Indian EPC Oil & Gas: Current Market Trends, Future Growth Drivers, Opportunities & Key Challenges
Anish De
Partner | National Head - Energy & Natural Resources
KPMG India

The EPC market in Oil & Gas in India is expected to grow in pace with economic growth, coupled with the growing energy needs of its vast population and industrialization. Looking at the Indian Government's thrust on reforms and policies towards increasing domestic exploration and production to minimize import dependence, increase the natural gas share in the energy mix, and self-sufficient in refining, the article shares a holistic view of the current market trends and future growth drivers of Indian EPC Oil & Gas industry, along with the key challenges and opportunities in the sector.

India with its GDP currently just over USD 2.6 trillion is on a rapid economic growth trajectory and aims to enter to the club of USD 5 trillion economies soon. Since 1991 when India's economy was opened up, the growth has been phenomenal largely driven by the rapid growing population, urbanization and industrialization. Despite being the third largest energy consumer in the world, India's per capita energy consumption stands at 0.6 tons of oil equivalent as compared to World's average. Energy would continue to play a pivotal role in supporting economic growth and improving the quality of life of people. It is this reason that energy security, access, efficiency and sustainability continue to remain a key challenge for the government and policy makers. As per BP World Energy Outlook 2018 estimates in the Evolving Transitions Scenario, India's oil consumption is expected to grow from current 5 million barrels per day to 9 million barrels per day by 2040. The gas consumption is likely to grow from current 54 BCM to 185 BCM in 2040.

The Asia-pacific region is emerging the new growth center for the EPC services for various reasons - including the rising oil and gas discovery, expansion of natural gas pipeline, increasing trade of LNG, and growing demand for refined products and petrochemicals, especially in China, India, Australia, Indonesia and Vietnam. This is inevitable since in the coming two decades almost all energy demand growth is anticipated to come from emerging Asia. The EPC market in oil & gas in India is expected to grow in pace with economic growth. Given the large import dependence on crude and gas there is a policy thrust towards domestic Exploration and Production (E & P). The volatility in crude oil prices has negatively impacted the demand for EPC services as many E & P companies slowed their investments into exploration and field developments especially the deep-water/ultra-deepwater projects.

Unleashing the Opportunities in Indian Upstream Sector
In 2019, Oil and Gas accounted for about 36 per cent of the total energy consumption in the country and registered a CAGR of nearly approx. 6 percent for oil and gas consumption during 2014-2019. Presently, about 83 percent of oil and 46 per cent of natural gas requirement is imported. India's dependence on imports has increased since 2015 despite the goal set out by Prime Minister Modi of reducing imports by 10 percent.

Import Dependence (% of Consumption)

In order to drive India's domestic oil and gas production, the Ministry of Petroleum and Natural Gas initiated a series of policy measures - including introducing the new Hydrocarbon Exploration Licensing Policy, or HELP, steps to allow contractual flexibilities in the Production Sharing Contracts (PSCs ), setting up National Data Repository (NDR), allowing marketing and pricing freedom for sale of natural gas and recently exempting operators from sharing revenues with government in unexplored area namely category II and III basins.

The above policy measures have led to significant improvement in the business environment for the exploration and production industry. So far, under three rounds of OALP and two rounds of DSF, India has awarded over 0.12 million square of acreage which is three times the area awarded under various rounds of the earlier NELP regime. About 30-35 billion dollars of investment is expected in next 5-7 years in the upstream sector with significant part of it planned in the development phase and in offshore projects.

India's Ambition to Move towards a Gas-based Economy
Over the years, Indian policy makers have emphasized on growth of share of natural gas in the energy basket. The government intends to move towards a gas-based economy and has set a target of 15 per cent share for natural gas by 2030. The share of natural gas in the energy mix has been fallen significantly since 2012 largely due to stagnated domestic production and increasing demand.

The key barrier to the growth of natural gas market are stagnated domestic production, pricing and allocation issues, lack of infrastructure and imper fect access regime. India currently has about 16,789 Kms of gas pipeline networks transporting gas largely towards western and northern markets. There is no connectivity of these trunk pipelines to central India, north -eastern and part of east coast and with various gas sources in other parts of India. There are also few isolated networks in the southern and north eastern region. As per plans, there are about 12000-13000 kms of gas pipelines being planned and built which will increase the overall capacity of the national gas grid from existing 370 MMSCMD to about 900 MMSCMD. Despite huge expansion plans, most of the pipeline projects have failed to progress on ground due to lack of demand and unfavorable viability. The government realizing the issues provided about 40% capital budgetary support to GAIL's Urja Ganga Gas Pipeline Project, a 2665 kms pipeline bringing connectivity to eastern regions of the country. However, the pipeline development continues to face significant economic viability and on ground implementation challenges which needs to be addressed for India to achieve 15 percent share.

Gas Pipeline Infrastructure in India

Source: KPMG in India Analysis, PNGRB, 2019

As per industry estimates, about USD 7-9 billion of investment is required in developing the planned pipeline projects. Of this, around 20-25 percent of investments are already committed. These pipeline projects are critical for providing access to various consumers who do not have the access to natural gas today.

The LNG re-gasification capacity has grown significantly since the first LNG terminal was commissioned in Dahej in the year 2004. The current capacity is around 39.5 MMTPA, spread between six terminals namely Dahej, Ennore, Hazira , Kochi, Dhabhol and Mundra. There are several greenfield and brownfield expansions planned. If most of these planned projects are implemented, then there would be adequate LNG capacity to assist India reach the end of the decade without requiring any further capacity addition. If the India would add a round 30 MMTPA of LNG capacity in next 5-6 years, a total of USD 3-4 billion of investment would be required.

Creating as gas-based economy would mean that the demand in major gas consuming sector needs to grow significantly. This brings along a complex set of challenges in power sector where gas faces price pressures due to cheap coal and growing renewable. Further, the other top consuming sector fertilizer is not expected to grow significantly in future. It is with this context; the government is betting big on expansion of city gas distribution networks to catapult the gas demand. As a step towards this, the government has assured domestic gas supply to the residential Piped Natural Gas (PNG) customers and Compressed Natural Gas (CNG) users in CGDs. Further, the Petroleum and Natural Gas Regulatory Board (PNGRB) recently concluded the ninth and the tenth round of CGD auctions offering 136 Geographical Areas (GAs) covering 298 Districts, 70 percent of India's population and 53 percent of areas under CGD.

The successful bidders have collectively committed to provide 42 million of domestic PNG connections, lay 0.17 million Inch-kms of steal pipeline and set up 8181 CNG fueling stations. As per estimates, about USD 17-19 billion of investment is expected in development of City Gas Distributions in around 300 Districts by 2030 in phased manner.

India - Eyeing at Mega Greenfield Expansion to Remain Self -sufficient in Refining
The country's refining capacity has increased from a modest 62 MMTPA in 1998 to 250 MMTPA in 2019. India is the Asian refining hub and is the fourth largest refiner in the world after US, China and Russia. There are total 23 refineries in the country well spread geographically and connected with cross country pipeline. India is self-sufficient and also exports significant quantity of petroleum products. As per estimates4 , the refining capacity is projected to increase from, current 250 MMTPA to about 440 MMTPA by 2030. While so far India has maintained to remain self-sufficient in meetings its demand for petroleum fuels, it needs to augment its refining capacity to meet the projected demand. In addition, it also plans to continuously upgrade the existing capacity to meet the BS-VI (EURO VI equivalent) emission norms planned to be implemented country wide by 2020. The world's largest single location refinery of capacity 60 million tonnes per annum (MMTPA) is proposed to be set up in the state of Maharashtra with the joint venture of three national oil marketing companies and two foreign partners namely Saudi Aramco and Abu Dhabi National Oil Company (ADNOC) with an investment of approximately USD 44 billion. It is estimated that refining sector in India would attract investments wor th USD 55 billion by 2030 including all planned greenfield and brownfield projects.

India - A Bright Spot Emerging for EPC Business in Global Oil and Gas Landscape
India is clearly one of the most attractive markets for Oil and Gas EPC business with around 120 to 150 billion dollars of investment planned in next 5-7 years and around 300 billion dollars planned in next two decade. There are several challenges viz. time & cost overruns due to regulatory delays, availability of limited funding, limited equipment market and vendor base, logistical and supply chain challenges. However, these challenges can be addressed with adoption of innovative business model and technologies. While the oil and gas sector show sign of recovery particularly in growth countries viz. China and India, there is need for traditional EPC business to evolve. As disruption is the new normal for the oil and gas industry, there are voices demanding capex efficiency without comprising on the performance, quality and safety of assets. EPC players need to re-think on their approach and business models that enable industry achieve its goals of remaining competent in such disruptive scenarios.

The performance challenges of EPC companies have been many, but in part can attributed to following reasons:
  • Lack of innovation and delayed adoption of new technologies
  • Insufficient knowledge transfer and cross-learnings from project to project
  • Siloed approach to project development
  • Poor Cross-functional coordination
  • Ineffective collaboration with suppliers
  • Lack of skilled manpower
The EPC companies needs to focus on following areas to transform their organization and methodologies:
  • Adopt a collaborative business model with developer as against the traditional LSTK approach. Developers today are looking for a risk -reward type of contracts
  • Integrating supply chain from project to operational phase – alliances with strategic suppliers
  • Flexible organization to adopt to business cycles and respond to market needs
  • Embracing digitalization to unlock value for clients
With quantum leap in digital technology a holistic approach needs to be adopted to reshape the existing business and operating models to ensure a far-reaching transformational impact. Embracing digital technologies will bring in immense value in following ways:
  • Enhance productivity through the oil and gas value chain
  • Enablement of employees with powerful decision support technologies viz. Digital twins and mixed reality
  • Enhanced health and safety with active security compliance and monitoring using AI, cognitive and spatial analytics
  • Gain operational insights though connectivity using digital asset management solutions
  • Effectively manage complex supply chain using AI, ML, IoT, Big Data and Analytics
  • Improved project monitoring, collaboration and real-time visibility performance, cost and risk of capital projects
With several reforms already implemented and many others planned, the business environment is better than ever for global players including investors and EPC companies. The economic crisis in 2008 and oil price slump in 2014 severely hit the investments in oil and gas and allied sectors and provided some valuable lessons for the industry. Low commodity prices discourages recovery of investments in the sector and has implications for the EPC business, but the oppor tunity remains large and EPC players have to evolve lean operating practices, innovation and digitalization to secure a brighter future for the EPC business in oil and gas in the coming decade.