ENERGY SECTOR IN INDIA (Overview) (Copy)
Overview
First Let’s Understand the Energy Sector
The energy sector is one of the most crucial elements for an economy. The industry includes the Oil & Gas industry, the Coal mining industry, the Power generating industry, and the power distribution industry. Despite the cyclical and volatile nature of the energy markets, accompanied by calls for more sustainable energy generation, energy stocks continue to exhibit gainful investment opportunities.
What is the Oil and Gas sector?
Crude Oil is the energy industry's primary component and the world's most important commodity. Oil & Gas includes products drawn out from crude oil extracted by oil drills. Crude oil is further refined to produce products such as petrol, diesel, ATF (aviation turbine fuel), kerosene, heating oil, LPG, and CNG among others.
Crude oil not only fulfills energy needs ranging from running cars to generating electricity but is also the key component used to create plastic, paints, lubricants, and asphalt (used for building roads) among others, making it key for energy and consumption.
The sector is divided into 3 segments:
Upstream segment – engaged in exploration and production (E&P) of crude oil. Companies in this segment are usually characterized with high investment capital, extended duration as it takes time to locate, drill and be technologically intensive. Examples include ONGC which is engaged in oil exploration and extraction.
Midstream segment – engaged in storage and transportation. Companies in this segment are characterized by shipping, trucking, pipelines, and storing of raw materials. The midstream segment is also marked by high regulation, particularly on pipeline transmission, and low capital risk. IOCL and GAIL are engaged in the storage and distribution of crude oil.
Downstream segment – engaged in refining, processing, and marketing of oil. E.g. IOCL and Reliance.
Overview of the Oil and Gas sector in India
India is the 3rd largest consumer of energy as well as oil. As on May 1, 2021, India’s oil refining capacity stood at 259.3 MMT (million metric tonnes), making it the second largest refiner in Asia.
India is pegged to increase this capacity to 667 MTPA (million tonnes per annum) by 2040. Private companies own about 35.19 percent of the total refining capacity in FY21.
The Oil and Gas industry offers multiple opportunities including:
Upstream Segment: 78% of the sedimentary area is yet to be explored; Secondary and Tertiary oil techniques.
Midstream Segment: Expansion of gas pipelines and LNG imports have increased, thereby giving an opportunity to boost production capacity in segments such as terminal operation, engineering, procurement and construction services.
Downstream Segment: India has 21 refineries and expansion is planned with FDI in export-oriented infrastructure, including product pipelines and export terminals; the development of CGD (city gas distribution) in many cities (including Tier 2 and 3 cities); and the expansion of the petroleum product distribution network.
Benefits of Investing in Energy Stocks
Energy is a key sector of the economy and will continue to see a rise in demand in the coming future, especially as India moves towards the goal of becoming a developed country. This increased demand will be met through both conventional and renewable sources of energy.
Additionally, by investing in energy stocks, investors can gain from capital growth and dividends. Many investors have earned handsome profits by investing in stocks like Reliance and Adani this year, which have returned spectacular results.
Finally, investing in energy sector stocks will help investors to diversify their portfolios. They can also gain diversification benefits by investing within the energy sector as these stocks deal with various sub-sectors, such as power, solar energy, oil & gas etc.
That’s all about the overview of the energy sector in general. In the next blog, we’ll talk about the financial ratios which we need to consider while analyzing the energy stocks.
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