Emerging domestic and international scenario in Oil & Gas sector

Oil as the chief driver of economy needs no special mention. As a composite product the position of oil deserves special attention with respect to its importance in macro-economic & micro-economic applications which extend to our day to day life. Time has come to such a pass that oil has been on the discussion tables of not only the economists across the world but also in households. Much has been discussed about the past events, primarily those leading to high oil prices which have the potential to mark a dent on any emerging economy and can also puncture a consumer’s pocket. In view of the above stated implications the focus rightly shifts to the emerging scenario in Oil sector across the nation and also the world. Of quite some time Gas has emerged as the most economical and environment friendly fuel which can replace oil in industrial, commercial and residential applications primarily due to its plentiful availability. As such any discussion encompassing oil covers the gas sector also by default.

If we scour through projects announcements, there are signs that we’re headed for a capex boom. These include not only capacity augmentation projects but also addition of new capacities. The total refining capacity in India is expected to go up to 260 mmtpa by 2015-2117. Moreover the demand of petroleum products would also be around 280-300 mmtpa by this period. Not only the companies will have to become extremely capital efficient but also the magnitude of fresh capital that needs to be brought in speaks of huge demand that can be gobbled up by upcoming industries across different sectors of the economy. The announced projected capital investment in petroleum products & refining and electricity & energy from FY06 to FY11 is at Rs. 44,880 and 2,69,303 crore respectively. Economists are also pursuing integration of O&G sector with Power sector. It becomes imperative to develop an approach which leads to timely completion of energy projects or we might lose the opportunity to tap the potential offered by gas in view of its escalating prices. The marketing margins will continue to pose challenges; as such the companies will need to support their marketing activities through a slew of innovative ancillary activities.
Keeping in view the volatility associated with oil prices the focus of companies will need to develop efficient price-risk management strategies. More and more crude will have to be sourced from spot markets.

Nations with untapped potential are moving towards self-reliance in terms of sourcing their crude needs. For those without any substantial indigenous crude diversified sources of supply will have to be sought. Emerging economies like China, India will be the main drivers of oil demand & hence oil prices too.

OPEC crude having life of another 150 years will continue to attract special attention from growing economies. It has to be accepted that non-OPEC crude will passover in the hands of major players which will serve the bigger nations leaving the developing nations at the mercy of OPEC. Relations with OPEC nations will have to be more inclusive and nations should pursue FTAs with OPEC to secure long term oil supplies. Light crude is slowly drying up and countries like Venezuela will assume more importance in the oil markets with a huge supply of (unofficial) heavy crude waiting to be tapped. Current prices of oil have also pushed up efforts in R&D of viable alternatives like CBM, gas hydrates, and oil shales. In short term we might see some production from these alternatives, though long term projections will definitely depend upon the oil prices in the coming time. The future E&P projects as well as refinery projects will have to face stricter environmental regulations and timely execution of the projects will hold key to success of the newer ventures.

India has an infinite demand for gas, which is projected to quadruple over the next 20 years. India is making enormous efforts to maximize the share of gas in the overall energy basket to meet its growing economic growth targets. As such various projects like LNG sourcing, pipelines feasibility and R&D in CBM are being taken up on priority basis. It needs to be mentioned that diversified supply sources will help rather than depending on a few producers. The indigenous gas market ought to be developed at a fast pace in order to decrease dependence on oil and also to find a ready market for the future gas supplies. Investing in pipelines and gas grids is the need of the hour. Gas pricing and regulatory issues will hold the key in developing the national gas market.

World natural gas consumption is projected to more than double in the next three decades. The share of natural gas in the world energy consumption is expected to increase to 28% by 2025. Gas demand is projected to grow most rapidly in Africa, Latin America and developing Asia. Again OPEC will prove to be a good supplier of gas in the years to come. Peaking oil has been shifting attention to gas of late and substantial markets have been developed. U.S. natural gas resources are on the decline while demand has been steadily growing at the rate of 1-2% annually. Recent natural gas price volatility has made analysts re-visit existing natural gas pricing models & contemplate newer concepts including price elasticity of demand. The attention will also shift on Russian reserves. Construction of transportation infrastructure is the major barrier to increased gas consumption. Investment in E&P, development of declining fields and LNG terminals will consume the bulk of investment in gas. Investments will have to come in risky political areas like Middle East, Algeria, T&T and Russia to name a few. European demand will be largely met by Russia. Alaska will do the same for U.S. in view of decreasing supplies from Canada. China is destined to be the fourth largest gas market by 2020 the frontrunners being USA, EU-25 & Russia. China’s current strategy of sourcing 65% of gas from domestic sources will need to be revisited in future considering its lack of technical, R&D, health & safety standards. By and large the vision for gas will depend enormously on the supply of vast sums of financial and intellectual capital.
LNG, the bulk of which will be used for power generation, will account for most of the increase in traded gas. OPEC countries will continue to dominate the supply of LNG.