'Changes in Petroleum FDI Policy: Impact assessment' Article authored by Mr. Sanjay Kaul

1. Sanjay Kaul
Change in Petroleum
FDI Policy-Impact Assessment
 Introduction: Latest reform in Petroleum FDI Policy
 Similar Precedents & their impact: E&P, LNG terminals, Pipeline Infrastructure
 Impact assessment PSU refining FDI reform: opportunities created
 Swifter expansion of current capacities & establishment of integrated refinery-
petrochemical complex: IOCL: Panipat, Gujarat & Paradip Refineries; BPCL: Kochi
refinery; HPCL: Vishikapatnam
 Renovating current technology processes in order to be more flexible both in
terms of input & output: IOCL: Panipat, Gujarat, Barauni, Guwahati, Digboi &
Haldia Refineries; BPCL: Mumbai & Kochi refinery; HPCL: Mumbai & Vishakapatnam;
MRPL, CPCL, Numaligarh
 Confidence in existing & prospective JV partner because of greater liberty (option)
to alter exposure in a project: HPCL-Mittal refinery
 Indian Offshore FDI retraction: Videocon exposure in Mozambique
 Embedded Strategic Opportunity
 PSU refiners can lead the Refining global trend
 Balance India’s Energy imports dependency with creation of Regional refining
Hub in India catering to the Subcontinent & South East Asia
 Example of Reliance Industries, Jamnagar complex
 Supporting information & references
Mr. Sanjay Kaul is the Founder President of the
University of Petroleum & Energy Studies &
Member - Executive Council, CPIES
For more about the author please click here.

2. pg. 2
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Executive Summary:
Historically two trends are salient; FDI reforms in Petroleum Sector have shown
little or no impact & Refinery sector has attracted 40% of all FDI in the sector over
2001-10. India also has a successful precedent that if a complex (flexible) Indian
refinery is integrated with petrochemical plant and has enough scale, then it can
be extremely competitive in the world market.
As consumption shifts to Asia and Indian product pricing become market
determined, this reform would be a good opportunity for International Oil
Companies (IOCs) and Indian PSU refiners (having majority of capacity) to work
together. While the former can share technology in exchange for access to Indian
market, the latter can expand and cater to South Asian & South East Asian
markets.
This reform may induce confidence in current JV partner of projects like that in
Bina & Bathinda by giving them ability to manage their exposure in the project. It
would give an opportunity for Indian FDI abroad, especially in Petroleum assets
like Mozambique to be brought back.

3. pg. 3
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Latest reform in Petroleum FDI Policy
All the activities in the O&G Sector enjoyed 100% FDI via
Automatic route except Refining in Public Sector where
49% FDI was allowed subjected to approval from the
Foreign Investment Promotion Board. Leaving the cap
unchanged, last week, GOI decided that FDI in refining
sector could be via automatic route.
Similar Precedents & their impact: E&P, LNG
terminals, Pipeline Infrastructure
Policy reforms including FDI limit & route are not new to
the Indian Petroleum Sector; however the similar
precedents in E&P, LNG terminals, Pipeline Infrastructure
have shown limited improvements. Bottle necks in
clearances, price policy, PSU monopoly, non-
implementation of current provisions like open access
have been the primary reasons.
The upstream sector, opened via NELP, has seen
considerable traction in terms, however pricing policy and
inordinate time for clearances (especially development
plans, environmental & defense approvals) have led to
IOCs such as Australia’s Santos, Italy’s ENI, UK’s BG,
Norwegian Statoil and Brazil’s Petro bras relinquishing
their respective blocks. In a country where 70 approvals
from different agencies are needed just to drill a well,
developing a field, where discovery is declared as
commercial, can itself be a real challenge leave aside
pricing issues.
PMOs intervention of granting special sanction for 46
blocks was a case of just too late, too little. Of the 248
PSCs over the last decade, 70 Gas discoveries were made
of which 50 discoveries remain undeveloped. This is
alarming for a country which spends close to 60 percent of
its hard cash reserve in importing Oil/Gas every year and
gives away another INR 1,50,000 crores ($ 27.27 billion) as
petroleum subsidies. More than enough to support the
> 49% FDI in PSU refining now
allowed via automatic route
>Earlier similar FDI reforms have
limited or no impact due to other issues
like clearances, pricing, PSU monopoly et
al.
>LY Australia’s Santos, Italy’s ENI,
UK’s BG, Norwegian Statoil &
Brazil’s Petro bras relinquishing their
respective blocks

4. pg. 4
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entire GOI public health expenditure for the last five year
plan!
In addition to the upstream constraints, Gas downstream
sector, including Pipeline Infrastructure & LNG
Regasification Terminals, have seen limited interest from
the global O&G fraternity. Shell is the only IOC which
operates INR 3000 Cr ($ 545 million) 2.5 mmtpa terminal
at Hariza and is coming up with a 5 mmtpa FSRU at
Kakinada in the east coast. Since 2006, PNGRB issued
licenses for 31,000 KM pipeline but none was a foreign
concessionaire. India’s current gas demand is double the
present supply (160 mmscmd) and would be in excess of
470 mmscmd by 2020, amidst a forecast that ample Gas is
available in the world market.
In all, over the period 2000-2010 Indian Petroleum Sector
attracted $3.2 billion, a mere 2.46 per cent of total FDI
inflows in the country. Of this $1.17 billion was in refining
alone. How will reform in FDI in refining impact the Indian
downstream sector remains to be seen.
Impact assessment PSU refining FDI reform:
opportunities created: The approval for FDI (49%) via
automatic route in PSU refineries is a forward looking step
which has the potential of fast tracking the
competitiveness curve of Indian refineries and in turn has
embedded strategic opportunities for India, PSU refiners
and IOCs.
Swifter expansion of current capacities & establishment
of integrated refinery-petrochemical complexes: PSU
refiners like IOCL, BPCL, HPCL are either planning or adding
integrated petrochemical processing in their current
refineries. The new FDI norm allows them to swiftly
collaborate with foreign entities having latest technology.
IOCL is implementing SBR unit at Panipat (utilizing the
Butadiene available from the Naphtha Cracker).
> Pipeline infrastructure, Regasification
terminals projects have seen little interest
from global fraternity
>Out of $3.2 billion FDI in petroleum
sector in last 10 yrs $ 1.17 billion have
been in refining
>IOCL, BPCL, HPCL are all have
plans to build intergrated petrochemical
complees

5. pg. 5
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>> Plans to implement
PX/PTA complex (capacity
370/570 KTA respectively).
>> Expanding Lab unit
capacity by 35%
>> Plans Poly Propylene unit (680 KTA)
>> Implementing SBR unit -
120 KTA (Utilizing the
Butadiene available from
Panipat Naphtha Cracker)
>> Plans to diversify into
Petrochemicals (in two
phases)
>> Proposal: To set up a 1.5
MMTPA Naphtha Cracker
and its integration with the
refinery off gas streams
(under Phase-II) to produce
80,0000 TPA of Ethylene and
250000 TPA of Propylene
>> Plans to setup an integrated 15
MMTPA capacity joint venture Refinery
cum Aromatics with Petrochemicals (1
MMTPA Ethylene)
>>Plans to produce POL Products
conforming to EURO V specifications by
2017-18 (Production capacity)
complex.
Panipat
Gujarat
Kochi
Vishakapatnam
Haldia
Refinery Petrochemical integration
Projects – Planned (except Panipat )

6. pg. 6
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It plans to implement PX/ PTA complex, Pet coke
gasification, Acetic Acid unit, a Cumene/ Phenol unit &
Oxo-Alcohols/Acrylic Acid/ Acrylates (utilizing the
propylene available from FCC units) in its Gujarat refinery
and Poly Propylene unit at Paradip refinery.
BPCL have plans to diversify into Petrochemicals at its
Kochi Refinery unit in two Phases. (Phase 1- comprising of
Propylene based derivatives based on Propylene obtained
from FCC unit being installed as a part of Integrated
Refinery Expansion Project & Phase 2 - comprising of
Ethylene and Propylene based derivatives through a
Naphtha cracker route). Production of Butadiene,
Aromatics and CBFS is also proposed from the Naphtha
Cracker.
HPCL intends setting up of an integrated 15 MMTPA
capacity joint venture Refinery cum Aromatics with
Petrochemicals complex at Visakhapatnam PCPIR in
association with GAIL. It has also announced setup up
another Refinery in Rajasthan.
Renovating current technology processes in order to be
more flexible both in terms of input & output: Though,
India more than tripled its refining capacity to 184 MMTPA
over the last 13 years, major up gradation and
modernization plans are in place for 12 refineries. PSUs
plan to invest INR 88,211 crores ($ 16.03 billion) during the
12th
Five Year Plan. Considerable part of this investment is
for modernization. The latest FDI reform can assist in this
process by hastening up the involvement of international
players possessing latest technologies. The three major
refining PSUs along with MRPL, CPCL, NRL have up
gradation projects like residue up gradation, MS/HSD
quality improvement, improving distillation yield
(Hydrocracker revamp), Diesel Hydo Treatment, Lube Oil
Base Stock improvement, revamp of NHT/CRU at Gujarat
Refinery, Haldia, Panipat, Barauni, Guwahati, Digboi,
> 22 of 27 refineries in India
have plans for capacity of
expansion & up-gradation for
making themselves flexible in
terms of input & output

7. pg. 7
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Bongaigaon, Mumbai, Kochi, Vishakapatnam, Chennai &
Numaligarh Refineries.
Gujarat Refinery
>> MS & HSD Quality - BS- IV
>> Distillate yield - from 68% to
75%
>> High Sulphur Crude - 26% to
> HSD Quality - BS-III/IV
> Distillate Yield - from 64% to 67.3%
> Capacity expansion - from 6 to 7.5
MMTPA
>> Low cost expansion - from 12
to 15 MMTPA
>> HSD Quality - BS-III/IV9
MS Quality - BS-III
MS/HCD Quality -
BS-III/IV
>> Naphtha - to Euro-III/Euro-
IV MS
>> Hydrocracker Unit capacity -
from 1.75 to 2.0 MMTPA
>>HSD Quality - Euro-IV
>> LOBS Qualities - From >>
Group-I to Group-H/Group-
III
>> New FCC - 1.45 MMTPA
HSD Quality - To Euro-III
HSD - To Euro-III
>> HSD QUality - Euro-III/IV (Diesel
Hydro Treater Project)
Capacity – from 9.6 to 15
MMTPA
>> MS/HSD Quality - Euro-IV
>> Refining capacity - from 9.5 to 11.1
MMTPA
HSD Quality - Euro-
III/Euro-IV
Panipat
Gujarat
Mumbai
Mangalore
Kochi
Chennai
Vishakapatnam
Haldia
Barauni
Bongaigaon
Numaligarh
Digboi
Guwahati
Refinery Expansion & up-gradation
Projects (planned)

8. pg. 8
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Confidence in existing & prospective JV partner because
of greater liberty (option) to alter exposure in a project
like in the case of Bina (BPCL-Oman Refineries) & Bathinda
(HPCL-Mittal Energy).
Indian Offshore FDI retraction: The FDI relaxation can help
divert the Indian FDI in foreign petroleum assets back to
India. For instance, sale of Videocon’s equity stake in
Videocon Mozambique Rovuma 1 Ltd. to OIL-OVL would
generate proceeds in tune of $2.47 billion. A portion of
this could be invested in India.
Embedded Strategic Opportunities
PSU refiners can lead the Refining global trend: Closure of
US & EU refineries under capacity & margin pressure due
to hefty environmental regulations and deceleration of
captive demand. The shift of demand to Asia may be an
opportunity for Indian Refiners to enhance scale &
technology (to effectively handle variety of crude and
produce most desired product mix) through acquisition of
these refineries. Unfortunately, there is addition in
refinery capacity across Asia despite global oversupply.
In last 12 months China alone has added 500,000 bpd
while is building another 1.6 million bpd to be
commissioned on or before 2015 apart from 2.6 million
bpd which are at early stage of planning. 5 million bpd
refining capacity will be built in Middle East countries
2010-18, representing more than 20% of global expansion
during the period and boosting regional capacity by nearly
60%. Saudi Arabia and Iran plan to raise refining capacity
by 1.2 million bpd each through 2018.
As Indian refiners would try to juggle rising competition,
oversupply, low average margins, shifting cyclicality and
continuous effort towards operational excellence, capacity
correction may be inevitable. Oil Marketing PSUs would
benefit from collaboration with IOCs and move down the
learning curve faster. ROCE for Exxon –Mobile refineries
has been consistently higher and stood at 15% in 2010.
> FDI reform may enhance confidence
in current & prospective JV partners
Videocon can invest its $2.47 billion
proceed from Mozambique sale in
refinery sector in India
>Global over supply & capacity
expansion in Asia. 20% of global
refining expansion in Middle East
>At 89 mbpd Current supply is in
excess of oil demand

9. pg. 9
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This FDI reform would help Indian national oil marketing
companies to optimize their operations and strategically
align them for the future challenges.
Balance India’s Energy imports dependency with
creation Regional refining Hub in India catering to the
Subcontinent & South East Asia: Developing on
improving refinery efficiency & complexity and using
location advantage, India could export its petroleum
products to the surrounding high growth high potential
markets like Myanmar, Thailand, Vietnam, Lao PDR,
Pakistan, Sri Lanka, Bangladesh et al.
Example of Reliance Industries, Jamnagar complex:
Reliance’s (which exports majority of its products) model
of high degree of integration at the Jamnagar complex (a
petroleum refinery, petrochemical complex, power
generation) is another example. It allows for feedstock
and product linkages that continue to lead to higher
efficiencies and enhanced value addition. Use of
technologies like Hydrodesulphurization, Catalytic
reforming, Fluid Catalytic Cracking, sulphur recovery,
hydrogen regeneration et al lead to features like zero
‘black oil’ production and high proportion of high value
products.
Prospective scale & flexibility of its
refineries India may be developed as
refining Hub for South Asia & South
East Asia.
Reliance is an apt example which exports
majority of its petroleum products

10. pg. 10
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Conclusion:
FDI reforms in Petroleum Sector have shown little or no impact due to absence of
other critical reforms (pricing, monopoly) & clearance delays. Refinery sector
which has attracted 40% of all FDI in the sector over 2001-10 can benefit from the
latest reform because this would be applicable in ongoing profitable projects with
minimum or above mentioned bottle necks.
India also has a successful precedent that if a complex (flexible) Indian refinery is
integrated with petrochemical plant and has enough scale can be extremely
competitive in the world market.
As consumption shifts to Asia and Indian product pricing become market
determined this would a good opportunity for IOCs and Indian PSU refiners
(having majority of capacity) to work together. While the former can share
technology in for access to Indian market the latter can expand and cater to South
Asian & South East Asian markets.
Moreover, it is imperative that some capacity correction is inevitable and only
setups would be able to survive which have significant advantage in terms of scale
& flexibility.

11. pg. 11
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© 2013 Centre of Policy Initiatives & Energy Studies (CPIES)
Supporting information & References
The Petroleum FDI policy latest shape
Activity FDI Cap/Equity Entry route Others condition
E&P 100% Automatic Subject to the
Sectorial
regulations of the
MoPNG
Subject to sectorial
policy
Refining >>49% for public
sector undertakings
(PSUs) without
involving any
divestment or dilution
of domestic equity in
existing PSUs;
>>100% for
private companies
>>Foreign Investment
Promotion Board
(FIPB) for PSUs has
been changed to
Automatic Route
>>automatic route for
private companies
>>Infrastructure
related to marketing
of petroleum
products & NG,
>>marketing of NG &
petroleum products,
>>petroleum product
&
NG pipelines,
>>LNG regasification
infrastructure,
market study and
formulation,
100% Automatic

12. pg. 12
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Trend of FDI in Indian O&G Sector
http://petroleum.nic.in/refinery.pdf
http://www.bain.com/Images/BAIN_BRIEF_Global_refining.pdf
http://www.ril.com/downloads/pdf/about_jamnagar.pdf
http://www.atkearney.com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/refining-2021-who-will-
be-in-the-game-/10192
MoPNG
http://www.business-standard.com/article/companies/royal-dutch-shell-india-unit-to-invest-1-bn-for-
lng-terminal-113021201055_1.html
http://profit.ndtv.com/news/industries/article-hpcl-board-okays-joint-venture-with-shapoorji-pallonji-
for-lng-terminal-319100