A Study of the Economic Factors Affecting the Oil & Natural Gas Sector in India

...

- Railways Industry – Fuel is an important part of the operations in the freight rail industry. Hence reduction in the fuel prices results in an increase in profitability of the rail industry, the benefits of which are then distributed to the customers. (Tipping, Schmahl, & Duiven, 2015)

- Automobile Industry – Reduction in price of oil means that consumers may have extra income at their disposal. This extra income may be used to buy a new vehicle. Those who thought owning a vehicle is an expensive affair may be attracted to own a vehicle due to lower oil prices. However various markets have different impacts of oil prices. (Johnston, 2015)

- Aviation Industry – Fuel costs is one of the biggest expenses that the aviation industry incurs. It accounts for 29% of total operating expenses and 27% of the overall airline industry revenue. Hence lower fuel costs lead to increase in profitability, which may also serve as a means of reducing fares in long run thereby increasing the demand of the flights. So we see that airlines alone is of not much value unless it is supplied with the oil. (Blokhin, 2015)

- Power Sector – Power sector is also one of the complements of oil and gas industry as the power generation is majorly dependent on crude oil and its by-products. Petroleum alone counts for 24% of the power generation in India, while natural gas accounts for 11%. As prices for crude oil increase, power prices are also expected to rise. (India Brand Equity Foundation, 2017)

Substitutes

The main substitutes for oil and gas energy include nuclear power, solar power, biofuel and wind power. These substitutes are dwarfed by fossil fuels in global and domestic energy markets, but their usage has increased steadily. (Ross, 2015)

- Nuclear Power – Many countries have larger concentrations of nuclear energy; France, for example, is the world's leading nuclear power and generates almost 80% of its electricity through nuclear. In comparison with goal, gas, oil and ethanol, nuclear power produces negligible adverse climate effects. More importantly, nuclear power can run much more economically than other clean energy forms, such as solar, wind or hydropower. (Ross, 2015)

- Solar and Wind Power – Solar and wind power are two prevalent renewable energy sources. Exponents argue that these substitutes offer a break from the fossil fuels of the 20th century. Most modern solar and wind plants have huge up-front capital costs. They also need continuous backup power sources, usually electricity generated from a coal plant, in case it gets cloudy or the winds die down. (Ross, 2015)

- Bio Fuel – This energy form has much lower emissions than fossil fuels while being in ample supply, creating an abundance of energy out of what otherwise would be stinking up a landfill. However, while it’s true that less greenhouse gases are released when utilizing biomass energy, some carbon dioxide is released into the environment, as well as whole lot of methane, which is considered a key to the destruction of our ozone layer as well as being a contributor to global warming.

---------------------------------------------------------------

Competitors

According to (NAGRALE, 2013) and (Oil and Gas Companies in India, 2017), the main competitors in the oil and gas sector in India are –

- Oil and Natural Gas Corporation Limited – ONGC is one of the largest companies that are exploring and producing oil and gas in Asia. It produces 62% of the total natural gas and 69% of the total crude oil that is produced in India. Government of India currently holds a 69.23% share in the company. It owns and operates 11,000 km of pipeline in the country and is exploring oil in 26 sedimentary basins in India.

- GAIL Limited – It was setup in 1984 as a PSU. It has gas distribution business in India: Mahanagar Gas Limited in Maharashtra and Indraprastha Gas Limited in Delhi. GAIL has set up joint ventures to supply gas to households, transport sector and consumers in cities including Hyderabad, Kanpur, Indore, Vadodara, Lucknow and Pune.

- Petronet LNG Limited – It is involved in degasification and import of liquified natural gas and supply it to Indian Oil, GAIL, Bharat Petroleum. Petronet has established India’s first Liquified Natural Gas regasification terminal at Dahej and Kochi.

- Indraprastha Gas Limited – It is responsible for supplying natural gas for domestic and commercial use. It has been established in Delhi to reduce pollution levels by increasing use of CNG instead of gasoline

- Reliance Industries – Reliance Industries deals with the production and exploration of natural gas. It is India’s largest private company with business in the energy value chain. Reliance has processing capacity of 1.24 million barrels per day which is the largest at any single location in the world.

- Cairn India – Cairn India is one of the largest oil and gas exploration and production companies. It caters to 30 percent of India's crude oil production. It has a market cap of US$ 10 billion. Mangala field in Rajasthan is the largest onshore oil discovery in the country in more than 20 years. Oil and gas is being produced from Cambay, Ravva and Rajasthan.

Nature of the Market

We shall now analyse the nature of the market by using the four-firm concentration ratio. The total net sales of all players in the industry amounted to Rs. 1,79,811 crores, with ONGC, GAIL, Petronet and OIL India having a market share by total net sales of 43.6%, 28.9%, 15.1% and 5.4% respectively, amounting to a four-firm concentration ratio of 93%. Thus, the nature of the market can be said to be an oligopoly.

Entry and Exit Barriers

The nature of the oil and gas industry in India can be explained by its numerous barriers to entry and exit.

Entry Barriers

Barriers to entry are aspects of an industry that include any institutional, government, technological or economic restrictions on the entry of potential participants into that market or industry. (Porter, 2008) has identified seven potential advantages that incumbents in an industry have relative t new entrants, which may pose as barriers to entry. They are – supply-side economies of scale, demand-side benefits of scale, customer switching costs, capital requirements, incumbency advantages independent of size, unequal access to distribution channels, and restrictive government policies.

Of the seven,