Press release

India dependent on crude oil imports, despite growing demands

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India, 17 September 2014: Despite the growing demand, the country is heavily dependent on crude oil imports to meet the demand. India imports nearly 76% of its crude oil requirements. This is largely due stagnant domestic production of crude oil, limited exploration and declining production from maturing fields.

National oil companies (NOCs) account for majority of the country’s refining capacity, with private players having the second-largest share. Given the declining capacity expansion and technology upgrade in developed economies, Indian refining players are likely to continue to increase their crude oil processing capacity through brownfield and greenfield expansions. Associated pipeline network for crude oil and petroleum products has also remained a focus area for investment as it helps minimize transportation costs and transit losses.

The demand for natural gas in India exceeds supply, creating a significant deficit. This is largely due to low domestic production, and limited natural gas transmission and distribution infrastructure. Natural gas demand is also price sensitive.

As a result, the country has been increasingly depending on liquefied natural gas (LNG) imports, with imported LNG contributing to about 28% of the total natural gas supply in the country. Indian players are expected to increase the LNG re-gasification capacity from 18.3 MMTPA in FY14 to 53 MMTPA in FY17. Petroleum and Natural Gas Regulatory Board (PNGRB) has awarded 3 pipelines to GSPL, in addition to GAIL’s plans to expand the natural gas pipeline infrastructure in the country. During the Twelfth Five-Year Plan, oil and gas players are expected to invest around INR841.8 billion for expanding natural gas pipeline network, including CGD.

“Formation of the new Government and strong intent to address sector issues coupled with reduction in petroleum product subsidies has led to an improvement in sentiment amongst the oil and gas players in India. Clear policies and an attractive fiscal regime to encourage global investments is imperative for India to augment domestic reserves, production, infrastructure, and thereby India’s energy security”, says Dilip Khanna, Partner-Oil & Gas, EY.

As per the ongoing Twelfth Five-Year Plan, Indian NOCs have planned an outlay of INR3.4 trillion for upstream and downstream sectors. Of this, more than INR1.8 trillion is expected to be spent on upstream activities, and INR 1.5 trillion in the refining and marketing space. Private players have also laid out plans to invest in expanding their refining and petrochemical capacities. About INR1.2 trillion is expected to be invested across the natural gas value chain – LNG terminals, transmission pipelines and CGD.

Projected investments in the oil and gas sector are expected to create significant opportunities for the oil and gas equipment industry. With 100% FDI allowed via the automatic route, there has been an increasing inbound interest of global players to either set up manufacturing bases in India or enter into alliances with local players. Process plant equipment, boilers, valves and pipes are some of the key oil and gas equipment that have witnessed growing investor interest.

Strong manufacturing base and capabilities has enabled the Indian oil and gas equipment manufacturers to contribute towards the overall development of the domestic oil and gas sector. However, there is a need to bridge the gap between expectations of end-users and domestic manufacturers to strengthen overall growth. “Creating a level-playing field through attractive tax and regulatory frameworks; facilitation of technology transfer; promoting domestic manufacturing; restricting import of re-furbished equipment; and establishing industry clusters with common manufacturing, R&D, new product development and testing facilities are some of the key measures that are needed to be taken to promote growth”, says Randhir Kochhar, Partner, Transaction Advisory Services, EY.

The process plan equipment market – which includes equipment like pressure vessels, storage tanks, columns, towers, crystallizer, heat exchangers, evaporators and furnace – is expected to touch INR350,000 million by 2017, growing at a CAGR of about 12%. The industry is one of the most self-reliant sub-sectors within the capital goods sector, with domestic procurement catering to nearly 91% of domestic demand.

Some of the key challenges faced by the industry include – limited R&D in developing new and critical processes, high dependence on imports of old process equipment, shortage of capital, high dependence on overseas process licensors, and weak logistics and infrastructure support.

The Indian boiler market in India was valued at INR195,000 million in 2012, and is expected to reach INR290,000 million by 2017. With the sector poised to grow at an encouraging rate, Indian players have collaborated with global players to gain access to latest technology. This has helped them meet the growing demand in the country.

Increasing demand for super-critical boilers, which requires advanced technology; cost differential between Chinese and domestic players; shortage of certain grade of steel and volatility in its prices; import of re-furbished goods; lack of proper logistic facilities pose significant challenges to the Indian players.

Oil and gas sector caters to nearly 47% of the Indian valves market, which is expected to be worth INR194,648 million by 2016, growing at a CAGR of 13.54%. Indian players are able to meet the domestic demand for valves in the sector except for large-size complex valves such as choke valves or christmas tree valves due to lack of requisite technical expertise. Indian players have been looking to collaborate with foreign players, keen to enter the Indian market, to gain access to technology and cost-effective manufacturing facilities.

Steel pipes and tubes industry grew at a CAGR of about 7.2% during FY2009-13, and is expected to grow at a CAGR of 5% over the next 3 years. With increasing investments in expansion of pipeline network for transportation of crude oil, natural gas and petroleum products, oil and gas sector is the largest end-user. This sector is also highly fragmented with 5 players accounting for nearly 34% of the market share by production. Increasing end-mile connectivity in distribution of

petroleum products and natural gas, and lower transmission loss and cost are some of the key drivers for increasing demand for steel pipes and tubes by the oil and gas industry.

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Notes to Editors

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