Despite loud talk for decades by successive governments for increasing domestic production of oil and gas to make India self-sufficient in energy, we are producing less than 20% of our requirement – balance over 80% continues to be imported. This heightens our vulnerability to a point whereby a slight disruption in any of major source of our imports [be it imposition of sanctions by USA against Iran or attack on oil installations in Saudi Arabia] creates ripples and causes a major destabilizing effect on the Indian economy.
The problem is not with lack of resources [India has 26 Sedimentary Basins covering an area of 3.14 million sq. km.] but lack of a conducive policy environment besides cumbersome regulatory processes which has deterred global firms [who have expertise, technology and capital] from investing in exploration and development of fields. At present, only 6 Sedimentary Basins [SBs] covering 0.518 million sq. km. or barely 16% of the total area are under commercial exploitation. Even these 6 SBs are sub-optimally utilized.
That apart, an overwhelming share of oil and gas is produced from fields that were discovered over 4 decades ago in the 70s viz. Mumbai Offshore, South Bassein etc even as there have been no major discoveries in recent times. The discoveries made in the Krishna Godavari [KG] basin in the early 2000s [touted as one that would contribute nearly 50% of total gas production] turned out to be a damp squib with the high profile KG-D6 operated by Reliance Industries Limited [RIL] having reserves of a mere about 2 trillion cubic ft [tcf] against an initial estimate of over 10 tcf.
Modi – government has tried to make the policy environment attractive by assuring higher price for more difficult deep/ultra-deep water, high-pressure/high-temperature fields and giving greater flexibility to operators in choosing new areas along with freedom of pricing and marketing under the Hydrocarbon Exploration and Licensing Policy [HELP] launched in July 2017. It has also simplified processes for approval and reduced bureaucratic red tape. But, many controls remain even as the policy lacks coherence.
Given the lukewarm response to the first three rounds of bidding held under HELP and absence of any major break-through in securing jump in production from fields already given under erstwhile NELP [New Exploration and Licensing Policy], it is unlikely that India would have reduced dependence on import even by 10% as committed by Modi. The government will therefore need to explore other options for meeting the increasing requirements of oil and gas on a ‘sustained’ and ‘uninterrupted’ basis.
One alternative could be to further improve our existing strategy of sourcing a major share of requirements under long-term arrangements with global suppliers and leaving a small share for buying in the spot market to take advantage of price fluctuations depending on global-demand supply scenario. We may also leverage the fact of India being third largest importer to negotiate better prices. But, it cuts both ways even as the supplier is fully conscious of our vulnerabilities inherent in high dependence on imports. Further, the threat of disruption in any major supply line will always remain.
A second alternative is for Indian companies to pick up stakes in global majors operating in countries which have abundant reserves [albeit proven] of oil. Indian companies – both public sector undertakings [PSUs] such as ONGC Videsh Limited [OVL] and private e.g. RIL have tried this in several jurisdictions. But, this route is not free from downside risks of erosion in the value of investment.
A third alternative is one in which global behemoths such as Aramco [Saudi Arabia’s government owned biggest oil giant and world’s biggest oil exporter] pick up stake in Indian companies which are focused predominantly on refining and marketing of oil products. Already, in this regard, Saudi Arabia has declared its intent to forge comprehensive partnership with India on long-term basis by investing a mammoth US$100 billion in latter’s value chain in the downstream sector including refining, petrochemicals, retailing etc.
Under this partnership, Aramco’s has proposed 25% equity in the US$ 60 billion West Coast refinery [another 25% will come from Abu Dhabi National Oil Company] and petrochemical project in Maharashtra in which the other 50% will be owned by Indian Oil Corporation [IOCL], Bharat Petroleum Corporation [BPCL] and Hindustan Petroleum Corporation [HPCL]. It is also contemplating to pick up 20% equity in oil and gas assets of RIL. The most crucial feature of this partnership is assured supply of crude by Aramco [50% of the requirement of West Coast refinery].
The arrangement is mutually beneficial. While, on one hand, India gets what it needs the most i.e. crude in desired quantities on long-term basis without any disruption, on the other, Saudi Arabia also gets what it needs the most i.e. an opportunity to diversify its sources of income thereby reducing its over-dependence on crude alone [this fits in to the Vision 2030 laid down by the Kingdom which has plans to take a plunge in to a host of other areas in industry and trade]. There could not be a more apt example of the two countries exploiting synergies to the advantage of both.
Indian companies can pursue similar arrangements with other major suppliers of crude viz. Iraq, Iran, United Arab Emirates [UAE] who will also be too keen to reduce their over-dependence on crude alone and make their economies immune to the vulnerabilities resulting from fluctuation in its price.
As part of its ambitious program of disinvestment to garner Rs 105,000 crore during the current year, the government has decided to divest all of its 53.3% shareholding in BPCL. If, it is sold to a strategic investor say Aramco [or any other global company which has ownership and control over crude assets], this will not only yield a whopping Rs 57,000 crore [at current market capitalization of Rs 107,000 crore] but also ensure assured supplies of crude.
BPCL was created following passage of Esso [Acquisition of Undertakings in India] Act, 1974 and Burmah Shell [Acquisition of Undertakings in India] Act, 1976 Act. These legislation having already been repealed in 2016, the decks are cleared for going ahead with its sale. Likewise, the government may also take up sale of HPCL – presently owned by Oil and Natural Gas Corporation [ONGC] which is majority owned by union government – to a global company that has plenty of crude assets.
While, planning for these initiatives, India’s political class needs to broaden its vision of oil security which should go beyond increasing indigenous production to cover arrangements for assured supplies of crude from all sources. It also needs to unshackle itself from the ‘socialist era’ mindset that crucial assets such as oil must necessarily owned only by PSUs. In a world wherein supply chains are globally integrated, the focus should be on how best our economic interests are served rather than worrying about ownership.
Modi – government should orchestrate its strategy combining the best of all available options viz. boosting domestic production; long-term contracts for supplies, letting global oil majors own equity in Indian refiners and retailers and Indian companies acquiring oil assets abroad for ensuring adequate supplies of crude and gas to meet its growing requirements on a sustained basis.