Globalization and Indian Petroleum Industry

The development of the Indian petroleum industry began on a very slow note. It started mainly in the northeastern part of India especially in the place called Digboi in the state of Assam. Until the 1970’s, the production of petroleum and the exploration of new locations for extraction of petroleum were mainly restricted to the northeastern state in India.

However, an important advancement in the Indian petroleum industry came with the passing of Industrial Policy Resolution in 1956, which emphasized focus on the growth and promotion of industries in India. Another major incident was the discovery of Bombay High, which changed the scenario of the Indian petroleum industry drastically. The Indian petroleum industry was sponsored completely by the government, and the management control of the petroleum industry and all its related activity was entirely with the government. The petroleum industry has the most significant role to play in changing the Indian economy from an agrarian economy to an industrial economy.

The adoption of liberalization and privatization in July 1991 changed the situation again. The government started allowing the Indian petroleum industry to go into private hands and also entered into government and private joint ventures. The government also eased the stringent regulation process on the petroleum industry. This gave a tremendous boost to the petroleum industry in India. The industry began to grow at a tremendous pace. The production of petroleum and petroleum products also showed a significant rise.

Along with liberalization and privatization, the overall economy of India grew. Also, the demand for petroleum products increased at an annual rate of about 5.5%. The demand for petroleum and petroleum products still continues to grow, and there is great potential for investors to invest in the sector and gain valuable returns while meeting the increasing demands for the petroleum products. Amount of petroleum used for generation of energy grew from 51.27 million tonne during 1990-91 to 128.8 million tonne during 2005-2006. Indian Petroleum Industry grew at a tremendous pace between the period 2000 and 2006. During the mentioned period, the production of petroleum products increased from 95.61 million tonne during 2000-2001 to 119.75 million tonne during 2005-2006.

The petroleum industry in India is particularly favorable for foreign investment because the industry is one of the fastest growing segments, and it has shown a staggering growth rate of around 13% in the recent past. Apart from the tremendous growth rate in the Indian petroleum industry today, it also boasts technology of international standards, easy availability of infrastructure at very cheap rates, high demands for petroleum products, and increased spending habits of the middle-class people. All these factors make investments in the Indian petroleum industry an attractive proposition for foreign investors.

Globalization and the Indian Petroleum Industry To overcome the severe balance of payment crisis of 1991, the government of India took resort to the International Monetary Fund (IMF) and the World Bank prescriptions to bail out its ailing economy. The liberalisation process which had been started earlier (at least in hydrocarbon sector) was accelerated and extended to other sectors of the economy in the name of structural adjustment process (SAP). The main features of SAP were i) privatisation and ii) opening up of economy to foreign companies. However, much before this exercise, the petroleum sector was opened to foreign companies.

Though the declared policy of the government of the post independent India was to develop this vital industry under public sector, in actual practice, the industry from its inception was very much dependent on foreign technology, capital and even on expert personnel. Over the years, the foreign involvement in different critical stages like exploration, production, transportation and refining has increased. Indian petroleum industry in the post independent period (1947-2001) it may be divided into three distinct phases * (i) early phase (1947 to 1969)- when the government consolidated its control over the industry with Soviet assistance; * (ii) development phase (1970 to 1989)- in this period the US companies played dominant role replacing the Soviets and * (iii) The economic liberalisation phase of 1990s.

On the eve of independence, India's demand for petroleum products was to the tune of about 2.2 million metric tons (mmt), of which roughly 0.2 mmt were produced in the country and the balance was imported. In 1947 the production of crude was 2,51,100tomes. During this time the Indian petroleum industry was controlled by few Anglo-American companies. They maintained their dominance till end of 1950s. After independence (1947), the newly independent state wanted to play significant role in this vital industry. The industry policy resolution of 1948 and 1956 has clearly documented the government's aspiration and future plans for core industries like petroleum.

All future development of petroleum industry was reserved for public sector undertakings. But foreign assistance was a necessity at least in the early stage. As collaboration with Anglo- American oil majors were ruled out, other alternatives were explored. At that time the government considered four options as under for the development of its petroleum industry. 1. seek assistance of a great power like Soviet Union,

2. collaborate with a small country like Rumania 3. explore the possibility of a government to government co-operation with other small but neutral countries like Austria which had developed sufficient technical expertise in petroleum industry by that time; 4. try and develop the industry through self-help by employing technicians and bringing necessary machinery from which ever source available. Of the above four alternatives, though co-operation with a small but neutral power like Austria was thought the best option, the government went for the first alternative. Thus the Soviets took charge of the nascent oil industry.

However, their influence diminished over the years. Subsequently, US companies and multilateral funding agencies like World Bank played increasingly significant roles in this sector. Apart from nationalisation of foreign companies, there were other important developments during seventies and eighties which needs to be mentioned here to understand the liberalisation process of this industry. ii) In 1974, the government offered 7 million acres of Bay of Bengal to Natamas Carlsburg Co. of USA for offshore exploration and production. A contract was entered into between the US company and Oil and Natural Gas Commission (ONGC) for the same.

Subsequently another contract between Readings and Bates, USA and ONGC for Kutch basin(Gujarat) was signed. It was agreed that initially the foreign company would have 61% share in the joint venture and the price of the crude if produced would be based on Indonesian and Persian Gulf crude. 40% of the total crude would go to the US company as "Cost Oil" towards recovery of their expenses. 65% of the remaining crude would be ONGCs share and rest 35% would go to the US company. However, the venture was unsuccessful. * iii) Since 1980, the government started to offer in a systematic way different sedimentary basins to foreign oil companies for exploration and production.

Better basins with liberal terms were offered in successive rounds * v) In the eighties, the government allowed Indian private companies to enter into refining sector initially as a joint venture partner with a public sector refining company. Later, Reliance Industries Ltd.(RIL) was allowed to build on their own the largest refinery in the country. * viii) The marketing policy followed by the public sector companies has made the economy and the society completely dependent on petroleum products. It has successfully replaced/barred entry of other alternative energy sources including natural gas. Against this background, we shall discuss the effect of post 1991 economic liberalisation on this vital industry. Our analysis will focus on (a) exploration and production (b) refining (c) marketing. a) Exploration and Production: