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Multiple challenges make increasing oil and gas exports and reducing dependence on imports costly

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Multiple challenges make increasing oil and gas exports and reducing dependence on imports costly

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The role of the hydrocarbon sector is vital to keep India’s economic growth engine running. With oil and gas consumption expected to increase dramatically over the next few years, only 14% of needs are currently being met nationally.

Over 85% of our crude needs are met by imports, resulting in a huge import bill, which stood at $ 111.9 billion in fiscal year 2018-19 (before Covid), compared to $ 87.8 billion in fiscal year 2017-18. This is expected to increase further in the future with the opening of the economy and the acceleration of the growth rate on the one hand, and the rise in the price of crude oil.

In view of this imperative, the Hydrocarbons Vision – 2025, published by the Ministry of Petroleum and Natural Gas, aims to ensure energy security by achieving self-sufficiency through increased local production and investment in the oil and gas sector. . It aims to:

  • promote a cleaner and greener India and the development of a world-class and globally competitive hydrocarbon sector,
  • promote a free market and healthy competition between players and the improvement of customer service,
  • create adequate oil storage for the security of the country, taking into account strategic and defense considerations.
  • The government, in February 2019, approved major reforms to strengthen exploration activities, attract domestic and foreign investment in pristine areas of sedimentary basins and accelerate domestic production.

    The political reforms aim to stimulate exploration activities by giving more weight to work programs, to simplified fiscal and contractual conditions, to offers of exploration blocks in sedimentary basins of categories II and III without any production or sharing of income with the government.

    In addition, the policy plans to provide early monetization of discoveries by expanding tax incentives, encouraging gas production, including freedom of marketing and pricing, induction of the latest technology and capital.

    It also examines greater functional freedom for national oil companies for collaboration and private sector participation for methods of improving production in nomination areas, streamlining approval processes and promoting ease. to do business, including electronic single window mechanism.

    In accordance with the timetable stipulated in the Hydrocarbon Exploration and Licensing Policy (HELP) / Open Land Licensing Policy (OALP), five tenders have so far been finalized in during which 105 exploration blocks have been awarded, covering an area of ​​approximately 1,56,579 square meters. km. The OALP Bid Round-VI, offering 21 blocks covering an area of ​​approximately 35,346 km², was also launched on August 6, 2021.

    To attract capital investment in oil exploration and production (E&P), 100 percent FDI has been allowed under the automatic path, which will allow for strategic divestment in the sector. It will expand the scope of privatizing more oil PSUs. This is in line to reduce government presence to the bare minimum in the strategic sector.

    Apart from this, privatization is favored to help achieve better synergies between the merged entities. However, this should not lead to an increase in the debt burden for the merged entities, unlike the case of HPCL-ONGC, where the sale of the government’s stake has burdened them with an alarming level of debt.

    While FDI and 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 insufficient data on geological outlook and has not been able to attract global players. Mainly due to the aversion to investing millions in surveying and drilling wells to establish reserves. Investors prefer to enter established fields where return on investment is assured.

    Foreign participants prioritize commercial aspects and the prevailing business climate. However, there have been more and more arbitration cases involving the administration of the PSCs, affecting the morale of the private sector and foreign oil companies. In addition, a retrospective tax claim resulted in disputes and litigation.

    Regarding gas exploration, it is unattractive because of the still low prices of domestic gas. These prices are much lower than the cost of production and therefore constitute a deficit proposition. The domestic gas price notified at $ 2.90 / MMBtu (GCV basis) for the period S2 FY2022 remains low and lower than the production cost of even benign geologies. And as a result, upstream Indian producers have asked the government to consider setting a floor for gas prices.

    India’s dependence on petroleum imports has been higher for many years now, and data from the Petroleum Analysis and Planning Unit (PPAC) of the Ministry of Petroleum shows a tendency to decline. rising oil imports. The country’s oil needs will be the highest in the world by 2040.

    Reducing oil imports is therefore a major concern.

    The Ministry of Petroleum and Natural Gas, along with other central ministries, is working on a multi-pronged strategy – including, but not limited to,

  • increase in national oil and gas production
  • promote efficiency and energy conservation,
  • emphasizing on-demand substitution,
  • promote 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 growing consumption.

    As part of the Hydrocarbons Vision – 2030, the Northeast region (NER) presents immense opportunities with abundant natural resources. And it is a prime area for the development of oil and gas exploration and production, also from the point of view of economic development and employment.

    Projects worth Rs 1 lakh crore have been sanctioned and should be completed by 2025. The exploration area will be doubled to 60,000 km² and offered under a special tender in the framework of the OALP.

    Plans are underway to double oil and gas production from the current 9 MMTOEs to 18 MMTOEs by 2025. In addition to the implementation of the North East gas network, a dedicated service provider hub is in the pipeline. , which should allow the region to access natural gas. .

    One of the key goals of any nation is oil security and the building up of long-term strategic oil reserves when international crude prices are low. It helps protect the economy from the risks of supply disruption, 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 fulfilled, which has saved around 5,000 crore rupees.

    The government is building two additional 6.5 million metric ton (MMT) storage facilities, which together with the existing 5.33 MMT would bring the strategic reserve capacity to 11.83 MMT.

    In line with the 2019-2020 consumption model, the total storage capacity will decrease from 9.5 days of crude oil to approximately 22 days of oil consumption. In addition, the WTO has storage facilities for crude oil and petroleum products for 65 days, making a total of 87 days of available oil consumption, a figure closer to 90 days according to the IEA. Timely completion, however, will be the key to achieving the strategic goals.

    Achieving the goal of increasing production and reducing dependence on imports is a daunting task, especially in a capital-intensive sector like oil and gas, where investments tend to have long periods. gestation. Several challenges must be overcome before achieving oil security for the country.

    —Sabyasachi Majumdar is Senior Vice President and Group Head of Corporate Ratings at ICRA Limited. The opinions expressed are personal.

    Multiple challenges make increasing oil and gas exports and reducing dependence on imports costly

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