March 30, 2020
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Flow Theory

As demand surges, India eyes foreign lands and higher domestic production to shore up its energy security

Flow Theory
It was during a private dinner at the Talisman Energy HQ in Calgary, Canada, that company CEO and president Jim Buckee candidly confessed to Atul Chandra, MD, ONGC Videsh Limited (OVL): "Hats off to you for having made such excellent time, I would like your team to be sitting on our side." Chandra cherished the compliment since OVL had successfully acquired a 25 per cent stake in the Greater Nile Petroleum Operating Company (GNPOC) of Sudan from Talisman for $720 million (Rs 3,600 crore).

Simultaneously, back home, the excitement after Reliance's gas discovery in the Krishna Godavari basin in May 2002 had become a frenzy. Cairns Energy, Niko Resources and even ONGC have all struck gas in areas as diverse as Rajasthan, Cambay Basin and offshore Gujarat. This has forced the government to seriously review the grand trans-Asia pipeline plans.

So if Sudan has consolidated our position internationally, the local gas discoveries have reinforced the prospects of India's long-term energy security. The issue has been a persistent concern and now with the Iraq war triggering uncertainty on global crude supply and price, it's grabbing headlines again. Since India imports 70 per cent of its crude requirements—89.02 million tonnes worth Rs 84,017 crore, of which three-fourths comes from West Asia—any volatility causes anxiety. "The demand for hydrocarbons is relatively inelastic in the short run, and any sudden shift in supply has a disproportionately large impact on price," says Vijay Kelkar, special advisor to the finance minister.

As things stand today, India's oil requirement is 2 million barrels/ day (mbd) but by year 2025, this will multiply nearly four times. What's worse, India has less than one per cent of the world's reserves. It is, therefore, critical that we draw up an energy security blueprint that minimises external dependency.

The government agrees, and says it has a long-term vision. "It's a five-pronged strategy," petroleum minister Ram Naik told Outlook. "The key elements: diversify sources, aggressively acquire oil assets abroad, increase indigenous production, tap alternative resources (ethanol-blended fuel or coal-bed methane), and maintain strategic reserves of 45 days."

In the last three years, says Naik, 70 exploration blocks have been given out to domestic and foreign companies under the new policy (against 22 in the '90s in a bid to maximise local production). The recent gas discoveries have only added to the bullish sentiments. The directorate general of hydrocarbons says with the spate of new gas finds over the last six months supply is expected to double by 2006, from the current 70 million standard cubic metres per day (mscmd) to 140 mscmd.

So if gas is the energy source of this millennium, then we are moving in the right direction. But key issues—over pricing, infrastructure-sharing and lack of reforms among the bulk users—continue to cloud the sectoral horizon. "Unless we have power and fertiliser reforms and gas is made a declared good, big money will elude the sector...and without reach, there won't be money to translate the finds to actual production," warns Subir Raha, cmd, ONGC. In any case, says a Reliance Industries official, these finds "will only reduce import dependency, not eliminate it". Gas can play a key part, but it's not the only one for energy safeguards.

India's drive to go overseas for oil equity took concrete shape only in the recent past. The Iraq crisis will give it a new thrust given the environment of rejuvenated economic diplomacy. With new empowerment that relaxes investment caps and bureaucratic hassles, OVL has been the spearhead of this endeavour. Other psus like gail and private companies like Reliance have also woken up to join the Great Global Energy Game.

"The objective is to both consolidate and expand the base. To achieve that, every year we need to invest over a billion dollars," says OVL's Chandra. "By 2025, we should contribute 60 million tonnes annually, two times what is being produced in India today." But ONGC's efforts may have to be integrated with higher domestic production, an incentive for Indian private players to seek a bigger slice of the global energy pie.

Overseas assets bring three advantages, feels Chandra. One, they ensure supplies. OVL's stake in GNPOC will fetch them 3 million tonnes of crude every year. But it is already negotiating with the other partners to buy their share of crude too, which will increase supplies by an additional 9 million tonnes. The overseas oil from such fields can either be sent directly to India or exchanged with supplies from other oil producers.

Then comes financial security as the output will fetch international prices. And that money can be better utilised to hedge our positions in global markets. Finally, it also controls price fluctuations. The net output or the long-term supply from these fields will, in theory, remain insular from the price waves.

There is another reason behind our global quest: China. Just like us, the Red Dragon has adopted a similar energy strategy for our needs are similar: a swelling population hungry for energy. Both are looking at estimated requirements of 7.6 mbd in two decades time. Even in the global race, China is neck-and-neck as their state-owned petro companies are feverishly scouting equity. Last month, Chinese firms pipped OVL for the British Gas stake in a major block called Kashagan in the Caspian Sea, for an estimated $1.3 billion. In contrast, India was keen to engage China commercially in Sudan for they are the operators there. "In this age, cooperation and not competition is key," says Naik.

So India needs excellent diplomatic skills to become sensitive to other nations. For instance, we'll need to think of our stance vis-a-vis the US since OVL is interested in Iraqi fields. Post-Iraq war, nations who opposed the US may see themselves shut out from such contracts. On the positive side, India's learning the tricks of the trade. In Sudan, for example, Indian diplomats used Track II diplomacy to pressure Petronas of Malaysia, which holds a 30 per cent stake in GNPOC, not to oppose OVL's entry. After this success, mea officials are looking at Africa "as the new and not the forgotten frontier".

Post-1991, India has also diversified the basket of crude and today we simultaneously source from Egypt, Libya, West Africa and Malaysia. The war may disrupt supplies from Iraq, but it's a mere five per cent of our total crude requirement. The government has also asked domestic refiners and exploration companies to defer maintenance shutdown by four months. Strategic reserves too will remain equally important but 45 days' buffer stocks comes with a cost of over Rs 10,000 crore. Till today, there is no clarity over who actually bears it. With security issues back in the picture, isn't it time we resolve policy bottlenecks too? And, isn't it time we looked at the entire macro vision, instead of the erstwhile micro and myopic planning?
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