ABSTRACT: Hotteling Rule was evolved by Harold Hotteling as a result of analysis of non-renewable resource management, is a distinct theory which gives us clear idea of non renewable resource economics and provides a close insight into long run behaviour of price and supply in market for non renewable resources.
The paper deals with the application of Hotteling rule to Oil and Natural Gas Corporation (ONGC) to find the sustainability of the oil resources and analyse the reserve trend scenarios. ONGC is the only fullyintegrated petroleum company in India, operating along the entire hydrocarbon value chain. It also contributes to over 78% of India’s oil and gas production. The analysis was carried out taking 2000-01 as the base year till 2007-08 to find out the sustainability of the oil reserves of ONGC.
It is found that according to the baseline scenario, the resources would deplete in 3-4 years, but as every year new reserves are found, the resource is being sustainable since 2000. Thus Hotteling Rule is said to be indifferent for the firm and the firm is said to sustainable.
The paper also carries the assessment of the exhaustion rate of oil and natural gas in India considering 1990 as the base year. The exhaustion rate of the reserves is found to be 13 to 21 years until and unless there is a new reserve replacement.
Key words: Hotelling rule, Non-renewable resources, Oil and Natural Gas Corporation, Resource depletion, Sustainability, Exhaustion rate, reserve replacement
Hotelling rule was first evolved by Harold Hotelling as a result of analysis of non-renewable resource management, first published in the journal of Political Economy in 1931. A simple expression of the rule says that; “price of an Asset will rise at the rate of Interest Rate.” Energy and non renewable resources are assets, of which price rises over a period of time. Hotteling Rule is a theory through which we can define the net price and fluctuations in net price with time line. Price of resource will rise with the maximization of the rent in time of fully extraction of non renewable resource. This rent can be defined as Hotelling rent or scarcity rent which means maximum rent acquired while emptying or depleting the fixed stock.
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Figure 1 Reserves replacement graphs
1.1 Substitution of depleted resources by other sources
In terms of non renewable resource, supply is limited, therefore non renewable resource have scarcity value. Hotelling rule is a distinct theory which gives us clear idea of non renewable resource economics and provides a close insight into long run behaviour of price and supply in market for non renewable resources. The price of these non-renewable resources will vary in 2 conditions. Price will increase if the rate of return of the capital investment is larger than the capital depreciation rate. Price will remain constant when there is consistent production of resource.
1.2 Example of Hotelling Rule Application
One person own 50 barrel oil. Market price is 50 Rs/barrel. When he should sell this to get profit out of it? Consider rate of Interest 10%
- Price today = P0
- Price tomorrow = P1
- Price after interest rate = 50 + 5 = 55
- If P1 > 55, it is Non profitable so he should wait.
- If P1 < 55, Non profitable, he should sell it today.
- According to Hotteling Rule, Equilibrium condition will be;
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Price should rise at the rate of Interest.
Hotteling rule will also give future scenario of resource reserve and its sustainability over a period of time.
1.3 Concluding Remarks
- Hotteling rule provide a model of resource depletion which is the fundamental economic model useful to analyze issues related to utilization pattern of non renewable resources.
- According to this model, resource owner can look for to maximize the present value of net benefits from resource extraction. It also considers current demand trend for resource and constraints with respect to initial resource stock.
- The final outcome of Hotteling rule is scarcity rent = marginal revenue - marginal cost, increases at the rate of interest.
The application of Hotteling Rule for Competitive market has been taken for ONGC as it is in current competitive market. Application of Hotteling rule will mainly deal with following aspects.
- Sustainability of resource
- Firm’s profitability Scenario
- The Reserve Trend scenarios
2. Background to the Study- ONGC
ONGC is the only fully integrated petroleum company in India, operating along the entire hydro carbon value chain. It holds the largest share of hydrocarbon acreages in India and contributes to over 78% of India’s oil and gas production with about one tenth of Indian refining capacity. It created a record of sorts by turning Mangalore Refinery and Petrochemicals Limited around from being a stretcher case for referral to BIFR to the BSE Top 30 within a year. The main interests of the firm are in LNG and product transport business.
2.1 Competitive strength:
All crudes are sweet and most (76%) are light, with sulphur percentage ranging from 0.02-0.10, API gravity range 26°-46° and hence attract a premium in the market. ONGC has a Strong intellectual property base, information, knowledge, skills and experience with maximum number of Exploration Licenses, including competitive NELP rounds.
ONGC owns and operates more than 15000 kilometres of pipelines in India, including nearly 3800 kilometres of sub-sea pipelines. No other company in India operates even 50 per cent of this route length. Its overseas arm ONGC Videsh Limited (OVL), has laid strong foothold in a number of lucrative acreages, some of them against stiff competition from international oil majors. OVL’s projects are spread out in Vietnam, Russia, Sudan, Iraq, Iran, Libya, Myanmar, Syria, Qatar, Egypt, Cuba, Nigeria Sao Tome Principe, Brazil, Nigeria and Columbia. It is further pursuing Oil and gas exploration blocks in various oil and gas rich countries. It also has established 6.42 billion tonnes of In-place hydrocarbon reserves with more than 300 discoveries of oil and gas in India; in fact, 6 out of the 7 producing basins have been discovered by ONGC: out of these In-place hydrocarbons in domestic acreages, Ultimate Reserves are 2.29 Billion Metric tonnes (BMT) of Oil plus Oil Equivalent Gas (O+OEG). The total Cumulatively producing 762.3 Million Metric Tonnes (MMT) of crude and 440.7 Billion Cubic Meters (BCM) of Natural Gas, from 115 fields.
- Production Installations: - 240
- Pipeline Network (km):- 15,800
- Drilling Rigs: - 70
- Work Over rigs: - 74
- Seismic Units: - 29
- Logging Units: - 32
- Engineering Workshops: - 2
- Virtual Reality Centre: - 5
- Regional Computer Centre: - 5
- Well Platforms: - 147
- Well-cum-Process Platforms: - 32
- Process Platforms: - 13
- Drilling Rigs: - 29
- Pipeline Networks (km):- 4,500
- Offshore Supply Vessels: - 55
- Special Application Vessels: - 4 (including 2 MSV)
- Seismic Vessels :- 1
ONGC posted a net profit of Rs 156.429 billion, the Highest by any Indian Company with a Net worth Rs 614 billion with Practically Zero Debt Corporate. It also contributed over Rs 286 billion to the exchequer.
3: Application of Hotteling rule to ONGC:
As ONGC is a competitive market, the Hotteling rule of Competitive market is applicable to our problem. The following detail method explains step by step about the ONGC’s sustainability of the reserves and the profitability of the Firm over the years.
The base year starting from 2000-01 has been taken and calculated for the future.
As explained above in the introduction to Hotteling Rule, the calculation of Pt (Price of extracted mineral in year t, which is in Million Rs/MMT), C (unit extraction cost of the reserves of ONGC, which is in Million Rs/MMT), Pt-C (Value of mineral in ground Million Rs), Reserves (MMT), r (interest rate), Total Production ( in MMT) is shown below ( as per the Annual report of the ONGC 2007-08) :
- Pt (Price of extracted mineral ) = (Total sales revenues / Total production) (in the year t)
- C (Cost of extraction of MMT of mineral in year t) = (Total cost & expenses / Total production) (in the year t)
- Marginal C (marginal cost) = (Total cost in the Year t- Total cost in the t0)
- Pt-C = value of unit in the ground
- Quote paper
- Yenneti Komalirani (Author)Joshi Gaurav (Author), 2009, Application Of Hotelling Rule For Analysing Utilisation Pattern Of Non-Renewable Resources In India Through ONGC, Munich, GRIN Verlag, https://www.grin.com/document/183551