Building a Sunshine Nation

India has one of the highest Solar potential in the World. Can it tap into it build a sustainable economy?

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Source: The Hindu

India generated 68% of its electricity from coal in the fiscal 2013-14. The inability of Coal India Ltd (the state-owned monopoly) to ramp up coal production resulted in 65,000 MW of installed capacity being stranded, causing a power deficit of 5.4% in the fiscal 2013-14. To plug the gap, imports rose to 152 million tonnes in 2013-14 (20% of total coal requirement) resulting in higher power prices. This situation, together with climate change imperative impels a rapid movement towards greener and cheaper sources of power, primarily solar energy.

Rising dreams and falling prices

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Source: Financial Express

 

The movement is already under way as a result of Government’s ambitious ‘National Solar Mission’ announced in 2009 which envisages 20,000 MW solar capacity installed in the country by the year 2022. The Narendra Modi-led Government raised that target last month to 1,00,000 MW of installed solar capacity, inviting domestic and foreign companies to invest about $ 100 billion in the country’s Solar power sector. The buoyant mood behind this ambitious target is supported by 4 key factors. First is the abundant solar resource availability. India receives about 4.5-7 kWh/m^2 of solar energy on average with 1500-2000 hours of sunshine per year (depending on the location). This is enough to generate power more than 1000 times the current demand. A second factor is the falling prices of Solar Photovoltaic modules. Large-scale production, especially in China, has caused the module prices to drop by 80% between 2008 and 2014, dropping by 12% last year alone. As a result the tariffs for grid-interactive solar power have fallen from Rs.17.91/ kWh in the year 2011 to Rs. 5.73 /kWh in the latest round of auctions held by the Andhra Pradesh state government.

Nearing Grid-Parity

The third factor has been the tremendous rise in efficiencies of solar PV-modules. Over the last 8 years, research and mass-scale production have resulted in rise of conversion-efficiency for crystalline silicon modules from 12% to about 19% and that for thin-film (Cd-Te) modules from 8% to 13%. Companies like SunPower (in USA) are already manufacturing silicon modules with 25% efficiency commercially. Scientists at Fraunhofer Institute in Germany recently developed solar cells modules with 44.7% efficiency. This combination of falling costs and rising efficiencies has resulted in solar power approaching grid-parity. KPMG, a consulting firm, predicts solar tariffs to achieve grid-parity by the year 2018-19. Solar power is already more economical than diesel power with an average tariff of Rs. 7/kWh against Rs. 15/kWh for the latter.

The fourth significant factor has been the Government support to build the solar power sector. The ambitious ‘National Solar Mission’ provided various fiscal incentives like preferential feed-in tariff, excise duty concessions, wheeling-charge concessions, income-tax holiday, an 80% accelerated depreciation on solar-equipment, etc. Besides, off-grid solar plants receive a capital subsidy of 30% of the entire-project cost (and of 70% in North-eastern states and J&K). These factors along with falling prices have resulted in rise in installed capacity from 161 MW in 2010-11 to 2,319 MW in 2013-14.

Sunshine on the horizon

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Source: Aditya Greens

This is however only a small amount of the total potential, which is estimated to be in the range of 7,00,000 to 11,00,000 MW. For the non-grid applications, Rooftop solar represents the most lucrative opportunity. It can fulfil 30% of the entire demand generated during the sunshine hours. The example of Germany shows that with robust and attractive policy, Rooftop solar can be effectively leveraged upon. Out of the total Solar capacity in Germany, 80% is via Rooftop solar modules which can meet about 10% of total demand on a typical summer day.

Apart from using Photovoltaic modules, Solar energy can be harnessed through thermal systems as well. In this domain, Solar cooking and Process-heating are the major segments. Of these, Solar cooking is the most mature category with an estimated potential of 2.6 lakh m^2 collector area and target installation sites like temples, hostels, canteens and prisons. Already, successful examples of mass-solar cooking like Shirdi temple and IIT-Roorkee’s student messes exist. But the most lucrative opportunity (of about 46 lakh sq. Metres of collector area) lies in the industrial heating segment. Indian industry accounts for 40% of the total primary energy consumption of which thermal-form accounts for a massive 70%. Solar process heating can easily replace Diesel, LDO or FO-fired boilers in industries like Textiles, Dairy, Pulp & paper and Food processing.

Clouds spoil the mood

Despite massive potential and Government’s good intentions, severe challenges face the nascent Solar power sector in India. The utility-scale projects through PPA-mode (Power Purchase Agreement) have persistently been under the shadow of poor financial condition of the state-owned distribution companies. The retrospective tariff reduction by Gujarat’s power utility and non-honouring of PPA agreement by Tamil Nadu’s power utility has made the investors apprehensive, lately. The health of the utility-scale projects via REC-mode (Renewable Energy Certificate) is even more precarious. Non-enforcement of RPOs (Renewable Purchase Obligations) by the state-governments has forced the REC prices to tumble by 70% from Rs. 9.5/kWh to Rs. 2.85/kWh. Only 2% of total solar RECs were traded in October 2014 as compared to 18% in April 2012. This has put projects of 500 MW capacity (1/6th of India’s current solar capacity) in a cash-crunch.

For the Rooftop solar industry, the main hurdle has been the indecisiveness in coming up with an effective policy for residential rooftops. In August 2014, a 30% capital subsidy was announced for Rooftop installations but this was applicable to only Government buildings. Moreover, there have severe delays for the last 8-10 months in subsidy payments as the MNRE budget was reduced from US $246 million in 2013-14 to US $72 million in 2014-15. A local rooftop installer, Zolt Energy’s Pradeep Palleli, said “Announcing subsidies and not releasing it in time is really a major hurdle hindering the growth of the rooftop solar industry.” Even the Solar thermal industry has hit a road-block after the Government withdrew the 30% capital subsidy on solar water heaters on October 1, 2014.

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Who will make them?

The weakest pillar in India’s solar industry however is the crippled manufacturing-base. Global over-supply of cheap modules from manufacturers in China and USA has put many domestic-manufacturers out of business. For those who are left, capacity-utilization of factories remains below 30%, putting them on verge of bankruptcy. The high cost of domestic finance has been another major disadvantage. Solar-developers are getting access to loans at 3-4% from US Export-Import Bank (Ex-Im) while domestic interest-rates remain above 13-14%. Solar-developers have taken loans in excess of US $1 billion from the US Ex-Im Bank. But these come with riders to procure modules from US-based manufacturers, thus putting Indian module-manufacturers out of business.

Government to the rescue

To eliminate the barriers and shortfalls in the sector, the Government has to take proactive steps. Foremost among them should be creating an environment of certainty and stability, where in, programs are sustained and incentive-payments never delayed. To reduce the debt costs for developers, funding avenues like long-tenure, tax-free solar bonds. Lastly, the government can also leverage the ‘Make in India’ campaign to create a robust and sustainable solar-manufacturing industry in the country. Solar-sector focused Manufacturing and Investment zones should be set up to provide business friendly ecosystem along with superior physical infrastructure.

Work has already begun on many investment-encouraging initiatives. As a result, India is building the world’s largest solar-power plant in Rajasthan with a capacity of 4,000 MW, which is expected to bring the cost of solar down to retail tariffs (and even lower in some locations). Big business-houses like Tata-group, Mahindra Group, Reliance, NTPC, Aditya Birla Group and others have already planned investments worth thousands of crores to make the best of the solar-opportunity. The US $ 100 billion solar-investment plan by the Modi Government takes India’s commitment to solar technology to an unprecedented level. The sun has begun dawning on India. Combined effort by Government and Businesses can take it up the horizon and shine upon India’s future.

 

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Harsh Jain is a second year student at IIM-Ahmedabad. He completed his graduation in mechanical engineering from IIT-Roorkee. With extensive research exposure in the form of market research projects and industry review reports in the energy sector, Harsh is an environment enthusiast and actively follows the latest trends in the power and automobile industries.

 

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Syria, Rupee, and Crude Imports

As global oil prices move higher owing to geo-political uncertainties in the Middle East and the rupee continues to weaken, the Indian economy faces gloomy prospects. The impact of the weaker INR and higher oil prices will, on the whole, have negative implications for India’s fiscal balance and inflation. Crude oil price in INR terms is currently at an all-time. Brent crude is getting closer to INR 8,000/barrel and is about 40% costlier than at the end of May, 2013. Accordingly, fiscal concerns are coming back. Under-recoveries have once again gone up in recent months despite continued, albeit small, upward revisions in domestic oil prices. Diesel under-recoveries will likely go up to INR 12/litre by end-August from a low of INR 3.8/litre about three months back. The crisis in the Middle East, initiated by sanctions on Iran and escalated by a war like situation in Syria, is creating uncertainty in global crude supplies. As a result, crude oil prices are likely to rise above the benchmark $120. With India already challenged by the effort to substitute Iranian crude post the embargo, this development is likely to compound India’s energy woes.

Fig. International Crude Oil prices (left)   versus   Crude Oil Prices in INR terms (right); Source: Barclays Oil & Gas

Fig. International Crude Oil prices (left) versus Crude Oil Prices in INR terms (right); Source: Barclays Oil & Gas

Syrian Crisis

The increasing likelihood of some form of US led military action in Syria is compounding concerns about the stability of the world’s key oil-producing region and this is likely to exert upward pressure on prices until the nature of the possible military intervention becomes apparent. But the bigger risk for the oil market is the potential for the Syrian conflict to spread to neighboring producing countries and endanger regional output. Iraq, currently OPEC’s second largest producer, has already seen its security situation significantly deteriorate because of Syria. Violence is running at the highest level in five years because of a renewed round of bombings and shootings. Sanctions on Iran and the recent labor and payment problems in Libya have brought OPEC disruptions to almost 2 million barrels per day (mbd), adding to the 0.8 mbd in unplanned shortages in non-OPEC countries.  While Libyan output is trickling through, and improvements could be expected in Iraq with the start-up of new fields; the return of supplies is likely to be staggered with a high possibility of a relapse to low levels in Libya, Nigeria, Iraq and South Sudan. Thus, with geopolitical tension and physical shortages on the rise, crude oil production may be at an inflection point.

Weakening Rupee

Since crude is the biggest component of India’s import bill, a weak rupee is bad for the economy. Oil companies, which pay for crude in dollars, will have to shell our more rupees for importing oil. This will increase India’s current account deficit. The weakening of the rupee means that there is little likelihood of a respite from high fuel prices. The consolation lies with the fact that since global commodity prices have been falling, there is no imminent threat of a price hike in commodities either. However, given the sensitivity of India’s current account to higher oil prices, if oil averages were to remain around US$120/barrel through rest of the fiscal year, it can potentially pose a 30 basis points hike in India’s current account deficit. Softer domestic demand reflecting weak growth momentum and government initiatives to contain the current account gap also remain important considerations in this context.

 Looking Ahead

 With an appreciation of the rupee unlikely in the short to medium term, India’s crude import, accounting for over 75% of India’s overall import bill, is likely to increase India’s already stretched Current Account Deficit. In addition, prevailing uncertainties in the Middle East, especially Syria, are likely to push the international crude prices over $120 in the near term. This will compound India’s deficit woes.  With India already struggling to substitute Iranian crude, a further drop in supplies from existing sources may severely expand India’s energy deficit. This is bound to have a cascading effect on Indian industry with utilities and infrastructure impacted first, followed by other sectors. These considerations, in addition to the incumbent government’s election largess in the form of the Food Security Bill, are likely to prompt credit agencies to re-evaluate India’s sovereign credit rating, which may have an adverse impact on institutional inflows and credit availability. It’s clear that India’s currency and energy security concerns need to be mitigated, by prompt policy corrections, and by the development of alternate supply markets to source India’s energy requirements.

Debabrata Ghosh is a PGP1 student at IIM Ahmedabad and a member of the Consult Club. He is a graduate from BITS Pilani in Chemical Engineering.

Coal, Where Art Thou?

The future of the Indian coal industry appears dark. The demand is going to increase significantly and the government is not ready to address the potential bottlenecks. This article talks about the evolution of Indian Coal Industry, its current challenges and prospective solutions.

Indian Coal Industry is going through a very tough time. The demand of coal is increasing year after year and is expected to grow threefold in next 20 years. But it appears that the domestic coal production will not be able to meet this increase in demand.

Coal has driven the engine of Indian industries for a long time. The Indian coal requirement can be broadly divided into two categories – Thermal Coal, used for power generation and Coking Coal, also known as metallurgical coal, used for steel production. At present, around 70% of coal in India is used for power generation and rest 30% is used by other industries like steel, cement, paper, chemical and pharmaceutics.  The Indian power sector is still dominated by Coal and as per an IEA 2012 report, 68% of Indian electricity is generated by coal. Industry-wise coal usage in India is shown in Exhibit 1.

Coal where art thou

Before proceeding further, let’s have a brief understanding of how the coal industry has evolved in India. The first commercial coal mining was started way back in 1774 by M/s Summer and Heatly, East India Company in Raniganj coal-fields. Since then, the coal industry has moved at a sluggish rate and before independence it just touched 30 million tonnes (MT) mark. After independence, Government of India (GoI) established the National Coal Development Corporation (NCDC) in 1956 to give a push to coal production, with the collieries owned by the railways. During the same time, many private firms also flourished. However, concerned about the low productivity, owing from the use of outdated technology and poor working conditions for labourers, GoI decided to nationalize private coal mines. This was done in two stages – coking coal mines in 1971-72 and non-coking coal mines in 1973. The Coal Mines (Nationalization) Act, 1973, provided the right to GoI to manage all coal mines in India and this act is still a centrepiece of Indian coal policy. Today, there are three state owned firms which control more than 90% of coal production in India – Coal India Limited (with its 8 subsidiaries), Singareni Collieries Company Ltd. and Neyveli Lignite Coal Ltd.

The Coal Mines (Nationalization) Act was amended in 1993 to allow private captive mining by private companies and other public entities for power generation. This amendment led to the allocation of more than 200 blocks by the government to various companies other than CIL, SCCL and NLCL. But, out of these 200 blocks, only 30 have started production till date and the contribution of captive mining was meagre 36 MT in 2010-11 against targeted 104 MT. The reasons for this dismal performance are many – absence of accurate geological statistics; delay in environmental approvals; land acquisition, Rehabilitation & Resettlement issues. This is the first set of issues which limit coal production itself. Logistical concerns like non-availability of enough railway wagons for transportation and lack of road infrastructure from mines to railway sidings is second problem which has affected production capacity. The logistical issues are not limited to rail and road network only. Current coal handling capacity of Indian ports is around 90 MT and this has to be increased by 50 MT in the next 5 years to meet import requirements of 140 MT in 2017.

Third constraint, as mentioned above, is expected increase in coal imports in the future. In 2011-12 India produced slightly more than 550 MT and around 85 MT of coal was imported to meet domestic demand. This gap between demand and supply is expected to increase to 140 MT by 2017 as per estimates by World Energy Council. The expected coal demand in India for the next two decades is shown in Exhibit 2.

Coal where art thou 2

Import of coal brings its own set of problems. India is primarily dependent on South Africa and Indonesia for thermal coal and Australia for coking coal. Australia has shown significant price fluctuations in the past because of the Queensland floods. Further, the changing regulatory and tax scenario in these countries suggests an increase in coal prices in the future. At the same time, other potential geographies like Mozambique and Columbia lack infrastructure facilities to ensure smooth coal transportation.

Fourth issue is coal quality management. Indian coal is low to medium grade with high ash content, low moisture and low sulfur. Indian power plants often complain about high ash content and inconsistency in coal quality. Coal benefaction and washing are potential solutions to this problem and as an initiative CIL has decided to set up 20 coal washeries with aggregate capacity of more than 100 MT/year.

There are a lot of measures that could be taken at various stages of coal value chain to release various bottlenecks mentioned above. At the coal exploration stage government should provide incentives as it does for Oil and Natural Gas exploration under NELP program. At the clearance stage, the government should appoint one single committee with representatives from all the concerned ministries like environment, water, mining, forest etc. This will reduce the clearance time significantly. Adding on, coal recovery from under-ground mines varies from 20% to 70%. To address this issue at mining stage, government should encourage investment in R&D and more efficient technologies to recover more coal. To address logistical issues, the government should adopt PPP model to develop first-mile infrastructure to transfer coal from mines to nearby railway sidings and for development of port capacities for coal handling. Simultaneously, given that imports are expected to augment in future, GoI should use diplomatic approach to make the process of acquisition of coal mines abroad and price mechanisms suitable for Indian industry.

The measures mentioned above are the need of the hour to ensure energy security as well as industrial growth of India. Coal is definitely going to stay as a major force behind Indian development for next few decades and ensuring a timely supply of high-quality coal to power plants and other industries is the key to development.

Mani Mahesh Garg is a PGP2 student at IIM Ahmedabad and a member of the Consult Club. He is a graduate from IIT (BHU), Varanasi with B.Tech in Ceramic Engineering. Prior to joining IIM-A, Mani Mahesh worked at RINL, a public sector steel manufacturer.

Delivering India’s Energy Security

India’s phenomenal growth in last two decades has made it a strong contender in the race of emerging global superpowers. However, if India wants to fuel any hopes to realize its ambitious plans, gaining energy security will be a paramount concern. India’s huge dependence on foreign imports not only puts a great strain on its economic resources, but also makes it vulnerable to the whims of outside world.

India’s energy sector has been majorly crippled by issues pertaining to domestic nature. Due to scarcity of domestic oil and gas reserves, more than three-fourths of India’s oil needs are met by imports. Even the existing reserves are not fully exploited. Excessive bureaucracy and requirement of approval from 7 different ministries has stalled production plans at numerous occasions. Government’s changing stance on tax laws, policy ambiguities and uncertainty on revenue sharing models has resulted in lower enthusiasm among foreign players. Moreover, Government’s regular intervention in fixing oil prices and misalignment with global prices has discouraged private sector to become a partner in finding solutions to India’s myriad energy problems.

In spite of abundant coal reserves, India imports huge quantities of coal owing to the poor domestic quality. While India’s long sunshine period and long coastline present a huge potential of exploiting renewable resources, their doubtful commercialization and huge investments have deterred any big plans. Moreover, the recent nuclear catastrophe in Japan has put looming concerns over the future of nuclear energy. The growing public awareness and stringent environmental regulations have made harnessing of conventional sources of energy even more difficult and costlier. Thus, India’s energy future looks bleak and need some immediate corrections.

India has to adopt a multi thronged strategy to effectively counter the above challenges. While India’s energy giants like ONGC have taken right steps by acquiring foreign oil and gas assets to overcome the domestic shortages, more such efforts need to be taken. Both private players and national oil firms have to aggressively pursue the path of acquisition of O&G reserves in Latin American, African and other countries. Government has to promote these initiatives by increasing its budget outlay for these acquisitions.

Coal to Gasification (CTG) technology is an answer to India’s poor quality of coal. The success of China in converting poor quality of coal into gas and transporting it form remote places to country’s main centre highlights the efficacy of this new technology in helping India harness its full coal potential.

Fuel subsidies have to be phased out in a systematic manner to cut their inefficient usage. Diversion of these funds towards R&D for better exploration techniques will pay huge dividends in increasing domestic production. India has to increase diplomatic efforts to bring more Clean Development Mechanism (CDM) projects to its shores. Such projects will bring much needed investments and build India’s base of renewable sources. The discovery of unconventional sources of energy like shale gas and coal bed methane reserves has also opened up a new window of opportunity. Schlumberger has already confirmed the availability of shale gas basins in Cambay and Cauveri basin. US’s shale gas success demonstrates that successful shale gas exploitation can go a long way in enhancing country’s gas production.

However, the area that requires major overhaul is India’s poor domestic exploration environment. While the New Exploration Licensing Policy (NELP) has played a role in bringing some private players to the domestic oil and gas exploration market, a lot needs to be done still. India urgently requires the technical expertise (deep sea and ultra deep sea technology) and huge investments from global energy players to increase production and oil and gas recovery. More transparency in product sharing contracts and implementation of open acreage policy will encourage participation of global players. Strong legal system has to be established to resolve the disputes arising out of contracts from allocated blocks. Currently, more than 52 of the allotted 114 blocks under NELP are pending approval from various ministries. The question is why these blocks were allotted before approvals of different ministries. Such cases set a bad precedent to future allocations. Single window clearance mechanism has to be developed to reduce the time and hassles of moving through different ministries. Moreover, Government has to launch aggressive marketing campaigns and make seismic data available for different regions to improve perception about India’s geology. Private players have to be encouraged through tax breaks and risk sharing agreements to make investments in the infrastructure and modern equipments for exploration.

To sum up, more proactive Government approach, higher private sector participation and efficient use of available resources will drive not only India’s energy security but also give more teeth to India’s rising dominance as a global superpower.


Ankur Goyal is a PGP1 student at IIMA, and is member of the Consult Club here. He graduated with a B.Tech in Chemical Engineering from IIT Delhi, and worked for a year in Kellogg Brown and Root Technology group, before joining the post-graduate program at IIMA.

Who Moved my Oil

If you had to take a guess at the companies that were involved in the chain of operations, from the oil field, to the fuel that you filled into your car, what would it be? Most people tend to associate the petroleum industry with one of the Supermajors: BP plc. (formerly British Petroleum), ExxonMobil, Royal Dutch Shell, Chevron Corporation, Total S.A. and possibly ConocoPhillips.

Big Oil is definitely big. The Supermajors are not only the world’s largest public oil companies; they are also the world’s largest corporations.

Company 2011 Revenue ($ Billions) 2011 Profits ($ Billion)
Royal Dutch Shell

484.5

30.92

ExxonMobil

452.9

41.06

BP

386.5

25.70

Sinopec

375.2

9.45

China National Petroleum

352.3

16.32

Chevron

245.6

26.90

ConocoPhillips

237.2

12.44

Total S.A.

231.6

17.07

Source: Fortune Global 500

However, the annual revenues and profits of publicly traded companies is only a part of the picture as far as the oil industry is concerned.

Image

Source: Wikipedia

State owned firms dominate the industry. Most of these firms are fully owned and privately held by the respective states and do not need to declare their revenues or earnings.  However, in terms of oil and gas reserves, state owned National Oil Companies (NOCs) clearly dwarf the Supermajors. NOCs control over 80% of the World’s oil and gas reserves. In terms of reserves, Exxon is the 11th largest oil and gas company in the world.

NOCs are also the world’s largest producers of oil. In 2011, PetroChina announced that its oil production had topped that of ExxonMobil. PetroChina produced 2.43 million barrels of oil per day in 2011, whereas Exxon’s production was 2.3 million daily barrels. However, Saudi Aramco, which produced 7.9 million daily barrels of oil in 2011, dwarfed both these giants.

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Source: The Economist

The origins of the first state owned firms lies in the 50s and 60s, when the petro-states started nationalizing their oil resources by creating NOCs to take charge of their reserves. The Supermajors were still needed for their technical expertise, capital and skill at managing large projects. Most oil projects took the form of joint ventures between NOCs and the Supermajors. However, over time, the NOCs have become more technically advanced and competent at managing their own projects.

More importantly, state firms from China and South Korea, which do not control their own domestic reserves, have also started competing with the Supermajors via acquisitions to obtain technology, as well as access to oil and gas fields and drilling licenses. On July 23rd China National Offshore Oil Corporation, CNOOC announced a $15 billion deal to buy Nexen, a Canadian energy firm with big holdings in tar sands and expertise in drilling for shale gas. Last year, it had announced a $2.2 billion deal with Chesapeake Energy through which it acquired assets in South Texas shale deposits and agreed to finance most of Chesapeake’s drilling costs. These deals are of strategic importance to China. They provide China with access to foreign oil reserves, as well as the necessary technical expertise to access its own domestic shale gas reserves.

The Supermajors are also facing competition from firms that provide Oil Field Services (OFS). OFS firms provide the equipment and services used in the exploration for and extraction of Oil. The sector can be broadly divided into:

  • Technology solution providers such as FMC that sell products or kits.
  • Drilling contractors such as Transocean that own and lease out rigs to companies.
  • Oilfield services providers that carry out most of the tasks involved in finding and extracting oil. Schlumberger, Halliburton, Baker Hughes and Weatherford international dominate this subsector.

OFS started growing as a sector in the 1980s when the oil companies decided to outsource drilling operations. At that time, the easy availability of oil resulted in relatively low margins on drilling operations. Since the 1990s, the tightening oil market has driven demand for new technologies for exploration and extraction of oil. The big service companies invest heavily in R&D. Schlumberger, which earned profits of $5 billion on revenues of $40 billion in 2011, invests roughly $1 billion annually on R&D. That is roughly the same as the R&D expenditure of Exxon. Technologies and techniques such as 3D seismology and directional drilling, developed by OFS firms, are the mainstay of the modern oil industry.

The dependence on new technologies is also likely to grow. Global production from mature oil fields is falling by between 2% and 6% annually. The dwindling supply and increasing demand for oil means that the oil companies are more and more dependent on OFS firms for the technology and services to extract oil from increasingly inaccessible reserves and remote locations.

The OFS firms have also played a role in reducing the dependence of the NOCs on the Supermajors for technical and managerial expertise. NOCs can now manage projects themselves and hire all the technical help they require directly from OFS firms. This can extend to the extent of risk sharing between the NOCs and the service firms, just as in joint ventures between oil companies. Schlumberger agrees to some amount of payment for performance on big contracts. Others, such as Petrofac, are taking small equity stakes in exploration projects.

So, overall, a number of other players are replacing the Supermajors. As far as owning reserves is concerned NOCs have claimed the best acreage in most of the old oilfields. The large OFS firms are the leaders as far as technical expertise at drilling and extraction is concerned. In spite of the Supermajors’ expertise at exploratory activities, smaller oil majors such as Tullow, Carin and Andarko are proving to be more capable at the task of discovering new reserves.

However, in spite of their diminishing role, Supermajors are obviously still a major part of the industry. Even technically advanced NOCs like Kuwait Oil and Saudi Aramco still depend on the Supermajors for downstream activities such as refining. New petro-states such as Uganda and Ghana do not have the capital, technology or managerial skills required to exploit their oil resources, and would prefer to deal with firms that have a reliable track record of successfully funding and managing big projects. OFS firms such as Schlumberger claim that they do not intend to own reserves. In addition, they do not have the finances to manage the risk associated with large exploration projects. Thus the Supermajors are the only players who can mobilize the technical expertise required to find and extract oil from harsh environments such as the Arctic, and deep oceans and from unconventional sources such as oil sands. Supermajors also have an advantage over smaller firms in the biggest capital-intensive projects such as the large Liquefied Natural Gas (LNG) projects managed by Shell in Australia, and Total in Russia.

In spite of their ever-increasing profits, it is fair to say that life has become a lot more difficult for the Supermajors. The industry has become move diversified and complex. A number of state-owned and private players are playing a large role in moving the oil.

-by Anubhav Bhattacharjee

Anubhav is a PGP-1 student at IIM, Ahmedabad and currently a member of the Consult Club here. He graduated from the Indian Institute of Technology, Madras in 2012

Note – A typographical error in the post was corrected on 28th August 2012. The profits quoted from Fortune 500 are in $ Billion and not $ Million.