Context
The spread and speed of the destruction caused by climate change in recent weeks present our new Minister of Petroleum and Natural Gas with a policy dilemma. The article offers five policy suggestions to deal with the dilemma.
Energy dilemma facing India
- The events of the past month all over the world have caught even the most alarmist of climate scientists by surprise.
- These events brought into sharp relief the reality that there was no option of denying the consequential implications of the use of fossil fuels.
- However, the dilemma India faces lies in the fact that the Indian economy is heavily dependent on fossil fuels and there is no end in sight to this dependence.
- Further, India imports approximately 85 percent of its crude oil requirements and is exposed to the volatility of the international oil market.
Five policy changes needed
1) Reduce emphasis on domestic exploration
- Not easy to locate and difficult to develop: A review of the public sector’s exploration and production (EP) track record suggests that whilst India may well be sitting on substantial hydrocarbon reserves, these reserves are not easy to locate and, even when located, difficult to develop and produce on a commercial basis.
- The government has often compounded this economic challenge by placing administrative limits on marketing by companies and their pricing freedom.
- High risk and structural softness in the market: The fundamental point is that EP in India is a high-risk activity, and this risk is even greater today because of the longer-term structural softness of the petroleum market.
- The resources earmarked for exploration can be deployed more productively elsewhere.
2) Increase productivity of producing fields
- The ONGC needs to allocate increasing resources to improving the productivity of its producing fields.
- Low oil recovery rate: The average oil recovery rate in India was around 28 percent that is, for every 100 molecules discovered, only 28 were monetized.
- This number did not compare well with the global average of around 45 percent for fields of comparable geology.
- Use technology: The application of enhanced oil recovery (EOR) technology offers a relatively low-risk avenue for increasing domestic production.
3) Increase strategic reserves
- We hold currently strategic reserves equivalent to 12 days of imports.
- The government has approved plans to increase this buffer to 25 days.
- By comparison, China, the EU, South Korea, and Japan hold between 70-100 days of reserves.
- A significant portion of our oil imports came from the Middle East, predominantly Saudi Arabia, Iraq, and Iran.
- This region faces deep political and social fault lines and there is no knowing when our supply lines might get ruptured.
- We would, therefore, be well-advised to build contingency safeguards.
4) Restructure and reorganize public sector petroleum companies
- Consolidate upstream assets: In the first instance, the upstream assets should be consolidated under ONGC (the upstream assets of BPCL, IOC, HPCL, and GAIL should pass onto ONGC) and GAIL should be unbundled into a public utility gas pipeline company
- Diversify: Thereafter, these companies should be encouraged to look beyond hydrocarbons to build an “energy” enterprise.
- The restructuring will help cut back the “avoidable” costs of intra public sector competition.
- It will also reduce the inefficiencies of “sub-scale” operations.
- It will provide a focused platform for balancing the shorter-term need to provide secure and affordable hydrocarbons with the medium and longer-term imperative of developing clean energy.
5) Avoid siloed thinking
- The petroleum minister should not see his responsibility through the siloed prism of oil and natural gas.
- He should broaden the aperture and become the progenitor of the energy transition.
Conclusion
The dilemma referred to in the opening sentence will be easier to resolve our priorities are set within the framework of clean energy.
