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.
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.
The foreign trade in petroleum and petroleum products in the recent past have registered significant growth. It has thus attracted new foreign investments. Some of the main petroleum products that are manufactured for trade with foreign countries are petroleum gases, gas oil, propane, distilled crude oil, naphtha, ethane, and kerosene.
The petroleum industry has contributed heavily to the manufacturing industry in the country through foreign trade in petroleum products.
Rapid globalization, fast-changing technology, and the changing methods in the way business is conducted have brought significant changes and enormous opportunities for petroleum companies in India to flourish and expand their operation to global markets.
Another very important reason why the Indian petroleum industry is a good option for investment is that the future of the petroleum industry in India promises great potential for development. The fast economic growth of India and the various developmental activities taking place presents India with opportunities in the future to be a dominant player globally in the export of petroleum products.
Problem # 1. Shortage of Petroleum Crude:
Petroleum industry in India has been suffering from the problem of shortage of raw materials, i.e., petroleum crude. Total refining capacity in the country has reached the level of 148.97 million tonnes in 2006-07 as against the total indigenous production of only 34.0 million tonnes.
Thus, the petroleum industry has to depend too much on the imported crude. Due to the increasing volume of demand-supply gap, the petroleum refineries in India have failed to utilise their production capacity fully.
Problem # 2. Dependence on Foreign Countries:
Petroleum industry in India has been depending too much on foreign countries for the supply of petroleum crude and machineries. Total consumption of petroleum crude has increased to 146.5 million tonnes in 2006-07 as against the total production of petroleum crude of 34.0 million tonnes. This has resulted in the import of 105.5 million tonnes of petroleum crude in 2006-07.
Moreover, the petroleum industry of the country depends too much on some foreign countries for meeting its requirement of various drilling and refining machineries.
Problem # 3. Price Hike:
The international prices of petroleum goods have been maintaining a constant hike since 1973-74. This has led to the excessive rise in our import bill on petroleum goods. In 2011-12, total import bill on petroleum oil and lubricants was to the tune of Rs 7, 43,075 crore as against Rs 5,587 crore in 1980-81.
Problem # 4. Shortage of Oil Refining Capacity:
In India there is a shortage of oil refining capacity as compared to total demand for petroleum products. Total refining capacity of the country stands at 214.1 million tonnes as compared to the total consumption of 220.5 million tonnes of petroleum products in 2011-12. This has necessitated the expansion of existing refineries and also setting up of new refineries under the joint sector.
Problem # 5. Exploration of New Reserves:
In India, the production of petroleum crude of existing old reserves has been shrinking due to normal technical reasons. The proved oil reserves in India constitute only 0.5 per cent of the world oil reserves (proved). At this present level of consumption, the proved reserves will be depleted within next 15 to 20 years.
The country has now increasingly facing the growing demand-supply gap of petroleum crude. The country has also been facing the problem of mounting import bill of POL items. Under the present circumstances, it is quite urgent to intensify the exploration activities of the oil sector sincerely.
Problem # 6. Technical Problems:
The petroleum industry of the country is also suffering from numerous technical problems in respect of production of middle distillates, activating its fire fighting systems etc. which need to be corrected and updated at the earliest possible time. The RD facilities in the industry should be expanded with the maximum possible limit to face these technical problems.
Problem # 7. Pollution:
The growing pollution near the refineries and oil fields is a big problem for the industry. The Government is trying to control such pollution by adopting certain effective measures.
Problem # 8. Lack of Market-Determined Pricing System:
The lack of a well functioning market determined pricing system, partly because of the lack of vibrant competition among the companies with diversified ownership, continues to constrain the performance of petroleum industry.
Despite the surge of international prices of petroleum touching record level, the petroleum companies are not allowed to revise their market price of petrol and HSD accordingly and allowed only a limited freedom to revise the prices as per revised methodology. This has resulted a serious drain of the financial resources of the petroleum companies.