CAPITAL: New Delhi

MONETARY UNIT: Rupee

REFINING CAPACITY: 1.086 million b/cd

OIL PRODUCTION: 647,000 b/d

OIL RESERVES: 4.3 billion bbl

GAS RESERVES: 17.4 tcf

India strained toward long-discussed liberalization of its oil and gas industry in 1997.

Adding to pressure for change was the $5.3 billion that the government owed domestic oil companies for selling products below market levels. A task force urged Prime Minister Inder Kumar Gujral to eliminate a subsidy for diesel fuel, lower subsidies on kerosene and LPG, and allow prices for all products to reach market levels by 2002.

Just before the coalition government that he headed collapsed at the end of November, Gujral announced a 4 year phaseout of state-administered prices and a decrease in import duties. Oil prices were to reach market levels by 2001-02. Gujral`s program was to have abolished the cost-plus system of pricing for refiners; set refinery-gate prices for kerosine, diesel, jet fuel, and LPG according to a tariff adjustment to mimic import prices; and allowed the market to set prices for other products. Indian refiners were to pay import-parity prices for crude oil in 1998-99 and adjusted prices for products. And Indian Oil Corp. would cease to be the sole importing agency for crude oil.

The ruling coalition split when the Congress (I) party, which dominated Indian politics until elections of 1996, withdrew its parliamentary support. Congress had demanded that the ruling 15 party United Front coalition expel the Dravida Munnetra Kazhagam (DMK) of Tamil Nadu, which a government report linked to the 1991 assassination of former Prime Minister Rajiv Gandhi. Gujral rejected the demand.

Congress`s withdrawal of support left the United Front unable to govern, necessitated new elections early in 1998, and set the stage for another clash between the United Front and Hindu nationalist Bharatiya Janata Party, which won the 1996 elections.

REFinery expansions

India`s administered pricing mechanism had insulated the country`s refiners from international commercial pressures, created false incentives for production of middle distillates, and aggravated import dependency.

The centralized planning under which India`s refining industry operated through 1997 forestalled investments needed for the capacity expansions that the country needed to keep up with demand growth.

In anticipation of liberalization, projects began to move forward late in 1997.

Bharat Petroleum Corp. and joint venture partner Royal Dutch/Shell, for example, selected a site in Uttar Pradesh for a $200 million, 140,000 b/d grassroots refinery. Located 45 km southeast of Allahabad, the refinery was to include crude oil import facilities, a products distribution terminal, and a 200-acre greenbelt.

And Shell and Saudi Arabian Oil Co. (Saudi Aramco) reported to the government that India was the first target of an effort they had begun to seek joint developments in new markets.

"India," the companies said in a statement, "represents one of the potentially most exciting markets in the world."

Indian Oil Co. Ltd. was building a 120,000 b/d refinery at Panipat and studying addition to the project of a $425 million cogeneration power plant.

Separately, Cochin Refineries Ltd. proposed a 500 MW gasified-resid cogeneration power project at its 93,400 b/cd refinery at Ambalamugal.

And Saudi Aramco and Hindustan Petroleum Corp. Ltd. were studying a refinery and power complex at Bhatinda, Punjab, a project that would include a 1,000 km crude oil pipeline, a 120,000-180,000 b/d refinery, and an 860 MW power plant.

To a 120,000 b/d refinery it was building at Panipat, Indian Oil Co. Ltd. proposed to add a $425 million cogeneration project.

In other processing action, Gas Authority of India Ltd. reported plans for a $1.2 billion expansion that would include a $720 million gas processing plant at Gandhar, Gujarat, a $360 million LPG plant at Auraiya, Uttar Pradesh, and a $156 million Kandla-Loni LPG pipeline.

India suffered a major refinery accident in September 1997 at Hindustan Petroleum Corp. Ltd.`s 90,000 b/d plant at Visakhapatnam. A fire and explosion killed 56 people. LPG was believed to have leaked during offloading of a tanker and formed a vapor cloud inside the refinery.

Upstream activity

OIL & Natural Gas Corp. (ONGC), India`s main oil producer, expected its oil production to average 572,000 b/d in fiscal 1997, 16,000 b/d above target and 2,000 b/d more than the 1996 level.

ONGC officials cited a halt in the rapid decline of Neelam oil field off the country`s western coast. The field started full production in May 1997 at 90,000 b/d. But output fell rapidly to as low as 32,000 b/d. ONGC appointed DeGolyer & McNaughton to assess reserves and implement a reservoir management plan. By yearend output was up to 40,000 b/d.

In the Cauvery basin, a group led by Hardy Oil & Gas plc started flow through India`s first floating production system from PY-3 field. Output was 13,000 b/d of sweet, 48° gravity crude.

In October 1997 the finance ministry approved a new petroleum tax code expected to boost licensing. The Ministry of Petroleum and Natural Gas planned to invite bids for 47 exploration blocks and to conduct continual open bidding instead of the traditional rounds every 6 months.

New licensing terms included a 7 year tax holiday for exploration and production, an end to preferential treatment of national oil and gas companies, no mandatory state participation, royalty payments of 12.5% for onshore oil and 10% for gas and offshore oil, international prices for crude oil, and reduced royalties for deepwater exploration for 7 years of production.

GAS projects

India`s growing need for natural gas sparked a series of proposals for import projects.

Enron International and Royal Dutch/Shell were studying a gas pipeline to western India from Myanmar by way of Bangladesh and India`s Tripura state. The pipeline could deliver to the Haldia industrial district in West Bengal or to Bihar and Orissa states.

The Foreign Investment Promotion Board approved proposals by Reliance Industries and Shell for separate LNG terminals at Hazira, Gujarat.

Reliance also was developing an LNG terminal at Jamnagar, Gujarat.

A third LNG terminal at Hazira had been proposed by LNG Petronet, in which Gas Authority of India Ltd., Bharat Petroleum Corp., ONGC, and Indian Oil Corp. held 12.5% interests each.

The Petronet terminal would have capacity of 5 million tons/year. The Reliance projects would have total capacity of 10 million tons/year. Shell`s facility would have capacity of 2.77 million tons/year.

Enron was working on a $5 billion venture to bring 5 million tons/year into India and in late 1997 reported to be near completion of sales deals in India and a supply agreement with Qatar General Petroleum Corp. A major deal in India was with the Maharashtra State Electricity Board for more than 2 million tons/year of LNG for Enron`s Dabhol power project.