Russia-Ukraine crisis underscores lack of integrated energy policy in India

News: The conflict between Russia and the Western powers over Ukraine will have adverse impacts on India’s energy security.

The crisis is a wake-up call for India to address its energy policies in totality, by energy price reforms, prioritizing resources to sectors, such as energy storage, and stopping vote banks from hijacking fuel pricing.

Why India’s Energy security is at stake?

India depends on imports to meet 85 percent of its crude needs, 60 percent of LPG use, and nearly half of its LNG consumption.

Russia is the second-largest exporter of crude oil with a 12 percent market share, and has a 25 percent share of total gas exports, according to Crisil.

First, though the Supply of Crude oil is not an issue, the cost of petroleum products is likely to surge. For instance, India may spend $140-$145 billion this fiscal for petroleum imports, equivalent to around 5 percent of GDP. Further, higher fuel prices will increase household expenditure.

Second, the impact of high prices will have a deleterious effect on a budding gas economy. Indian companies are investing billions of dollars in city gas networks, CNG outlets, and gas pipelines as India aim to increase the role of gas to 15 percent of its energy mix by 2030 from six percent. Imported LNG is a critical component to achieve India’s target.

Third, India’s LNG needs will be at stake. The sanctions on Russia will further force Europe to diversify its supplies and reduce dependence on Russian pipeline gas. Earlier, India had to compete with China, Japan, and South Korea for fuel; now it has to compete with Europe for scarce LNG. High demand might force Indian importers to exit the market.

For instance, the US and Qatar are the key supplier of LNG to India. If Russian exports to Europe are disrupted, under such circumstances, the US will prioritize LNG supplies to Europe and may persuade its ally Qatar to do the same. That would definitely leave India in a bind.

What are the issues in India’s energy policies?

Oil Pricing is not decontrolled yet. For instance, oil companies kept fuel rates unchanged despite wide variations in the oil market.

Indian state oil companies, which control over 85 percent of the domestic fuel market, are merely refining and distribution entities rather than price-setters. Pump rates are controlled by the center.

The announcement of a 20 percent ethanol-blending target with petrol has further reduced the role of oil companies in fuel pricing because ethanol prices are fixed by the government in an opaque manner.

What needs to be done?

If India has to partially insulate itself from the impact of international conflicts, then oil companies must be given leeway to manage oil price risks.

High energy prices cannot be avoided, but there are always options to manage the risks. Hedging is the only way out.

Source: This post is based on the article “Russia-Ukraine crisis underscores lack of integrated energy policy in India” published in Business Standard on 25^th Feb 2022.