Millennium Post
In Retrospect

Indian oil industry: Genesis & initial decades

While India was gradually making strides towards gaining foothold in the strategic oil sector, foreign players dominated the landscape for first eight decades

Indian oil industry: Genesis & initial decades
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The history of oil in India dates back to 1825. The earliest recorded references to oil in the upper Assam were found in the despatches of Leunt Wilcox. He saw it "rising to the surface at Supkhong with great bubbling of gas and green petroleum." In 1865, HB Medicott of the Geological Survey of India (GSI) came across the oil seepages while reporting on the coalfield of upper Assam, and recommended a trial boring in the area. This was the first important step towards scientifically assessing the oil prospects in Asia. The drilling was carried out by Goodenough of Makillop, Stewart and Co., Calcutta.

Assam Railways and Trading Co. Ltd. (AR & T Co.), which was registered on July 30, 1881 with the objective of constructing railways and exploiting the natural resources of coal, successfully spudded a well in the hope of oil in September 1889 at Digboi. After the discovery of oil by AR & T Co. at Digboi, a tiny refining unit was created at Margherita in 1893.

In 1899, AR & T Co. formed a new company — Assam Oil Co. (AOC) — to take over their oil interests. The Assam Oil Syndicate was formed and construction of India's first refinery was started. The Digboi refinery was commissioned in 1901. As petrol driven cars were not introduced in the Indian market at that time, the refinery produced only kerosene, wax oil for lubrication, fuel oil and greases. The capacity was 500 barrels per day.

The history of Indian petroleum sector can be divided into three phases: (i) between 1889 and the 1960s when it was mostly controlled by foreign companies (ii) during 1970-1990 when public sector institutes were wielding their control (iii) from 1991 to present — the liberalisation, privatisation and globalisation (LPG) phase of Indian economy. This article will remain confined to the first phase only.

Oil before 1970

AR & T Co., whose main business was transportation, trading and coal mining in upper Assam, got involved in petroleum refining without any prior experience and proper planning. Their construction workers discovered oil by a sheer chance, and due to the non-existence of any refinery in and around, they had to think of constructing a refinery to process the crude. In 1921, through arrangement with AR & T Co., the Burmah Oil Co. (BOC) took over the control of Assam Oil Company's operations in a phased manner.

The Burmah oil Company (BOC) — founded by a Scottish merchant in 1886 with headquarters at Glasgow — had proven experience of oil operations. It was the first petroleum transnational corporation which got involved in the nascent petroleum industry of India. After it took over AOC's operations in 1921, it was entirely rebuilt in 1923. In 1954, a new gasoline plant and a new lubricating oil distillation unit were added. The Digboi refinery remained the only refinery in India till the early fifties.

The other three major transnational corporations which dominated Indian petroleum industry, mainly as traders, till the early fifties were: (a) Burmah Shell, a joint venture between Burmah Oil Company and Shell Transport and Trading Company of Royal Dutch Group; (b) Standard Vacuum Oil Company (Stanvac), a jointly owned affiliate of Standard Oil of New Jersey and Mobil Oil; and (c) Caltex, a joint venture of Standard Oil of California and Texaco.

Immediately after the independence, the Government of India had proposed to Burmah Shell, Standard Vacuum and Caltex to set up oil refineries in India. But those companies did not accept the proposal as it was more profitable to them to market imported products from Abadan (Iran) than to process imported crude. On the other hand, Indian business houses were not prepared — both technically and financially — to take up the refining job.

In 1950-51, the government renewed the proposal. This time foreign companies agreed. There were atleast two reasons which influenced the change in the earlier decision of the foreign companies. First, the nationalisation of Anglo-Iranian Oil Company in Iran — leading to the closure of the Abadan refinery in 1951 — resulted in the disruption of supplies of the marketing affiliates of major oil companies. Second, there was threat from other smaller oil companies setting up refineries in a large market like India.

The Government signed the first agreement with the Standard Vacuum Oil Company on November 30, 1951 for construction of a refinery at Trombay near Bombay. The agreement with Burmah Shell was signed on December 15, 1951 for setting up of a 1.5 MMTPA refinery at Trombay. With Caltex, the agreement was signed on March 20, 1953 for a 0.5 MMTPA refinery at Visakhapatnam. The refinery agreement provided that "all purchases of crude oil are to be made at world market price prevailing at the time and place of shipment with freedom of choice as to the source of supply."

The terms of refinery agreements were heavily loaded in foreign companies' favour. India suffered due to the inclusion of the clauses relating to crude supply and the remittance.

Crude supply

The crude fields in Digboi were too small to cater to the rising demand of the petroleum sector. AOC discovered a new prolific field in the Duliajan area which was only a few miles from the Digboi refinery. Till the early fifties, AOC was the only refining and crude producing company in India. Then, in 1955, the government of India opened an Oil and Gas Division with the Geological Survey of India (GSI).

The major objective was to develop the petroleum industry under the public sector. For a nascent state, foreign assistance was a necessity, atleast in the early stage. US aid, under the Truman Point Four Programme, was thought of but America refused to help. The American refusal coincided with an invitation in September 1955 from the Soviet Union for an Indian delegation to visit Russia for a study of oil exploration and prospects of procuring equipment.

As collaborations with international oil majors were ruled out, four other alternatives were explored (Kaul H N 1991): i) to seek assistance of a great power like Soviet Union which certainly had the capacity and technical knowledge and experience to assist India; (ii) to seek the help of a small country, like Rumania, which had the same capability of Soviets but would be easier to deal with; (iii) to ascertain whether there was some other country such as Austria which was willing to cooperate with India on a Government-to-Government basis; and (iv) to try and develop the industry through self-help, by employing technicians from wherever they could be found and buying the necessary machinery from whichever source it might be available.

Considering all the above alternatives, cooperation with a small power like Austria was thought to be the best option. But a wide range of relationships was then being forged by Nehru with the Soviet Union, and oil was one field of collaboration. A larger and well-defined role for the ONG Directorate than merely surveying and exploring had become inevitable after the New Industrial Policy Resolution of April 1956, which placed oil for exclusive development in the public sector. In May 1956, the Cabinet conferred the status of a Commission on the ONG Directorate. Thus, the Oil and Natural Gas Commission (ONGC) was formed.

It was followed by the formation of a joint sector company — Oil India Ltd (OIL) —between the government and Assam Oil Company (AOC).

The major share of OIL was in the hands of AOC/BOC. They controlled the most prolific upper Assam region. After the formation of Oil India Pvt. Ltd. in 1959, AOC was compelled to be engaged in marketing activities. The 510 sq. miles of its mining lease licence of Naharkatiya, Hugrijan and Moran (all in upper Assam) was transferred to the new company Oil India Pvt. Ltd.; AOC was left with a very small oilfield at Digboi adjacent to its refinery.

In view of Burmah Oil Company's interest in additional areas (in upper Assam and Northeast Frontier Agency, now Arunachal Pradesh), the Government negotiated with BOC and increased its share in OIL from 33.33 per cent to 50 per cent in 1961. Thus, the Government acquired 50 per cent share in Oil India Ltd. and the company was given an additional area of about 1,800 sq. miles for exploration. In a supplemental agreement in 1961, OIL was assured a minimum guaranteed return of nine per cent to 13 per cent on paid up capital for supply of three million tonnes of crude per annum. It was later argued that due to this assured return, OIL had no incentive or compulsion for efficiency and economy.

Though ONGC was entirely a government-owned organisation, it had to depend initially on foreign experts (mainly Soviets). Shortly after its birth, ONGC discovered oil and gas in the Cambay basin of Gujarat. In that period, exploratory activities were concentrated on highly potential basins of Assam and Gujarat. Between 1958 and 1961, it discovered four oil and gas fields in Cambay, Ankleshwar, Kalol in Gujarat and Rudrasagar in Assam. In 1964, another major field at Lakwa in upper Assam was discovered. Government established ONGC as an alternative national company to foreign companies.

Triguna Sen — the then Minister of Petroleum and Chemicals — went to the USSR in September 1969 to seek the help of the USSR experts for working jointly with ONGC specialists to make a techno-economic study of the oil and gas reserves in India. The proposal found ready acceptance of the USSR authorities. In consultation with them and ONGC, the scope of the proposed techno-economic study was formulated for the (i) overall assessment of the petroleum potential on the basis of the geological and geophysical data of the various sedimentary basins of India, onshore and offshore; and (ii) determination of priorities for the exploration of those areas, taking into account the prospects, logistics and economics. Thus, exploration in the 'offshore' basins for crude, with the assistance of the Soviet Union, got government's approval.

Refining and marketing

The Government was able to split the vertical operation of an integrated oil company by not allowing OIL crude to be refined at AOC's refinery at Digboi. Instead, AOC and OIL agreed to construct a pipeline between Moran to Barauni/Duliajan via Guwahati.

Two public sector refineries at Guwahati and Barauni were established with Russian and Rumanian assistance.

ONGC had struck oil in Gujarat. To process ONGC crude, another public sector refinery at Koyali with Russian assistance was built. Thus, the government entered into the challenging field of oil refining also.

Almost simultaneously, a marketing company — Indian Oil Corporation — was formed. By early 1960s, the Indian public sector enterprises were all set to compete with the foreign oil companies operating in the country for decades. However, the journey was not smooth. Foreign oil interests had used all their weapons including foreign aid to derail the process.

Confrontation with foreign companies

Foreign oil companies took advantage of the financial and technical weakness of India. But the scene changed in India's favour from the mid and late fifties due to discovery of vast low-cost oilfields in the middle east and emergence of newly independent oil companies. Moreover, USSR's crude depressed international prices. In this new situation, the crude supply clause proved costly to India, and tension between foreign companies and the government started to snowball.

The confrontation with the government reached beyond manageable limits when foreign companies refused to process USSR crude which was available at a much cheaper price. The government then decided to fight the foreign companies head on. Four significant decisions were taken up.

First, in the late fifties, the government decided to establish refineries at Guwahati and Barauni to process crude oil from Assam fields.

Second, to ensure steady supply of crude, apart from the formation of ONGC, the government entered into a joint venture with AOC to form OIL. The crude production department of AOC was shifted to OIL and the former was left with refining and marketing functions only.

Third, the government, under the initiative of KD Malaviya, started to market Soviet oil products through its newly found marketing organisation, Indian Oil Company. This decision had threatened the foreign companies then engaged in refining and marketing activities.

Fourth, the Indian Refineries Ltd. (IRL), which was established by Government of India in 1958 for setting up two refineries in Guwahati and Barauni, was merged with Indian Oil Company in 1964 to form an integrated oil refining and marketing company to compete with foreign companies. Thus, the Indian Oil Corporation was formed.

Joint sector refineries

In the early sixties, the government decided to establish two more refineries at Cochin and Madras under joint ventures. The major reasons behind this move were: (i) Government's unwillingness to depend on Russian oil alone. Soviet crude and product prices began to increase after 1960. Government was also not willing to depend on foreign oil majors already operating in India, like Burmah Shell, for supply of crude oil to new refineries. Second, at that time, the US-based independent oil companies were emerging as the new suppliers of crude oil at competitive prices. They were also ready to provide credits and technical assistance for the construction of refineries. Their willingness to accept minority shares in the refining company suited the government's declared industrial policy. It also served as a warning to the existing foreign oil companies.

The first joint venture oil refinery — Cochin Refinery Ltd. — was incorporated as a public limited company in 1963. The promoters were:

⁕ The Government of India holding 52.4 per cent of the total share.

⁕ Phillips Petroleum Company, USA with 26.4 per cent shares.

⁕ Duncan Brothers and Company with 2 per cent share

⁕ Balance i.e., 19.2 per cent was held by the Government of Kerala, the Life Insurance Corporation of India and the public.

Another joint venture refinery — Madras Refinery Ltd. (MRL) was established during that time in Madras.

Oil for food!

To get an idea about the close association between oil refineries and fertiliser plants, the formation agreement of MRL demands elaborate discussion. Unlike the Cochin Refinery, in the case of MRL, global tender was invited for the establishment of the refinery. Out of the 14 parties, the Government of India shortlisted three parties for further discussion. They were: (a) National Iranian Oil Company/American International Oil Company. (b) Burmah Oil Company/ Burmah Shell. (c) Gulf Oil Company/Continental French Petroleum (Gulf/CFP).

However, the government rejected the BOC/Shell offer and concentrated on Gulf/CFP and NIOC/AIOC offer only. In addition to economic consideration, two other factors played important roles in rejection of BOC/Shell offers.

First, the government's overenthusiasm to corner the Anglo-Dutch transnational firm Burmah Shell which enjoyed near monopoly for many decades.

Second, the political situation in India at that period was inclined more towards the USA. Discussion on a 'miracle seed' to introduce a revolutionary farming package consisting of high yielding hybrid seed, chemical fertiliser and pesticide was in progress with the Rockefeller Foundation.

The refining project gave the US firms an opportunity to get a foothold in the Indian petroleum and fertiliser sector.

Conclusion

The first eight decades of the nascent oil sector of India was primarily dominated by the foreign companies. Major corporate houses of India were not prepared to take the risk of either oil exploration or refining. Thus, the entire oil sector was dependent on foreign capital and technology. Henry Kissinger, the noted US strategist, once said, "Control oil and you control nations; control food and you control people." This leads to an important question: Who actually controlled the Indian oil sector during its next two phases of development? This will be discussed in the subsequent articles.

Views expressed are personal





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