Investments in Oil & Gas sector to fetch Energy Security for India

How soon can we see major investment in the domestic, upstream oil and gas sector? Remember, this is in line with Prime Minister Narendra Modi’s “Make in India” initiative, to give domestic manufacturing a major push

Industry analysts predict a major chunk of investment in the domestic oil and gas sector in the next 5 years. In line with Prime Minister Narendra Modi’s ‘Make in India’ initiative.

The initiative will give domestic manufacturing a major push, and all sectors – upstream (oil and gas exploration), midstream (gas pipeline and ship transport) and downstream (refining) – are likely to benefit.

Recently, the Boston Consulting Group came out with a report where it mentioned that the upstream oil and gas sector will see in excess of 1.5 lakh crore investment over the next 5 years, for discovery & exploration of basins across the country – onshore and offshore.

For a complete energy security, India needs a robust grid of natural gas pipeline infrastructure. This infrastructure will ensure an equitable distribution of gas & the sector will see investments in excess of 2.5 lakh crores. Refinery & petrochemicals, too, are likely to see huge investments of about Rs 88,000 cr and Rs 100,000 crore, respectively.

Moreover, to jump-start manufacturing industry, the government will emphasis on local value addition, opening of more service centres in India and providing access to capital at globally competitive rates.

Energy-Security

India presently imports more than 80% of its oil needs, and it doesn’t have adequate storage facility to store oil. Developed countries are constantly increasing their capacity to store oil domestically, to ensure uninterrupted supply in times of distress. China has enough storage to last more than 90 days, and they’re building reserves to store 180 days’ worth of supply. Given the unpredictable political situation in Asia, the Government of India must expedite the process of building storage facilities. In fact, consumer markets have made the most of crashing global crude prices by investing in large-scale storage facilities – both strategic and financial.

Low energy prices are a boon because India is—and will, in the near future, remain—a net energy importer. However, if energy prices start to inch up, as they inevitably do, it’s domestic exploration and production that will give India an edge against higher oil prices.

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Flip Side of Global Crude Oil Falling

Over the last few months, the frown on my face has been gradually turning into a smile while getting petrol for my car. Looking at soaring share market prices, it would spread even wider. With the rising values of my shares and savings on account of lower petrol and commodity prices, I thought that the ache din had truly arrived for me.

However, a couple of days back this smile weared off with the news of stock market crashing 900 points on Tuesday – the biggest one-day fall in over five years – making a  huge dent to my meagre wealth.

Whilst this served as a reminder about the vagaries of the stock market, it also prompted me to find out what caused this huge downfall in an otherwise positive looking business environment.

And to my surprise, it is the same petrol that was bringing a huge smile which is causing me pain now.

A powerful storm of market forces is rippling across oil and gas industry’s plummeting oil prices, weakening global oil demand and the rapid growth of renewable energy. In just past few days, oil prices hit a five-year low. This has not only caused massive havoc to the exporting nations, but the economic casualties have spread through to the other economies the world over.

From the outset, economies like India that are dependent on oil and gas exports should be laughing away to banks with the savings on import but that isn’t the case. With the world’s economies increasingly dependent on each other’s success, it’s no longer the case that one country’s economic problem is limited to its own backyard. Greece is a classical case in point of how a country with less than 10% of India’s GDP has suddenly become very important for domestic investors. Greece’s economy might be small but its problems have roiled global markets since 2009.

Ashok Malik aptly put it in his tweet “Frankly I don’t think Greek has had such impact on Indian fortunes since Alexander defeated Porus”

Similarly, falling global crude oil prices has its own flipside and perhaps can cause more harm to the Indian economy than good.

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Countries like Russia and Venezuela have been massively hit by the Crude oil storm. The rouble, for example  crashed owing to falling crude oil prices. Indian markets had to bear the brunt as well even though it  benefits from falling cost of fuel. India imports nearly 80 per cent of its energy needs and falling oil prices not only help the government’s finances, but are also beneficial for consumers.

“Oil is setting off several other dominos across the globe. You had a taste of that when we saw what happened in Russia. The biggest fear is this could probably lead to some sort of a currency crisis which might result in treatment of entire emerging markets as a single basket.

“Clearly, in a world where money can enter and exit markets freely, sharp movements, such as the one seen on Tuesday, are unavoidable”, analysts say.

And if this downward trend continues, it portends even more disaster for Indian economy. Although till now the OPEC has not decreased the production in a bid to squeeze and wear off other Oil export economies like Russia and Nigeria, it won’t be too long before their economies start bearing the brunt. And that’s when the large middle east sovereign funds and investors with large holdings in many Indian corporates will start exiting Indian markets out of financial pressures, leaving our Stock market in a bit of flux.

I hope that the crude oil prices stabilise for the larger good of global economies. It might be worth for met to pay some more for driving my car, but higher cost for running the nation will be too much to pay for.

Fast Tracking Oil & Gas in India

Like many other sectors, Domestic Oil and Gas exploration industry has been mired in bureaucratic hurdles since long. Although NELP has helped the industry make some headway, a lot is yet to be done to enable India harness the true potential of its Domestic Oil and Gas production.

And the new revenue sharing formula being proposed by the government according to which state gets a share from the first day of production, irrespective of cost incurred on the field  goes against the grain of its commitment to ease the business environment in the country.

Previously the oil ministry was in favor of knocking out the prevailing contractual regime wherein oilfield operators recover their costs before sharing profit with the government, as it became controversial due to its strict audit notes and requirement of state to monitor the contractor’s expenditure to protect the government’s share of profit.

However, having done a detailed discussions with global and domestic investors, the oil ministry has now decided to revise the system, which attracts explorers only for explored basins. It is in favour of non-controversial revenue sharing model for basins where oil and gas is established, like say blocks in Assam, Cambay and the Krishna Godavari basin. In September 2011, while examining product sharing contracts. (PSCs) of Reliance Industries, BG and Cairn India, the Comptroller & Auditor General ( CAG) of India had criticised that the contractual regime provided “inadequate incentives” for private contractors to reduce capital expenditure. Prime Minister Manmohan Singh constituted a committee under his Economic Advisory Council Chairman C Rangarajan, which recommended to scrap the PSC model and adopt a non-controversial revenue sharing model where cost-recovery was not allowed. “The government will not launch the tenth auction round unprepared and in a hurry just because the auction is pending for over four years. Objective is to attract global energy firms and not to score number by auctioning blocks to overburdened domestic companies,” a top government source said. The Narendra Modi government is upset over the dismal performance of state-run explorers such as ONGC and Oil India and wants them to expeditiously carry exploration blocks in existing blocks rather than adding more blocks to their portfolio. More than three-fourth of 254 blocks auctioned under Nelp are with public sector companies, particularly ONGC and Oil India.

Exploration success is eluding India since 2002-04, when RIL discovered gas fields in its KG-D6 block and Cairn found massive on-land oilfield in Rajasthan. “These discoveries were made by two private companies after almost four decades of ONGC’s discovery of the Mumbai High. ONGC is under the government’s radar to perform and we are expecting results soon,” an oil ministry official said.

Oil and Gas sector can make significant contribution in achieving the goals outlined by Modi govt. Therefore it is extremely important that an efficient solution is found soon attract the much wanted investment in the sector. It will be a win-win situation of the industry, for the govt. and most important, for the people of the country.