India to increase its dimension of oil importing

Context

• Indian Oil Corporation placed India’s first ever shale oil order with the U.S., and the prices from the U.S. were very competitive even when compared with those from Gulf nations.
• India bought four cargoes at the first Shale oil order.

Pressure on OPEC countries

• The increasing oil imports from new sources such as the U.S. was putting pressure on OPEC countries to reduce the ‘Asian premium’ on oil prices they charge Asian countries, including India.
• India earlier used to buy oil on an FOB (Free On Board) basis. Now, these small shale producers cannot give a complete supply, so India have allowed them to aggregate and ship it. It is their ship that will deliver to India.
• Under the FOB model, the buyer takes delivery of the item as soon as it leaves the seller’s shores, which means that shipping costs are borne by the buyer.
• The deal with U.S. companies by IOC and BPCL, for 3.5 million barrels and 1.9 million barrels respectively, has PetroChina transporting the oil on behalf of the U.S. companies.

Issues concerning China

• Several ministers travelling to China found out that whatever is happening on the border or on the diplomatic front, the Chinese do not want to let business stop between the two countries, i.e., China is showing the red carpet for Indian business.
• The diversification of oil imports, put pressure on the OPEC countries to do away with the Asian premium, something India has been arguing for.
• What was going slow through bilateral engagements earlier, is now being achieved. The American shale oil and gas are coming at a new normal price, and giving India leverage.

India as an oil importer

• India was the fourth-largest consumer of crude oil and petroleum products in the world in 2015, after the United States, China, and Japan.
• The country depends heavily on imported crude oil, mostly from the Middle East.

Status

• India was the fourth-largest consumer of crude oil and petroleum products after the United States, China, and Japan in 2015.
• It was also the fourth-largest net importer of crude oil and petroleum products.
• The gap between India’s oil demand and supply is widening, as demand in 2015 reached nearly 4.1 million barrels per day (b/d), compared to around 1 million b/d of total domestic liquids production.
• Demands accelerated in the year 2016 through 2017 timeframe as India’s transportation and industrial sectors continue to expand under economic development, oil price declines since mid-2014.
• Dependence on imported crude oil has led Indian energy companies to diversify their supply sources.
• To this end, Indian national oil companies (NOCs) have acquired equity stakes in overseas oil and natural gas fields in South America, Africa, Southeast Asia, and the Caspian Sea region to acquire reserves and production capability.
• However, major chunk of crude oil and condensate imports continue to come from the Middle East, where Indian companies have little direct access to investment.

Domestic production

• India has 18 state-owned oil and gas companies at present. The top six include large exploration and production players namely ONGC, Oil India, and refining and marketing companies such as IOC, BPCL and HPCL, besides the gas giant GAIL. And the consolidation could happen at various stages and levels going by the synergies.
• India’s upstream petroleum industry is still largely owned by state-owned firms, although the sector attracts some level of private and foreign investment.
• The government regulates the fuel price for petroleum products, although the mounting costs of fuel subsidies in recent years have encouraged the government to lift retail price caps on many oil products.
• The government permits license operators to produce all types of oil and natural gas, including unconventional resources.
• In May 2016, India’s government opened its first bidding round for 67 small and marginal fields in 9 basins under the new policy. Both state-owned and private companies can bid on these fields.
• The Ministry of Petroleum and Natural Gas (MOPNG) regulates the entire value chain of the oil sector, including exploration and production (E&P), refining, supply, and marketing.
• Under the MOPNG, the Directorate General of Hydrocarbons regulates the upstream side of the oil sector, as well as coalbed methane (CBM) projects.
• Another sub ministry, the Petroleum and Natural Gas Regulatory Board (PNGRB), acts as a downstream regulator, for activities including petroleum product sales and distribution.
• Two state-owned companies, the Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL), hold most of the production and refining activity in India.
• ONGC is India’s largest oil producer, accounting for about 69% of the domestic production in 2014, including oil produced from its joint ventures.
• A few private companies have emerged as important players in India’s oil industry the past decade, although none have made any significant inroads into the upstream sector.
• Cairn India, primarily owned by London-based firm Vedanta Resources, is the largest privately-owned producer of crude oil in India and has major equity stakes in the Rajasthan and Gujarat regions and in the Krishna-Godavari basin.
• Private Indian companies like Reliance Industries (RIL) and Essar Oil have become major refiners.

Oil Trading

• India has amplified its total net oil imports from 42% of demand in 1990 to an estimated 75% of demand in 2015.
• India’s demand for crude oil and petroleum products is projected to continue rising, barring a serious global economic recession.
• Oil import dependence will continue to climb if India fails to achieve production growth equal to demand growth.
• Saudi Arabia is India’s largest oil supplier, with a 20% share of India’s crude oil imports.
• In total, approximately 58% of India’s imported crude oil came from Middle East countries, mostly Saudi Arabia and Iraq.
• The second-largest source of oil imports is Africa (19%), with most of that crude oil coming from Nigeria.
• The Western Hemisphere accounted for 18% of India’s crude oil imports, mostly from Venezuela and imports from this region have grown substantially over the past several years.
• Supply disruptions in several countries, including Iran, Libya and Sudan, in addition to India’s growing dependence on imported crude oil, compelled India to diversify its crude oil import slate over the past few years.

Fluctuating oil prices: a concern

• Price of crude oil (Indian basket) has increased from $39.9 in April 2016 to $52.7 in December 2016.
• The concern over crude oil prices shoots from India’s energy import bill of around $150 billion, projected to reach $300 billion by 2030.
• India imports around 80% of its crude oil and 18% of its natural gas requirements. India imported 202 million tonnes of oil in 2015-16.
• The descending spiral in international crude oil prices results in a decline in oil import bill by around 18 per cent which together with a sharp decline in gold imports led to a reduction in India’s overall imports.
• Countries such as India that are dependent on imports to meet their oil needs are particularly vulnerable to price volatility.
• Bankruptcies and sovereign defaults occurring in oil exporting companies will aggravate the economic slowdown at the global level, which might impact India’s exports.
• A whole range of other issues are also linked with lower oil prices. Servicing of high foreign debt and cash flows of Indian companies might also be a concern.

Government’s new policies

• The low international crude price coupled with a strengthening rupee certainly supported the new government at the Centre.
• Not only was it considered the sign of a strong economy, but it also gave it a chance to think about several long term reforms in many sectors, including oil and gas.
• Among the several new policy choices that the new government made for the oil and gas sector, the biggest and the most critical one was the proposal to create an oil behemoth by merging oil Public Sector Units (PSUs).
• It was only in the third year of the government that Finance Minister Arun Jaitely in his 2017 Union Budget announced that the government plans to form Indian oil giants by merging some of the existing players to take on international and domestic competition.
• The government also recently announced plans to reduce oil imports and thereby significantly save on oil subsidies.
• The government had made its idea clear about a potential reduction in import dependency by setting an agenda of reducing it to 67 per cent by 2022, the 75th year of Independence, as a tribute to freedom fighters.
• The Prime Minister’s ‘give it up’ campaign asking citizens to give up subsidized LPG (domestic cooking gas) connection was a successful move for the new government.
• The campaign has seen nearly 2.8 lakh consumers surrendering subsidized connections as of now.
• There are about 15 crore LPG connections in the country at present and the government spends almost Rs 40,000 crore as subsidy on this.

Challenges ahead

• Even as the government could create the much needed momentum in the country’s petroleum sector, the coming years may prove challenging as it is time to appraise the attainment of several of these goals.
• While achieving the targets such as reaching piped natural gas (PNG) to one crore houses over the next two years and scaling up the capacities for reducing imports to the expected levels may be some of the challenges internally, tackling budding hike in crude prices will pause a bigger external challenge for the government moving forward.
• While India will remain a major importer of crude oil, any sharp spikes in the international price could pose bigger challenges.
• India imports 75% of its oil requirements thus making India vulnerable to global market fluctuations.
• Private Oil companies are losing almost 30$ per barrel. Coupled with a depreciating currency, the companies will lose out leading to many of them closing.
• High Tax rates leading to losses to companies.
• Search for alternative fuels poses a risk to the industry.

What can be done?

• The ad valorem tax can be further reduced to help companies.
• Boosting private companies to spend in India by giving them hassle free clearances, less unnecessary regulations.
• Tax credits can be provided to incentivize incremental production from marginal oil fields and enhanced oil recovery.
• More Research &Development, cooperation between students and companies can be done to ensure innovation and development of better, cheaper drilling methods.
• There should be less political influence thus reducing red-tapism and bureaucracy.
• Targeted subsidies to make Oil production viable can be given.