Event Reports

Can India capitalise on the low price environment?

Photolabs@ORF
2016
Feb
20

In these times of low oil and gas global market, how can India capitalise on this beneficial environment? What measures the government of India could and should take to capitalise this windfall to strengthen and improve the hydro-carbon sector in the country? This was the topic of discussion at this year’s Petro India conference in New Delhi on February 2, 2016.

Participating in the conference, themed ‘Oil price volatility: Consequences & Policy responses’, top officials of the private and public sector companies, experts, former bureaucrats and others suggested many measures to fully utilise the situation and make maximum benefits to the sector as well as the country.

The conference attracted a gathering of more than 200 participants, including speakers. They expressed their views on how the Indian hydrocarbon sector is expected to perform in a volatile environment and offered suggestions on how India can capitalize on this environment.

In his theme address, Mr Sunjoy Joshi Director ORF, briefly described the history of crude oil starting with it competition with Whale oil. He pointed out that the current commodity cycle was not new because crude oil price was $18 per barrel ($400/bbl in today’s money) in 1860 and dropped to 10 cents per barrel in 1866 ($3/bbl in today’s money). He observed that the title of swing producer had passed from OPEC to US as it had shifted from the Texas rail commission to OPEC in 1970s.

14th Petro India

He said that $400 billion worth of projects were deferred on account of low oil prices and that investments made during the crest of the market were the first ones to get distressed. He observed that the losses on the gas side were greater than that of oil. He highlighted market developments such as the likelihood of Australia overtaking Qatar as largest LNG exporter and Iran emerging as the largest supplier to India after the sanctions are lifted. He said that it was a buyers-market and possibly the best time to capitalize on low prices. He offered insights on the development of the Singapore-marker price for natural gas.

Mr. S C Tripathi, former Secretary, Ministry of Petroleum said that prices moving up and down are common in oil markets like financial markets. He pointed out that the major difference between the financial market and the oil market was that unlike financial market, the oil market did not have any regulators. He observed that a two-year period of oil price below $37/bbl would save consuming economies $3 trillion. He agreed with the view that it is best time to complete survey of unexplored areas. He requested the government to let go control of oil prices and hand it over to the PNGRB. Mr. Tripathi also raised the issue of climate change and said that gas is the least polluting fossil fuel and its share in India’s energy basket should increase.

Mr B K Chaturvedi former Secretary, Ministry of Petroleum said that when oil prices were high there was an under-recovery of Rs 1.5 lakh crore which has been wiped out by low prices. He observed that prices may rise soon and that this was the best time to reinvest in development of oil technologies. He commented that we needed to improve our domestic capacity to increase energy security. Mr. Chaturvedi reiterated the view of other speakers that to meet our climate change commitments gas was the best bet. He pointed out that gas will improve the composition of our energy mix and that it could potentially to reduce our GHG emission intensity by 30%. He also said that we should improve gas transportation pipelines and invest in other energy producing countries to improve our energy security.

Mr. Amit Khera of Mckinsey set the theme for the upstream session. Mr. Khera pointed out that increase in global supply, change in OPEC policy towards market share and decrease in demand growth were the major factors behind the fall in oil prices. He said that there will be slower demand growth of only 1% per annum up to 2018. He added that US tight oil production has so far proven resilient but commented that future growth outlook was highly uncertain. According to Mr Khera, in the long term cost compression could push equilibrium price of oil to around $65 -75/bbl. He cautioned that by 2025, the world could be running out of cheap supply (especially in US unconventional) which could push prices up, unless new technologies unlock resources, or OPEC increases production further. He said that they did not expect peak oil demand by 2030 but expect a secular decrease in the pace of demand growth.

Dr. Avinash Chandra, former DG, DGH elaborated on forces behind the price of oil and commented that price balancing effect of shale oil could mean that the future oil prices may not increase beyond $ 90/bbl. He said that eventually the forward price curves may flatten out but speculative stocks may re-enter the market and delay price recovery of oil. Mr Narendra Taneja, Energy Expert & Commentator said that this was the best time to invest in overseas energy assets as prices were favorable.
In the downstream session Mr. Debashish Bera of Price Waterhousecoopers advocated the idea that the sector is integrated so that margins can be managed. Mr. Bankapur, former Director, IOCL pointed out that refineries having high Nelson Complexity Index had no advantage because the difference between the price of sweet and sour crude was not significant. He outlined the importance of Petrochemicals in total revenue and commented that Petrochemicals have been steady amid an unstable market. He said that the crude price is likely to remain low for the next two years. He observed that renewables could become unviable when oil prices are low.

Ms Vartika Shukla, ED, EIL stressed the need to shift from BS IV to BS VI fuels for transportation by 2020. She said that there was a need to augment refinery margins. She explained that how increasing petrochemicals capacity can produce high margins. She pointed out that by 2020 an additional refining capacity of 260 Mt would be required. She also raised the question on which technology path India should take. She said that Hydrogen addition technology was expensive while carbon rejection technology was cheaper. Mr. Ashok Dhar, Director, ORF Kolkata gave an overview of shifts in the global and domestic refining sector and offered specific recommendations such as creating independent companies, creating national, regional and local oil marketing companies, creating SPVs of common carriers, availing opportunities in augmentation & acquisition abroad, removing structural imbalances, correcting pricing distortions post trade flow reversals and creating a price marker.

Ms Gauri Jauhar from IHS set the theme for natural gas session. She pointed out that the LNG supply build was just beginning and that global gas oversupply would intensify and endure for most of the rest of the decade. She said that weakening Chinese gas demand was adding to the global LNG surplus. She raised the question as to whether India could compensate with imports on comparable scales. She pointed out that LNG supply was set to grow 43% by the end of the decade and that the United States was set to become a major LNG supplier after 2018. She said that increasing volumes of LNG supply push would enter Europe intensifying competition with European incumbent pipeline suppliers. In North America she expected productivity progress to reduce shale gas costs and enable steady or increased production at low prices. According to Ms Jauhar, the US was increasing its long-term competitive position for new-build LNG projects.

Mr. Aneesh Jain of ICF described the current state of the gas market in India and how low gas prices have created a unique opportunity for India. He made the point that low oil price environment was the best time to reform gas pricing in India. According to Mr Jain, increase in hedging by large consumers and state OMCs can lock in low prices for the country, which can reduce India’s import bill and improve the status of the current account significantly. Mr B S Negi, former Member PNGRB highlighted some causes of low prices for gas such as shale gas production, the push on renewables, diminishing regional market size etc. He said that the fall in the price of oil was not translating into a stimulus for the economy unlike in the past but cost of equipment and services had come down from $10-11 to $5-6/mmbtu which provided an opportunity to explore frontier regions. He also gave an overview of LNG and pipeline projects in India.

In the valedictory session, stalwarts of the Indian hydrocarbon sector including Mr R S Sharma, former CMD, ONGC, Mr N M Borah, Former CMD, OIL and Mr Sushir Vasudeva, Former CMD, ONGC offered valuable insights on how suggestions by panelists and participants can be taken forward (to be covered in detail in the recommendations report).

Theme address by Sunjoy Joshi.

This report is prepared by Neeraj Kumar, Research Intern, Centre for Resources Management, Observer Research Foundation, Delhi.