What is the difference between upstream, downstream, and marketing in the oil and gas sector?

Upstream refers to the exploration and production (E&P) of crude oil and natural gas — finding the reservoirs, drilling wells, and extracting hydrocarbons. Companies like ONGC and Oil India operate in this segment. Downstream refers to refining — converting crude oil into refined products (petrol, diesel, LPG, jet fuel, naphtha, fuel oil) through a complex of distillation and conversion units called a refinery. Companies like Reliance, BPCL, HPCL, and IOC operate large refineries. Marketing refers to the distribution and retail sale of refined products to end consumers — through petrol stations, LPG cylinder delivery, and bulk industrial supply. IOC, BPCL, and HPCL are the dominant fuel retailers in India. Some integrated companies operate across all three segments.

What is a gross refining margin (GRM) and how is it calculated?

Gross Refining Margin (GRM) is the difference between the value of all refined products produced by a refinery and the cost of the crude oil processed. It is typically expressed in US dollars per barrel of crude processed. If a refinery processes crude oil costing US$80/barrel and produces refined products worth US$92/barrel in aggregate, the GRM is US$12/barrel. GRM is the key profitability metric for downstream refining companies. It varies with the product slate (complex refineries that produce more valuable products from the same crude have higher GRMs), crude quality processed (heavy, sour crude typically yields a higher margin than light, sweet crude for a complex refinery), and global product supply-demand conditions. Reliance Industries' Jamnagar refinery, one of the world's largest, historically achieved GRMs at a significant premium to Singapore benchmark GRMs due to its complexity and operational efficiency.

What was the Kirit Parikh committee on natural gas pricing?

The Kirit Parikh Committee was a government-appointed expert committee that submitted recommendations in November 2022 on reforming the domestic natural gas pricing framework in India. At the time, domestic gas prices were set by a formula under the APM (Administered Price Mechanism) that linked prices to international benchmarks. The committee recommended moving toward market-linked pricing with a price band (floor and ceiling), transitioning domestic gas pricing away from administrative control over time, and aligning pricing with the actual economics of gas exploration and development to incentivise E&P investment in India's sedimentary basins. Several of the committee's recommendations were subsequently incorporated into revised gas pricing guidelines that were implemented by the government.

How do marketing margins on petrol and diesel work in India?

Marketing margins are the difference between the retail price at the petrol pump and the price at which the oil marketing company (OMC) procures refined fuel from the refinery (its own or third-party). In theory, since petrol and diesel prices were deregulated (petrol formally deregulated in 2010, diesel in 2014), OMCs could set retail prices to cover their cost plus a desired margin. In practice, the government has informally maintained retail prices stable for political reasons during periods of high crude prices, leading OMCs to absorb negative marketing margins — effectively selling below cost — which depresses their reported profits. These episodes are called 'under-recoveries' in Indian oil sector parlance, though the formal subsidy structure changed post-deregulation. When crude prices fall, OMCs benefit from expanded marketing margins by not fully passing on the lower costs to consumers.

What is city gas distribution (CGD) and who are the major players?

City Gas Distribution (CGD) refers to the piped infrastructure that delivers compressed natural gas (CNG) to vehicles at filling stations and piped natural gas (PNG) to homes and commercial establishments in urban and semi-urban areas. CGD is a licensed, regulated business — the Petroleum and Natural Gas Regulatory Board (PNGRB) allocates geographic areas (called Geographical Areas or GAs) to CGD entities through competitive bidding. Once a CGD entity wins a GA, it has an exclusivity period of several years to build the network, after which competition is allowed. Major listed CGD players in India include Indraprastha Gas (IGL, serving Delhi-NCR), Mahanagar Gas (MGL, serving Mumbai), and Gujarat Gas (serving Gujarat's industrial and residential markets). CGD businesses historically enjoyed strong pricing power during the exclusivity period and generated attractive returns on capital.

Oil & Gas Sector in India: Upstream, Downstream, and Marketing

The three segments explained

The oil and gas value chain is conventionally divided into three segments, each with distinct business economics, risk profiles, and profit drivers.

Upstream: exploration and production

Upstream companies find oil and gas reservoirs, develop wells to extract hydrocarbons, and sell crude oil and natural gas to refiners or industrial users. The economics of upstream are fundamentally about the cost of finding and producing each barrel of oil equivalent (boe) — the finding and development cost (F&D cost) — versus the price received for that barrel.

In India, upstream is dominated by two government-owned companies: ONGC (Oil and Natural Gas Corporation), the largest, with offshore fields in the Mumbai High basin and onshore operations across multiple basins; and Oil India Limited, with primary operations in the Brahmaputra river basin in Assam. Both were historically characterised by relatively mature, aging producing fields with declining production rates, partially offset by incremental development of new finds and enhanced oil recovery (EOR) techniques on mature fields.

The other significant upstream player is Reliance Industries, through its Krishna Godavari basin (KG-D6) deepwater gas block, which was the site of India's largest domestic gas discovery (the D1 and D3 fields) and began production in 2009. Production from KG-D6 faced significant operational challenges and declined sharply from its initial ramp-up, but new development clusters (R-Cluster, Satellite Cluster, MJ Field) restored output from FY2020 onwards. ONGC also holds the adjoining KG-DWN-98/2 block.

Downstream: refining

Refining converts crude oil into a slate of refined petroleum products. A crude distillation unit (CDU) separates crude by boiling point into fractions: light ends (LPG, naphtha), middle distillates (jet fuel, diesel, kerosene), and heavy residue (fuel oil). A simple refinery stops here. A complex refinery adds secondary processing units — fluid catalytic crackers (FCC), hydrocrakers, cokers — that upgrade heavy residue into more valuable light products. Complexity is measured by the Nelson Complexity Index (NCI); a higher NCI indicates a more complex refinery with higher capital cost but higher potential margin.

India is a significant refining country. Total refining capacity exceeded 250 million metric tonnes per annum (MMTPA) by FY2024–25, making India a net product exporter in some categories. Reliance Industries operates the world's largest single-location refinery at Jamnagar, Gujarat, with the two refinery complexes having a combined capacity of approximately 68 MMTPA and one of the highest Nelson Complexity Indices globally. The Public Sector OMCs — IOC, BPCL, and HPCL — own a series of large refineries across India, both for domestic consumption and for product export.

Marketing: fuel retail and distribution

Marketing encompasses the distribution and sale of refined petroleum products to end consumers. This includes the retail petrol station network (petrol and diesel for vehicles), LPG cylinder supply (domestic cooking fuel), aviation turbine fuel (ATF) supply to airports, and industrial and commercial bulk fuel sales.

IOC, BPCL, and HPCL together operated the largest fuel retail network in India — tens of thousands of petrol stations collectively. These networks are also important real estate assets, particularly in urban areas. The marketing business's profitability depends on the marketing margin — the spread between the retail price charged and the wholesale cost of the product — which has historically been influenced by both market conditions and government pricing policy.

Key players by segment

ONGC (Oil and Natural Gas Corporation)

ONGC is India's largest oil and gas company by revenue and production, and the government's primary upstream vehicle. Approximately 65–70% of India's total domestic crude oil production historically came from ONGC's fields. ONGC also owns a majority stake in Hindustan Petroleum Corporation (HPCL), acquired in 2018, making it an integrated company with both upstream and downstream exposure. ONGC Videsh Limited (OVL) is its overseas exploration subsidiary with stakes in fields in Russia, Vietnam, Mozambique, and other countries.

Oil India Limited

Oil India is a smaller upstream company focused primarily on northeast India (Assam, Rajasthan) and has international operations through OIL's overseas ventures. It acquired a minority stake in the Numaligarh Refinery Limited (NRL) in Assam as part of the disinvestment of BPCL's NRL stake.

Indian Oil Corporation (IOC)

IOC is India's largest company by revenue (historically in the Fortune 500) and the largest refiner and fuel retailer. It operates 11 refineries with a combined capacity of approximately 80+ MMTPA, including the Panipat (Haryana) and Barauni (Bihar) refineries. IOC also has a significant petrochemicals integration at some refinery complexes. Its fuel retail network (IndianOil branded stations) historically had the largest geographic coverage of any OMC in India.

Bharat Petroleum Corporation (BPCL) and HPCL

BPCL operates the Mumbai and Kochi refineries and is the second- largest fuel retailer. The central government announced BPCL's privatisation in 2020, but the divestment process stalled and had not concluded as of early 2026. HPCL (owned 54.9% by ONGC as of the 2018 acquisition) operates refineries in Mumbai and Visakhapatnam and a significant retail fuel network.

Reliance Industries

Reliance occupies a unique position in Indian oil and gas because of the breadth of its integration and the scale of its non-oil businesses. Its Jamnagar refinery complex is one of the most efficient and complex refineries globally. The adjoining petrochemical plants (polyester, polymers, fibre intermediates) extend the value chain beyond refined products into specialty chemicals, capturing additional margin. Reliance also has a significant upstream interest in KG-D6.

What makes Reliance uniquely complex to analyse is that its energy business (refining + petrochemicals + upstream gas) competes for investor attention with Jio Platforms (telecom and digital services) and Reliance Retail (the largest organised retailer in India). The interplay of these businesses — and the value attributed to each in a sum-of-the-parts analysis — is a recurring theme in Reliance research. In FY2023–24, Jio Platforms and Reliance Retail together represented a meaningful and growing share of consolidated EBITDA, reducing the company's relative dependence on oil-linked earnings.

How refining margins work: the GRM explained

Gross Refining Margin (GRM) is the single most important profitability metric for downstream companies. It is calculated as:

GRM (US$/bbl) = Value of refined product slate − Cost of crude processed

The product slate value depends on the actual products produced and their prevailing prices. A refinery optimised to maximise diesel and jet fuel output will have a different GRM profile than one producing more LPG or naphtha. International benchmarks like the Singapore GRM (which reflects a representative refinery processing a mix of crude to produce a standard product slate) are used as comparison points.

Complex refineries process heavy sour crude (cheaper raw material) and upgrade it into light products (more valuable), achieving a larger spread than simple refineries processing light crude. Reliance's Jamnagar refinery, being among the most complex in the world, has historically achieved GRMs significantly above the Singapore benchmark — a "premium to Singapore GRM" that analysts track each quarter. The spread between light and heavy crude prices, and between diesel/jet fuel and fuel oil prices, are the key GRM drivers.

Marketing margins and the under-recovery legacy

The marketing segment of Indian OMCs has historically been the most politically sensitive part of their business model. The core tension is that crude oil prices are global and volatile, but the Indian government has — for social and political reasons — periodically prevented OMCs from passing the full cost of crude price increases to consumers at the petrol pump.

Until petrol deregulation in 2010 and diesel deregulation in 2014, OMCs were formally required to sell at government-set prices that were often below their cost. The gap between the selling price and the actual cost was termed an "under-recovery." The government partly compensated OMCs through upstream sharing (ONGC and OIL would transfer a portion of their oil revenues as subsidy sharing) and partly through oil bonds or direct budgetary transfers. This created a complex web of cross-subsidisation that affected the financial statements of multiple public sector companies simultaneously.

After formal deregulation, OMCs theoretically have the freedom to price petrol and diesel at market rates. In practice, the government has continued to exercise informal influence — most visibly during the high crude price period of mid-2022, when retail prices were held stable despite crude at US$100+/bbl, causing OMCs to report large marketing losses. When crude subsequently fell and OMC prices were kept elevated, marketing margins turned strongly positive and OMC profitability recovered.

This "informal influence" dynamic is a structural risk for PSU OMC investors: the government has both commercial interests (as majority shareholder) and political interests (keeping fuel prices low) that can conflict, and the balance between these has historically been unpredictable.

Natural gas pricing: APM vs market-discovered

India's natural gas pricing framework has been a significant policy discussion for the past decade, driven by the need to incentivise investment in domestic gas exploration while also keeping gas affordable for power generation, fertiliser manufacturing, and city gas distribution.

The Administered Price Mechanism (APM) gas price was set by a government formula — historically linking domestic gas prices to a weighted average of international benchmarks (Henry Hub, NBP, Russian prices). From April 2014 onwards, a revised formula under the Rangarajan committee recommendations applied. This APM price applied to ONGC and OIL's legacy production from nomination fields. New discoveries and deepwater/high-pressure high-temperature (HPHT) fields — including Reliance's KG-D6 — were eligible for a premium price above APM.

The Kirit Parikh Committee, which submitted its report in November 2022, recommended a significant reform: moving domestic gas pricing toward market-linked rates over time, with a floor price and a ceiling price to provide producer upside and consumer protection respectively. The committee's recommendations were partially adopted in revised guidelines issued by the government in April 2023, which modified the price formula and the ceiling mechanism. The reform was seen as positive for domestic gas producers (ONGC, Oil India) and negative for high-volume domestic gas consumers (fertiliser companies, power plants, some city gas distribution operators).

Key metrics for oil and gas sector analysis

Crude oil production (MMboe/year): For upstream companies, total oil and gas production in million barrels of oil equivalent annually. Declining production from mature fields is the key challenge for ONGC and Oil India.
Gross Refining Margin (GRM, US$/bbl): The primary profitability metric for refiners. Tracked quarterly and compared to the Singapore benchmark.
Marketing volume (billion litres/year):Total volume of petrol, diesel, LPG, and ATF sold through the retail network. Volume growth tracks India's fuel demand growth.
Marketing margin (₹/litre): The net margin earned on fuel sales after product cost. Positive in benign crude environments; negative during high crude/price freeze periods.
Gas price realisation (US$/mmbtu): For upstream producers and city gas distributors, the price received per million British thermal units of gas.
Under-recoveries (₹ crore): A legacy metric tracking the aggregate loss OMCs bore from selling fuel below cost during periods of price regulation. Less directly relevant post-deregulation, but the concept remains relevant as an informal constraint.

City gas distribution: the growth segment

City Gas Distribution (CGD) is the fastest-growing sub-segment of the Indian gas sector. CGD companies build and operate piped networks in cities and towns to supply compressed natural gas (CNG) to vehicles and piped natural gas (PNG) to households, commercial kitchens, and industrial users.

The CGD business model has attractive characteristics: a regulated return structure (the PNGRB determines tariff guidelines), exclusivity for several years in the licensed geographic area which limits competition during network build-out, a captive customer base once pipelines are installed (customers find it costly to switch back to LPG cylinders or petrol/diesel), and relatively predictable volume growth as CNG vehicle adoption and PNG household connections increase.

Indraprastha Gas Limited (IGL), serving Delhi, Noida, and surrounding areas, was historically one of the most profitable CGD operators in India, benefiting from Delhi's large CNG vehicle fleet (mandated for public transport by Supreme Court orders in the early 2000s). Mahanagar Gas Limited (MGL) serves Mumbai and Raigad. Gujarat Gas Limited (GGL), with a network spanning industrial corridors in Gujarat as well as residential supply, is the largest CGD player by network size in India.

CGD operators source gas from a combination of APM gas (allocated by government for priority sectors including CNG/PNG at subsidised prices), market-priced gas (spot LNG and domestic long-term contracts), and imported LNG. The mix of these sources, and the pricing terms of each, determines the input cost that CGD operators pass through to consumers as their selling price. When domestic APM gas allocation was reduced (as happened in periods of tight domestic supply), CGD operators had to procure more expensive market gas, compressing their per-unit margins.

Reliance's unique position

Reliance Industries defies simple sector classification. Within oil and gas, it operates the world's largest refinery complex (Jamnagar), a significant petrochemical business built around refinery integration, and a domestic upstream gas business (KG-D6). These businesses generate substantial and globally competitive returns.

But the company is simultaneously India's largest telecom operator through Jio (over 450 million subscribers as of FY2024–25), and the country's largest organised retailer through Reliance Retail (thousands of stores across fashion, grocery, electronics, and B2B commerce formats). The combined EBITDA of Jio and Retail had grown to exceed that of the O2C (oil-to-chemicals) business by FY2023–24, fundamentally changing the nature of Reliance as an investment proposition.

Analysts covering Reliance typically use a sum-of-the-parts (SOTP) valuation, assigning separate valuations to O2C (using EV/EBITDA multiples appropriate for a refining/chemicals business), Jio (using EV/EBITDA or EV/subscriber multiples appropriate for a telecom business), Retail (using revenue multiples or EBITDA multiples from comparable global retailers), and the upstream gas business (using DCF-based values for the KG-D6 reserve base). The SOTP exercise regularly yielded significantly different implied values depending on the assumptions used — making Reliance one of the most debated large-cap valuation exercises in Indian equity markets.

Nifty 500 companies in oil and gas

The Nifty 500 includes upstream producers, refiners, integrated OMCs, city gas distributors, and petrochemical companies across the oil and gas value chain. To explore all oil and gas sector companies with their financial profiles and shareholding data, visit the Oil & Gas sector stocks on EquitiesIndia.com.

This article is educational only and does not constitute investment advice or a recommendation to buy, sell, or hold any security. All references to companies, pricing mechanisms, policy developments, and market conditions describe historical observations and are illustrative in nature. Past performance and historical patterns are not indicative of future results. Stock markets carry risk, including the loss of principal. Please consult a SEBI-registered investment adviser before making any investment decision.