Economics Presentation..

Collusive oligopoly and OPEC. What are the possible cartel formation in petroleum companies in India?

Oligopoly market structure: An Introduction

An oligopoly describes a market situation in which there are limited or few sellers.   Each seller knows that the other seller or sellers will react to its changes in prices and also quantities.This can cause a type of chain reaction in a market situation. In the world market there are oligopolies in steel production, automobiles, semi-conductor manufacturing, cigarettes, cereals, and also in telecommunications.   Often oligopolistic industries supply a similar or identical product. These companies tend to maximize their profits by forming a cartel and acting like a monopoly. A cartel is an association of producers in a certain industry that agree to set common prices and output quotas to prevent competition. The larger the cartel the more likely it will be that each member will increase output and causes the price of a good to be lower.   The majority of time an oligopoly is used to describe a world market; however, the term oligopoly also describes conditions in smaller markets where a few gas stations, grocery stores or alternative restaurants or establishments dominate in their fields.   A distinguishing characteristic of an oligopoly is the interdependence of firms.   This means that any action on the part of one firm with respect to output, price, or quality will cause a reaction on the side of other firms.   Many times an oligopoly leads to price leadership between many firms.   A price leadership is the practice in many oligopolistic industries in which the largest firm publishes its price list ahead of its competitors.   Then these competitors feel the need to match those announced prices so they lower their prices.   This is also termed a parallel pricing. Other characteristics of an oligopoly market include:

Entry and Exit: Barriers to entry are high. The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firm.Number of firms: "Few"–a "handful" of sellers. There are so few firms that the actions of one firm can influence the actions of the other firms.Long Run Profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits.Product differentiation: Product may be standardized (steel) or differentiated (automobiles)Perfect Knowledge Assumptions about perfect knowledge vary but the knowledge of various economic actors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product quality.

Interdependence: The distinctive feature of an oligopoly is interdependence.Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm's market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm's countermoves.It is very much like a game of chess or pool in which a player must anticipate a whole sequence of moves and countermoves in determining how to achieve his objectives. For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also lower their prices and possibly trigger a ruinous price war. Or if the firm is considering a price increase, it may want to know whether other firms will also increase prices or hold existing prices constant. This high degree of interdependence and need to be aware of what the other guy is doing or might do is to be contrasted with lack of interdependence in other market structures. In a PC market there is zero interdependence because no firm is large enough to affect market price. All firms in a PC market are price takers, information which they robotically follow in maximizing profits. In a monopoly there are no competitors to be concerned about. In a monopolistically competitive market each firm's effects on market conditions is so negligible as to be safely ignored by competitors.

Determining the oligopoly market structure:

Step 1: Determining the demand curve:Consider the two demand curves. An oligopolistic might not know which of these demand curves it faces. Suppose a firm knows that any time it raises or lowers its prices all other firms in the industry will do the same. In this case it faces DI, the inelastic curve. If all firms change prices together, the effect of a price change won't have a large effect on the sales of any one of the firms. If no other firms follow its changes in prices the firm will instead find itself on DE, a much more elastic demand curves. If the firm is the only one to raise prices it will experience a large drop in sales. Likewise, if it is the only one to lower prices it will find sales increase rapidly. So DE is the relevant demand curve if others don't follow the firms price changes.

Before it can set profit maximizing price and quantity the firm must determine which the appropriate demand curve is. The kinked demand curve model is based on the idea that, if the firm raises prices other firms won't follow because they don't worry about losing market share to a firm which is raising price. However, if the firm lowers its prices other firms will respond by lowering their prices also since they don't want to lose market share.

Step 2: Kinked demand curve of oligopolistic market:

If price increases are ignored by other firms but price decreases lead to lowering of prices by competitors the firm will face a kinked demand curve as shown below, with the kink at the current market price of P*

   Keep in mind that the firm's belief that it faces a kinked demand curve comes from basic strategic considerations. It believes that competitors won't respond to price increases but that they will respond to price decreases. This in turn, means that the elasticity of the demand curve it faces depends on the direction of a price change. From here we use the simple logic of profit maximization to analyze behavior.

Step 3: Determining the MR curve

If the demand curve is kinked as considered the marginal revenue curve will have an unusual shape. As always the marginal revenue curve lies below the relevant demand curve and is steeper, so it makes sense that the MR curve shown here has two segments with very different slopes. What is unusual is the gap in the MR curve, shown by the dashed line. Simply put, if the firm lowers price below P* a strong reaction from competitors occurs in the form of industry wide price drops. This causes MR to drop dramatically, causing a gap in the curve.

Step 4: Determining the equilibrium position:

If marginal costs fall in the gap of the MR curve P* will remain the profit maximizing price and Q* will be the profit maximizing output.

   One of the points of the kinked demand curve model was that it provided an explanation for a behavior that economists were well aware of within oligopoly. It had been observed that firms in oligopolistic industries didn't change price and output often, even when production costs were known to have changed.

   It turns out that this simple bit of strategic thinking on the part of firms in an oligopoly was able to explain this otherwise strange phenomenon, strange because all our models have shown that profit maximizing firms will change price and output when variable costs change.

Step 5: Profit maximizing equilibrium:

If marginal costs fall anywhere between MC1 and MC2 the firm will choose to leave price and output unchanged. Because of its belief about how other firms will respond to a price change the firm is better off not altering price even in the face of rather significant changes in production costs.

   As we will see, strategic considerations can cause behavior that varies considerably from the simple mechanistic responses predicted by profit maximization. Not that there is anything wrong with the profit maximizing model in other industrial structures, but it doesn’t capture the rich strategic complexity that we must allow for in our study of oligopoly.

Step 6: Individual firm to industry:

In the diagram below a producer cartel is assumed to fix the cartel price at output Qm and price Pm. The distribution of the cartel output may be allocated on the basis of an output quota system or another process of negotiation.

Although the cartel as a whole is maximizing profits, the individual firm’s output quota is unlikely to be at their profit maximizing point. For any one firm, within the cartel, expanding output and selling at a price that slightly undercuts the cartel price can achieve extra profits. Unfortunately if one firm does this, it is in each firm’s interests to do exactly the same. If all firms break the terms of their cartel agreement, the result will be an excess supply in the market and a sharp fall in the price. Under these circumstances, a cartel agreement might break down.

Having determined the kinked market demand curve of an oligopoly market, we need to understand what a collusive oligopoly implies. Thus, a collusive oligopoly is defined in the study of economics and market competition, when within an industry rival companies cooperate for their mutual benefit. Collusion most often takes place within the market structure of oligopoly, where the decision of a few firms to collude can significantly impact

the market as a whole. Cartels are a special case of explicit collusion. Collusion which is not overt, on the other hand, is known as tacit collusion.The best example of a collusive oligopoly is Organization of the Petroleum Exporting Countries, OPEC.  In the following study we have found evidences that OPEC is a collusive oligopoly market where it has formed a cartel among international petroleum exporters and controlled the market of petroleum as a whole.

OPEC: The Oil Cartel

First of all let us define what a cartel is: A cartel is a formal (explicit) agreement among competing firms. It is a formal Organization of producers and manufacturers that agree to fix prices, marketing, and production.Cartels usually occur in an oligopolistic industry, where there are a small number of sellers and usually involve homogeneous products. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. The aim of such collusion (also called the cartel agreement) is to increase individual members' profits by reducing competition. One can distinguish private cartels from public cartels. In the public cartel a government is involved to enforce the cartel agreement, and the government's sovereignty shields such cartels from legal actions. Contrariwise, private cartels are subject to legal liability under the antitrust laws now found in nearly every nation of the world. Competition laws often forbid private cartels.

Identifying and breaking up cartels is an important part of the competition policy in most countries, although proving the existence of a cartel is rarely easy, as firms are usually not so careless as to put agreements to collude on paper.The example of one of the most important and influential international cartel in the petroleum market is OPEC.

An introduction:

OPEC is a permanent, intergovernmental organization, established in Baghdad, Iraq,10–14 September 1960.The Organization of the Petroleum Exporting Countries is a cartel of twelve countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC hosts regular meetings among the oil ministers of its Member Countries. Indonesia withdrew in 2008 after it became a net importer of oil, but stated it would likely return if it became a net exporter in the world again.

According to its statutes, one of the principal goals is the determination of the best means for safeguarding the cartel's interests, individually and collectively. It also pursues ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations; giving due regard at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry.OPEC nations account for two-thirds of the world's oil reserves, and, as of April 2009, 33.3% of the world's oil production, affording them considerable control over the global market. The next largest group of producers, members of the OECD and the Post-Soviet states produced only 23.8% and 14.8%, respectively, of the world's total oil production.

OPEC's influence on the market has been widely criticized, since it became effective in determining production and prices. Although largely political explanations for the timing and extent of the OPEC price increases are also valid, from OPEC’s point of view, these changes were triggered largely by previous unilateral changes in the world financial system and the ensuing period of high inflation in both the developed and developing world.

Again, OPEC, as an Organization, has maintained its commitment to ensure stablesupplies of crude oil to the market at all times, undertaking an ambitious programmeof investment, aware of the importance of responding to the demand for its crude ina timely manner, while offering an adequate level of spare capacity. However, it is notwithout concern that the Organization observes a repetition of the past, where a largedrop in oil demand leads to damagingly high levels of unused capacity.

The growing need for what some term ‘counter-cyclical’ action to help offset the market’s cyclical behavior has come to the fore, in both the global economy and the international oil market. This can be viewed in the announced stimulus packages to counteract the recession, and OPEC’s actions focused on maintaining oil market stability supply, demand and investments, including such core issues as costs and human resources, over all timeframes.

This scenario also has important implication on OPEC Member Country investmentactivity. Indeed, history has clearly shown the dilemma of having to make investment decisions in a climate of demand pessimism and low oil prices. OPECMember Countries have concerns over the problem of security of demand, and therisk that large investments will be made in capacity that is not needed.

The decision in Oran, Algeria, in December 2008, to further reduce OPEC supply by a total of 4.2 mb/d against the September 2008 level reflects a decisive effort by OPEC Member Countries to restore oil market stability. Similar action has been seen elsewhere. In the face of falling demand, production has been cut in other industriesto try to avoid a damaging build-up of inventories.

In fact, OPEC Member Countries have a sound record of actions aimed at supporting social and economic development in many countries around the globe. This includes through the establishment of their own aid institutions, as well as many effective bilateral and multilateral aid agencies. Among these is the OPEC Fund for International Development (OFID), set up

in 1976 to “reinforce financial cooperation between OPEC Member Countries and other developing countries and promote South-South solidarity.”

In the present time,OPEC's ability to control the price of oil has diminished somewhat due to the subsequent discovery and development of large oil reserves in Alaska, the North Sea, Canada, the Gulf of Mexico, the opening up of Russia, and market modernization.The OPEC Reference Basket rose to a record $141/b in early July before falling to $33/b by thend of the year, the lowest level since summer 2004. The central element linked to this collapse in oil prices, of course, was the global financial crisis that originated in the US, the demand for OPEC crude oil, having fallen in 2009 in the face of the global economic contraction, thereafter rising slowly over the medium-term, returning back to 2008 levels by around 2013.Large investments are currently underway in OPEC Member Countries to expand upstream capacity.

Despite some recent data signaling a slowdown in the rate at which economic output is deteriorating and a gradual return of confidence in financial markets, the consensus among macroeconomic forecasters remains that the economic slowdown will be ‘U-shaped’ rather than ‘V-shaped’, in other words the recovery will gather momentum only gradually.1 Much rests on the success of the bold monetary and fiscal measures undertaken by governments to restore confidence in the banking sector and to provide stimulus to the economy.

Challenges in the oil industry : The high growth and low growth scenarios demonstrate the large level of uncertainty overThe needs for OPEC future upstream capacity, both in terms of volume and investment.

Financial markets and oil prices:

Oil price volatility in the recent past has been extreme.OPEC in particular, stems from the large uncertainties about future demand levels for energy and oil. The uncertainties that lie ahead, and the corresponding difficulties associated with making appropriate and timely investment decisions, underline the importance of exploring other oil supply and demand paths.In addition, there are various other challenges facing the oil industry. Clearly, for

most individuals, businesses and governments, the dramatic changes to the economiclandscape over the past year as the global financial crisis has unfolded are the currentoverriding concern.

Upstream costs

Further uncertainties and challenges include those related to upstream anddownstream costs and the future availability of skilled human resources. On the costissue, for the past few years, the oil industry has seen costs that have been significantlyinflated, in part as a result of the low oil price environment and low margins ten yearsor so ago that led to the implementation of downsizing and cost-cutting strategies.While costs have fallen a little, the question is whether this cost behavior is structuralor cyclical.

Human resources Regarding human resources, the past has shown that it is critical to maintainand enhance the adequacy of the industry’s skills base, even during an economicdownturn. There is a need to advance the numbers of students taking energy-relatedcourses, and to make sure these are open to all students from across the world. Morework needs to be done to help make the industry more attractive to employees, as wellas to future graduates, including easing university enrolment across national boarders.To this end, further coordinated efforts should be undertaken by international oilcompanies, national oil companies, service companies, governments, regulators andacademia.

Technology and the environment

Advancements in technology have helped expand production, improved recovery ratesand at the same time facilitated a continuing increase. There is no doubt that technology will remain pivotal to the industry’s future.Thus, it is essential that the evolution of technology continues, so that the industry can carry on developing, producing, transporting, refining and delivering oil to end-users in an ever more efficient, timely, sustainable and economic manner. The oil industry has a good track record in reducing its environmental footprint. And with the world expected to rely essentially on fossil fuels for many decades to come, it is vital to ensure the early and swift development, deployment, diffusion and transfer of cleaner fossil fuels technologies.

Sustainable development objectives:

It is critical that the world community makes sure access to reliable, affordable, economically viable, socially acceptable and environmentally sound energy services is available to all.

Cooperation and dialogue

Addressing all of these challenges should involve the strengthening and broadening of the dialogue between energy producers and consumers. Given the anticipated future growth of investment requirements in all segments of the oil industry, cooperation among national, international and service companies should be enhanced, taking into account the diverse national circumstances and priorities, the permanent sovereignty of nations over their natural resources, the interests of host countries and the objective of investors for a fair return on their capital.

OIL INDUSTRY AS AN EVER GROWING MARKET:

Under all scenarios, energy use is set to rise. In the Reference Case, it increases by

42% from 2007–2030. Developing countries will account for most of these increases,by virtue of higher population and economic growth.

Developing countries are set to account for most of the long-term demandincrease, with consumption rising 23 mb/d over the period 2008–2030 to reach56 mb/d. Almost 80% of the net growth in oil demand from 2008–2030 is in developingAsia.

The transportation sector is the main source of future oil demand growth, accountingfor over 60% of the total increase to 2030.

Oil use is at the heart of much industrial activity. In addition to the petrochemicalsindustry, diesel and heavy fuel oil, in particular, are needed in construction andother major industries such as energy, iron and steel, machinery and paper. The strongestincrease in the industry sector comes from developing Asia.

It is estimated that around 6 mb/d of new crude distillation capacity willbe added to the global refining system from existing projects by 2015. Almost50% of this new capacity is located in Asia, mainly China and India. To have this capacity in place, the global refining system will require around $780 billion (2008 dollars) of investment to 2030. The Asia-Pacific region should attract the highest portion of these investments.

Aviation oil demand in 2007 was less than one-sixth of that for road transportation,accounting for a little over 6% of world demand. The OECD currently accountsfor around two-thirds of world aviation oil demand, more than double that consumedin developing countries.

Oil use trends in the residential sector are affected by the move away fromtraditional fuels in developing countries, as a result of rising urbanization. facilitating access to commercial energy, social progress and increasing averagepersonal wealth.

For the agricultural sector, oil use continues to improve productivity in many parts of the world in such activities as tilling, sowing, the application of fertilizers and pesticides, harvesting and post-harvesting, and the transport of harvested crops.

India needs to take advantage of its strategic leadership in refining and increase its refining capacity, as demand for petroleum products is high in Asia. India's close neighbors themselves are energy deficient countries and there is a huge potential for exports of petroleum products to Pakistan, Myanmar and China. Besides, the huge demand that exists in Japan could also be captured.

Prospect of Cartel formation: India

The growing need for petroleum product in the developing countries has brought about the need for India to become self sufficient by overcoming the challenges faced by the present cartel and the oil industry.As of July 2005, there were a total of 18 refineries in India with an aggregate installed capacity of 127 million metric tonnes per annum. Provisional data for the production of petroleum products for the year 2004-05 was placed at 120.47 million tonnes, up from 115.78 million tons in the previous year.In the year 2000-01, India was a net importer of petroleum products. However,since 2001-02, India has become a net exporter of petroleum products. This could happen mainly due to increase in refining capacity.

Several steps has been initiated in the same line wherein India’s government approved a new ‘Integrated Energy Policy’ in December 2008. The new energy policy reportedly focuses on developing a road map to achieve sustainable growth and energy security. The policy would make energy markets more competitive through the market-based energy pricing of coal and petroleum.

The major players in the petroleum industries are:

Indian oil corporation limited:

The Indian Oil Corporation Ltd. operates as the largest company in India in terms of turnover .The oil concern is administratively controlled by India's Ministry of Petroleum and Natural Gas, a government entity that owns just over 90 percent of the firm. Since 1959, this refining, marketing, and international trading company served the Indian state with the important task of reducing India's dependence on foreign oil and thus conserving valuable foreign exchange. That changed in April 2002, however, when the Indian government deregulated its petroleum industry and ended Indian Oil's monopoly on crude oil imports. The firm owns and operatesseven of the 17 refineries in India, controlling nearly 40 percent of the country's refining capacity. The oil industry in India changed dramatically throughout the 1990s and into thenew millennium. To prepare for the increased competition that deregulation would bring, Indian Oil added a seventh refinery to its holdings in 1998 when the Panipat facility wascommissioned. The company also looked to strengthen its industry position by forming joint ventures.

Indian Oil also entered the public arena as the government divested nearly 10 percent of the company. In 2000, Indian Oil and ONGC traded a 10 percent equity stake in each other in a strategic alliance that would better position the two

According to a 1999 Hindu article" The article went on to claim that "whilemaintaining its leadership in oil refining, marketing and pipeline transportation, itaims for higher growth through integration and diversification. In early 2002, Indian Oil acquired IBP, a state-owned petroleum marketing company. The firm also purchased a 26 percent stake in financially troubled Haldia Petrochemicals Ltd. In April of that year, Indian Oil's monopoly over crude imports ended as deregulation of the petroleum industry went into effect. As a result, the company faced increased competition from large international firms aswell as new domestic entrants to the market.

ONGC: OIL AND NATURAL GAS CORPORATION

ONGC’s wholly-owned subsidiary ONGC Videsh Ltd. (OVL) is the biggest Indian multinational, with 40 Oil & Gas projects (9 of them producing) in 15 countries, i.e. Vietnam, Sudan, Russia, Iraq, Iran, Myanmar, Libya, Cuba, Colombia, Nigeria, Nigeria Sao Tome JDZ, Egypt, Brazil, Syria and Venezuela. OVL had invested around Rs 50,000 Crores (Approx 10 billion US dollars).

ONGC has single-handedly scripted India’s hydrocarbon saga by:

• Establishing 6.89 billion tonnes of In-place hydrocarbon reserves with more than 300 discoveries of oil and gas; in fact, 6 out of the 7 producing basins have been discovered by

ONGC: out of these In-place hydrocarbons in domestic acreages, Ultimate Reserves are 2.42 Billion Metric tonnes (BMT) of Oil Plus Oil Equivalent Gas (O+OEG).

•Cumulatively produced 803 Million Metric Tonnes (MMT) of crude and 485 Billion Cubic Meters (BCM) of Natural Gas, from 111 fields.

•ONGC has bagged 120 of the 238 Blocks (more than 50%) awarded in the 8 rounds of bidding, under the New Exploration Licensing Policy (NELP) of the Indian Government. ONGC has bagged 17 out of 31 blocks awarded in NELP round VIII (14 as operator).

ONGC is the only fully–integrated petroleum company in India, operating along the entire hydrocarbon value chain:

Holds largest share of hydrocarbon acreages in India. Contributes over 79 per cent of Indian’s oil and gas production. Refining capacity of about 12 MMTPA. Created a record of sorts by turning Mangalore Refinery and Petrochemicals Limited

around from being a stretcher case for referral to BIFR to the BSE Top 30, within a year. Interests in LNG and product transportation business

The competitive strength of the company is:

All crudes are sweet and most (76%) are light, with sulphur percentage ranging from 0.02-0.10, API gravity range 26°-46° and hence attract a premium in the market.Strong intellectual property base, information, knowledge, skills and experience

Maximum number of Exploration Licenses, including competitive NELP rounds. ONGC has bagged 120 of the 238 Blocks awarded in the 8 rounds of bidding, under the New Exploration Licensing Policy (NELP) of the Indian Government. ONGC has begged 17 out of 31 blocks awarded in NELP round VIII(14 as operator).

ONGC owns and operates more than 22000 kilometers of pipelines in India, including nearly 4500 kilometers of sub-sea pipelines. No other company in India, operates even 50 per cent of this route length.

Bharat petroleum

On 24th January 1976, the Burmah Shell Group of Companies was taken over by the Government of India to form Bharat Refineries Limited. On 1st August 1977, it was renamed Bharat Petroleum Corporation Limited. It was also the first refinery to process newly found indigenous crude (Bombay High), in the country.

The core strength of Bharat Petroleum Corporation Limited has always been the ardent pursuit of qualitative excellence for maximization of customer satisfaction. Thus Bharat Petroleum, the erstwhile Burmah Shell, has today become one of the most formidable names in the petroleum industry.Bharat Petroleum produces a diverse range of products, from petrochemicals and solvents to aircraft fuel and specialty lubricants and markets them

through its wide network of Petrol Stations, Kerosene Dealers, LPG Distributors, Lube Shoppes, besides supplying fuel directly to hundreds of industries, and several international and domestic airlines.The vision of the company:

They are a leading energy company with global presence through sustained aggressive growth and high profitability

They are the first choice of customers, always They exploit profitability growth opportunity outside energy They are the most environment friendly company They are a great organization to work for They are a learning organization They are a model corporate entity with social responsibility.

Essar group:

Essar Oil's assets include developmental rights in proven exploration blocks, a 10.5 mtpa refinery on the west coast of India and over 1,300 Essar-branded oil retail outlets across India. Plans are under way to increase its exploration acreage in various parts of the globe, expand its refinery capacity to 18 mtpa, and open 1,700 outlets countrywide.

Their global portfolio of onshore and offshore oil and gas blocks, with about 70,000 sq km is available for exploration. We have over 300,000 bpsd (barrels per stream day) of crude refining capacity that is being expanded to 750,000 bpsd, with a goal to reach a global refining capacity of 1 million bpsd. We have a 50 percent stake in Kenya Petroleum Refineries Ltd., which operates a refinery in Mombasa, Kenya, with a capacity of 80,000 bpsd.  Their Exploration and Production (E&P) business has participating interests in several hydrocarbon blocks for exploration and production of oil and gas. This includes the Ratna and R-Series blocks on Bombay High, and an E&P block in Mehsana, Gujarat, which has currently started commercial production. It has also been awarded a Coal Bed Methane (CBM) block at Raniganj in West Bengal, and two more E&P blocks in Assam, India. The overseas E&P assets include three onshore oil and gas blocks in Madagascar, Africa, and one offshore block each in Vietnam and Nigeria. 

They have a 10.5 mtpa refinery at Vadinar in Gujarat, which started commercial production on May 1, 2008. It has been built with state-of-the-art technology and has the capability to produce petrol and diesel suitable for use in India as well as advanced international markets.

It will also produce LPG, Naphtha, light diesel oil, Aviation Turbine Fuel (ATF) and kerosene. The refinery has been designed to handle a diverse range of crude — from sweet to sour and light to heavy. It is supported by an end-to-end infrastructure setup including SBM (Single Buoy Mooring), crude oil tankage, water intake facilities, a captive power plant (currently 120 MW, being expanded to 1,010 MW), product jetty and dispatch facilities by both rail and road.

The refinery is strategically located in Vadinar, a natural all-weather, deep-draft port that can accommodate Very Large Crude Carriers (VLCCs). Vadinar also receives almost 70 percent of India’s crude imports. Post its expansion to 36 mtpa, the refinery will run at a Nelson Complexity of 12.8. This means it will be able to refine all varieties of crude, producing Euro 5 grade fuels. It will also be among the largest single location refineries in the world thus leveraging on economies of scale.

Essar Oil serves retail customers through a modern, countrywide network of over 1,300 retail outlets. We were the first private Indian company to enter petro retailing, looking beyond urban markets and reaching out to consumers in India’s heartland.

They offer a wide range of products to bulk customers in the industrial and transport sectors. EOL has product off take and infrastructure sharing agreements with oil PSUs, namely Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL) and Indian Oil Corporation (IOCL). We have received approvals to supply Aviation Turbine Fuel (ATF) to the Indian Armed Forces.

HPCL:HPCL is a Fortune 500 company, with an annual turnover of  Rs. 1,08,599 Cores and sales/income from operations of Rs 1,14,889 Crores (US$ 25,306 Millions) during FY 2009-10, having about 20% Marketing share in India and a strong market infrastructure.

HPCL operates 2 major refineries producing a wide variety of petroleum fuels & specialties, one in Mumbai (West Coast) of 6.5 Million Metric Tonnes Per Annum (MMTPA) capacity and the other in Vishakapatnam, (East Coast) with a capacity of 8.3 MMTPA. HPCL holds an equity stake of 16.95% in Mangalore Refinery & Petrochemicals Limited, a state-of-the-art refinery at Mangalore with a capacity of 9 MMTPA. In addition, HPCL is constructing a refinery at Bhatinda, in the state of Punjab, as a Joint venture with  Mittal Energy Investments Pte. Ltd.

HPCL also owns and operates the largest Lube Refinery in the country producing Lube Base Oils of international standards, with a capacity of 335 TMT. This Lube Refinery accounts for over 40% of the India's total Lube Base Oil production.  HPCL's vast marketing network consists of 13 Zonal offices in major cities and 101 Regional Offices facilitated by a Supply & Distribution infrastructure comprising Terminals, Aviation Service Stations, LPG Bottling Plants, and Inland Relay Depots & Retail Outlets, Lube and LPG Distributorships. HPCL, over the years, has moved from strength to strength on all fronts. The refining capacity steadily increased from 5.5 MMTPA in 1984/85 to 14.8 MMTPA presently. On the financial front, the turnover grew from Rs. 2687 Crores in 1984-85 to an impressive Rs 1,16,428 Crores in FY 2008-09.

GAIL:

GAIL (India) Limited, is India's flagship Natural Gas company, integrating all aspects of the Natural Gas value chain (including Exploration & Production, Processing, Transmission, Distribution and Marketing) and its related services. In a rapidly changing scenario, we are spearheading the move to a new era of clean fuel industrialization, creating a quadrilateral of green energy corridors that connect major consumption centers in India with major gas fields, LNG terminals and other cross border gas sourcing points. GAIL is also expanding its business to become a player in the International Market.

Today, GAIL's Business Portfolio includes:

7,847 km of Natural Gas high pressure trunk pipeline with a capacity to carry 157 MMSCMD of natural gas across the country

7 LPG Gas Processing Units to produce 1.2 MMTPA of LPG and other liquid hydrocarbons

North India's only gas based integrated Petrochemical complex at Pata with a capacity of producing 4,10,000 TPA of Polymers

1,922 km of LPG Transmission pipeline network with a capacity to transport 3.8 MMTPA of LPG

27 oil and gas Exploration blocks and 1 Coal Bed Methane Blocks 13,000 km of OFC network offering highly dependable bandwidth for telecom service

providers Joint venture companies in Delhi, Mumbai, Hyderabad, Kanpur, Agra, Lucknow,

Bhopal, Agartala and Pune, for supplying Piped Natural Gas (PNG) to households and commercial users, and Compressed Natural Gas (CNG) to the transport sector

Participating stake in the Dahej LNG Terminal and the upcoming Kochi LNG Terminal in Kerala

GAIL has been entrusted with the responsibility of reviving the LNG terminal at Dabhol as well as sourcing LNG

GAIL Gas Limited, a wholly owned subsidiary of GAIL (India) Limited, was incorporated on May 27, 2008 for the smooth implementation of City Gas Distribution (CGD) projects. GAIL Gas Limited is a limited company under the Companies Act, 1956.

Established presence in the CNG and City Gas sectors in Egypt through equity participation in three Egyptian companies: Fayum Gas Company SAE, Shell CNG SAE and National Gas Company SAE.

Stake in China Gas Holding to explore opportunities in the CNG sector in mainland China

A wholly-owned subsidiary company GAIL Global (Singapore) Pte Ltd in Singapore .

Reliance natural resource limited:

Reliance Natural Resources Limited (the "Gas Based Energy Resulting Company") was originally incorporated on the March 24, 2000, under the Companies Act, 1956 as Reliance Platforms Communications.Com Private Limited. The status of the Company changed from private limited to public limited on July 25, 2005. Reliance Natural Resources Limited (RNRL) is engaged in the business of sourcing, supply and transportation of gas, coal and liquid fuels. The company is concentrating on building a strong foundation for the business of

fuel management and has already established itself as a contending player in the Indian market.

RNRL has been awarded four CBM blocks, with an acreage of about 3,251 sq. kms, for the exploration and production of coal bed methane (CBM), making it the second largest CBM player in India in terms of acreage. The Company has applied for Petroleum Exploration License ( PEL ) for all four blocks to the Governments of the concerned States. The company has received the PEL for two blocks(Barmer 4&5) located in Rajasthan for which operations have commenced.

RNRL has also been awarded an oil and gas block with acreage of about 3,619 Sq. Kms. in the state of Mizoram under the sixth round of the New Exploration Licensing Policy (NELP–VI) for the exploration and production of oil and gas. The Company has received PEL for this block and has commenced exploration activities.

RNRL is actively pursuing business opportunities in the supply management of coal and natural gas.

Scope of cartel formation:

According to Oil & Gas Journal (OGJ), India  had approximately 5.6 billion barrels of proven oil reserves as of January 2010, the second-largest amount in the Asia-Pacific region after China. India’s crude oil reserves tend to be light and sweet, with specific gravity varying from 38° API in the offshore Mumbai High field to 32° API at other onshore basins.

India produced roughly 880 thousand barrels per day (bbl/d) of total oil in 2009 from over 3,600 operating oil wells. Approximately 680 thousand bbl/d was crude oil, the remainder was other liquids and refinery gain. In 2009, India consumed nearly 3 million bbl/d, making it the fourth largest consumer of oil in the world. EIA expects approximately 100 thousand bbl/d annual consumption growth through 2011.

The combination of rising oil consumption and relatively flat production has left India increasingly dependent on imports to meet its petroleum demand. In 2009, India was the sixth largest net importer of oil in the world, importing nearly 2.1 million bbl/d, or about 70 percent, of its oil needs. The EIA expects India to become the fourth largest net importer of oil in the world by 2025, behind the United States, China, and Japan.

Nearly 70 percent of India’s crude oil imports come from the Middle East, primarily from Saudi Arabia, followed by Iran. The Indian government expects this geographical dependence to rise in light of limited prospects for domestic production.

The basis on which the cartel can be formed in India are:

Sector Organization

Though the government has taken steps in recent years to deregulate the hydrocarbons industry and encourage greater foreign involvement, India’s oil sector is dominated by state-owned enterprises. India’s state-owned Oil and Natural Gas Corporation (ONGC) is the

largest oil company and dominates India’s upstream sector. State-owned Oil India Limited (OIL) is the next largest oil producer. Other major state-run players include the Indian Oil Corporation (IOC) and the Gas Authority of Indian Limited (GAIL). In addition, the private Indian firm, Reliance Industries Limited, is becoming a significant operator in the oil sector and is the largest private oil and gas company in the country. Cairn India, a branch of UK-based Cairn Energy, and BG Exploration are also important private sector operators in the industry.

As a net importer of oil, the Indian government has policies aimed at increasing domestic exploration and production (E&P) activities. As part of an effort to attract oil majors with deepwater drilling experience and other technical expertise, the Ministry of Petroleum and Natural Gas created the New Exploration License Policy (NELP) in 2000, which for the first time permits foreign companies to hold 100 percent equity ownership in oil and natural gas projects. Despite this, international oil and gas companies currently operate a small number of fields.

India’s downstream sector is also dominated by state-owned entities. The Indian Oil Corporation (IOC) is the largest state-owned company in the downstream sector, operating 10 of India’s 18 refineries and controlling about three-quarters of the domestic oil pipeline transportation network. Reliance Industries opened India’s first privately-owned refinery in 1999, and has gained a considerable market share in India’s oil sector.

Suggestion: Infrastructure creation

The demand for petroleum products in India is high in north and north- western region and coastal locations are appropriate for refinery construction because of effective supply and transportation facility. Strategic location of inland refineries with more effective supply and evacuation system through pipelines nearer to the consumer market would add strength to this sector.

Exploration and Production

Most of India’s crude oil reserves are located offshore, in the west of the country, and

onshore in the northeast. Substantial reserves, however, are located offshore in the Bay of

Bengal and in Rajasthan state. India’s largest oil field is the offshore Mumbai High field,

located north-west of Mumbai and operated by ONGC. Another of India’s large oil fields is

the Krishna-Godavari basin, located in the Bay of Bengal. Block D6 in the Krishna-Godavari

basin, operated by Reliance Industries, began oil production in September 2008.adding up.

RNRL has been awarded four CBM blocks, with an acreage of about 3,251 sq. kms, for the

exploration and production of coal bed methane (CBM), making it the second largest CBM

player in India in terms of acreage. Again, Essar Oil's assets include developmental rights in

proven exploration blocks, a 10.5 mtpa refinery on the west coast of India and over 1,300

Essar-branded oil retail outlets across India the primary mechanism through which the Indian

government has promoted new E&P projects has been the NELP framework. The latest round

of auctions, NELP VIII, was launched in April 2009 and attracted nearly $1.1 billion in

investment. India currently plans to launch the NELP IX bidding round in the third quarter of

2010.Since, these companies have such massive reach in the exploration and production

capacity a joint cartel would rather make India a self sufficient producer of petroleum

product.

Suggestions:Capacity addition through de-bottlenecking

De-bottlenecking in refinery means increasing the capacity of the refinery without much capital expenditure. De-bottlenecking is relatively a different concept than capacity expansion, where the capital expenditure and modifications in the plants are relatively high. De-bottlenecking of existing facilities always has been an attractive option to enhance a plant's capacity and profitability. Many Indian refineries, both public and private sector haveincreased the capacity through de-bottlenecking.

Overseas E&P

In recent years, Indian national oil companies have increasingly looked to acquire equity stakes in E&P projects overseas. The most active company abroad is ONGC Videsh Ltd. (OVL), the overseas investment arm of ONGC. OVL conducts oil and natural gas operations in 13 countries, including Vietnam, Myanmar, Russia (Sakhalin Island), Iran, Iraq, Sudan, Brazil, and Columbia. One of OVL’s most high profile investments is its share in the Greater Nile Petroleum Operating Company (GNPOC), which has engaged in E&P work in Sudan since 1997. OVL acquired a 25 percent equity stake in the company in 2003, with the balance held by the China National Petroleum Company (CNPC, 40 percent), Petronas (30 percent), and the Sudan National Oil Company (Sudapet, 5 percent). The GNPOC acreage in Sudan holds proved crude oil reserves of more than one billion barrels with current production levels at roughly 300,000 bbl/d from 10 fields. In addition to the upstream activities, the GNPOC companies operate a 935-mile crude oil pipeline that pumps oil to Port Sudan for export.

OVL also holds a 20 percent stake in the ExxonMobil-led consortium that operates the Sakhalin-I project in Russia. According to company estimates, the oil fields associated with Sakhalin-I hold recoverable crude oil reserves of 2.3 billion barrels.

In addition to ONGC, other Indian companies are also actively involved in E&P projects abroad. OIL, for example, is working on projects in Libya, Gabon, Nigeria, and Sudan.The overseas E&P assets of Essar include three onshore oil and gas blocks in Madagascar, Africa, and one offshore block each in Vietnam and Nigeria. 

Downstream/Refining

According to OGJ, India had 2.8 million bbl/d of crude oil refining capacity at 18 facilities as

of January 1, 2010. India has the fifth largest refinery capacity in the world. In 2009,

privately-owned Reliance Industries added another refinery to its Jamnagar complex to raise

the entire complex’s refining capacity from 660,000 bbl/d to 1.24 million bbl/d. The

Jamnagar complex is the largest oil refinery complex in the world.

Other key upcoming refinery projects include Essar Oil’s Vadinar refinery expansion of

110,000 bbl/d in 2011, 120,000 bbl/d greenfield refinery in Bina in 2011 by a joint venture

between Bharat Petroleum Corporation Limited and Oman Oil Company Limited, a 180,000

bbl/d grassroots refinery in Bhatinda in 2014 by Hindustan Petroleum Corporation Limited,

and IOC’s grassroots Paradeep refinery of 300,000 bbl/d in 2015. India is slated to add 840

thousand bbl/d of refining capacity through 2015 based on currently proposed projects.

Due to expectations of higher demand for petroleum products in the region, further

investment in the Indian refining sector is likely. As part of the country’s 11th Five Year Plan

from 2007 to 2012, the government would like to promote India as a competitive refining

destination, and industry experts expect the country to be an exporter of refined products to

Asia in the near future.

Refined Fuel Subsidies

The Market Determined Price Mechanism is notionally benchmarked to international oil

prices, but the Indian government heavily subsidizes domestic prices of oil products such as

diesel, gasoline, kerosene, and LPG. At the same time, taxes on crude and petroleum products

imposed by different layers of Indian government often exceed the subsidies. According to

industry analysts, though originally an attempt to protect economically disadvantaged Indian

consumers, fuel subsidies distort India’s domestic market by forcing India’s state owned oil

companies to accept “under-recoveries” (i.e. losses) and encouraging India’s private

companies to orient their product sales internationally. With diesel prices significantly lower

than other fuels, particularly gasoline, diesel consumption rose by nearly 20 percent from

2007 through 2009. The International Energy Agency reports that losses from fuel price

subsidies for the 2010-11 fiscal years are expected to exceed $23 billion.

Suggestions: Integration of refineries

Indian refineries have low integration with petrochemical sector. It ss attractive, in refiners' interest, to move towards integration with Petrochemicals to capture full Synergies with refineries. This will also help use the optimal refining capacities of respective refineries within the country.

Strategic Petroleum Reserve

To support India’s energy security, India is constructing a strategic petroleum reserve (SPR).

The first storage facility at Visakhapatnam will hold approximately 9.8 million bbls of crude

(1.33 million tons) and is scheduled for completion by the end of 2011. The second facility at

Mangalore will have a capacity of nearly 11 million bbls (1.5 million tons) and is scheduled

for completion by the end of 2012. The third facility of Padur, also scheduled to be completed

by the end of 2012, will have a capacity of nearly 18.3 million bbls (2.5 million tons).

The selection of coastal storage facilities was made so that the reserves could be easily

transported to refineries during a supply disruption. The SPR project is being managed by the

Indian Strategic Petroleum Reserves Limited (ISPRL), which is part of Oil Industry

Development Board (OIDB), a state-controlled organization. India does not have any

strategic crude oil stocks at this time.

Suggestion: Integration of Strategic Reserves:

India is a growing economy and thus needs to improve its oil security and avoid any supply disruptions. Integration of strategic reserve of crude oil and Petroleum products is necessary to improve oil security in India.

Natural Gas

According to Oil and Gas Journal, India had approximately 38 trillion cubic feet (Tcf) of

proven natural gas reserves as of January 2010. The EIA estimates that India produced

approximately 1.4 Tcf of natural gas in 2009, a 20 percent increase over 2008 production

levels. The bulk of India’s natural gas production comes from the western offshore regions,

especially the Mumbai High complex, though the Bay of Bengal and its Krishna-Godavari

(KG) fields are proving quite productive. The onshore fields in Assam, Andhra Pradesh, and

Gujarat states are also significant sources of natural gas production.

In 2009, India consumed roughly 1.8 Tcf of natural gas, almost 300 billion cubic feet (Bcf)

more than in 2008, according to EIA estimates. Natural gas demand is expected to grow

considerably, largely driven by demand in the power sector. The power and fertilizer sectors

account for nearly three-quarters of natural gas consumption in India. Natural gas is expected

to be an increasingly important component of energy consumption as the country pursues

energy resource diversification and overall energy security.

Despite the steady increase in India’s natural gas production, demand has outstripped supply

and the country has been a net importer of natural gas since 2004. India’s net imports reached

an estimated 445 Bcf in 2009.

Natural Gas Imports

India’s natural gas import demand is expected to increase in the coming years. To help meet this growing demand, a number of import schemes including both LNG and pipeline projects have either been implemented or considered. . RNRL is concentrating on building a strong foundation for the business of fuel management and has already established itself as a contending player in the Indian market.

Liquefied Natural Gas

India began importing liquefied natural gas (LNG) in 2004. In 2008, India imported 372 Bcf

of LNG, nearly 75 percent of it from Qatar, making it the sixth largest importer of LNG in the

world. India imports LNG through both long-term contracts and spot shipments.

Currently, India has two operational LNG import terminals, Dahej and Hazira. India received

its first LNG shipments in January 2004 with the start-up of the Dahej terminal in Gujarat

state. Petronet LNG, a consortium of state-owned Indian companies and international

investors, owns and operates the Dahej LNG facility with a capacity of 5 million tons per

year (mtpa) (975 Bcf/y). India’s second terminal, Hazira LNG, started operations in April

2005, and is owned by a joint venture of Shell and Total. The facility has a capacity of 2.5

mtpa (488 Bcf/y), which may be expanded to 5 mtpa (975 Bcf/y) in the future.

The 5 mtpa (975 Bcf/y) LNG processing plant in Dabhol continues to face delays. Currently

operating as a power plant, the LNG receiving terminal may be operational in 2011 after

dredging operations are complete so that a breakwater can be built.

In addition, Petronet LNG has begun construction of a 2.5 mtpa (488 Bcf/y) LNG import

facility at Kochi. The facility is expected to be completed in the first quarter of 2012 and has

secured a 1.5 mtpa (293 Bcf/y) supply from Australia’s Gorgon LNG project.

In order to secure supply of natural gas to India and meet growing demand, India is currently

looking to invest in liquefaction projects abroad. For example, ONGC and the UK-based

Hinduja Group are considering service contracts in Iran to supply 5 mtpa (975 Bcf/y) of LNG

to India. The country is also exploring the possibility of investing more in the Sakhalin I

LNG project.

Long-term growth in demand for LNG remains unclear however, as price is an issue of

contention in India and increasing domestic natural gas production is expected from eastern

offshore fields. Industry analysts note that Indian companies appear unwilling to commit to

long-term LNG supply contracts at international prices. While negotiations are currently

underway for several long-term LNG supply deals, whether or not India’s bids will be

accepted is questionable in light of the low prices that India has offered to pay. Instead, India

is becoming an important destination for spot LNG cargoes.

Imports from Myanmar

A third international pipeline proposal envisions India importing natural gas from Myanmar.

In March 2006, the governments of India and Myanmar signed a natural gas supply deal.

Initially, the two countries planned to build a pipeline crossing Bangladesh. After indecision

from Bangladeshi authorities over the plans, India and Myanmar studied the possibility of

building a pipeline that would terminate in the eastern Indian state of Tripura and not cross

Bangladeshi soil. In March 2009, Myanmar signed a natural gas supply deal with China

sourced from a field invested in by GAIL and ONGC, putting any India-Myanmar pipeline

deal in question.

Suggestion: Strengthening energy diplomacy

The solution for India's energy problems lies overseas and can only be tackled through energy diplomacy. India is a member of International Energy Forum (IEF), which provides a biennial meeting of the ministers from the energy producing and consuming nations. India, being a big consumer of oil, will have to ensure its oil security by strengthening the dialogue process in such meetings. Further, such forums do provide a plethora of opportunities toforge ahead with individual oil-surplus countries.

Iran-Pakistan-India Pipeline

India has considered various proposals for international pipeline connections with other

countries. One such scheme is the Iran-Pakistan-India (IPI) Pipeline, which has been under

discussion since 1994. The plan calls for a roughly 1,700-mile, 5.4-Bcf/d pipeline to run from

the South Pars fields in Iran to the Indian state of Gujarat. While Iran is keen to export its

abundant natural gas resources and India is in search of projects to meet its growing domestic

demand, a variety of economic and political issues have delayed a project agreement. Indian

officials have made it clear that any import pipeline crossing Pakistan would need to be

accompanied by a security guarantee from officials in Islamabad. Due to the uncertainties

involving this pipeline, the Indian government’s 11th Five Year Plan does not project any gas

supply from this route or the following two discussed pipelines.

Turkmenistan-Afghanistan-Pakistan-India Pipeline

India has worked to join the Turkmenistan-Afghanistan-Pakistan Pipeline (TAP or Trans-

Afghan Pipeline). With the inclusion of India, the project consists of a planned 1,050-mile

pipeline originating in Turkmenistan’s Dauletabad natural gas fields and transporting the fuel

to markets in Afghanistan, Pakistan, and India. In 2008, all parties agreed to induct India as a

full member into the project, thereby renaming the pipeline TAPI. TAPI is envisioned to have

a capacity of 3.2 Bcf/d, but work has not yet begun on the project. Concerns about the project

have included the security of the route, which would traverse unstable regions in Afghanistan

and Pakistan. Furthermore, a review of the TAPI project raised doubts as to whether Turkmen

natural gas supplies are adequate to meet proposed export commitments.

Conclusion:

Thus integration of various functions of the petroleum companies of India would lead to efficient and self sufficiency in the oil industry in India, so it is a very good prospect if India forms an oil cartel similar to OPEC.