“Turmoil – the heat is on” is a popular video game, where the player has to earn a living to become a successful oil entrepreneur. Rising oil prices have certainly caused a stir in India, threatening to alter the pace of its economic growth. In 2015, aided by the US shale boom and the Paris Climate Accord, the oil market was impacted by fundamental supply and demand forecasts, rather than geopolitics.
Growing shale production promised to serve as a cap on any price hikes that might be triggered by OPEC-induced production cuts. The Paris Climate Agreement promised a long-term perspective, with a more dominant role for renewables over fossil fuels and, within fossil fuels, gas was to overtake coal. And the world began to believe in peak oil demand, abandoning its earlier belief in peak oil supply.
Scaled back to 2022, the long-term prospects of the end of the oil-dominated global energy mix still hold. However, the market is nervous, speculating on the outcome of the Russian-Ukrainian conflict, the impact of sanctions and inflationary trends.
Reforms, the road traveled so far
Pre-NELP and NELP phase: Four decades ago, India could meet around 75% of its oil needs from domestic production and did not import gas or coal. Now we have to import 80% of our oil needs and 50% of our gas needs. India’s oil demand growth has closely tracked its rate of economic growth.
In the early 1990s, mainly due to the lack of foreign exchange, a few discovered offshore fields were opened up for foreign direct investment in the oil and gas sector. The policy required mandatory participation of 40 percent in the NOC, the balance of 60 percent in the private sector, as well as the operator. One of these oil and gas fields was Ravva (diamond). But the major policy breakthrough in India came when the Indian government launched the New Exploration Licensing Policy (NELP) in early 2000. The Production Sharing Contract (PSC) regime was the basis of the nine latest NELP tenders.
This resulted in over 250 CSPs, attracted investments worth over $20 billion and led to 130 discoveries. The three major discoveries by the private sector are the MBA oil and gas field, the Barmer basin in the desert district of Rajasthan and two major deep-sea gas discoveries on the east coast of India.
The NELP regime introduced a level playing field, transparent bidding processes, an internationally established contracting regime, and market-determined crude oil prices, while the government retained control of crude oil prices. gas. Although a late entrant, the private sector has made its mark.
Unfortunately, over time, the PSC system has generated controversy, becoming a challenge for both contractors and the government. Unnecessary procedures have taken precedence and the primary objective of finding and producing oil and gas has been lost. Unable to withstand the heat of bureaucracy, a few international oil and gas companies that have entered India have backed down in frustration.
When the NDA government began its term, one commodity that lent an unexpected helping hand in managing the economy was oil. Falling oil prices and the import bill helped the government remove subsidies on petroleum products, limit LPG subsidies to eligible citizens through a direct transfer of benefits, and adopt lower gasoline prices and diesel fuel at retail outlets. The National Data Repository (NDR) under HELP, with its 24/7 access, is the most impactful policy reform that has dramatically improved the ease of doing business.
Revenue Sharing Contracts (RSC) under HELP have waived the cost recovery model and associated complications. Overall, HELP as a policy instrument was well thought out, but unfortunately its timing was a decade behind. This came as global oil and gas majors stopped considering cross-border investments due to their energy transition agenda.
Reforms, the road ahead
Reality check: India lacks a well-articulated integrated energy policy and governance structure. Energy administration is fragmented across multiple ministries, making integrated energy management a major challenge, adding uncertainty to its energy transition agenda. India’s energy sector has limited players, a skewed market, energy resources are under-explored, energy production is at sub-optimal levels with energy prices determined by policy rather than by the economy – states and central government compete on energy taxes, driving consumer choices away from greener fuels.
India’s transport sector consumes 70% of crude oil in the form of petroleum products, but has no role in shaping consumers’ fuel choices. Policymaking in a changing world must treat oil and gas as a form of energy, along with other forms of energy to evolve an integrated energy policy and governance structure to attract global investment. India needs to map global developments in fossil fuel technologies, assess enabling policy initiatives in selected countries to promote alternative fuel choices, outline planning and infrastructure requirements and establish a roadmap that will deliver fuel choices to consumers and ensure energy security in India. To achieve this, the following steps are essential:
1) The first step is to consolidate the multiple policy reforms and ease of doing business initiatives announced by the various ministries involved in the management of natural resources and various modes of transport to present a compelling investment opportunity in the energy space wider; 2) there is a need to involve state governments in the formulation of energy policy on the model of the GST Council. The reality is that whether one travels by air, sea, rail or road, petroleum products remain the only fuel of choice. Maharashtra, Gujarat, Tamil Nadu, UP and Rajasthan each consume over 10 million tonnes of liquid petroleum products, and can switch to a flexi mix of gas and ethanol, even if the gas were to be imported in the form of LNG and at a premium price must be paid to increase the production of ethanol in the country.
On the exploration front, India’s 26 sedimentary basins span an area of over 3 million square kilometres, spanning land, offshore and deep water. Of its projected hydrocarbon resource potential, only one-third has been converted to hydrocarbons in situ through limited exploration. There are still significant “yet-to-find” hydrocarbon resources that require big payers capable of making high-risk investments. Mineral oils (which include crude oil and natural gas) are listed as Union in Schedule VII of the Constitution of India. To explore and exploit mineral oils, the central government is the appropriate government. However, ‘land’ is listed as state in the Constitution of India.
Thus, to explore and exploit mineral oils and attract investment in onshore areas, States have a key role; 3) accelerate India’s transformation to a gas economy. The share of natural gas in India’s energy mix is still low at less than 10%, but it is expected to grow at a faster rate. Gujarat is the only state to have widely embraced gas. Gujarat is home to over 3,000 km of gas pipelines, two gas replenishment terminals for importing LNG and a well-developed city gas distribution (CGD) network.
This robust gas infrastructure increases the share of gas in Gujarat’s primary energy mix to over 24%. This presents a huge opportunity to build on the strong gas industry foundations that already exist in India. Currently, India has a network of over 14,000 km of natural gas transmission pipelines. This pipeline network should double to reach 30,000 km. The government recently announced a policy to build the additional gas pipeline in a “public-private partnership (3P)” mode to quickly implement its vision to establish a national gas network.
However, the transnational gas pipeline projects that India has shown interest in have never been finalized to reach the next stage of execution. India must position itself as a reliable market for the gas surpluses of its neighbors such as Bangladesh and Myanmar and assess the oil and gas potential of its other neighbors at the border basins such as Sri Lanka and Nepal, by developing a suitable partnership model. Overall, the phenomenal growth in gas demand, coupled with projections of improved pipeline infrastructure, presents a significant investment opportunity; 4) finally, bringing oil and gas and all petroleum products under GST to ensure a level playing field across all sectors of the economy – no doubt this would send the signal for reform the stronger to global investors and would complement the single market and A tax principle that underpins the GST. To conclude, India’s energy demand is such that it needs oil, gas and coal from domestic and foreign resources, it needs gas both via LNG carriers and pipelines, and it needs access it both as a buyer and as an equity investor. .
It must generate electricity from all fuel sources, from fossil fuels to renewable energies. Major international oil companies (IOCs) ignored India’s tenders, raising doubts about its resource base. However, its power as a growing market for oil and gas cannot be ignored. The recent major policy launch of the Open Area Licensing Program (OLAP) under the Hydrocarbon Exploration Licensing Policy (HELP) has revived hopes for recovery in the oil and gas sector. India’s strategically critical upstream gas pipeline, and this momentum must be sustained to attract global investment. But policymakers must recognize the reality that the energy world is witnessing a tectonic shift toward clean energy.
It will be a long journey and may take several decades, but the journey has begun. How India will meet its growing demand for energy, what strategy it follows to ensure energy security, how it wants to attract global investment in the energy sector and the fuel choices it makes to transport people and goods are essential not only for India, but for the global energy market. India’s greatest advantages are its growing market and the ability to apply technology on a large scale, both in governance and in various sectors of its economy.
The author is Managing Director, Hindustan Oil Exploration Company
August 14, 2022