As India undergoes major economic and industrial reforms, the one sector that is booming is oil refining.

India's oil and gas industry is estimated to be a US$ 110 billion and it is one of the largest contributors to the central and state exchequers.

There are 19 refineries in India that have the capacity to process about 160 million tonnes per year.

India's crude oil output for the financial year ended March 2007 was up 5.6 per cent to 33.98 million tonne (mt) compared with 32.19 mt in the previous fiscal. During the same period, the country produced 31.55 billion cubic metres of natural gas.

According to an estimate from India's Petroleum Ministry, the country ranks sixth in the world in terms of petroleum demand. By 2010, India is projected to replace South Korea and emerge as the fourth-largest consumer of energy, after the United States, China and Japan.

Experts say this sterling growth in India's refining success has been thanks to the emphasis that the government has been giving to the oil sector ever since the country's Independence from Britain in 1947.

Energy requirements and security have been a major concern for the government that recent years, public sector companies from India have taken stakes in oil and gas fields from Myanmar to central Asia and Africa.

"I believe India will become a major hub for oil refining in the world in a few years. The major thrust should be now in searching for hydrocarbons in onshore and offshore blocks in the country," says Raghuram Srivivas, an oil industry expert based in Mumbai.

The demand for petroleum products is linked with the energy requirements of the country, which is a function of the country, which is a function of the level of economic activity as a measured by the GDP. In the liberalised scenario, the hydrocarbon sector has been identified as one of the main areas of the focus.

Major policy changes are planned for the vital sector to make the oil industry globally competitive. With the reforms package formulated and expected high growth in all economic sectors, the demand for petroleum products is expected to show a compound growth of about 7%.

To become a major global fuel exporter, the Indian government plans to expand refining capacity by 62 per cent to 4.82 million barrels per day (mbpd) over the next five years.

The cost effectiveness of refining in India has also been drawing many global players here. This is because India is logistically well placed for refineries. Besides being a major market for crude oil and petroleum products, it adjoins major demand centers such as China. Also, crude oil from West Asia can easily be brought to refineries in India.

In May, Steel magnate L N Mittal was allowed to pick up 49 per cent stake in Hindustan Petroleum Corporation [Get Quote] refinery in Bathinda. This could mark the beginning of several others moving in, who are also looking to tie up with Indian refiners. They include Saudi Aramco, world's largest oil producer, Cairn Energy, ExxonMobil, Petrobras, Shell, and China Petro.

Following are the challenges that India's oil refining sector face:

• To build up adequate refining capacity; new refineries, expansion and replacements.
• To update/implement the emerging technologies to meet the predominant demand for middle distillates.
• To improve the quality of India's petroleum products to make them environment-friendly and globally competitive.