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View: Multiple challenges make increasing oil and gas export, reducing import dependence an onerous task

View: Multiple challenges make increasing oil and gas export, reducing import dependence an onerous task
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By CNBCTV18.com Contributor Jan 12, 2022 10:55:28 AM IST (Published)

Achieving the goal of increasing production and reducing import dependence is an arduous task, especially in a capital-intensive sector like oil and gas, where typically investments have long gestation periods. Several challenges need to be overcome before reaching petroleum security for the country.

The role of the hydrocarbon sector is vital in keeping India's economic growth engine running. With the consumption of oil and gas set to rise significantly over the next few years, only 14 percent of the needs are currently met domestically.

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Over 85 percent of our crude requirements are met through imports, entailing a huge import bill, which was $111.9 billion in FY2018-19 (pre-Covid), up from $87.8 billion in FY2017-18. This is further set to increase going forward with the opening up of the economy and increased pace of growth on the one hand, and the rising price of crude oil.
Given this imperative, the Hydrocarbon Vision – 2025, released by the Ministry of Petroleum and Natural Gas, aims to assure energy security by achieving self-reliance through increased indigenous production and investment in the oil and gas sector. It aims to:
  • promote a cleaner and greener India and development of a world-class and globally competitive hydrocarbon sector,
  • promote a free market and healthy competition amongst players and improvement of customer service,
  • create adequate oil storage for the country's security, keeping in view strategic and defence considerations.
  • The government, in February 2019, had approved major reforms to enhance exploration activities, attract domestic and foreign investment in virgin areas of sedimentary basins and accelerate domestic production.
    The policy reforms aim to boost exploration activities by giving greater weightage to work programmes, simplified fiscal and contractual terms, bidding of exploration blocks under Category II and III sedimentary basins without any production or revenue-sharing with the government.
    Further, the policy plans to provide early monetisation of discoveries by extending fiscal incentives, incentivising gas production, including marketing and pricing freedom, induction of the latest technology and capital.
    It also looks at more functional freedom for national oil companies for collaboration and private sector participation for production enhancement methods in nomination fields, streamlining approval processes and promoting the ease of doing business, including the electronic single-window mechanism.
    As per the schedule stipulated in the Hydrocarbon Exploration and Licensing Policy (HELP)/Open Acreage Licensing Policy (OALP), five bidding rounds have so far been finalised in which 105 exploration blocks have been awarded covering an area of approximately 1,56,579 sq. km. The OALP Bid Round-VI, offering 21 blocks covering an area of approximately 35,346 sq. km., was also launched on August 6, 2021.
    To attract capital investments in oil exploration and production (E&P), 100 percent FDI has been allowed under the automatic route, which will enable strategic divestment in the sector. It will expand the scope of privatisation of more oil PSUs. This is in line to reduce the government's presence to a bare minimum in the strategic sector.
    Apart from this, privatisation is preferred to help achieve better synergies between merged entities. It should, however, not result in an increased debt burden for the merged entities, unlike in the case of HPCL-ONGC, wherein the government's stake sale saddled the latter with alarmingly high debt levels.
    While the FDI and the big oil companies in oil E&P are needed, very few are likely to participate given the high risks.
    Compared to some countries, India has poor data on geological prospects and has been unable to attract global players. Majorly due to averseness to investing millions in surveying and drilling wells to establish reserves. Investors prefer to enter into established fields where the RoI is assured.
    Foreign participants accord priority to commercial aspects and the prevailing business climate. However, there have been increasing arbitration cases involving the administration of PSCs, impacting the morale of the private sector and foreign oil companies. Additionally, a retrospective tax demand has led to disputes and litigation.
    So far as gas exploration is concerned, it is unattractive due to continuous low domestic gas prices. These prices are much below the cost of production and thus is a loss-making proposition. The domestic gas price notified at $2.90/MMBtu (GCV basis) for the period H2 FY2022 remains low and below the cost of production from even benign geologies. And accordingly, Indian upstream producers have requested the government to consider providing a floor to the gas prices.
    India's dependence on oil imports has been higher for many years now, and data from the Oil Ministry's Petroleum and Planning Analysis Cell (PPAC) shows a rising oil import trend. The country's oil needs will be the highest globally by 2040.
    Reducing oil imports, therefore, is a big concern.
    The Ministry of Petroleum and Natural Gas, with other Central ministries, is working on a multi-pronged strategy – including but not limited to
    • increasing domestic production of oil & gas
    • promoting energy efficiency and conservation,
    • emphasising on demand substitution,
    • promoting bio/alternative/renewable fuels and
    • refinery process improvements.
    • While these are encouraging, reducing oil imports is likely to be a slow process, given India's rising consumption.
      Under the Hydrocarbon Vision - 2030, the North Eastern Region (NER) presents immense opportunities with abundant natural resources. And is a thrust area for developing oil and gas E&P, also from economic development and employment perspective.
      Projects worth Rs 1 lakh crore have been sanctioned and are sought to be completed by 2025. The exploration acreage will be doubled to 60,000 sq km and offered through a special bidding round under the OALP.
      Plans are afoot to double the oil and gas production from the current 9 MMTOE to 18 MMTOE by 2025. Besides implementing the North East Gas Grid, a dedicated service provider hub is in the offing, which is likely to provide the region access to natural gas.
      One of the key goals for any nation is petroleum security and building long-term strategic oil reserves when international crude prices are low. It helps to safeguard the economy from risks of supply disruptions, price volatility, natural disasters, war, or other calamities. India has thus built up strategic oil reserves, taking advantage of low crude oil prices in April/May 2020. The same has been filled, leading to approximately Rs 5,000 crore notional savings.
      The government is building two incremental storage facilities of 6.5 million metric tonnes (MMT), which together with the existing 5.33 MMT would raise the strategic reserve capacity to 11.83 MMT.
      As per the consumption pattern of 2019-20, the total storage capacity will rise from 9.5 days of crude oil to about 22 days of oil consumption. In addition, the OMCs have storage facilities for crude oil and petroleum products for 65 days, which makes a total of 87 days of available oil consumption, a figure closer to 90 days as per the IEA. Timely completion will, however, be the key to fulfilling strategic goals.
      Achieving the goal of increasing production and reducing import dependence is an arduous task, especially in a capital-intensive sector like oil and gas, where typically investments have long gestation periods. Several challenges need to be overcome before reaching petroleum security for the country.
      —Sabyasachi Majumdar is the Senior Vice President and Group Head of Corporate Ratings at ICRA Limited. Views expressed are personal.
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