Author : Manish Vaid

Originally Published 2013-06-11 00:00:00 Published on Jun 11, 2013
Starting with the challenges faced by Indian petroleum sector in its hydrocarbon discoveries, the scenario remains to be unimpressive even after nine rounds of NELP bidding. Out of sedimentary basin area of 3.14 million km2 only 22 per cent has been well explored, while similar percentage is poorly explored.
Policies that fail to energise the fuel sector
India has grown rapidly since early Nineties which coincided with economic liberalisation programme. However, the exponential increase in energy demand and the high important dependence nature of its energy needs have raised questions about the sustainability of its economic growth. The New Exploration Licensing Policy of India (NELP) of 1997 was an attempt to bring a paradigm shift, wherein investments from private and foreign firms were attracted to augment India's domestic hydrocarbon resources. Despite such liberalisation of exploration and production and the licensing policy, India continued to rely heavily on imported crude.

During 2011-12, such import jumped by 40 per cent within a of just one year to $140 billion on year to year basis. Apparently, India's natural gas production has started to follow the same route, particularly after gas production of RIL's Krishna Godavari basin (KG-D6) peaked at 69 million metric standard cubic meters per day (mmscmd) during March 2010. Thereafter, production took a nosedive touching a level of 15.89 mmscmd in April 2013. It is now believed that India could soon become net importer of natural gas, when liquefied natural gas (LNG) imports of 115 mmscmd will surpass domestic production of gas of 113 mmscmd during 2014-15. Production of natural gas by Indian PSUs is not able to make up the shortfall as the increase is not able to cope with rising domestic demand.

This has resulted in an increase in volumes of LNG imports both on spot basis as well as long-term procurement. Long term LNG supplies are handled by GAIL and Petronet LNG. For instance, for procurement of LNG, GAIL has signed two such deals with the US to procure 3.5 mmtpa of LNG from Sabina Pass Liquefaction LLC, and 2.3 mmtpa of LNG from Cove Point LNG terminal by signing Terminal Service Agreement. Petronet LNG has already been importing 7.5 mmtpa of LNG from Rasgas of Qatar.

All this has thrown a gauntlet to Indian policy makers to come out with reasonable solutions taking care of multiple stakeholders across hydrocarbon value chain. Concerned with rising crude imports bill and its negative impact on India's current account deficit, the petroleum minister unsurprisingly decided to set ambitious target of making this national energy independent by drastically reducing India's crude imports completely by 2030.

Interestingly, the term 'energy independence' has already been used in Integrated Energy Policy and Hydrocarbon Vision 2025. India's former President Dr. APJ Abdul Kalam has too been advocating from energy independence through the use of renewable, particularly nuclear energy, and making India a fossil fuel free country. Therefore, without undermining the fact to curb down India's crude imports and diversifying its energy sources, the term 'energy independence' has by and large been sued as a political statement with differentiated interpretation.

For petroleum minister the term to a large extent meant fulfilling India's oil demand from domestic production incrementally by 2030. For Dr. Kalam the term meant doing away with fossil fuel economy by first becoming self-reliant in oil and gas as an interim measure concurrently moving on to renewable energy resources like nuclear, solar, wind, etc. The idea in this case is to insulate country's economy from volatile global oil and gas prices, thereby making India energy independent by 2030.

However, 'energy independence' or energy self-sufficiency has been explained by International Energy Agency (IEA) as well. According to IEA's World Energy Outlook (WEO) 2012, Energy Self-sufficiency is calculated as indigenous energy production (including nuclear power) divided by total primary energy demand. According to the same outlook under New Policy Scenario, it is only the US which will be attaining net energy self-sufficiency of 97 per cent by 2035. Remaining countries including India by this period would be having even greater energy dependence on imports. India's net energy self-sufficiency would be close to 60 per cent by this period.

The estimates of fuel import bills consisting of crude, coal and gas reflects the contrasting picture of the US compared to the rest of the countries in question. For instance, US's emergence as a gas exporter has resulted into expected fall of fuel imports by 63 per cent from $364 billion in 2011 to $400 billion in 2035, which is even more than that of energy giant China, whose increase in import bills is expected to be around 199 per cent by 2035.

Move beyond energy independence rhetoric

Unlike the targets set by India's petroleum minister, its fuel import still remains to be in existence even in 'Efficient World Scenario' of 2035, where significant investment in energy efficiency is required. Therefore, even the best case scenario, WEO 2012 considers India to be significant energy importer despite increased focussed on energy efficiency methods. Energy efficiency calls for reduced energy infrastructural investments, lower fossil fuel dependency, increase competitiveness followed by improved customer welfare. Therefore, reaching near IEA's estimates of Efficient World Scenario would entail herculean task on the part of the government. The challenges which Indian policy makers would be facing are immense ranging from attracting investments in upstream sector with the purpose of increasing domestic production. This would be in addition to dealing with rising current account deficit which in 2012-13 was around 5 per cent, highest in a decade.

Starting with the challenges faced by Indian petroleum sector in its hydrocarbon discoveries, the scenario remains to be unimpressive even after nine round of NELP bidding. Out of sedimentary basin area of 3.14 million km2 only 22 per cent has been well explored, while similar percentage is poorly explored. According to Directorate General of Hydrocarbons Annual Report 2011-12, out of 200 billion barrels of Oil and Oil equivalent gas predicted resources only 70 billion barrels have been converted to 'In Place'volumes, while 130 billion are in 'yet to find' category. Given the world energy supplies becoming increasing constrained, augmenting domestic production of hydrocarbons gains even more relevance. Intense competition over foreign hydrocarbon assets like crude and now LNG, particularly after Japan's decline to its nuclear energy post Fukushima disaster has made obtaining of those resources harder.

With an understanding that surety of energy supply cannot be hundred per cent, India should strive for energy security rather than putting ambitious target for energy independence. Because cutting down energy import necessitates providing equivalent quantity of domestic energy supplies by not only augmenting the similar energy production domestically but also expanding the portfolio of energy supplies including clean energy. Furthermore, energy efficiency and energy conservation will go a long way to help gaining energy security. Integrated Energy Policy of India aptly defines energy security. It states, "We are energy secure when we can supply lifeline energy to all our citizens irrespective of their ability to pay for it as well as meet their effective demand for safe and convenient energy to satisfy their various needs at competitive prices, at all times with a prescribed confidence level considering shocks and disruptions that can be reasonably expected".

Further, according to the policy the two broad ways to improve energy security is reducing the risk and dealing with the risk. Therefore, curbing energy imports to a significant level in dealing with price shocks, thereby cutting the risk, is as crucial as ability to import same to deal with domestic supply shocks. Energy security can further be boosted by diversifying both the source of supply and energy mix.

The policy as also promulgated by India's Hydrocarbon Vision, further advocates for security securing overseas oil and gas assets as a means to ensuring energy security. The contention of the government of equity oil as a means to provide protection against a price hike is highly debated. But overseas equity certainly secure strategic interests of the nations which is investing in overseas assets, like in case of ONGC Videsh Limited and now Oil India Limited, which is planning to have similar such overseas arms for this purpose. Notwithstanding these interventions, the biggest challenge confronting government would be to set right the domestic price of petroleum products, including natural gas. For instance, petroleum ministry is working hard to put the gas price regime.

Another challenge which India is facing at present is putting right eh gas price regime so as to attract large number of companies. The solutions range from offering attractive contractual and fiscal terms in no only allocating scare resources but also to boosting output to a new natural gas pricing regime. To achieve this goal, petroleum minister advocated for right mix of energy sources at lowest possible economic and environmental cost. India should move beyond the rhetoric of energy independence and strive to curb its dependency on energy imports, increase domestic production of oil and gas and put more emphasis on renewable energy sources like nuclear, solar, wind, etc. all this should synchronise with energy efficiency measures.

(The writer is a Research Assistant at Observer Research Foundation, Delhi)

Courtesy : The Financial World

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Manish Vaid

Manish Vaid

Manish Vaid is a Junior Fellow at ORF. His research focuses on energy issues, geopolitics, crossborder energy and regional trade (including FTAs), climate change, migration, ...

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