Ageing infrastructure, a favourable regulatory framework and de-control of petroleum products price will drive investments, giving an impetus to the rising business opportunities for oil & gas equipment manufacturers.
During the Eleventh Plan period (2007-2012), domestic oil and gas players exceeded the planned capital expenditure outlay. They invested Rs 2,751.6 billion, 120 per cent of the planned target of Rs 2,289.9 billion. The upstream sector, which had the highest share in the planned capital expenditure, recorded approximately 129 per cent of the planned target. This resulted in more than anticipated oil and gas reserves accretion. The downstream sector achieved around 104 per cent of its planned outlay target, primarily due to large investments made by Indian Oil Corporation Ltd (IOCL), accounting for 51 per cent of the total expenditure.
During the Twelfth Plan period (2012-17), an outlay of Rs 3.4 trillion has been envisaged by Indian national oil companies (NOCs) for the upstream and downstream sectors. The upstream sector is expected to account for more than Rs 1.8 trillion of this. The majority of the amount will be spent on conducting drilling and developing exploration and production wells. PSUs are expected to spend approximately Rs 1.5 trillion on capacity augmentations in the refining and marketing space. Private players such as RIL and Essar Oil are also spending significant capital on their capacity additions.
Capital spending of Rs 1.2 trillion is projected across the natural gas value chain during the Twelfth Plan period. Investments worth Rs 439 billion are projected for capacity augmentation in gas transmission pipelines. The balance is projected for new capacity additions in LNG terminals (Rs 313 billion) and the expansion of the CGD network (Rs 403 billion).
Given the rise in demand for oil and gas, the gap between the demand and supply from indigenous sources is likely to widen over years. Nevertheless, Indian oil and gas companies have been investing across the value chain to bridge the rising gap. During FY15û17, oil and gas companies (including NOCs and private companies) plan to invest around Rs 2.8 trillion across the value chain. Out of this, ONGC accounts for 34.2 per cent of the total investment, followed by RIL with 28.4 per cent. On a segment level, upstream accounts for 56.8 per cent share, followed by downstream with 42.6 per cent.
According to AK Srinivasan, Executive Director, Chief Corporate Finance, ONGC, the level of capex for the company will be in the range of about Rs 36,000 crore. And the same trend will be continuing for the next year also.
In terms of capex plan for Cairn India, Mayank Ashar, Managing Director and CEO of Cairn India suggested that during the quarter, $247 million net was invested, taking nine month´s net capex to $785 million. Gross cumulative capex on development in Rajasthan stood at $4.9 billion (89 per cent in DA1 and 11 per cent in DA2) and on exploration at $1 billion as at December 31, 2014.
Meanwhile, India´s largest player in this space, Reliance Industries Ltd, is not far behind when it comes to capex. Currently, RIL is investing in excess of Rs 150,000 crore across its businesses.
For RIL´s Shahdol - Phulpur Gas Pipeline Project, the company has completed 100 per cent land acquisition and RoU Notification under PMP Act. It has also awarded all construction contracts. Meanwhile for its Jamnagar refinery project procurements of mechanical tags, electrical, instrumentation and bulk material have been completed. Orders placed on vendors across the globe include the majors like L&T, GE Energy, Linde, Atlas Copco, Doosan, Sungjin, Flowserve, Elliot, Sumitomo, Siemens, ABB, Tyco, and Invensys etc
In terms of equipment, over 7,000 pieces have been ordered including 100 compressors, over 2,000 pumps and more than 150 columns and reactors. The company has ordered over 5,000 km pipes and 3 million flanges, fitting and valves. In addition, over 350,000 MT of structural steel has been ordered too. The company has already procured more than 6,000 pieces of electrical machinery and nearly 50,000 instrument tags.
Rise in LNG import capacity
India´s dependence on liquefied natural gas (LNG) is increasing, given the country´s limited domestic production to meet the rising demand. LNG imports have increased from 8.9 MMTPA in FY10 to 10.8 MMTPA in FY14, at a CAGR of 5 per cent. Currently, LNG import accounts for 28.3 per cent of the total gas supply. The country´s LNG re-gasification capacity is expected to increase from 18.6 MMTPA (excluding that in Kochi, which was commissioned in August 2013) in FY14 to around 53 MMTPA in FY17 on the back of the greenfield LNG terminals proposed by private and public sector companies along the eastern and western coast of India.
Growing natural gas transmission network
Despite accounting for around 38 per cent of the total pipeline network, India´s gas transportation infrastructure has historically remained inadequate due to the limited availability of gas in the country and the regional concentration of gas-producing fields and LNG import facilities (mostly in western India). As of March 2014, India had a natural gas transmission network of 15,340 km, with an aggregate transmission capacity of 390 million standard cubic metres per day (mmscmd). GAIL accounts for 70.7 per cent of the total pipeline network in India by length. PNGRB had also authorised GSPL and Andhra Pradesh Gas Distribution Corporation Limited to expand the Mallavaram-Bhopal-Bhilwara-Vijaipur line and build the Kakinada-Srikakulam gas pipeline.
Penetration of pipelines
The GoI and other stakeholders are encouraging investments to strengthen the midstream segment and address the significant unmet demand for gas. During the Twelfth Plan, companies are likely to invest Rs 841.8 billion for expanding their gas pipeline network (including the CGD network). Around 90 per cent of this proposed investment will be used to expand the gas trans¡mission and distribution network. Furthermore, the GoI has announced plans to build additional 15,000 km of gas pipelines to complete the construction of the gas grid via the Public Private Partnership (PPP) route.
Expanding CGD network
The use of natural gas in the residential, industrial and commercial sectors is rising on the back of favourable regulatory policies and cost benefits. The existing CGD network extends to 90 cities and covers 47 geographical areas (GAs). The network of distribution pipelines spans nearly 40,535 km. The total number of compressed natural gas (CNG) stations in the country has increased to 966 in FY14 from 617 in FY11, at a CAGR of 11.9 per cent. The Petroleum and Natural Gas Regulatory Board (PNGRB) plans to expand the CGD network through competitive bidding in more than 300 GAs in a phased manner, depending on the availability of natural gas. To expand the CGD network and boost competition, PNGRB has introduced amendments to existing bidding parameters in 2013 and 2014. It has also authorized three GAs - Bhavnagar, Jamnagar and Jalandhar ù to go ahead with the third CGD round. In addition, it has invited bids for developing CGD networks in 14 cities under the fourth bidding round. Recently, the PNGRB has extended the bidding deadline to September 2014 for the districts of Khammam, Nalgonda and Rangareddy and Medak in Telangana; Shahjahanpur in Uttar Pradesh; and Guna in Madhya Pradesh. The Indian government has raised the share of allocated domestic gas to 100 per cent of the requirement for CNG (transport) and PNG (domestic), up from the previous 80 per cent mentioned in the Gas Utilisation Policy. With this, it plans to reduce the dependence of CGD players on costlier LNG, as well as provide cheaper fuel to end consumers. Favourable policy is likely to encourage investment in the CGD sector. This, in turn, is expected to generate more opportunities for equipment companies.
Surplus refining capacity
India has surplus refining capacity and is a net exporter of petroleum products. Over the past few years, many companies - private and NOCs - have expanded their refining capacities, driven by the rising domestic consumption of petroleum products and incentives granted by the Government of India (GoI). Currently, the bulk of petroleum products of public sector undertaking (PSU) refineries are sold in the domestic market, while private companies mainly cater to export demand. During FY10û14, the country´s refining capacity grew at a CAGR of 3.8 per cent to 215 million metric tonnes per annum (MMTPA). The total exports of petroleum products increased from 51.2 million metric tonnes (mmt) (US$30.7 billion) in FY10 to 67.9 mmt (US$60.7 billion) in FY14. The country currently has 22 refineries, of which 17 are in the public sector, three in the private sector and two are joint venture refineries. NOCs account for the majority (55.8 per cent) of the country´s refining capacity, followed by private players with a 37.2 per cent share.
Expansion of refining
Refining companies are likely to continue to enhance their crude processing capacity by upgrading existing facilities and building greenfield refineries. During the Twelfth Plan, new refineries are likely to be commissioned by Indian Oil Corporation Limited (Paradeep, 15 MMTPA). By the end of FY17, the country´s cumulative refining capacity is projected to increase to 310.9 MMTPA. Out of this, NOCs are likely to account for 197.9 MMTPA. Access to modern technology, and research and development initiatives may become key focus areas, given the rising global production of heavy unconventional oils, coupled with the shift of consumers towards modern fuels. (See: Current and projected refining capacity share by company)
Augmenting the pipelines
India´s refining companies have developed a wide oil pipeline network, driven by the need to minimise transportation costs (compared to those of railways and tankers), pilferage and transit losses. India has a cumulative crude oil, liquefied petroleum gas (LPG) and petroleum product pipeline network of 23,823 km, indicating growth at a CAGR of 5 per cent during 2009û2013. (refer to Piping hot) As of April 2013, petroleum products and crude oil pipelines accounted for around 37 per cent and 25 per cent of the total pipeline length, respectively. IOCL is the market leader in the crude and petroleum product pipeline segment, accounting for 46.5 per cent share in total length. In terms of crude oil-carrying capacity, ONGC accounts for around 42 per cent share, followed by IOCL with 29 per cent. There are 31 petroleum product pipelines, accounting for 83.5 per cent share of total length and 95 per cent of capacity. The remaining network comprises four LPG pipelines, covering 2,316 km with 4.73 MMTPA capacity.
The oil and gas industry is the largest end-user market for the process plant equipment industry. Process plant equipment finds wide applications in refineries and gas processing plants in critical processes such as phase separation, oil processing and storage, gas processing, and oil and gas metering and transport. On the other hand, pumps, valves and steel pipes form an integral part of both upstream and downstream equipment. These are used extensively for transporting crude oil from oilfields to refineries, as well as in marketing and distribution.
Process plant equipment overview
Major process plant equipment includes pressure vessels, storage tanks, columns, towers, crystallizer, heat exchangers, evaporators and furnace. These find applications across a wide spectrum, including oil and gas, refinery, chemical, petrochemical, energy, fertilizer, paper and pulp, sugar, cement and dairy.
The process plant equipment market in India was valued at Rs 163,450 million in 2011. Production amounted to Rs 198,610 million in 2012. It is expected to touch Rs 350,000 million by 2017, growing at a CAGR of 12 per cent.
The market is fragmented, with more than 200 companies manufacturing process plant equipment across India. Close to 65 per cent of these are small and mid-size enterprises.
This sector employs 128,000 persons directly and 240,000 persons indirectly.
Market growth drivers
Increasing growth in the end-user segment
Growth in process plant equipment is highly correlated with that in the oil and gas sector, since it is a major consumer of process plant equipment. With growing demand for petroleum products, oil and gas players are expected to further add refining capacity. This would drive demand for process plant equipment.
Investments in the Indian upstream and downstream
During FY15û17, oil and gas companies (including NOCs and private companies) plan to invest around Rs 2.8 trillion across the value chain. Out of this, ONGC accounts for 34.2 per cent share, followed by RIL with 28.4 per cent.
Strong manufacturing capability
Domestic manufacturers have gained the requisite capability to execute end-to-end large projects. They are now equipped to provide equipment of the highest quality and in compliance with global standards, thus leading to huge export potential.
The value chain business
The process equipment industry has evolved considerably over the last few years. Indian players are now able to cater to the varied needs of customers, ranging from design and engineering at the backend to erection and commissioning at the front end, while competing with global majors for engineering, procurement and commissioning contracts.
Favourable policies and strong investment pipeline by PSUs
Increased initiatives by the GoI, such as to permitting 100 per cent FDI in the capital goods and engineering sectors and strong investment plans by PSUs to add refining capacity would drive demand for oil and gas equipment. By the end of FY17, the country´s cumulative refining capacity is projected to increase to 310.9 MMTPA. Out of this, NOCs are likely to account for 197.9 MMTPA.
There is a technological gap between domestic and foreign manufacturers. This is leading to an increase in imports, as demand from end-user segments for next-generation products has considerably evolved over time.
High dependence on imports
Companies are increasingly using refurbished imported process plant equipment, primarily because it is cost effective compared to procuring new equipment. Old machinery can be imported without minimal restriction on age and quality benchmarks, resulting in losses for domestic manufacturers.
Shortage of capital and high interest rate differential
Being a capital-intensive industry, players are unable to source financing to execute large-size projects, primarily due to high interest rates. Also, the high interest rate differential is leading to higher financial costs, thus increasing delivery cycle time for equipment. This is detrimental for the industry.
High dependence on overseas process licensors
In the absence of a systematic technology transfer policy and limited proprietary knowhow on process technology, domestic manufacturers are dependent on global players to manufacture next-generation products.
Logistics and infrastructure to support the industry
Another major problem is weak support infrastructure, which leads to severe transportation issues, such as high risk in transporting large equipment. This leads to further increase in costs.
BTG on a roll
The boiler market (includes boiler used in electrical and other industries) in India was valued at Rs 195,000 million in 2012. It is expected to grow at a CAGR of 9.3 per cent and 15.1 per cent to be worth Rs 290,000 million and Rs 585,000 million by 2017 and 2022, respectively.
Based on investment estimates and capacity addition targets, domestic demand for Boiler, Turbine & Generator (BTG) is anticipated between Rs 1,250,000 million and Rs 1,500,000 million by 2022.
The boiler export and import market was valued at Rs 11,209 million and Rs 16,000 million as of 2012, after having grown at a CAGR of 15 per cent and 4 per cent, respectively during 2008-2012.
The boiler industry is fragmented due to the number of manufacturers. About 675 manufacturers make BTG sets, with over 90 per cent of them being SMEs.
BHEL is the Indian market leader in boiler manufacturing, with over 60 per cent share and an installed base of 120,000 MW.
Other players include L&T, Thermax, Gammon, BGR and Alstom.
Amid a favourable demand outlook, various domestic OEMs have collaborated with global players to acquire new technology and, thereby, meet growing demand from the local end-user industry.
Market growth drivers
High demand in end-user segments
The boiler market is expected to derive growth from the demand arising from the rapidly expanding end-user segments, such as the oil and gas equipment industry and the electrical generation equipment market.
Valve industry to grow by 14 per cent in 2016
The valve market in India was valued at Rs 117,129 million in 2012. It is expected to be worth Rs 194,648 million by 2016, growing at a CAGR of 13.54 per cent.
The Indian industrial valve market is fragmented, with the unorganized sector contributing 40 per cent of the market.
Oil and gas accounts for 47 per cent of the valves market, with valves forming an integral part of the upstream equipment and downstream distribution network.
More than 350 companies operate in the Indian industrial valves market. Audco India Limited, Tyco, Emerson, BDK Weir, MIL, NSSL, Microfinish are among the key players.
L&T-owned Audco India is the market leader in the Indian valve industry, with 12.5 per cent market share as of FY13.
Large-size complex valves such as choke valves or Christmas tree valves are primarily imported due to the limited capabilities of domestic players. In addition, foreign players are increasingly interested in entering the Indian valve market. Domestic players are looking to leverage their technical expertise to meet the diversifying end-user demand, as well as to gain access to cost-effective manufacturing capabilities
During the Twelfth Five-Year Plan, companies are likely to invest Rs 841.8 billion (including in the CGD network) to expand their oil and gas pipeline network.
The increasing use of pipelines in oil and gas directly translates into higher demand for steel pipes. Crude oil, gas and product pipelines have grown at a CAGR of 10.5 per cent, 11.7 per cent and 4.7 per cent over 2008û2012, respectively. Steel pipe commands the largest share in the oil and gas sector, primarily because of its high pressure resistance properties.
Production of steel pipes and tubes is estimated to have grown at a CAGR of 7.2 per cent over FY 2009û13 to 7.52 million tonnes. Domestic consumption is estimated to have increased to 6.19 million tonnes for the corresponding period. Steel pipes and tube production is expected to grow by a CAGR of 5 per cent over the next 3 years.
India remained a net exporter of steel pipes and tubes over FY09û13, with net exports amounting to Rs 59,600 million during FY 2013; however, imports of steel pipes and tubes increased at a CAGR of 7.3 per cent higher than the export CAGR of 2.5 per cent over the period FY2009-13.
The key pipe manufacturers in India:
Seamless pipes: Maharashtra Seamless, Jindal Saw, BHEL, Remi Metals, ISMT ltd. Ratnamani
HSAW / LSAW: Jindal Saw, Welspun, Man Industries
ERW: Maharashtra Seamless, Jindal Pipes, BHEL, Surya Roshni, Welspun