refined product export industry led by RILs Jamnagar facility but also increasingly supported by new OMC refineries is characterised by extremely large-scale, lowcost and modern plants capable of processing heavy crudes and producing complex, clean products. The addition of around 1 mb/d of traded refined product, especially high quality product, in the Indian Ocean rim will substantially strengthen liquid fuel supply chains in this region and deepen currently-underdeveloped Asian trade in refined product. While Indias refining successes are intimately related to the natural comparative advantages of the country itself, it has also been fostered by prudent policies and intervention by the GoI. From an outcomes perspective, the policy mix chosen by the GoI for the refining sector has been highly successful (albeit while coming at a tremendous fiscal cost). The government has single-mindedly pursued large-scale investment in refining capacity through OMCs by extending considerable financial support to these firms; by upholding confidence in OMCs within capital markets; and by providing OMCs the freedom to make investment decisions based on a range of non-commercial factors, as well as strictly commercial ones. Despite its significant successes, in the long-term India faces several challenges to its growing status as global refining powerhouse. Current extensive investment will certainly ensure that India remains a key exporter of refined product, especially in the Asia-Pacific region. However, falling investment in refinery capacity after 2012, owing largely to growing regional excess capacity and a tighter fiscal environment, puts at risk Indias emergence as truly one of the worlds largest refinery centres in the long-term, especially in the context of growing domestic product demand. It is difficult to predict the exact trajectory of Indian refinery investment after 2015, when the current wave of investments will have ended. Certainly, investment will be much lower and more incremental in nature. To a large extent, investment dynamics post-2012 will depend on the content of the 12th Five-Year Plan (beginning in 2012), just as the 11th Five-Year Plan has intimately affected current investment trends. The GoIs move to abolish the tax holidays on refinery investment and construction occurring after 2012, however, suggests that it is content with Indias projected refinery base to 2012 and that it will take a less expansionary attitude to refinery capacity in the future. While from an outcomes perspective the GoIs refinery sector policies have been highly successful, from a cost perspective, they have been close to disastrous. As has been described, in order for OMCs to be in a position to make large-scale refinery investments (and, secondly, in order for OMCs to be able to continue to incur under-recoveries, and thereby to create space for private-sector refiners to prosper), the GoI has been forced to make payments, in various forms, to OMCs amounting to close to USD 60 billion since 2004-05. This figure, for example, is about fifteen times greater than was IOCLs refinery investment for this same period. The combination of managed petroleum product prices and large-scale refinery investment has thus become extremely expensive for the GoI, contributing significantly to an alarming and rapid fiscal overflow since 2008 and temporary concerns of a twin deficits crisis. The funding pattern that has largely underpinned Indias refinery boom is therefore clearly and entirely unsustainable. Although a great deal of investment has been completed, India will need to incrementally add refinery capacity after 2012 to maintain its export potential. Given Indias fiscal circumstances, and under rapidly tightening budgetary conditions, this investment should
43

be increasingly sought commercially from the private-sector, including from IOCs. In order to promote increasing private-sector involvement in Indian refining, including foreign privatesector involvement, the GoI must begin the process of product market liberalisation, which will help to foster timely, effective investment responses to clear market signals, and work to encourage high-quality investment from private-sector refiners. In turn, liberalisation will reduce the dependence of OMCs on the GoI for working capital, allowing these companies, too, to invest in an efficient and timely fashion. Reform to pricing policy in product markets will thus reduce the fiscal burden of the current system of unofficial subsidies on the GoI, and promote least-cost refining investment responses. Such reform also has secondary benefits. Clear price signals encourage fuel conservation and substitution. This will simultaneously reduce Indias crude import costs, and, as substitution to cleaner fuels occurs, greenhouse gas emissions will be reduced as well while boosting energy security. For each of these reasons, the GoI should move in the direction of market-based reform in petrol, diesel, LPG and kerosene markets. It should do this, however, while employing effective policy tools, such as price ceilings and highly targeted subsidies that provide energy market access for poor Indians, especially in LPG and kerosene markets.

LIST OF TABLES
1.1 1.2 Production, consumption, net imports and reserves of petroleum (2005-2006) Production, consumption , net imports and reserves of natural gas (2005-2006)
44

1.3 1.4 2.1 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9

Production, consumption, net exports of coal (2005-2006) Net generation, consumption, installed capacity of electricity (2005-2006) World 2007 top oil producer, consumer, exporter, importers as in 2006-

Company wise location, capacity of refineries in India as on April, 2007 Domestic consumption (2000-2007) of petroleum products and crude oil

Domestic production of crude oil (2000-2007) Domestic production of petroleum products (2000-2007) Imports of crude oil (2000-2007) Gross imports of petroleum products (2003-2007) Exports of petroleum products (2003-2007) Net imports of petroleum products (2003-2007) Domestic oil reserves (1990, 2000-2007)

REFERENCES
45

Supplements, journals and annual reports of:

Ministry of Petroleum and Natural Gas OPEC Tata Energy Research Institute (TERI) International Energy Agency (IEA) Central Statistical Organisation (CSO) Ministry of Transport Petroleum Planning and Analysis Cell, New Delhi ONGC, OIL, DGH CRISIL Facts Software used for Econometric model I and II is STATA.

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