MANAGEMENT DISCUSSION AND ANALYSIS Economic overview Global: Global growth in 2014 was a modest 3.4% compared with 3% in 2013, primarily due to a growth revival in advanced economies. Developing countries were once an engine of global growth but following the financial crisis, faced a difficult economic environment. As a result, growth in emerging and developing economies slowed. Despite the slowdown, emerging market and developing economies accounted for three-fourths of global growth in 2014. Headline inflation declined in advanced economies, reflecting a decline in oil prices, softer commodity prices and weaker demand in a number of countries already experiencing belowtarget inflation (Euro area and Japan). With regard to emerging markets, lower prices for oil and other commodities contributed to lower inflation through 2014, with the notable exception of countries suffering sizable exchange rate debrciation like Russia. Overall, global growth is projected to reach 3.5% in 2015 and 3.8% in 2016. India: The full-year GDP growth for the fiscal ending March 2015 settled at 7.3%, up from 6.9% in 2013-14 (figures calculated as per the new series of national accounts with base year of 2011-12). This growth was due to improved performance of the services and manufacturing sectors. The Gross Value Added (GVA), a new concept introduced by Central Statistical Office (CSO) to measure the economic activity, rose by 7.2% in 2014-15 compared to 6.6% in the brvious fiscal. The economy remained relatively unshackled of factors generally associated with an economic slowdown. Average Wholesale Price Index (WPI) inflation declined in 2014-15 to 3.4% (April-December) vis-à-vis 8.9% in 2013-14, as fuel witnessed a sharp decline in prices. Food price inflation also moderated to 4.8% during April-December 2014 compared to 9.4% in 2013-14. Average retail inflation, measured by Consumer Price Index (CPI), moderated to 6.3%in 2014-15 (April-December) from 9.5% in 2013-14. The country’s current account deficit narrowed to 1.3% of GDP in 2014-15, primarily on account of a lower trade gap. The Reserve Bank of India projected India’s GDP growth for 2015-16 at 7.6%. The International Monetary Fund forecast India’s growth to strengthen from 7.3% in 2014 to 7.5% (2015 and 2016). Oil and the Indian economy If crude prices fall by 15% on average for FY2015 (-2.5% y-o-y for April- October 2014), net savings on oil trade account would be US$5.4 billion. Wholesale price index inflation could decline 70-80 bps for every 10% fall in global crude prices accompanied by a weakening rupee. A decline in crude price could reduce oil subsidy (0.7% of GDP) and moderate tax collections. The contribution of the petroleum sector to the exchequer of both Government of India (GOI) and state governments is H3 trillion or ~3% of GDP. The government’s earning from this sector is higher than the oil subsidy. Adverse fiscal implications of loss of tax revenue and dividend payouts by public sector oil companies can outweigh a reduction in oil subsidy due to lower crude prices GLOBAL OIL SECTOR Global energy scenario Consumption increased for all fuels, reaching record levels for every fuel type except nuclear power; production increased for all fuels except coal. Consumption: Global primary energy consumption increased by just 0.9% in 2014, a marked deceleration over 2013 (+2.0%) and well below the 10-year average of 2.1%. This was the slowest rate of growth since the late 1990s, other than immediately after the financial crisis. The growth in 2014 slowed for every fuel other than nuclear power. This slowing was driven in part by the rebalancing of the Chinese economy away from energy-intensive sectors, causing the growth of energy consumption in China to slow down to its lowest rate since 1998. Even so, China remained the world’s largest growth market for energy. Although emerging economies continued to dominate the growth in global energy consumption, growth in these countries (+2.4%) was well below the 10-year average of 4.2%. China (+2.6%) and India (+7.1%) recorded the largest national increments to global energy consumption. Oil remained the world’s leading fuel, accounting for 32.6% of the global energy consumption. But its proportion in the global energy basket reduced for the fifteenth consecutive year. Global oil scenario Man’s energy consumption has been trending upward, the average power use tipping over 18 terawatts. As progress continues and developing countries industrialise, this voracious energy appetite is likely to grow. Reserves: Total world proved oil reserves reached 1700.1 billion barrels at the end of 2014, sufficient to meet 52.5 years of global production. The largest addition to reserves came from Saudi Arabia, adding 1.1 billion barrels. The largest decline came from Russia, where reserves fell by 1.9 billion barrels. OPEC countries continue to hold the majority of the world’s reserves, accounting for 71.6% of the global total. South and Central America continue to hold the highest R/P ratio, estimated at more than 100 years. Over the past decade, global proved reserves have increased by 24%, or more than 330 billion barrels. Based on data from OPEC, the highest proved oil reserves, including nonconventional oil deposits, are in Venezuela (20% of global reserves), Saudi Arabia (18% of global reserves), Canada (13% of global reserves) and Iran (9%). Production: Global oil production growth was more than double that of global consumption, rising by 2.1 million b/d or 2.3%. Production outside OPEC grew by 2.1 million b/d. The US (+1.6 million b/d) recorded the largest growth in the world, becoming the first country ever to increase production by at least 1 million b/d for three consecutive years, and taking over from Saudi Arabia as the world’s largest oil producer. Non-OPEC production grew by a record amount; the OPEC output was flat, and the group’s share of global production fell to 41%, its lowest since 2003. Consumption: Global oil consumption grew by 0.8 million barrels per day (b/d), or 0.8% – a little below its recent historical average and significantly weaker than the increase of 1.4 million b/d seen in 2013. Countries outside the OECD once again accounted for all of the net growth in global consumption. OECD consumption declined by 1.2%, the eighth decrease in nine years. Chinese consumption growth was below average but still recorded the largest increment to global oil consumption. Prices: Crude oil prices remained firm in early 2014 in the face of continued large supply disruptions, but fell sharply later in the year due to strong non-OPEC production growth combined with weaker consumption growth (relative to 2013) and OPEC’s November decision to defend market share. The WTI-Brent differential narrowed to $5.66 per barrel despite continued robust US production growth. Outlook: Population growth and increase in income per person are the key drivers behind growing demand for energy. By 2035, the world’s population is projected to reach 8.7 billion, which means an additional 1.6 billion people will need energy. By 2035, global GDP is expected to more than double, with non-OECD Asia contributing nearly 60% of that growth. Globally, GDP per person in 2035 is expected to be 75% higher than today, an increase in productivity, which accounts for three-quarters of global GDP growth. Primary energy consumption is expected to increase by 37% between 2013 and 2035, with growth averaging 1.4% p.a. The projected growth rate of global energy consumption could be significantly slower than the recent trend (2.4% p.a. for 2000-13). INDIAN OIL AND GAS SECTOR The oil and gas industry ranks among India’s six core industries. India is the fourth largest petroleum consumer. According to the International Energy Agency’s World Energy Outlook 2014, India’s oil demand is likely to increase at a compounded annual growth rate of 3.5% between 2013 and 2040, among the highest in the world. India’s domestic production of oil and gas falls far short of its burgeoning energy requirement, prompting imports. Reserves India has an estimated sedimentary area of 3.14 million sq km comprising 26 sedimentary basins, out of which, 1.35 million sq km area is in deepwater and 1.79 million sq km area is onland and shallow offshore pockets. Of this, about 48% has been appraised. Crude oil Oil accounts for about 30% of India’s primary consumption; more than 80% of India’s oil consumption is imported Production and imports: India produced 37.46 million tonnes of crude oil, a decline of 0.85% over the brvious year’s production. This stagnancy was due to ageing fields of the national oil companies. The production shortfall was compensated by imports. India imported 189.43 million tonnes of crude oil, accounting for 83.5% of the total crude oil supply. During the last five years, India’s crude oil import registered an increase of over 3.7%. Consumption: Demand for petroleum products has increased consistently. As of 2014-15, the demand for petroleum products stood at about 165 million tonnes – a 4.15% growth over the brvious year. Government initiatives: The Government reduced the regulation on the oil and gas industry through the following initiatives: Diesel prices were deregulated, linking the same to market-determined levels. It approved a subsidy formula that exempts upstream companies from bearing the under-recovery burden during the first quarter of 2015-16 if crude oil prices remain below US$60 per barrel. Natural gas India had 47 trillion cubic feet of proven natural gas reserves at the beginning of 2014. Approximately 34% of total reserves were located onshore, while 66% were offshore. Natural gas production in India stood at about 33.66 bn cubic metres (bcm) a decline of 4.9% over the brvious year. ONGC and OIL account for more than 70% of India’s natural gas production. The decline in production was due to a number of factors: Production in ONGC’s offshore unit was delayed Production in ONGC’s onshore Gujarat units declined due to an unplanned shutdown Production in other blocks in Rajasthan, Tripura, Andhra Pradesh, Tamil Nadu, and Assam was affected due to lower off take by consumers and closure of wells due to the GAIL pipeline incident The import dependence of natural gas is lower than that of crude oil. Despite the reduction in production the imports have not risen commensurately. Liquified Natural Gas (LNG) imports stood around 13 MT during the three years from 2011- 12 to 2013-14. Government initiative: There were some important policy initiatives in 2014. The Government approved a new gas pricing formula with effect from November 1, 2014 in a bid to provide incentives to players to enhance upstream investments. Exploration potential Since the introduction of NELP 16 years ago, exploration companies invested US$23.92 billion in blocks awarded to them (as of April 2014). Overall, a total of 135 hydrocarbon discoveries (46 crude oil and 89 natural gas) were reported under the NELP as of April 2014. In addition, 22 NELP discoveries were reported to be under development. Despite these achievements, India’s dependence on imports increased for an important reality. As many as 116 exploration blocks under the NELP were reported to be affected due to delays in the grant of necessary approvals. Recent discoveries: India made important headway in reducing its dependence on crude oil imports. In March 2015, Reliance Industries (along with its partner BP) reported eight oil discoveries in the Cambay basin block Government initiatives NELP-X will offer a uniform licensing model — which means the drilling of all forms of hydrocarbons, from oil and gas to shale under a single contract — and also usher in the revenue-share model. Till now, nearly 42 blocks have been shortlisted to be offered under NELP-X. Post NELP-X, the government intends to shift to the Open Acreage Licensing Policy (OALP). The OALP will enable upstream companies to bid for any oil and gas block throughout the year without the government having to hold an auction. Outlook According to a report by BP (formerly British Petroleum), the growth in energy demand in India would be the highest among all countries by 2030-35. India’s energy production would rise by 112%, while consumption would grow by 132%. Oil imports would rise by 169% and account for over 60% of the net increase in imports, followed by increasing imports of gas (+573%) and coal (+85%). India’s energy mix will evolve over the next 20 years, with fossil fuels accounting for 87% of demand in 2035 (92% currently), compared to a global average of 81%. India’s energy reduction as a share of consumption would drop from 61% to just 56% by 2035 |