Interacting with global leaders from the energy sector that included ministers of Saudi Arabia and UAE – prominent members of OPEC [Organization of Petroleum Exporting Countries] – besides CEOs of leading MNCs on October 15, 2018 in New Delhi, prime minister, Narendra Modi flagged three major issues:-
First, expressing concern over the steep increase in the international price of crude oil [and concomitant increase in prices of all petroleum products viz. diesel, petrol, ATF, LPG etc], he urged all leading producers/exporters to be more responsible in fixing the price to bring it down from current high to reasonable level.
Second, keeping in mind the overarching need to increase domestic production India, he asked them to consider investing in exploration and development of oil and gas fields. He also exhorted MNCs to consider transfer of technology especially to extract oil/gas from geologically and physically challenging ultra-deep water, high pressure/high temperature [HP/HT] areas.
Third, considering the debilitating effect of rupee depreciation [during the current year alone, the rupee has declined by about 15% vis-à-vis the US dollar] on the oil import bill, he urged them to think through alternative payment arrangements say, payment in rupee instead of the extant practice of payment in US dollars.
Modi has touched upon all the right notes that are crucial to ensuring adequate supply of energy at affordable price to run the wheels of Indian economy which is targeted to grow in double digits to meet the aspirations of the growing population.
First, it is known fact that with OPEC countries alone accounting for over 40% of the world oil supply, the market for crude is ‘oligopolistic’ [or, a suppliers market]. They fix the price taking into account the global demand-supply scenario which generally remains tight. Each member of the cartel regulates its supply – as per a well orchestrated agreed plan – in a manner so as to jack up the price to the desired level.
In November, 2016, the members of OPEC decided to reduce their combined output by about 1.2 million barrels a day effective from January 1, 2017. Likewise, the non-OPEC countries led by Russia decided to knock off over 500,000 barrels from their supplies. Initially operative for six months, the cartel members are sticking to the cuts. As a result, the price of crude which was ruling at US$ 40 per barrel as of end November, 2016 [after plummeting to a low of US$ 27 per barrel in January, 2016] has more than doubled to about US$ 80 per barrel currently.
Considering that the cost of producing oil in those countries is a pittance viz. less than US$ 10 per barrel, even at rock bottom price of US$ 27 per barrel in January, 2016, they were making huge profit [ even in late 90s, when the crude had plunged to just about US$ 10 per barrel, they did not lose]. Clearly, at US$ 80 per barrel, they are making super-normal/exorbitant profit.
In his address, the OPEC secretary-general, M Barkindo opined that ‘exporting countries had made their best efforts to restore balance and that the global market was adequately supplied’; yet if ‘the price has spurted, this may have a lot to do with the sentiments’, he added. Barkindo was referring to the looming trade war and impending US sanction against Iran. This is skulduggery!
When, the underlying fundamental of tight global demand-supply balance are loaded against the consuming countries [a creation of deliberate actions by exporting countries], it makes no sense to blame things on ‘sentiments’. As regards, sanctions against Iran, if only major exporters like Saudi Arabia etc have the will, nothing prevents them from pumping more supplies to compensate for the reduced supply from Iran.
It was therefore, apt that Modi urged members of the OPEC to be gracious and show accommodation keeping in mind the mutuality of interest between the producers and consumers. They need to ponder whether or not by crippling the resource position of importing countries [inevitable if high price is charged], they will end up harming their own interest in medium to long-term.
This together with the pressure being built by President Trump on OPEC members to bring down the price to reasonable level [he is even contemplating the so called ‘NOPEC’ legislation which could open the group to anti-trust lawsuits] should prompt them to shed their intransigence in price setting.
On second, in contrast to the dispensation under the erstwhile UPA – regime when almost every aspect of exploration and production was under control and micro-managed by the bureaucrats, Modi has taken some bold initiatives to improve the policy environment and reduce regulatory hurdles.
In July, 2017, the government introduced the Hydrocarbon Exploration and Licensing Policy [HELP] – also dubbed as Open Acreage Licensing Policy [OALP] in place of extant NELP [New Exploration Licensing Policy]. Under it, bidders can get a single licence for exploration and production of conventional as well as unconventional hydrocarbons. They can pick up a block of their choice. They are allowed freedom of pricing and marketing.
HELP offers revenue sharing contract. This eliminates scope for government intervention, reduces interface with bureaucracy and eliminates delays. The operator can remain focused wholly on optimizing production without having to worry as to whether any activity and associated cost would be recognized or not. It provides a certain and stable policy environment.
As regards pricing, w.e.f. November 1, 2014, the government put in place a formula based approach using gas prices prevailing in four global locations. Further, to make the policy environment for ultra-deep water, HP/HT areas attractive, in March 2016, it allowed higher price – based on alternate fuels such as fuel oil, naphtha, LNG etc. For marginal fields, it has allowed market based pricing which is also applicable to CBM [coal bed methane].
Modi has thus created a perfect policy setting that should enthuse resource rich countries in the middle-east and MNCs to invest in exploration and production in India and bring in the technology needed for extracting gas from difficult areas.
His third request needs to be viewed in the backdrop of the Rupee losing value because of exogenous developments viz. increase in US interest rate and withdrawal of monetary stimulus despite continuing strong fundamentals of the Indian economy.
The prime minister is taking all the right steps. But, the road ahead is tough as there are limits to influencing actions of oil producers though enticing MNCs to participate in Indian exploration efforts is doable. One can only wait and watch.