Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

[pib] Automated fuelling technology- UFill

Note4Students

From UPSC perspective, the following things are important :

Prelims level : UFill

Mains level : NA

The Bharat Petroleum Corporation Limited (BPCL) has launched an automated fuelling technology -UFill- to ensure that its customers have a better experience at outlets.

What is UFill?

  • UFill functionality, which has been described as swift, secure and smart, has been launched in 65 cities and will soon be launched across the country.
  • It does not need any app download, and is payment app agnostic.
  • Customer can use any payment app already downloaded on his/her phone.
  • It offers real time QR and voucher code through SMS and is accepted at all BPCL Fuel Stations where the functionality is enabled.

Key features

  • UFill aims to improve customer’s turn-around time (TAT) at fuel outlet and increase transactional transparency, thereby providing enhanced retail like experience.
  • The technology provides the customer with control of fuelling as well as touch less pre-payment solution.
  • There is no need to check zero before fuelling or final reading, the dispensing unit will automatically dispense the exact quantity of fuel.

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Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Places in news: Gulf of Mexico

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Gulf of Mexico

Mains level : NA

An oil spill spanning at least 10 miles has been captured by satellite imagery in waters off the Louisiana coast near the Gulf of Mexico.

Gulf of Mexico

  • The Gulf of Mexico is an ocean basin and a marginal sea of the Atlantic Ocean, largely surrounded by the North American continent.
  • It is bounded on the northeast, north and northwest by the Gulf Coast of the United States; on the southwest and south by the Mexican states of Tamaulipas, Veracruz, Tabasco, Campeche, Yucatan, and Quintana Roo; and on the southeast by Cuba.
  • The US states of Texas, Louisiana, Mississippi, Alabama, and Florida, which border the Gulf on the north, are often referred to as the “Third Coast” of the United States (in addition to its Atlantic and Pacific coasts).
  • It is covered with a tangle of pipes, wells and other energy infrastructure, much of it no longer used, as a result of generations of oil extraction there.

Its formation

  • The Gulf of Mexico took shape approximately 300 million years ago as a result of plate tectonics.
  • Its floor consists of sedimentary rocks and recent sediments.
  • It is connected to the part of the Atlantic Ocean through the Florida Straits between the US and Cuba, and with the Caribbean Sea via the Yucatán Channel between Mexico and Cuba.
  • Because of its narrow connection to the Atlantic Ocean, the Gulf experiences very small tidal ranges.

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Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Leaded Petrol is officially eradicated

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Leaded Petrol

Mains level : Not Much

The use of leaded petrol has been eradicated from the globe, a/c to the UN Environment Programme (UNEP).

What is Leaded Petrol?

  • Tetraethyl-lead (TEL) is a petro-fuel additive, first being mixed with petrol beginning in the 1920s as a patented octane rating booster that allowed engine compression to be raised substantially.
  • This in turn caused increased vehicle performance and fuel economy.
  • The practice of adding tetraethyl lead to petrol had spread widely to all countries soon after its anti-knock and octane-boosting properties were discovered.
  • TEL is still used as an additive in some grades of aviation gasoline.

Issues with leaded petrol

  • Lead is toxic, affects multiple body systems and is particularly harmful to young children.
  • It affects the brain, liver, kidneys, and bones. Lead is measured in the blood to understand exposure.
  • Lead in bone is released into the blood during pregnancy and becomes a source of exposure to the developing foetus.
  • More recent research has indicated that lead can damage the infant brain even at blood levels as low as 5 microunits per decilitre (μ/dl).

India’s tryst with leaded petrol

  • India was among those countries that took early action to phase out leaded petrol. The process of phase down that had started in 1994, got completed in 2000.
  • Initially, low-leaded petrol was introduced in Delhi, Mumbai, Kolkata and Chennai in 1994, followed by unleaded petrol in 1995.
  • The entire country got low-leaded petrol in 1997 while leaded fuel was banned in the National Capital Territory of Delhi.
  • The final introduction of unleaded petrol in the entire country was mandated in April 2000.
  • This decision was also catalyzed by the Supreme Court order that had directed the introduction of unleaded petrol to enable the adoption of catalytic converters in petrol cars.

Significance of phasing out

  • It is a milestone that will prevent more than 1.2 million premature deaths and save world economies over $2.4 trillion annually.
  • It has taken 100 years to stop the use of leaded fuel finally.

Try answering this PYQ:

Q.Lead, ingested or inhaled, is a health hazard. After the addition of lead to petrol has been banned, what still are the sources of lead poisoning? (CSP 2012)

  1. Smelting units
  2. Pens pencils
  3. Paints
  4. Hair oils and cosmetics

Select the correct answer using the codes given below:

(a) 1, 2 and 3 only

(b) 1 and 3 only

(c) 2 and 4 only

(d) 1, 2, 3 and 4

 

Post your answers here.
6
Please leave a feedback on thisx

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Oil and Gas Sector – HELP, Open Acreage Policy, etc.

What are Oil Bonds?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Oil Bonds

Mains level : Oil prices volatility and its impact on India

The Centre has argued that it cannot reduce taxes on petrol and diesel as it has to bear the burden of payments in lieu of oil bonds issued by the previous UPA government to subsidize fuel prices.

What are Oil Bonds?

  • Oil bonds are special securities issued by the government to oil marketing companies in lieu of cash subsidy.
  • These bonds are typical of a long-term tenure like 15-20 years and oil companies are paid interest.
  • Before the complete deregulation of petrol and diesel prices, oil marketing companies were faced with a huge financial burden as the selling price of petrol and diesel in India was lower than the international market price.
  • This ‘under-recovery is typically compensated through fuel subsidies allocated in the Union budget.
  • However, between 2005 and 2010, the UPA government issued oil bonds to the companies amounting to Rs 1.4 lakh crore to compensate them for these losses.

Why do governments issue such bonds?

  • Compensation to companies through issuance of such bonds is typically used when the government is trying to delay the fiscal burden of such a payout to future years.
  • Governments resort to such instruments when they are in danger of breaching the fiscal deficit target due to unforeseen circumstances that lead to a collapse in revenues or a surge in expenditure.
  • These types of bonds are considered to be ‘below the line’ expenditure in the Union budget and do not have a bearing on that year’s fiscal deficit, but they do increase the government’s overall debt.
  • However, interest payments and repayment of these bonds become a part of the fiscal deficit calculations in future years.

Backgrounder: Deregulation of fuel prices

  • Fuel price decontrol has been a step-by-step exercise, with the government freeing up prices of aviation turbine fuel in 2002, petrol in 2010, and diesel in 2014.
  • Prior to that, the government would intervene in fixing the price at which retailers were to sell diesel or petrol.
  • This led to under-recoveries for oil marketing companies, which the government had to compensate for.
  • The prices were deregulated to make them market-linked, unburden the government from subsidizing prices, and allow consumers to benefit from lower rates when global crude oil prices tumble.
  • Price decontrol essentially offers fuel retailers such as Indian Oil, HPCL or BPCL the freedom to fix prices based on calculations of their own cost and profits.
  • However, the key beneficiary in this policy reform of price decontrol is the government.

Impact: Loss of consumers

  • While oil price deregulation was meant to be linked to global crude prices, Indian consumers have not benefited from a fall in global prices.
  • The central, as well as state governments, impose fresh taxes and levies to raise extra revenues.
  • This forces the consumer to either pay what she’s already paying, or even more.

Why are the Oil Bonds in news?

  • As prices of petrol and diesel climb steeply, the Centre has been under pressure to cut the high taxes on fuel.
  • Taxes account for 58 per cent of the retail selling price of petrol and 52 per cent of the retail selling price of diesel.
  • However, the government has so far been reluctant to cut taxes as excise duties on petrol and diesel are a major source of revenue, especially at a time the pandemic has adversely impacted other taxes such as corporate tax.
  • The government is estimated to have collected more than Rs 3 lakh crore from tax on petrol and diesel in the 2020-21 fiscal year.

The blame game

  • The present government has blamed the UPA regime for its inability to cut taxes.
  • It pointed out that the bonds issued by the Manmohan Singh government have weakened the financial position of the oil marketing companies and added to the government’s fiscal burden now.
  • It is an argument that has been often repeated since 2018.

What budget documents show

  • Budget documents show that such bonds will be up for redemption over the next few years — beginning with two to be redeemed in the current fiscal year — till 2026.
  • The government has to repay a principal amount of Rs 10,000 crore this year, according to these documents.
  • The government has paid around Rs 10,000 crore annually as interest over the last decade.
  • The government is likely to pay a similar amount of interest for the current fiscal as well.

Is the issuance of such special securities restricted to the UPA era?

  • Besides oil bonds, the UPA era also saw the issuance of fertilizer bonds from 2007 to compensate fertilizer companies for their losses due to the difference in the cost price and selling price.
  • However, the issuance of such special securities is not limited to the UPA regime.
  • Over the years, the Modi government has issued bank recapitalization bonds to specific public sector banks (PSBs) as it looked to meet the large capital requirements of these PSBs without allocating money from the budget.

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Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Second-generation bioethanol: It is time to launch it headlong

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Bioethanol, Ethanol blending

Mains level : Ethanol blended petrol (EBP) Program

India has been promoting 2G bioethanol to achieve its E20 target.

What is Bioethanol?

  • Biomass has always been a reliable source of energy.
  • Cultivated biomass has begun to be used to generate bioethanol.
  • They are categorised as first (1G), second (2G) and third-generation (3G), based on the source of raw material used for bioethanol production.

Its types

  • 1G bioethanol: Raw materials required are corn seeds and sugarcane; both are food sources. There is not enough food for everyone; so the use of 1G is a major concern. However, some countries have enough raw materials to manufacture 1G.
  • 2G bioethanol: It can be produced using inedible farm waste left over after harvest. Corn cobs, rice husks, wheat straw and sugarcane bagasse can all be transformed into cellulose and fermented into ethanol that can then be mixed with conventional fuels.
  • 3G bioethanol: Algae grown in wastewater, sewage or saltwater can be used to produce bioethanol. Water used for human consumption is not required. The benefit of 3G is that it does not compete with food. Nevertheless, economic viability remains a critical issue.

Ethanol blending in India

  • India currently blends approximately 8.5 per cent ethanol with petrol.
  • It is estimated that ethanol production in India will triple to approximately 10 billion litres per year by 2025.
  • The 2G plant will play a major role in making bioethanol available for blending.
  • In addition to reducing agricultural waste incineration, it can also help meet the goal of converting waste into energy.

Moves for production

  • The first 2G ethanol biorefinery is being set up at Bathinda, Punjab.
  • Hindustan Petroleum Corporation Ltd (HPCL) plans to set up four 2G ethanol plants that will convert agricultural waste into biofuel, reducing toxic air pollution in northern India.
  • Additionally, HPCL has plans to build four plants to produce ethanol using grains, such as surplus maize, surplus rice and damaged grain.

Innovations in this field

  • An Indian company has filed a patent for loop reactor technology.
  • It is a long, serpentine tubular reactor, in which fermentable sugars are converted to ethanol with the help of brewer’s yeast.
  • This sparked an idea to come up with reactive pipeline technology, wherein the pipeline connects the sugar factories where the ethanol is produced to the blending depot at the closest oil manufacturing companies.
  • Reactive pipeline technology is poised to be a game-changer for sugar factories and grain-based distilleries since uninterrupted raw material supply is a major challenge.

Benefits offered by ethanol blending

(1) Energy security

  • The Union government has emphasized that increased use of ethanol can help reduce the oil import bill.
  • India’s net import cost stands at $551 billion in 2020-21. It is estimated that the E20 program can save the country $4 billion (Rs 30,000 crore) per annum.

(2) Emission reduction

  • Use of ethanol-blended petrol decreases emissions such as carbon monoxide (CO), hydrocarbons (HC) and nitrogen oxides (NOx), the expert committee noted.
  • Higher reductions in CO emissions were observed with E20 fuel — 50 per cent lower in two-wheelers and 30 per cent lower in four-wheelers.

Some issues to be addressed

(1) Fuel efficiency

  • There is an estimated loss of six-seven per cent fuel efficiency for four-wheelers and three-four per cent for two-wheelers when using E20, the committee report noted.
  • These vehicles are originally designed for E0 and calibrated for E10.

(2) Recalibrating engines

  • The use of E20 will require new engine specifications and changes to the fuel lines, as well as some plastic and rubber parts due to the fuel’s corrosive nature.
  • The engines, moreover, will need to be recalibrated to achieve the required power, efficiency and emission-level balance due to the lower energy density of the fuel.

Conclusion

  • The country’s target of 20 per cent ethanol blending in petrol (E20) by 2025 can play a key role in reducing crude oil imports and bolstering India’s energy independence.
  • But India may miss an earlier goal set by him in 2015 — of reducing crude oil import dependency 10 per cent by 2022.
  • The target is far from being met and the country’s import dependency is only increasing.
  • The country’s target of 20 per cent ethanol blending in petrol (E20) by 2025 can play a key role in reducing crude oil imports and bolstering India’s energy independence.

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Back2Basics: EBP Programme

  • Ethanol Blended Petrol (EBP) programme was launched in January 2003 for the supply of 5% ethanol blended petrol.
  • The programme sought to promote the use of alternative and environment-friendly fuels and to reduce import dependency for energy requirements.
  • OMCs are advised to continue according to priority of ethanol from 1) sugarcane juice/sugar/sugar syrup, 2) B-heavy molasses 3) C-heavy molasses and 4) damaged food grains/other sources.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

National Hydrogen Mission

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Hydrogen

Mains level : National Hydrogen Mission

During his I-Day speech, the PM has announced a National Hydrogen Mission and said India will become the world’s largest exporter of green hydrogen in the years to come.

National Hydrogen Mission

  • The PM’s announcement takes forward the proposal, made in the 2021 Budget, for the launch of NHM that would enable the generation of hydrogen “from green power sources”.
  • The added advantage of hydrogen is that, apart from transportation, it can be a “decarbonizing agent” for industries like chemicals, iron, steel, fertilizer and refining, transport, heat and power.
  • While the details of the NHM are yet to emerge, India has taken several exploratory steps.
  • India has been working on a pilot project on Blue Hydrogen, Hydrogen CNG (H-CNG), and Green Hydrogen.
  • Several programs are focusing to blend hydrogen with compressed natural gas for use as a transportation fuel as well as an industrial input to refineries.

Hydrogen as a fuel

  • Hydrogen is the fuel of stars and packs awesome energy. It is also the most abundant element in the universe.
  • But on Earth, it is found in complex molecules such as water or hydrocarbons.
  • Hydrogen is not a source of energy, like fossil fuels or renewable sources like sunlight and air, but an energy carrier, which means it has to be produced, or extracted, and stored before it can be used.
  • But no matter how it is used, the by-product the burning of hydrogen produces is water.

How is Hydrogen produced?

  • There are several ways of extracting hydrogen and, depending on the method, the hydrogen produced is classified as ‘grey’, ‘blue’, or ‘green’ hydrogen.
  • According to WEC, as of 2019, 96 percent of hydrogen is produced from fossil fuels via carbon-intensive processes.
  • Hydrogen thus obtained is called ‘grey’ hydrogen as the process, though not as expensive as the other methods, releases a lot of carbon dioxide.

What Is Grey, Blue, Green Of Hydrogen?

  • ‘Grey’ hydrogen becomes ‘blue’ hydrogen when the CO2 given out during its production is locked up through carbon capture and storage (CCS) processes.
  • But while the CO2 output is lowered, this process is quite expensive.
  • ‘Grey’ and ‘blue’ hydrogen, thus, are both produced by the same processes, the only difference for ‘blue’ hydrogen being that the CO2 produced is sequestered.
  • But it is ‘green’ hydrogen that governments are aiming at. This is any hydrogen that is produced from clean energy sources like renewables.
  • ‘Green’ hydrogen is released via the electrolysis of energy from renewable sources. This process, though it gives rise to no CO2 emissions, is expensive and not commercially viable yet.

Key challenges

  • Lack of infrastructure:  India does not have enough storage capacity for the current state of domestic consumption.
  • Safety concerns: Hydrogen is highly inflammable.

Way ahead

  • Developing technologies to produce ‘green’ hydrogen is cost-intensive.
  • However, falling renewable energy and fuel cell prices and stringent climate change requirements have provided an impetus for investments in this area.
  • In India, the IITs, IISc, Benaras Hindu University, Council for Scientific and Industrial Research laboratories etc. are exploring different aspects of hydrogen production.

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Also read:

[Burning Issue] India’s push for a Gas-based Economy

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Ujjwala 2.0 Scheme

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Ujjwala Scheme

Mains level : Not Much

Prime Minister has launched the second phase of the Ujjwala gas connection scheme for the poor and said it would provide the biggest relief to lakhs of migrant worker families in the country.

Ujjwala 2.0

  • Under Ujjwala 2.0 migrant workers would no longer have to struggle to get address proof documents to get the gas connections, Mr. Modi said.
  • Now migrant workers would only be required to submit a self-declaration of their residential address to get the gas connection.
  • Along with a deposit-free LPG connection, Ujjwala 2.0 will provide the first refill and a hotplate free of cost to the beneficiaries.

About the PM Ujjwala Yojana

  • Pradhan Mantri Ujjwala Yojana (PMUY) was launched in 2016, with the aim to provide Liquefied petroleum gas (LPG) connections to five crore women members of below poverty line (BPL) households in the first phase.
  • he scheme was expanded in April 2018 to include women beneficiaries from seven more categories (SC/ST, PMAY, AAY, Most backward classes, tea garden, forest dwellers, Islands).
  • In the second phase the target was expanded to eight crore LPG connections.

Significance of Ujjwala 2.0

  • LPG infrastructure has expanded manifold in the country due to the Ujjwala scheme.
  • In the last six years, more than 11,000 new LPG distribution centres have opened across the country.
  • The LPG coverage in India is now very close to becoming 100 per cent.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

No fossil fuels as usual

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Oil recovery rate

Mains level : Paper 3- Balancing the energy needs dependent on fossil fuel and environmental concerns

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.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Strategic Petroleum Reserves

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Strategic Petroleum Reserves Programme

Mains level : Oil prices volatility and its impact on India

Under Phase II of the petroleum reserve program, the Government has approved two additional commercial-cum-strategic facilities at Chandikhol (Odisha) and Padur (TN) on Public-Private Partnership (PPP) model.

Strategic Petroleum Reserves Programme

  • To ensure energy security, the govt had decided to set up 5 million metric tons (MMT) of strategic crude oil storage at three locations namely, Visakhapatnam, Mangalore, and Padur (near Udupi).
  • These strategic storages would be in addition to the existing storage of crude oil and petroleum products with the oil companies and would serve as a cushion during any supply disruptions.
  • The petroleum reserves established are strategic, and the crude oil stored in these reserves will be used during an oil shortage event, as and when declared so by the Government of India.
  • The construction of the Strategic Crude Oil Storage facilities is being managed by Indian Strategic Petroleum Reserves Limited (ISPRL), a Special Purpose Vehicle.

Why need SPR?

  • The Gulf War in 1990 caused a sharp rise in oil prices and a massive increase to India’s imports.
  • During the subsequent 1991 Indian economic crisis, foreign exchange reserves could barely finance three weeks’ worth of imports while the government came close to defaulting on its financial obligations.
  • India was able to resolve the crisis through policies that liberalized the economy. However, India continued to be impacted by the volatility of oil prices.
  • In 1998, the AB Vajpayee administration proposed building petroleum reserves as a long-term solution to managing the oil market.
  • Three storage facilities were built in underground locations in Mangalore, Visakhapatnam and Padur.

Construction of ISPR

  • The crude oil storages are constructed in underground rock caverns and are located on the East and West coasts of India.
  • Crude oil from these caverns can be supplied to the Indian Refineries either through pipelines or through a combination of pipelines and coastal movement.
  • Underground rock caverns are considered the safest means of storing hydrocarbons.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Nord Stream 2 Pipeline Project

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nord Stream 2 Pipeline

Mains level : Not Much

The US, which had previously imposed sanctions to prevent the completion of a major new gas pipeline between Russia and Germany, has now signaled its approval for the project.

Nord Stream 2 Pipeline

  • It is a system of offshore natural gas pipelines running under the Baltic Sea from Russia to Germany.
  • It includes two active pipelines running from Vyborg to Lubmin near Greifswald forming the original Nord Stream, and two further pipelines under construction running from Ust-Luga to Lubmin termed Nord Stream 2.
  • In Lubmin the lines connect to the OPAL line to Olbernhau on the Czech border and to the NEL line to Rehden near Bremen.
  • The first line Nord Stream-1 was laid and inaugurated in 2011 and the second line in 2012.
  • At 1,222 km in length, Nord Stream is the longest sub-sea pipeline in the world, surpassing the Langeled pipeline.

Why is the pipeline controversial?

  • The US believed that the project would increase Europe’s dependence on Russia for natural gas.
  • Currently, EU countries already rely on Russia for 40 percent of their gas needs.
  • The project also has opponents in eastern Europe, especially Ukraine, whose ties with Russia have seriously deteriorated in the aftermath of the Crimean conflict in 2014.
  • There is an existing land pipeline between Russia and Europe that runs through Ukraine.
  • The country feels that once Nord Storm 2 is completed, Russia could bypass the Ukrainian pipeline, and deprive it of lucrative transit fees of around $3 billion per year.
  • Ukraine also fears another invasion by Russia once the new pipeline is operational.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

OPEC+ seeks consensus on oil output

Note4Students

From UPSC perspective, the following things are important :

Prelims level : OPEC, OPEC Plus

Mains level : Global crude oil pricing mechanisms

OPEC+ has failed to reach a deal on oil output policy because the United Arab Emirates blocked some aspects of the pact.

About OPEC

  • OPEC is a permanent, intergovernmental organization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
  • It aims to manage the supply of oil in an effort to set the price of oil in the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.
  • It is headquartered in Vienna, Austria.
  • OPEC membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.
  • Today OPEC is a cartel that includes 14 nations, predominantly from the middle east whose sole responsibility is to control prices and moderate supply.

What is OPEC+?

  • The non-OPEC countries which export crude oil along with the 14 OPECs are termed as OPEC plus countries.
  • OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan.
  • Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as OPEC Plus — which now includes 11 OPEC members and 10 non-OPEC nations — that aims to shore up oil prices with production cuts.

Must read:

[Burning Issue] Oil Prices and OPEC+

Concerns for India

  • Rising oil prices are posing fiscal challenges for India, where heavily-taxed retail fuel prices have touched record highs, threatening the demand-driven recovery.
  • India imports about 84% of its oil and relies on West Asian supplies to meet over three-fifths of its demand.
  • As one of the largest crude-consuming countries, India is concerned that such actions by producing countries have the potential to undermine consumption-led recovery.
  • This would hurt consumers, especially in our price-sensitive market.

Answer this PYQ in the comment box:

Q.The term ‘West Texas Intermediate’, sometimes found in news, refers to a grade of (CSP 2020):

(a) Crude oil

(b) Bullion

(c) Rare earth elements

(d) Uranium

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Emerging crisis of obtaining Helium in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Helium and its practical uses

Mains level : Helium imports of India

India imports helium for its needs and with the U.S. appearing set to cut off exports of helium since 2021, the Indian industry stands to lose out heavily.

Helium is not just for balloons but it is the key ingredient for India’s high technology and the most sophisticated medical diagnosis.

Helium on Earth

  • Helium is a chemical element with the symbol He and atomic number 2.
  • It is a colourless, odourless, tasteless, non-toxic, inert, monatomic gas, the first in the noble gas group in the periodic table. Its boiling point is the lowest among all the elements.

Its discovery

  • In 1906 a young Englishman by the name of Moris Travers arrived in Bangalore, to take up the position of the Director of Indian Institute of Science.
  • Travers extracted helium in small quantity by heating up monazite sand abundantly available in Kerala beach, in a pioneering effort.
  • Dutch physicist Kamerlingh Onnes liquefied Helium by cooling the gas to -270 degrees Celsius.
  • It is known that Onnes collected helium gas from the springs of Bath in Baden Baden, Germany for his liquefaction experiment.

Helium in India

  • India’s Rajmahal volcanic basin is the storehouse of helium trapped for billions of years, since the very birth of our Earth from the Sun.
  • At present, researchers are mapping the Rajmahal basin extensively for future exploration and harnessing of helium.

Why India needs Helium?

  • Every year, India imports helium worth Rs 55,000 crores from the U.S. to meet its needs.
  • Helium is used in medicine, scientific research, for blimp inflation, party balloons as well as having welding applications.
  • It finds many applications, mainly in magnetic resonance imaging (MRI) scans, in rockets and in nuclear reactors.

US monopoly in Helium

  • The U.S. became the most important exporter of helium across the world.
  • It was soon realized that the U.S. was also the biggest storehouse of helium.
  • The US is now planning to switch off the export of helium from 2021.
  • Qatar is a possible exporter but acute political and diplomatic wrangles have made Qatar unreliable.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

[pib] SATAT Scheme

Note4Students

From UPSC perspective, the following things are important :

Prelims level : SATAT Scheme, CBG

Mains level : SATAT scheme

Oil and Gas Marketing Companies (OGMCs) are inviting potential entrepreneur to procure Compressed Bio Gas (CBG) under the SATAT scheme.

Try this MCQ:

Q.SATAT is an initiative of the Government of India, aims at:

(a) Promoting Self Help Groups in rural areas

(b) Providing financial and technical assistance to young start-up entrepreneurs

(c) Promoting affordable transportation

(d) Providing affordable and quality education to the citizens for free

SATAT Scheme

  • SATAT stands for Sustainable Alternative Towards Affordable Transportation.
  • It is an initiative aimed at setting up Compressed Bio-Gas production plants and makes them available in the market for use in automotive fuels by inviting Expression of Interest from potential entrepreneurs.
  • The initiative was launched in October 2018 by the Ministry of Petroleum & Natural Gas in association with the PSUs- Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd.

Its implementation

  • CBG plants are proposed to be set up mainly through independent entrepreneurs.
  • CBG produced at these plants will be transported through cascades of cylinders to the fuel station networks of OMCs for marketing as a green transport fuel alternative.
  • The 1,500-strong CNG stations network in the country currently serves about 32 lakh gas-based vehicles.
  • The entrepreneurs would be able to separately market the other by-products from these plants, including bio-manure, carbon-dioxide, etc., to enhance returns on investment.
  • So far 9 CBG plants have been commissioned and started supply of CBG under the scheme.
  • These plants are located in Andhra Pradesh (1No.), Gujarat (3 No.), Haryana (1 No.), Maharashtra (3 No.) and Tamil Nadu (1No.).

Benefits of the programme

There are multiple benefits from converting agricultural residue, cattle dung and municipal solid waste into CBG on a commercial scale:

  • Responsible waste management, reduction in carbon emissions and pollution
  • Additional revenue source for farmers
  • Boost to entrepreneurship, rural economy and employment
  • Support to national commitments in achieving climate change goals
  • Reduction in import of natural gas and crude oil
  • Buffer against crude oil/gas price fluctuations

Back2Basics: Compressed Bio Gas (CBG)

  • Biogas is produced naturally through a process of anaerobic decomposition from waste / bio-mass sources like agriculture residue, cattle dung, sugarcane press mud, municipal solid waste, sewage treatment plant waste, etc.
  • After purification, it is compressed and called CBG, which has a pure methane content of over 95%.
  • CBG is exactly similar to the commercially available natural gas in its composition and energy potential.
  • With calorific value (~52,000 KJ/kg) and other properties similar to CNG, CBG can be used as an alternative, renewable automotive fuel.
  • Given the abundance of biomass in the country, CBG has the potential to replace CNG in automotive, industrial and commercial uses in the coming years.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

What is OPEC+?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : OPEC+

Mains level : India's oil import

India, the world’s third-biggest oil importer, has said that the decision by major producers to continue with output cuts as prices move higher could threaten the consumption led-recovery in some countries.

Try this PYQ:

Q.The term ‘West Texas Intermediate’, sometimes found in news, refers to a grade of

(a) Crude oil

(b) Bullion

(c) Rare earth elements

(d) Uranium

What is the news?

  • The Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group known as OPEC+, agreed not to increase supply in April as they await a more substantial recovery in demand amid the COVID-19.
  • Crude prices rose after the announcement and are up 33% this year (meanwhile India flaring up prices to 100 Rs/litres for Petrol).

What is OPEC+?

  • The non-OPEC countries which export crude oil along with the 14 OPECs are termed as OPEC plus countries.
  • OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan.
  • Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as OPEC Plus — which now includes 11 OPEC members and 10 non-OPEC nations — that aims to shore up oil prices with production cuts.

Concerns for India

  • Rising oil prices are posing fiscal challenges for India, where heavily-taxed retail fuel prices have touched record highs, threatening the demand-driven recovery.
  • India imports about 84% of its oil and relies on West Asian supplies to meet over three-fifths of its demand.
  • As one of the largest crude-consuming countries, India is concerned that such actions by producing countries have the potential to undermine consumption-led recovery.
  • This would hurt consumers, especially in our price-sensitive market.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Why are Petrol, Diesel prices rising?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Impact of fuel prices on inflation

Mains level : Global oil price dynamics

Diesel and petrol prices have hit record highs across the country.

Govt explanation

  • The government reasons that global crude oil prices have risen by more than 50 per cent to over $63.3 per barrel since October, forcing oil retailers to increase pump prices.
  • That, however, is only partly true.
  • Indian consumers are already paying much higher than what they were paying last January, even though crude prices are yet to reach levels of early last year.

Note: Petrol and diesel do not come under the purview of goods and services tax (GST).

Fuel price dynamics in India

  • Retail petrol and diesel prices are in theory decontrolled — or linked to global crude oil prices.
  • It means that if crude prices fall retails prices should come down too, and vice versa.
  • But this does not happen in practice, largely because oil price decontrol is a one-way street in India.
  • When global crude oil prices fall and prices slide, the government slaps fresh taxes and levies to ensure that it rakes in extra revenues.
  • The consumer should have ideally benefited by way of lower pump prices, is forced to either shell out what she’s already paying or spend even more for every litre of fuel.
  • The main beneficiary in this subversion of price decontrol is the government.

Why crude oil prices are rising now?

  • Prices collapsed in April 2020 after the pandemic spread around the world, and demand fell away.
  • But as economies have reduced travel restrictions and factory output has picked up, global demand has improved, and prices have been recovering.
  • The controlled production of crude amid rising demand has been another key factor in boosting oil prices, with Saudi Arabia voluntarily cutting its daily output.

What is the impact of taxes on retail prices of auto fuels?

  • The central government hiked the central excise duty on petrol to Rs 32.98 per litre during the course of last year from Rs 19.98 per litre at the beginning of 2020.
  • It increased the excise duty on diesel to Rs 31.83 per litre from Rs 15.83 over the same period to boost revenues as economic activity fell due to the pandemic.
  • A number of states have also hiked sales tax on petrol and diesel to shore up their revenues.

How much tax do we pay now?

Currently, state and central taxes amount to around 180 per cent of the base price of petrol and 141 per cent of the base price of diesel in Delhi.

How will these hikes impact inflation?

  • Experts note that the impact of rising fuel inflation has been counterbalanced by declining food inflation, but that consumers with greater expenditure on travel are feeling the pinch of higher prices.
  • Rising fuel inflation may pinch consumers who have to travel further for work and have access to affordable cereals etc.
  • The urban population would be more impacted by rising fuel prices than the rural population — however, a weak monsoon may lead to rural India being hit as farmers are forced to rely more on diesel-powered irrigation.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Significance of crude oil crossing $60 a barrel

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Crude oil prices dynamics

Mains level : India's oil import bill

The price of Brent crude crossed the $60 per barrel mark after over a year on the back of oil-producing countries maintaining production cuts due to lockdowns.

What is Crude Oil?

  • Petroleum also known as crude oil and oil is a naturally occurring, yellowish-black liquid found in geological formations beneath the Earth’s surface.
  • It is commonly refined into various types of fuels.
  • Components of petroleum are separated using a technique called fractional distillation, i.e. separation of a liquid mixture into fractions differing in boiling point by means of distillation, typically using a fractionating column.
  • It consists of naturally occurring hydrocarbons of various molecular weights and may contain miscellaneous organic compounds.
  • The name petroleum covers both naturally occurring unprocessed crude oil and petroleum products that are made up of refined crude oil.

Why has the price of crude oil risen sharply?

  • Major oil-producing countries had cut oil production last year amid a sharp fall in demand due to the Covid-19 pandemic.
  • However oil-producing countries have continued to limit production despite an increase in prices with Saud Arabia cutting its own oil production by 1 million barrels per day to strengthen crude oil prices.
  • Expectations of strong improvements in demand with the global rollout of the Covid-19 vaccine have also put upward pressure on crude oil prices according to experts.

How will this impact India?

  • The rise in the price of Brent crude will lead to an increase in India’s import bill.
  • India imports of 80 per cent of its crude oil requirements and the average price of Indian basket of crude oil has already risen to $54.8 barrel for January.
  • The upward move in crude prices will also put upward pressure on petrol and diesel prices across the country which is already at all-time highs.

Signs of no remedy

  • The government had hiked central taxes on petrol and diesel by Rs 13 per litre and Rs 11 per litre in 2020 to boost revenues amid lower economic activity.
  • The increase in taxes had prevented consumers from getting the benefit of low fuel prices as international prices crashed during the first quarter of last fiscal.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

[pib] International Energy Agency (IEA)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : International Energy Agency

Mains level : Not Much

The Framework for Strategic Partnership between the International Energy Agency (IEA) members and India was signed yesterday to strengthen mutual trust and cooperation & enhance global energy security, stability and sustainability.

Try this MCQ:

Q.The Global Energy Transition Index recently seen in news is released by:

a) International Energy Agency (IEA)

b) World Economic Forum (WEF)

c) International Renewable Energy Agency (IRENA)

d) International Solar Alliance

International Energy Agency

  • The IEA is a Paris-based autonomous intergovernmental organization established in the framework of the Organisation for Economic Co-operation and Development (OECD) in 1974 in the wake of the 1973 oil crisis.
  • It was initially dedicated to responding to physical disruptions in the supply of oil, as well as serving as an information source on statistics about the international oil market and other energy sectors.
  • At the end of July 2009, IEA member countries held a combined stockpile of almost 4.3 billion barrels of oil.
  • They are required to maintain total oil stock levels equivalent to at least 90 days of the previous year’s net imports.
  • The IEA acts as a policy adviser to its member states but also works with non-member countries, especially China, India, and Russia.
  • The Agency’s mandate has broadened to focus on the “3Es” of effectual energy policy: energy security, economic development, and environmental protection.

Greater role play

  • The latter has focused on mitigating climate change.
  • The IEA has a broad role in promoting alternate energy sources (including renewable energy), rational energy policies, and multinational energy technology co-operation.

Why need a partnership with IEA?

  • This partnership will lead to an extensive exchange of knowledge and would be a stepping stone towards India becoming a full member of the IEA.
  • India and the IEA members will work as Energy Security, Clean & Sustainable Energy, Energy Efficiency, Enhancing petroleum storage capacity in India, Expansion of gas-based economy in India, etc.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

[pib] Kochi – Mangaluru Natural Gas Pipeline

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Natural Gas

Mains level : Natural gas as an alternative fuel

PM will today dedicate the Kochi – Mangaluru Natural Gas Pipeline to the nation.

Try this PYQ:

Q. Consider the following statements:

  1. Natural gas occurs in the Gondwana beds.
  2. Mica occurs in abundance in Kodarma.
  3. Dharwars are famous for petroleum.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 2 only

(c) 2 and 3 only

(d) None

Kochi – Mangaluru Pipeline

  • The 450 km long pipeline has been built by GAIL (India) Ltd.
  • It has a transportation capacity of 12 Million Metric Standard Cubic Metres per day.
  • It will carry natural gas from the Liquefied Natural Gas (LNG) Regasification Terminal at Kochi (Kerala) to Mangaluru (Dakshina Kannada district, Karnataka).
  • It will pass through Ernakulam, Thrissur, Palakkad, Malappuram, Kozhikode, Kannur and Kasaragod districts.

Its significance

  • The event marks an important milestone towards the creation of ‘One Nation One Gas Grid’.
  • The pipeline will supply environment-friendly and affordable fuel in the form of Piped Natural Gas (PNG) to households and Compressed Natural Gas (CNG) to the transportation sector.
  • It will also supply Natural Gas to commercial and industrial units across the districts along the pipeline.
  • Consumption of cleaner fuel will help in improving air quality by curbing air pollution.

Back2Basics: Natural Gas

  • Natural gas is a fossil fuel source consisting primarily of methane.
  • It is the cleanest among all the available fossil fuels.
  • It is used as a feedstock in the manufacture of fertilizers, plastics and other commercially important organic chemicals as well as used as a fuel for electricity generation, heating purpose in industrial and commercial units.
  • Natural gas is also used for cooking in domestic households and a transportation fuel for vehicles.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Gas Production in Krishna-Godavari Basin

Note4Students

From UPSC perspective, the following things are important :

Prelims level : KG basin, Natural Gas

Mains level : Oil and gas reserves in KG basin

Reliance Industries Ltd and BP (British Petroleum) have announced the start of gas production from the R cluster of the KG Basin, the deepest off-shore gas field in Asia.

Must read

https://www.civilsdaily.com/burning-issue-natural-gas-marketing-reforms/

Krishna-Godavari Basin

  • The Krishna Godavari Basin is a proven petroliferous basin of continental margin located on the east coast of India.
  • Its onland part covers an area of 15000 sq. km and the offshore part covers an area of 25,000 sq. km up to 1000 m isobath.
  • The basin contains about 5 km thick sediments with several cycles of deposition, ranging in age from Late Carboniferous to Pleistocene.
  • The major geomorphologic units of the Krishna Godavari basin are Upland plains, Coastal plains, Recent Flood and Delta Plains.

Minerals found

  • KG inland and offshore basins have good prospects of tight oil and tight gas reserves from the conducted field studies.
  • The first gas discovery in the basin was in 1983.
  • Most of the conventional wells drilled and operated have a shorter lifespan than envisaged life and with erratic production.
  • This may be due to drilling of conventional wells in tight oil and gas fields without horizontal drilling in the shale rock formations and hydraulic fracturing.

Note: Tight gas and tight oil are produced from reservoir rocks with such low permeability that considerable hydraulic fracturing is required to harvest the well at economic rates.

The KGD6 block

  • Krishna Godavari Dhirubhai 6 (KG-D6) was Reliance’s first offshore gas field development and its first underwater discovery.
  • It was also India’s largest deposit of natural gas and the largest such discovery in the world in 2002.
  • The project takes its name from India’s Krishna-Godavari Basin, which covers more than 19,000 square miles (50,000 square kilometres) in Andhra Pradesh and production block D6 in the Bay of Bengal.

Why is this important?

  • The R cluster, along with the Satellite Cluster and MJ gas fields in the KG Basin is expected to produce around 30 MMSCMD (million standard cubic metres per day) of natural gas.
  • This is about 15% of India’s projected demand for natural gas by 2023.

Do they impact India’s energy security efforts?

  • The three projects are a key part of the plan to boost domestic production of natural gas to increase the share of natural gas in India’s energy basket from 6.2% now to 15% by 2030.
  • Increased domestic production of natural gas is an important aspect of reducing India’s dependence on imports and improves energy security.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

[pib] XP100: The premium grade Petrol

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Octane number

Mains level : India's oil sector

The Ministry of Petroleum & Natural Gas has launched world-class premium-grade Petrol (with Octane number 100) in the country.

What is XP100?

  • It is petrol developed by Indian Oil with octane number 100.
  • The availability of XP100 puts India in an elite group of countries, having access to such high-quality oil. It will provide high quality and power to the engine.
  • It will be rolled out in 15 identified cities across the country in two phases.
  • Worldwide, 100 Octane petrol has a niche market for luxury vehicles that demand high performance and is available only in six countries like Germany, USA, etc.

Try this PYQ:

Q.Lead, ingested or inhaled, is a health hazard. After the addition of lead to petrol has been banned, what still are the sources of lead poisoning?

  1. Smelting units
  2. Pens pencils
  3. Paints
  4. Hair oils and cosmetics

Select the correct answer using the codes given below:

(a) 1, 2 and 3 only

(b) 1 and 3 only

(c) 2 and 4 only

(d) 1, 2, 3 and 4

What is Octane numbering of Petrol?

  • Octane number, also called Antiknock Rating, a measure of the ability of a fuel to resist knocking when ignited in a mixture with air in the cylinder of an internal-combustion engine.
  • Engine knock is a tapping, pinging sound that gets louder and more obnoxious as we accelerate.
  • The octane number is determined by comparing, under standard conditions, the knock intensity of the fuel with that of blends of two reference fuels: iso-octane, which resists knocking, and heptane, which knocks readily.
  • The octane number is the percentage by volume of iso-octane in the iso-octane–heptane mixture that matches the fuel being tested in a standard test engine.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

What is OPEC+?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : OPEC + members

Mains level : Global oil price dynamics

Oil prices jumped by close to 10% for its biggest daily gain in almost six months after news of a highly effective vaccine against COVID-19 and Saudi Arabia’s assurance that an OPEC+ oil output deal could be adjusted to balance the market.

About OPEC

  • OPEC stands for Organization of the Petroleum Exporting Countries.
  • It is a permanent, intergovernmental organization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
  • It aims to manage the supply of oil in an effort to set the price of oil in the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.
  • It is headquartered in Vienna, Austria.
  • OPEC membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.
  • Today OPEC is a cartel that includes 14 nations, predominantly from the middle east whose sole responsibility is to control prices and moderate supply.

What is OPEC+?

  • The non-OPEC countries which export crude oil along with the 14 OPECs are termed as OPEC plus countries.
  • OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan.
  • Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as OPEC Plus — which now includes 11 OPEC members and 10 non-OPEC nations — that aims to shore up oil prices with production cuts.

Why OPEC plus came into existence?

  • When Russia concluded the Vienna Agreement in 2016, the Russian leadership believed that it would help prepare the country for the Russian presidential elections in March 2018.
  • Higher oil prices ensured the Kremlin’s financial capacity to lead a successful electoral campaign.
  • This changed the regime’s priorities – from satisfying the needs of the general population to ensuring the sustainability of the Kremlin’s alliance with powerful tycoons, including that controlling oil production.
  • For Saudi Arabia, turning what had been an ad hoc coalition into a formal group provides a hedge (protection) against future oil-market turbulence.
  • For Russia, the formalization of the group helps expand Putin’s influence in the Middle East
  • However, both reportedly aimed at causing a drop in oil prices in order to hit US shale producers, who have continued to benefit from OPEC production cuts by expanding their market share.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

What is Winter Diesel?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Winter grade diesel

Mains level : Not much

India’s armed forces may soon be using winter diesel for operations in high altitude areas such as Ladakh, where winter temperatures plummet to extremely low as -30° Celsius.

This year BS-VI compliant fuel was in news. Try differentiating the Winter Diesel with the BS-VI fuel.

What is Winter Diesel?

  • Winter diesel is a specialised fuel that was introduced by Indian Oil Corp. Ltd. last year specifically for high altitude regions and low-temperature regions such as Ladakh, where ordinary diesel can become unusable.
  • The flow characteristics of regular diesel change at such low temperatures and using it may be detrimental to vehicles.
  • Winter diesel which contains additives to maintain lower viscosity can be used in temperatures as low as -30°C and that besides a low pour point, it had higher cetane rating — an indicator is the combustion speed of diesel and compression needed for ignition.
  • It has lower sulphur content, which would lead to lower deposits in engines and better performance.

Back2Basics: BS-VI fuel

  • Sulphur content in fuel is a major cause for concern. Sulphur dioxide released by fuel burning is a major pollutant that affects health as well.
  • BS-VI fuel’s sulphur content is much lower than BS-IV fuel.
    It is reduced to 10 mg/kg max in BS-VI from 50 mg/kg under BS-IV.

This reduction makes it possible to equip vehicles with better catalytic converters that capture pollutants. However, BS-VI fuel is expected to be costlier that BS-IV fuel.

With inputs from:

[pib] Winter-grade diesel

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Why India is producing less and less oil?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : OALP

Mains level : India's oil sector

India’s crude oil production fell 7.1% in May 2020 compared to May 2019 on the back of low demand due to the Covid-19 pandemic.

Practice question for mains:

Q.Discuss the impact of Covid-19 pandemic on the global crude oil dynamics.

Crude oil exploration in India

  • Crude oil production in India is dominated by two major state-owned exploration and production companies, ONGC and Oil India.
  • These companies are the key bidders for crude oil block auctions and end up acquiring most of the blocks that are put up for auction in India.

Falling production

  • Domestic production of crude has been falling every year since FY 2012.
  • This has led to a steady climb in the proportion of imports in domestic crude oil consumption from 81.8% in 2012 to 87.6% in 2020.

Why is production falling?

  • Most of India’s crude oil production comes from ageing wells that have become less productive over time.
  • A lack of new oil discoveries in India coupled with a long lead time to begin production from discovered wells has led to a steady decline in India’s crude oil production making dependency on imports.
  • The output of these ageing wells is declining faster than new wells can come up according to experts.
  • Domestic exploration companies are attempting to extend the life of currently operational wells.

Why are there not more private players?

  • There has been a lack of interest in exploration and production in India from major private players, particularly those based abroad.
  • According to experts, this is because of long delays in the operationalization of production even after an oil block is allotted due to delays in approvals.
  • Some of the key approvals which are required to begin production include environmental clearances and approval by the Directorate General of Hydrocarbons after the allottee completes a seismic survey and creates a field development plan.

What policy changes could help?

  • Existing public and private sector players have asked for reduced levies of oil production including oil cess, royalties, and profit petroleum especially when crude oil prices are below $45/barrel.
  • Experts say the requirement to pay royalties to the government at low crude prices can make it unviable for these companies to invest in further exploration and production.

OALP could help

  • The government introduced the Open Acreage Licensing Programme (OALP) in 2019 to allow companies to carve out blocks that they are interested in and with lower royalties and no oil cess.
  • However, existing players are calling for a relaxation of royalties and oil cess on block allotted under previous policies.
  • The Chinese government offered a floor price to oil producers insulating them somewhat from any sharp falls in international crude prices.
  • This kind of policy at least allows for a company to have a fixed worst-case scenario for the sale of crude oil attracts more investment in exploration and production.

Back2Basics: OALP

  • The OALP, a part of the government’s Hydrocarbon Exploration and Licensing Policy (HELP), gives exploration companies the option to select the exploration blocks on their own, without having to wait for the formal bid round from the Government.
  • The company then submits an application to the government, which puts that block up for bid.
  • OALP offers single license to explore conventional and unconventional oil and gas resources to propel investment in and provide operational flexibility to the investors.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Indian Gas Exchange (IGX): the first nationwide online delivery-based gas trading platform

Note4Students

From UPSC perspective, the following things are important :

Prelims level : IGX

Mains level : Utility of the IGX

India’s first gas exchange — the Indian Gas Exchange (IGX) — was launched by the Ministry of Petroleum. The exchange is expected to facilitate transparent price discovery in natural gas, and facilitate the growth of the share of natural gas in India’s energy basket.

Note the following things with caution from the newscard:

  • IGX allows only imported LNG and not domestically produced natural gas.

  • India’s import of LNG

  • GAIL

  • Taxation of LNG

What is IGX?

  • The IGX is a digital trading platform that will allow buyers and sellers of natural gas to trade both in the spot market and in the forward market for imported natural gas.
  • It will allow trading across three hubs —Dahej and Hazira in Gujarat, and Kakinada in Andhra Pradesh.
  • Imported Liquefied Natural Gas (LNG) will be regassified and sold to buyers through the exchange, removing the requirement for buyers and sellers to find each other.
  • The exchange also allows much shorter contracts – for delivery on the next day, and up to a month – while ordinarily contracts for natural gas supply are as long as six months to a year.
  • This will mean that buyers do not have to contact multiple dealers to ensure they find a fair price.

Will domestically produced natural gas also be bought and sold on the exchange?

  • The price of domestically produced natural gas is decided by the government. It will not be sold on the gas exchange.
  • However, following appeals by domestic producers that the prices set by the government are not viable given the cost of exploration and production in India.
  • A new gas policy will include reforms in domestic gas pricing and will move towards more market-oriented pricing.

Will this make India more import-dependent?

  • Domestic production of gas has been falling over the past two fiscals as current sources of natural gas have become less productive.
  • Domestically produced natural gas currently accounts for less than half the country’s natural gas consumption; imported LNG accounts for the other half.
  • LNG imports are set to become a larger proportion of domestic gas consumption as India moves to increase the proportion of natural gas in the energy basket from 6.2% in 2018 to 15% by 2030.

What regulatory change is required?

  • Currently, the pipeline infrastructure necessary for the transportation of natural gas is controlled by the companies that own the network.
  • State-owned GAIL owns and operates India’s largest gas pipeline network, spanning over 12,000 km.
  • An independent system operator for natural gas pipelines would help ensure transparent allocation of pipeline usage, and build confidence in the minds of buyers and sellers about neutrality in the allocation of pipeline capacity.
  • Experts have also called for natural gas to be included in the Goods and Services Tax (GST) regime to avoid buyers having to deal with different levies such as VAT across states when purchasing natural gas from the exchange.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

How fuel price decontrol works — or why consumers always lose out

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Sweet and Sour grade crude oil

Mains level : Fuel prices hike and their impact

India fuel prices are somewhat stagnant these days despite spikes in global crude oil prices. The key beneficiary in this subversion of price decontrol is the government. The consumer is a clear loser, alongside fuel retailing companies as well. Let’s see how.

Do you know?

Grade of crude oil processed in Indian refineries:  ‘Sour grade’ (Oman and Dubai average) and ‘Sweet grade’ (Brent)

Oil and India

  • In theory, retail prices of petrol and diesel in India are linked to global crude prices.
  • There is supposed to be complete decontrol of consumer-end prices of auto fuels and others such as the aviation turbine fuel or ATF.
  • It means that if crude prices fall, as has largely been the trend since February, retails prices should come down too, and vice versa.

So, why is there a divergence in the trends?

  • Oil price decontrol is a one-way street in India — when global prices go up, this is passed on to the consumer, who has to cough up more for every litre of fuel consumed.
  • But when the reverse happens and prices go down, the government — almost by default — slaps fresh taxes and levies to ensure that it rakes in extra revenues, even as the consumer, who should have ideally benefited by way of lower pump prices.

How does decontrol work?

  • Price decontrol essentially offers fuel retailers such as Indian Oil, HPCL or BPCL the freedom to fix prices of petrol or diesel based on calculations of their own cost and profits.
  • Fuel price decontrol has been a step-by-step exercise, with the government freeing up prices of ATF in 2002, petrol in the year 2010 and diesel in October 2014.
  • Prior to that, the Government used to intervene in fixing the price at which the fuel retailers used to sell diesel or petrol.
  • While fuels such as domestic LPG and kerosene still are under price control, for other fuels such as petrol, diesel or ATF, the price is supposed to be reflective of the price movements of the so-called Indian basket of crude oil.

Are India’s taxes on fuels high? Obviously, Yes!

  • On May 5, the Centre announced one of the steepest ever hikes in excise duty by Rs 13 per litre on diesel and Rs 10 per litre on petrol, following up on another round of sharp hikes in the first week of March.
  • All of this effectively cements India’s position as the country with among the highest taxes on fuel.
  • Prior to the increase in excise duty (in February 2020), the government, centre plus states was collecting around 107 per cent taxes, (Excise Duty and VAT) on the base price of petrol and 69 per cent in the case of diesel.
  • With the second revision in excise duty in May, the government is collecting around 260 per cent taxes, (Excise Duty and VAT) on the base price of petrol and 256 per cent in the case of diesel (as on 6th May 2020), according to estimates by CARE Ratings.
  • In comparison, taxes on fuels as a percentage of pump prices was around 65 per cent of the retail price in Germany and Italy, 62 per cent in the UK, 45 per cent in Japan and under 20 per cent in the US.

Do OMCs also benefit?

  • The only entity that benefits at the consumer’s expense is the government — in fact, both the Central and state governments.
  • OMCs, interestingly, are also among the losers from the sharp downward gyrations in oil prices.
  • The problem for companies such as IOC or BPCL is that a continuous slide in fuel prices leads to the prospect of inventory losses.
  • It is a technical term for the losses incurred when crude oil prices start falling and companies that have sourced the oil at higher prices discover that the prices have tumbled by the time the product reaches the refinery.
  • Including both crude oil and products, companies such as IOC keep an inventory of about 20-50 days.

Also read:

[Burning Issue] Oil Prices and OPEC+

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Is India prepared for crude oil eventualities?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Import of crude oil and its proportion in total consumption.

Mains level : Paper 3- Energy security.

The era we are living in is reigned by the uncertainties. And the oil market is not immune to these uncertainties. Against this background, India’s energy security is discussed in this article. Switching to the “just in case” needs with respect to crude oil is suggested by the author. But, that would require capital. So, how could the problem of capital be solved? Read the article to know…

Switching from just in time to just in case

  • The post-COVID “world (will be) switching from just in time to just in case”  said economist Alan Kirman.
  • This is more so for the Indian petroleum sector.
  • The decision-makers of this sector should switch to a “just in case” policy mode.

Oil market: Land full of uncertainties

  • The oil market is in no man’s land. Few speak with conviction about its future trajectory.
  • Last month, it dropped into negative territory for a day in the USA.
  • But today the price of the same crude quality is above $30/barrel.
  • If one reads the commentary of experts, some predict that prices will soon cross $50/barrel while some predict price-crash to below $20/barrel.
  • The fine print of these reports is always caveated with the disclaimer, “it all depends” on one or more of the comparably uncertain variables.
  • These variables include economic growth, geopolitics — US-China relations, the timing of the development of an anti-COVID vaccine or a combination of all these variables.
  • The fact is no one really knows how the petroleum sector will fare in the “new normal” of the post-COVID world.

The problems policy-makers face: some known, some unknown

  • Policy-makers know that irrespective of the twists and turns in the petroleum market, India will need fossil fuels (coal, oil and gas) to drive its economic growth for at least the next decade, if not longer.
  • And that a sizeable percentage of these requirements will have to be imported.
  • The country does not have the geology to expect gushers especially in an environment of volatile (and relatively low) oil prices.
  • What must also be discomforting is the “known unknown” of the post-COVID stress.
  • They know that COVID has knocked the props from under the Indian economy.
  • They also know that every petroleum company, irrespective of whether it is in the private or public sector, will face an increasingly uncertain and challenging future business environment.
  • What they do not know is the nature of these challenges, and therefore, the conditions, sine qua non, for managing them.

Let’s look at some facts and figures of India’s crude oil requirements

  • India consumes around 50,00,000 barrels of crude oil every day.
  • Of that, it imports approximately 45,00,000 barrels/day making the country the third-largest crude market in the world.
  • Every month, on average, 70 loaded VLCC (very large crude carriers ) — accounting for 10 per cent of the global tanker market — bring crude oil to India.
  • Approximately 60 per cent of this oil is discharged in and around the Jamnagar area and then carried by pipelines to refineries in Jamnagar, Mathura, Panipat, Bina and Bhatinda.
  • And 50 per cent or so is sourced from Saudi Arabia, Kuwait, Abu Dhabi, Iran and Iraq.
  • It is against this background of post-COVID uncertainties and above facts India should consider switching to “just in case” policy mode.

Why should India consider switching to “just in case” policy mode?

We should analyse this by considering two scenarios

  • ONGC/OIL are strategically important PSUs.
  • Few have questioned the support to these two companies and the importance of harnessing our indigenous oil and gas reserves.
  • Until now, this support has been premised on the view that oil supplies are relatively scarce and that prices will trend upwards.

1) Low oil prices scenario

  • 1) We now need to ask: What if, “just in case” the oil market is structurally oversupplied and prices fall to such low levels that it makes no commercial sense for ONGC/OIL to expend public resources on “ high risk, high cost” exploration?
  • Oil and gas are, after all, tradables and can be purchased on the high seas.
  • Should they not, given this possibility, contemplate redefining their core purpose and perhaps pivot away from oil and gas towards clean energy?

2) Choking of supply lines scenario

  • Looked at through a different lens but with a “just in case” mindset, the preponderance of crude supplies sourced from countries facing deep political, economic and social tensions raises the question:
  • What if these domestic problems choked our access?
  • How would we manage the disruption?
  • Our decision-makers have worried about supply security for decades.
  • But the circumstances created by COVID are new.
  • The issue of strategic reserves could, for instance, acquire a different hue.
  • We have currently 11 days of reserve cover (5.33 million tonnes) with plans to increase it to 24 days (11.83 million tonnes).
  • Were we to decide to build up these reserves to levels comparable to other countries of between 70 to 100 days of import cover, the issue would be capital.
  • Given the slowdown of the economy and the pressures on the exchequer, the government would not have the financial resources to invest in the creation of additional facilities.
  • The only way this financial hurdle could be overcome is if the government and the private sector invest jointly.
  • This collaborative option would have to be considered to counter the “just in case” contingency of prolonged and major disruption.
  • And if indeed such an option were acceptable, it could be extended to cover trading, crude purchases, co-freighting, subject of course to anti-trust and competition rules.

Consider the example to understand the importance of “just in case” thinking

  • An example to embed the importance of “just in case” thinking can be drawn from the geopolitics of our neighbourhood.
  • What if the relations between India/Pakistan/China took an ugly turn?
  • What security measures should we contemplate to protect the petroleum assets located in Mumbai and Jamnagar?

Consider the question “Over the decades, India has been grappling with the issue of energy security. With the rising uncertainties around the world, the issue has gained more prominence. In light of this, suggest the ways to tide over the disruption in oil supplies.”

Conclusion

In the backdrop of COVID, when all hands on decks are needed to tackle the “urgent” task of reviving the economy, the government must not, in the process, lose sight of the “importance” of creating, if nothing else, the mindset of preparedness to respond to “just in case outcomes”.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Sharp fall in oil prices is opportunity for India to increase stockpile

Note4Students

From UPSC perspective, the following things are important :

Prelims level : SPR

Mains level : Paper 3- Importance of SPR , issues with it and need for the diversification.

This article highlights the opportunity that the sharp drop in the oil prices presents to India. It also highlights several issues with India’s strategic petroleum reserves and suggests ways to deal with them. We have covered an article from livemint on the same topic in the past week.

Negative price in the international market for WTI crude oil

  • Oil prices continue to decline globally, with crude hitting multi-decade lows, as global demand evaporates.
  • Earlier last week, in unprecedented price action, the near-month contract for West Texas Intermediate (WTI) sweet crude oil dropped to -$37.63 a bbl.
  • A negative price has never before been registered for a major global crude oil benchmark.
  • The extreme price action is a signal that there is a global oil glut with few places to store oil.
  • Global oil markets have been severely disrupted.
  • While WTI does not feature in India’s basket, Brent Crude Oil, which does, is trading around $25 a barrel, the lowest in 18 years.

Price of oil: The silver lining of the future recovery

  • Even as India suffers from a lockdown, a silver lining for future recovery and reconstruction is the price of oil.
  • Given India’s growth aspirations and lack of self-sustaining oil production, a sharp reduction in oil prices is a bonanza.
  • Normally, reduced oil prices would translate into surplus for the consumers and a fiscal bonus for the government through increased tax collections.
  • However, given that the demand for petrol has slumped, those gains will not accrue right away.
  • Opportunity for India: India should look at this as an opportunity to strengthen its energy security by buying oil and filling up our Strategic Petroleum Reserves (SPR).
  • Considering that India was the third-largest consumer of energy in the world, as well as the third-largest importer of oil in 2018, we are particularly vulnerable to oil price fluctuations.
  • The dramatic reduction in oil prices offers a once-in-a-generation opportunity for us to fill up our reserves in an extremely cost-effective way.

India’s Strategic Petroleum Reserve (SPR) Programme

  • Currently, we do maintain an emergency stockpile of oil reserves: Under the existing Strategic Petroleum Reserves programme, India claims to have 87 days of reserves.
  • Out of this, refiners maintain 65 days of oil storage and the rest of the reserves are held in underground salt caverns maintained by Indian Strategic Petroleum Reserves Limited (ISPRL).
  • The existing and planned capacity for the underground reserves is 10 and 12 days of import cover for crude oil respectively.

Following point highlights the importance and various issues with India’s Strategic Petroleum Reserves (SPR). SPR plays an important role in India’s energy security.  A question based on its role may be asked by the USPC “Assess the importance of Strategic Petroleum Reserves for India and what are the issues associated with that need to be improved?”

Issues with the strategic reserves

  • First, capacity does not directly translate into utilisation, which is partly because oil is an expensive commodity most days of the year.
  • In 2019, the average closing price of a barrel of crude was $57.05.
  • In 2018, it was $64.90, and in 2017, U$50.84.
  • Of the existing 10 days of capacity, only about 50 per cent is utilised.
  • The second issue is with regard to the refinery holdings.
  • In India, the SPR arrangement between the oil refineries and the Union or state governments is not specified well, though most of the refineries that hold stock are publicly-owned companies.
  • In fact, a breakdown of which refineries hold SPR and in what form (crude or refined) or information about where they are located is not publicly available.

Need for transparency in relation to SPR

  • The first step, therefore, should be to introduce transparency and accountability in relation to the SPR.
  • The procedures, protocols and facts about Indian SPR storage require greater public and parliamentary scrutiny, just like India’s other strategic reserves (for instance, foreign exchange).
  • For this, there should be timely and reliable dissemination of information.
  • Instead, it is now shrouded in secrecy.
  • The ambiguity surrounding mobilisation process: The lack of transparency around our SPR holdings is compounded by the ambiguity surrounding the mobilisation process.
  • SPR reserves are meant to be used in emergencies, where time is likely to be of the essence.
  • The SPR mobilisation process could be made more efficient by laying out designated roles for different agencies to avoid redundancies in times of crisis.
  • There should be role and process clarity regarding SPR mobilisation.
  • For instance, to begin with, there should be clarity on who (or which agency) can define an emergency and therefore order a mobilisation.

Diversification of SPR

  • Further, in order to mitigate risks better, India should look to diversify its SPR holdings.
  • Diversification can be 1)Based on geographical location (storing oil either domestically or abroad), storage location (underground or overground) and 2) Product type (oil can be held in either crude or refined form).
  • Storage and transportation costs could be saved by diversifying geographically.
  • 3) Diversification could also be in the form of ownership — either publicly owned through ISPRL or by private oil companies, such as ADNOC of Abu Dhabi.
  • The private companies could fill up the SPR when prices are low and take advantage of price arbitrage.
  • This could achieve a degree of price stability and reduce the cost for India to buy such large quantities of oil.
  • The only requirement for this to work is to have a clear contract with the private companies about the mandatory minimum level of stock that they should preserve for use in emergency times.

Storing oil abroad

  • With oil dirt-cheap, if we can purchase more than we can store in our existing facilities, why not go abroad for more storage space?
  • For instance, one option could be to operationalise, modernise, and add to the oil tanking facilities at Trincomalee in Sri Lanka.
  • Another opportunity would be to enter into a strategic partnership with Oman (Ras Markaz) for oil storage.
  • Partnership with Oman would also help India avoid the potential bottleneck of the straits of Hormuz.
  • Geopolitical risk factor: Since many of these places could potentially be vulnerable to geopolitical risks, only a small part of India’s overall SPR strategy should involve storing abroad.

Conclusion

Energy is and will remain vital to India’s aspirations for growth. The sharp fall in the price of oil presents an opportunity for the Union government to increase its SPR stockpile and achieve a degree of energy security.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Don’t waste the oil crisis

Note4Students

From UPSC perspective, the following things are important :

Prelims level : WTO benchmark, Brent crude.

Mains level : Paper 3- What are the implications of oil price fluctuations for Indian economy?

This article discusses the factors that contributed to oil prices falling below zero, and where the prices are headed in the near future. There are suggestions for India to make the most of this oil crisis. In the last week, we covered the same topic but its focus was on increasing the storage capacity. This article also covers the geopolitical implications of oil prices remaining low for long.

What negative price of the benchmark US crude WTI mean?

  • The collapse in the price of WTI reflected a technical peculiarity of futures trading.
  • Paper traders would normally have had two options- 1) To let their contract expire and take physical delivery 2) To pass on the contract to someone else.
  • The US was running out of crude oil storage capacity and traders knew they could not “risk” taking delivery.
  • There was no physical space to hold the product.
  • So their only option was to sell the contract.
  • On the last day before the contracts expired, the traders in desperation “paid” to offload their risk.
  • There was no physical transaction of oil.
  • The current future price is back in positive territory.

The world running out of oil storage capacity

  • The world and not just the US was fast running out of storage capacity.
  • Production in excess of demand: This was because oil production was way in excess of demand.
  • The latter had crashed by almost 30 million barrels a day or mbd (the equivalent of OPEC’s entire production) because of the COVID-induced lockdown of transportation and industry.
  • The price of the other crude benchmarks had also dropped but not the same extent — the North Sea Brent fell, for instance, to $15/bbl, a level not seen since 1999.
  • The reason was that unlike the WTI, which is traded in the US and therefore dependent on US inland storage capacity, the other crudes have access to seaborne storage (oil tankers).
  • This latter capacity is, however, fast filling up and the price of these crudes may also hit historic lows.

So, where the oil prices are headed?

  • Oil prices will be volatile downwards until demand picks up and/or supply is further cut.
  • Demand will depend on the curve of post-COVID economic recovery.
  • Supply will rest on the outcome of further discussions amongst OPEC, Russia and, ironically, the US.
  • OPEC and Russia had earlier this month agreed to cut production by 10 mbd.
  • But clearly, this is not enough and further cutbacks have to be agreed on.
  • Whatever the scenario for economic recovery or supply constraints, there is a slim likelihood of crude oil prices reaching the average price levels of 2019 ($64) over the next 12 months or so.
  • More likely, they will be volatile downwards with $50 as the ceiling and with no floor.
  • This “low for longer” price outlook raises two issues for India’s policy-makers.

As India depends on imports for over 80% of its oil requirements, oil prices have wide implications for the financial health of India. Safe oil supply lines are essential for its energy security. Both these points are important from the UPSC point of view. Following two points deal with these two factors.

Two issues that India’s policy-makers need to consider-

1. Disruption of oil supply lines and problems of diaspora

  • Every oil producer with no exception will face a budgetary crisis.
  • Some, like Saudi Arabia, the UAE and Kuwait will finance their social and economic commitments by cutting costs, increasing debt and drawing down on their sovereign reserves.
  • Others like Iran, Iraq, Nigeria and Venezuela, who have no such cushion and whose credit ratings are junk, will confront deepening political and social crises.
  • Economic plan: India should build into its economic plans the possibility that its traditional oil supply routes could get disrupted.
  • And that its diaspora, whose remittances are of significance, could face disproportionate hardship as these economies retrench.

India has the largest diaspora in the world and sends as much as $80 billion back home as remittances. So, any impact on diaspora in oil economies has implication for India from this perspective as well.

2. Empower the oil traders and remove bureaucratic control

  • On the day prices hit negative territory, it is unclear whether the trading experts in our oil PSUs had the flexibility to even contemplate “buying” the WTI futures contract for June, taking delivery, shipping it to India and storing it someplace.
  • It is also not clear whether they had the authority to lock in low prices through forward contracts.
  • Storage capacity and WTI quality mismatch: There is a shortage of storage capacity in India and a mismatch between the quality of WTI and the requirements of our refineries.
  • India cannot leverage the current market conditions of low and volatile oil prices to our national advantage unless we empower the traders and leave them unencumbered from bureaucratic control.
  • Most importantly, protect them from the three Cs ( CVC, CBI and CAG) in case their trade goes awry.

Conclusion

This oil market crisis could be made to work to our advantage. We must not waste this opportunity. There is a need to remove the bureaucratic hurdles in our PSUs, increasing storage capacity and sound financial planning by the government to make the most of this oil crisis.


Back2Basics: What is WTI  and Brent crude benchmark?

  • West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing.
  • This grade is described as light crude oil because of its relatively low density, and sweet because of its low sulfur content.

Brent Crude

  • Brent Crude is a trading classification of sweet light crude oil that serves as one of the two main benchmark prices for purchases of oil worldwide.
  • This grade is described as light because of its relatively low density, and sweet because of its low sulphur content.

Futures contract

  • In finance, a futures contract is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future, between parties not known to each other.
  • The asset transacted is usually a commodity or financial instrument.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Let’s make the most of dirt-cheap oil

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Strategic Petroleum Reserves.

Mains level : Paper 3-How India can make the most of cheap oil prices?

For the first time in history, oil prices hovered in the negative territory recently. This article discusses how this opportunity can be utilised by India in various ways.

Oil selling for negative price

  • In a dramatic and unprecedented turn of events on Monday, crude oil began trading in negative territory for the first time since records began.
  • The price on a futures contract for West Texas crude that was due to expire on 21 April crashed to minus $37.63 a barrel.
  • Covid effect: This is a direct result of the market mayhem caused by covid-19, which has resulted in lockdowns around the world, brought economies to a screeching halt, and crushed demand for transport fuel.
  • No space to store oil: Reports say there is so much unused oil in the US that there is no space left to store fresh supplies.
  • Storage costs money. Thus, oil producers had to pay to offload their stock.

How did we get here?

  • Thanks to the covid-19 pandemic, multiple demand and supply shocks are wrecking economies across the globe and bringing economic activity to a standstill.
  • Assembly lines have halted, supply chains have snapped, commodity prices have fallen, the services sector has ground to a halt, financial markets are in a panic.
  • And the Great Lockdown has depressed various other economic variables and pushed the world into a deep recession.
  • Tensions among suppliers: The sudden fall in oil prices is tied not just to a demand crunch, but also tensions among the world’s major suppliers.
  • Relatively high prices over 2019 had allowed non-traditional players like US shale oil companies to thrive.
  • Meanwhile, Saudi Arabia and Russia, the most influential members of OPEC+, the Organization of Petroleum Exporting Countries that have allied with Russia on and off since 2016, had been in competition to expand their market share.
  • A flashpoint arose in early March, when Moscow refused to agree to OPEC’s desired production cuts to keep prices stable.
  • This prompted a price war with Riyadh, as both attempted to increase market share or put other competitors (particularly US shale) out of business.
  • Though a production cut has since been agreed to between Russia and Saudi Arabia, demand is estimated to have fallen far more than that.
  • Contracts for late 2020 are still going for only around $30 per barrel.
  • As a result, producers such as Kuwait, Oman, Nigeria, and Venezuela will continue to feel the strain.

How can India maximise potential gains?

  • India imports nearly 80% of the oil it consumes, and so cheap oil is to be taken as an opportunity.
  • Under normal circumstances, such a drastic fall in oil prices would have a big positive effect on the finances of the Union government and the economy in general.
  • The current circumstances, however, are anything but normal.
  • So, India must use this low price opportunity in the following ways.

The strategic petroleum reserves (SPRs) assumes significance in India’s energy security whenever tension rises in the region from which we import our oil. Take note of the suggestion with respect to SPRs.

Fill up the strategic petroleum reserves (SPRs)

  • The best way to turn this situation to India’s advantage, therefore, is to grab this chance to fill up the country’s strategic petroleum reserves (SPRs).
  • Like other large consumers, India holds oil inventories for the sake of energy security during a supply cut-off or some other emergency.
  • How much are our SPRs? Our SPRs are estimated at five days’ worth of oil imports, stored in underground salt caverns, and a further 65 days’ worth held by commercial refineries.
  • Current prices provide a perfect opportunity to bolster these reserves in preparation for future shocks.
  • The government-owned agency, Indian Strategic Petroleum Reserves Limited (ISPRL), should now be focused on filling up and utilizing the existing capacity of the country’s underground caverns.
  • In fact, it should be hardwired to consider filling these up each time the price of Brent crude falls below $40.
  • Separately, in the second phase of India’s SPR plans should be fast-tracked.
  • Working with private players: This involves working with private players to design, build, finance, operate, and transfer underground oil tanks.

Negotiate long term contracts at current prices

  • Commercial refineries, many of which are public-sector enterprises, should strike and renegotiate long-term contracts with suppliers based on current prices.
  • Other firms reliant on oil and subject to the vagaries of oil prices, such as airline companies, should also do likewise.

Geographically diversify the SPR holdings

  • This is also an opportune time for the Indian government to geographically diversify its SPR holdings.
  • To lower transport and storage costs, and to diversify risk, Oman or Fujairah in the UAE could be contracted to hold a quantity of oil on India’s behalf.
  • These reserves can be shipped to India when needed.
  • India should also operationalize, modernize and add to its oil tank facilities in Trincomalee, Sri Lanka, which is partially owned by India.

Conclusion

The global energy landscape is likely to remain volatile in the near future and oil is likely to remain an important part of India’s energy needs. This is a good time to enhance the country’s energy security.

 

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

What explains crude oil prices falling below the $0 mark?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : West Texas Intermediate (WTI), Brent Crude

Mains level : Global crude oil pricing dynamics and its impact on India

Context

  • Recently US oil markets created history when prices of West Texas Intermediate (WTI), the best quality of crude oil in the world, fell to “minus” $40.32 a barrel in New York.
  • Not only is this the lowest crude oil price ever known the previous lowest was immediately after World War II — but also well below the zero-mark.
  • At this price, the seller would be paying the buyer of crude oil $40 for each barrel that is bought.

Crude oil price dynamics are undergoing dramatic changes this year. The ongoing pandemic has worsened the situation further. India has ample  opportunities to get benefited from the ongoing situation.

But how can that be? How did prices fall below zero in the first place? Let us see:

Global fall in crude oil prices

  • The first thing to understand is that, even before the Covid-19 induced global lockdown, crude oil prices had been falling over the past few months.
  • The reason was straightforward. The price of a commodity falls when supply is more than demand.
  • The global oil pricing is by no stretch an example of a well-functioning competitive market. In fact, it’s seamless operations crucially depend on oil exporters acting in consort.

OPEC+ failure (earlier)

  • Historically, the OPEC, lead by Saudi Arabia, which is the largest exporter of crude oil in the world (single-handedly exporting 10% of the global demand), used to work as a cartel and fix prices in a favourable band.
  • It could bring down prices by increasing oil production and raise prices by cutting production.
  • In the recent past, the OPEC has been working with Russia, as OPEC+, to fix the global prices and supply.
  • This happy accord came to an end as Saudi Arabia and Russia disagreed over the production cuts required to keep prices stable.
  • As a result, OPEC undercutting each other on price while continuing to produce the same quantities of oil.

What it costs to a country for cutting production

  • The production cut was made worse with the growing spread of Coronavirus, which, in turn, was sharply reducing economic activity and the demand for oil.
  • It must be understood that cutting production or completely shutting down an oil well is a difficult decision because restarting it is both costly and cumbersome.
  • Moreover, if one country cuts production, it risks losing market share if others do not follow suit.

Demand-supply mismatch got worse

  • By the time the Saudi Arabia and Russia discord was sorted out last week, under pressure from US President, it was possibly too late.
  • Oil-exporting countries decided to cut production by 6 million barrels a day — the highest production cuts — and yet the demand for oil was shrinking by 9 to 10 million barrels a day.
  • This meant that the supply-demand mismatch continued to worsen right through March and April.
  • According to reports, all possible the mismatch resulted in almost all storage capacity being exhausted.

What led to negative oil prices: Immediate causes

  • The contracts fir this month for WTI, the American crude oil variant, was due to expire. As the deadline came near, prices started plummeting. This was for two broad reasons.
  • There were many oil producers who wanted to get rid of their oil even at unbelievably low prices instead of choosing the other option shutting production.
  • The space to store the oil too got exhausted. Trains and ships, which were typically used to transport oil, too, were used up just for storing oil.
  • They figured that it would be more costly for them to accept the oil delivery, pay for its transportation and then pay for storing it, especially when there is no storage available than to simply take a hit on the contract price.

Future prospects

  • It is important to note that it was the WTI price for May in the US markets that went so low.
  • Crude Oil prices elsewhere fell but by not so much. Moreover, at least for now, oil prices are pegged at around $20 a barrel.
  • It is likely that this was a one-off event and will not happen as producers are forced to cut back production further.
  • But one cannot rule out such a repeat, with COVID-19 continuing to spread, demand is falling every day.
  • In the end, it would be the demand-supply mismatch (adjusted for how much can be stored away) that will decide the fate of oil prices.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

OPEC+ decides combine slashing of crude oil production

Note4Students

From UPSC perspective, the following things are important :

Prelims level : OPEC+

Mains level : Global crude oil pricing dynamics and its impact on India

India has made a case for affordable oil prices in the backdrop of the Organization of the Petroleum Exporting Countries-plus (OPEC+) combine slashing production amid the COVID-19 pandemic.

Global crude oil pricing dynamics greatly impact  India and its import bill. Kindly refer to the article titled “Oil Prices and OPEC+” pinned below this newscard. Various aspects related to the issue are covered in the Burning Issue section . It seeks to answer all your doubts such as ; Impact on Fuel prices,  India’s forex reserves, Strategic petroleum reserves,  etc.

Why a cause of worry?

  • OPEC accounts for around 40% of global production.
  • The OPEC accounts for 80% of India’s crude oil imports.
  • Any production cut by the OPEC plus arrangement impacts India’s energy security efforts in the short run.

Impact on India

  • India, which is one of the major OPEC consumers, has always stood for a global consensus on responsible pricing.
  • Indian refiners have cut production as the lockdown has led to a sharp decline in demand for transportation fuels.
  • Demand for domestic cooking gas has, however, increased as more people stay indoors during the lockdown aimed at containing the spread of the coronavirus.

About OPEC+

  • The non-OPEC countries which export crude oil along with the 14 OPECs are termed as OPEC plus countries.
  • OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan.
  • Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as OPEC Plus — which now includes 11 OPEC members and 10 non-OPEC nations — that aims to shore up oil prices with production cuts.

Back2Basics:  OPEC

  • OPEC is a permanent, intergovernmental organization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
  • It aims to manage the supply of oil in an effort to set the price of oil in the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.
  • It is headquartered in Vienna, Austria.
  • OPEC membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.
  • Today OPEC is a cartel that includes 14 nations, predominantly from the middle east whose sole responsibility is to control prices and moderate supply.

Also read:

[Burning Issue] Oil Prices and OPEC+

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Oil in a post-Covid world

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Oil war in international oil market and implications for India.

Context

In the post-COVID world, India will, once again, confront the challenge of oil and gas supply security. We should, therefore, ask: What will be the landscape of the petroleum sector, post-COVID? And what should India do now to prepare for an uncertain and contingent energy future?

Oil war and the death knell of OPEC

  • The concept of MAD (Mutually Assured Destruction) deterred the nuclear powers during the Cold War. It has had no such effect on the oil powers.
  • Implications of the decision of Saudi Arabia and Russia: At a time when the virus had pushed the global economy into recession, Russia and Saudi Arabia took a set of decisions last month that knocked the economic props from under the oil market.
  • What were the reasons behind the decisions: The Saudis decided to flood the market to hold onto market share and the Russians accepted the consequent decline in prices to push the US shale industry to the wall.
  • Future of OPEC: Both may achieve their objectives but they have sounded the death knell of OPEC and possibly that of the oil industry as well.

Two reasons for the decline in the oil prices

  • Today, the price of oil, at just above $30/bbl , is at its lowest in a decade, and volatile downwards. The average price in 2019 was $64/bbl.
  • The reason is two-fold.
  • One, the Saudis have ramped up production from 9.8mbd (before the March meeting) to in excess of 12 mbd today.
  • Two, there has been an unprecedented COVID-induced crash in demand. This is because of the lockdown of the two main drivers of oil consumption — transportation and industry.
  • It is estimated that oil consumption in the current quarter will fall by approximately 25 mbd.
  • This is almost as much as OPEC’s production.
  • The Saudis and Russia may still come to an understanding that rallies the price.
  • There will be three major implications for the oil-producing countries.

1. Budgetary crisis

  • Every major oil-exporting country will face a budgetary crisis.
  • Qatar has the most robust balance sheet of all OPEC members. But it still needs an oil price of around $40/bbl to balance its books.
  • Algeria has the weakest. It needs an excess of $100/bbl.
  • Saudi Arabia is at the Algerian end of the spectrum requiring a price of around $80/bbl.
  • Abundant foreign reserves: This does not mean these countries are about to go financially belly up. Most of them, the Gulf producers, in particular, have abundant sovereign reserves.
  • But what it does mean is they will be hard-pressed to sustain their social and economic commitments.
  • They will have to cut back on subsidies, raise taxes and the citizens will be required to tighten their belts.
  • What India should do? India should build into its oil supply plans with the likelihood of civil strife in these countries.

2. Reconfiguration of the oil industry will take place

  • Already, at current prices, a large number of companies are finding it difficult to cover their cash costs and have been forced to cut production and shutter operations.
  • At even lower prices, they will become bankrupt.
  • Whatever the final outcome, one fact is clear. Those that survive the carnage will have substantially slimmed balance sheets and reduced valuations.
  • Exxon’s market capitalisation has, for instance, halved over the past month.
  • Implication for India: Against this backdrop, we should drop the expectation of international interest in BPCL. Or for that matter ME investment into India.
  • Ratnagiri refinery: The $40-billion Ratnagiri refinery project by Saudi Aramco and UAE will certainly not see the light of day.
  • We should also expect a drop in the intensity of domestic exploration.

3. Behavioural changes and uncertainties

  • The world, post-COVID will be different from the world pre-COVID. Behaviours will shift and these will deepen uncertainties.
  • “Social distancing” may change the dynamics of “shared mobility”.
  • Teleporting may reduce business travel.
  • Heightened awareness of the porosity of national boundaries may accelerate the push towards decarbonisation? These uncertainties will push the petroleum market deeper into no man’s land.

Way forward for India

  • Whatever be the shape of the post- COVID international petroleum market, India will be dependent on it to secure its domestic energy requirement. The question should, therefore, be asked. What should the decision-makers do today to respond to such a contingent and uncertain future?
  • 1. Increase the strategic reserves: It should fill the oil caverns with strategic reserves. Prices may fall further but rather than bottom fish, it should leverage the availability of capacity to secure discounted supplies.
  • The world has run out of storage capacity and producers may pay premium dollar to find space for their unsold cargoes.
  • 2. Reduce the dependency and risk: India should increase its imports of gas (LNG ) from Australia, Africa and the US.
  • This will reduce the political risks of dependency on oil supplies from the Middle East.
  • Gas is also now economically competitive. The landed price of LNG is low enough to kick-start some of the stranded gas-based power plants.
  • 3. Increase operational efficiency of oil companies: It should unthread the “patchwork quilt of authority” exercised by bureaucrats, regulators and politicians, which today stifles management and operational efficiency of the petroleum companies.
  • 4. Integrated energy policy: India should create an institutional basis for an integrated energy policy. If there is one message we must internalise from COVID, it is the importance of collaboration and coordination.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

The battle to set oil prices

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Factors contributing to the drop in oil prices and implications for India.

Context

The global economy, grappling with the COVID-19 pandemic, is now facing an energy war, with crude oil prices crashing in the international market.

Developments that contributed to the fall in oil prices

  • First, Crude oil prices tanked, as the Organisation of the Petroleum Exporting Countries (OPEC) and its alliance partners failed to reach any consensus on cutting back production to levels that would enable prices to remain stable.
  • Second, the U.S., as the largest oil producer today, has stayed away from the OPEC-plus arrangement, hoping that production cuts by OPEC-plus countries will help it increase its market share.
  • Russia refused any production cuts, unleashing an energy war with Saudi Arabia. There has been a spectacular fall of around 30% in crude oil prices.
  • The International Energy Agency (IEA) has scaled down global demand for oil, a move not taken by the energy watchdog since 2009.
  • COVID-19 Factor: Demand for oil had already weakened owing to the global economic slowdown, and this weakening has become more pronounced due to the COVID-19 pandemic, which has hit China’s economy and reduced consumption by the world’s largest importer.

The US-Russia oil war

  • Denying market share to the US oil producer: Russia’s decision to reject any production cuts is driven directly by its strategy of denying market share to American shale oil producers.
  • Shale oil companies can sustain in high prices only: The American shale oil producers rely on higher prices in the range of $50-$60 to remain profitable because of higher production costs.
  • At $31 per barrel, not more than five American shale oil producers can remain profitable.
  • Sanctions on Rosneft: Russia also remains resentful of sanctions imposed on Rosneft, which is building the gas pipeline project Nord Stream 2 across the Baltic Sea, carrying Siberian gas to Germany, a major consumer.
  • Delay in completion of the pipeline: This pipeline was delayed due to opposition from Denmark’s environmental activists and could not be completed before the U.S. sanctions kicked in.
  • Moscow has accused Washington of using geopolitical tools for commercial reasons.
  • The energy war over prices is Russia’s revenge, to cripple the American shale oil industry.
  • Russia’s signal to Saudi Arabia: Russia is also signalling to Saudi Arabia that its American patrons can do little to protect its oil interests and it would be prudent for Saudi Arabia to reach some understanding with Russia.
  • Both Saudi Arabia and Russia depend heavily on oil revenues — upwards of 80% of export revenues accrue from crude oil.
  • Russia and Saudi Arabia fighting for market share: Both are also fighting to retain market share.
  • Impact on India: It has been reported that Saudi Arabia has agreed to supply crude oil at lower rates to refiners in India and China, two primary customers, but refused to supply to other refiners in Asia. This will have an impact on India’s oil procurement from the U.S.

The benefits to importing countries

  • Why the price drop matters to India? Lower crude oil prices are not necessarily bad news for oil importing countries like India, which is the world’s third-largest importer of crude oil and the fourth largest importer of LNG.
  • Collateral adverse consequences: There are, however, collateral adverse consequences like the battering of the stock markets worldwide.
  • Impact on the global economy: The global economy, already impacted by President Donald Trump’s trade war with China and other countries, including India, and the COVID-19 pandemic, may find lower energy costs helpful in overall growth.

Benefits for India

  • From a high of $147 per barrel in 2008, crude oil prices have fallen to around $24 per barrel and may even go further southwards.
  • How much the price drop matter for India? India, with 80% of its energy requirements met by imports from the international market, stands to save ₹10,700 crores for every $1 drop in prices.
  • Non-oil related factors: While this may help manage the current account deficit, fiscal deficit and inflation, there are non-oil related collateral factors that can cause countervailing adverse economic impact.

How long Russian and Saudi Arabia can sustain the war?

  • Can Russia and Saudi Arabia sustain the energy war for long?
  • Saudi Arabia’s production cost is the cheapest in the world and it can ramp up production to around 12 million barrels a day.
  • By offering discounts, it can undercut other producers, including Russia.
  • Domestic considerations also matter.

Conclusion

There is no doubt that India will benefit from lower oil prices if the cost of fuel at the pump is passed on to consumers. It will reduce transportation costs and boost demand. The consumer, however, may not benefit much since the government may choose to use this financial windfall for other purposes, like bailing out banks which have been hollowed out by NPAs to leading Indian companies.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Impacts of the Oil Price War

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Pricing mechanism of fuels in India.

Mains level : Paper 3- Implications of oil-price war for India.

Context

A “pass-through effect” of low crude prices is improbable given the constrained fiscal space.

The backdrop to the oil price war

  • Against the backdrop of the covid-19 pandemic and the economic slowdown, Saudi Arabia-led oil cartel OPEC (Organization of the Petroleum Exporting Countries) wanted to curtail oil production by 1.5 million barrels per day.
  • However, as Russia has not agreed to this proposal, Saudi Arabia has declared a price war by reducing the Brent crude oil price from $65 per barrel in end-December 2019 to $33 now.
  • The race to the bottom to this extent by Brent is the first time ever since the 1991 Gulf crisis.

Would it impact India by providing a fiscal dividend?

  • A $20 reduction in Brent oil prices can reduce India’s current account deficit.
  • However, the instability in oil prices is a short-run phenomenon, and India cannot anticipate a prolonged fiscal dividend.
  • Quite contrary to the expectations about a “pass-through effect” of low crude oil prices on consumers, the Government of India (GoI) raised the excise duty on petrol and diesel by `3 per litre.
  • The special excise duty on petrol was hiked by 2 to 8 per litre in the case of petrol and to 4 in the case of diesel.

Fuel price determination in India

  • There has been no “pass-through effect” primarily because the price determination of petrol and diesel in India is not linked to crude oil prices in the international market.
  • Price determination is done through dynamic pricing, termed as “trade parity pricing,” based on the international prices of petrol and diesel (finished products) prevailing in the international markets, and not on crude oil per se.
  • An obvious question here is whether the crude oil prices and the petrol-diesel prices move in tandem in the international market. Not always.
  • Globally, the market mechanism of ad hoc configurations of demand and supply of crude oil is different from the demand-supply dynamics of petrol and diesel, and, in turn, their pricing behaviour will also be distinctly different.
  • The goi fixes the price of petrol and diesel based on dynamic pricing and trade parity pricing by converting the price from dollars to Indian rupees.

Factors affecting fuel prices in India

  • The rupee-dollar exchange rate mechanism also affects the pricing of petrol and diesel.
  • This can offset the benefits India can reap from comparatively lower prices of crude oil in the international market, quoted in dollars.
  • The other components of this pricing formula are: 1.The cost of inland freight marketing costs. 2. Taxes levied by the centre and the state governments. 3. The margins (charged by the oil companies) and (the dealer) commissions.
  • It is, therefore, obvious that low international prices per se do not translate into lower prices for petrol and diesel in India as long as the centre and states levy exorbitant taxes on these products.
  • The interstate variation in the prices of petrol and diesel is also significantly explained by the differentials in taxes imposed.
  • Yet another factor to be borne in our minds is that the effect of international prices on the in-house pricing of petrol and diesel in India is not instantaneous or spontaneous.
  • There is a time lag involved in the pricing process.
  • Even though the goi uses the daily pricing mechanism in the dynamic pricing formula of petrol and diesel, the international prices component enters into the pricing equation as an international “benchmark price” of petrol and diesel.
  • Today’s price in India reflects the average international prices of petrol and diesel of the previous fortnight.
  • However, the fuel prices will not come down in a fortnight’s time.
  • This is because, in the price equation, the international price component is just one among many components, whereas the tax component constitutes a dominant part in the equation.

The Covid-19 factor

  • The covid-19 outbreak has started striking the financial markets and the real sector, and especially investment in the energy sector.
  • So, the lowering of the oil price by Brent cannot help the global economy from recession.
  • Overall, the oil price war can negatively affect the investment decisions in the energy sector and can be a drag on global growth.
  • Due to the covid-19 outbreak, there could be reduced oil-drilling activities in the energy sector, and there will be some cutbacks in demand and, in turn, in the capex energy infrastructure.
  • Analysts have revealed that every $10 fall in oil prices transfers around 0.3% of the global gross domestic product from oil-producing nations to oil-consuming nations.
  • The interest rate strategists are also concerned as the Russian 10-year bond yields reached a record low of 2.56%, and Saudi Arabian government bonds maturing in April 2030 are currently at 2.38%.

Microeconomic policy to tackle oil price war?

  • The US Federal Reserve has lowered the federal funds’ interest rate by 50 basis points (one-half of a percentage point) to 1.25%.
  • The Bank of Canada also reduced the bank rate by 50 basis points to the US level. The stock market indexes fell to the levels of  2008.
  • The 1.25% federal funds rate now is below the 2.5% US inflation rate. However, monetary policy has failed to trigger the economy.
  • As mentioned by the European Central Bank, “targeting” rather than generalised public policy needs to be done.

Conclusion

  • The Reserve Bank of India policy tools may be ineffective now to tackle the slowdown, especially against the backdrop of the worsening of the economy from the effects of covid-19. The re-dominance of fiscal policy by the North Block is what is keenly awaited, for an economic turnaround.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Govt. has raised excise duty cap on fuel

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Excise duty

Mains level : Crude oil pricing dynamics

In a move which would help the government to raise excise duty on fuel further in future, the government has raised the cap on special additional excise duty on petrol and diesel. These changes are as per the amendments in the Finance Bill passed in the Parliament.

Why such move?

  • Government is increasing duties on petrol and diesel to raise revenues in view of a tight fiscal situation.
  • Slump in global crude oil prices, alongside possibility of a global economic recession, has forced the government to look for avenues to raise revenues to support growth.
  • With major companies going for production shut downs, industry players have suggested the government to boost fiscal stimulus in the wake of demand collapse triggered by the coronavirus.
  • Earlier, Saudi Arabia had triggered the crash in prices by announcing a sharp increase in oil production after Russia declined to reduce oil supply to contain a fall in oil prices due to declining demand in a meeting of petroleum exporting countries.

Impact of the move

  • Every rupee hike in excise duty is expected to yield roughly Rs 13,000-14,000 crore annually.
  • The slump in global crude oil prices enables the government to raise these duties substantially without immediately putting the burden on the consumer.
  • But there is expected to be a demand slowdown for fuels with a nearly country wide lockdown in the wake of coronavirus.
  • With airlines, railways, trucks and passenger cars going off the roads, petrol, diesel and ATF (aviation turbine fuel) consumption is expected to fall drastically.

Back2Basics

What is Excise Duty?

  • Excise duty is a form of tax imposed on goods for their production, licensing and sale.
  • It is the opposite of Customs duty in sense that it applies to goods manufactured domestically in the country, while Customs is levied on those coming from outside of the country.
  • At the central level, excise duty earlier used to be levied as Central Excise Duty, Additional Excise Duty, etc.
  • Excise duty was levied on manufactured goods and levied at the time of removal of goods, while GST is levied on the supply of goods and services.

Purview of excise duty

  • The GST introduction in July 2017 subsumed many types of excise duty.
  • Today, excise duty applies only on petroleum and liquor.
  • Alcohol does not come under the purview of GST as exclusion mandated by constitutional provision.
  • States levy taxes on alcohol according to the same practice as was prevalent before the rollout of GST.
  • After GST was introduced, excise duty was replaced by central GST because excise was levied by the central government. The revenue generated from CGST goes to the central government.

Types of excise duty in India

Before GST kicked in, there were three kinds of excise duties in India.

Basic Excise Duty

  • Basic excise duty is also known as the Central Value Added Tax (CENVAT). This category of excise duty was levied on goods that were classified under the first schedule of the Central Excise Tariff Act, 1985.
  • This duty was levied under Section 3 (1) (a) of the Central Excise Act, 1944. This duty applied on all goods except salt.

Additional Excise Duty

  • Additional excise duty was levied on goods of high importance, under the Additional Excise under Additional Duties of Excise (Goods of Special Importance) Act, 1957.
  • This duty was levied on some special category of goods.

Special Excise Duty

  • This type of excise duty was levied on special goods classified under the Second Schedule to the Central Excise Tariff Act, 1985.
  • Presently the central excise duty comprises of a Basic Excise Duty, Special Additional Excise Duty and Additional Excise Duty (Road and Infrastructure Cess) on auto fuels.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

 How the country should make the most of a second oil windfall

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- How the government should utilise the windfall from fall in the oil prices?

Context

Amid the coronavirus scare came India’s silver lining in the form of a failure of the Organization of the Petroleum Exporting Countries (Opec) and Russia to reach an agreement on oil production cuts.

Reasons for Russia’s decision and its aftermath

  • Why Russia declined to sign the agreement: Russia declined to cut its oil supply with an intention to compete with the US shale industry.
  • Start of the price war: Consequently, a price war has started as Saudi Arabia plans a big increase in its oil supply. Saudi Arabia, which is the world’s largest oil exporter, has started offering unprecedented discounts in Europe, the Far East and the US to increase its supplies at the cost of other oil producers.
  • Immediate fallout: An immediate fallout of the Russia-Opec meeting was a 9% fall in oil prices on Friday. Monday saw a sharper drop.

Supply and demand shocks and implications for India

  • The demand shock: The impact of Covid-19 will be felt on the global demand for oil, too, as a dramatic increase in Covid-19 cases has put further downward pressure on demand for commodities, including oil.
  • Thus, both supply and demand shocks have coalesced to roil the crude oil market.
  • How much was the drop in price: Since the start of the year, oil prices have fallen by about a third.
    • Prices may drop further under the weight of the twin assault of higher supply and lower demand.
    • It is, therefore, not a stretch to expect oil prices over the coming financial year to be lower than they were in the previous two.
  • Implications for India: This has positive implications for India’s economy and policymaking, as it comes at a time when it has embarked on an uncertain and hesitant recovery.

Opportunity for India

  • Precarious fiscal situation: The growth slowdown in the last two years has resulted in a precarious fiscal situation because of tax revenue shortfalls.
  • Implications of the fiscal constraints: A direct casualty is the ability of the government to spend or meet its fiscal commitments in the form of budgetary transfers to states, payment of dues and compensation for revenue shortfalls to state governments under the goods and services tax (GST) framework.
  • Constraints holding back the government from offering stimulus: Budgetary constraints combined with the Fiscal Responsibility and Budget Management Act have held the government back from fully offsetting a private sector demand slowdown with its own spending.
  • Opportunity in the low oil prices: Low oil prices offer an opportunity to raise some revenue and improve its fiscal balance.

Way forward

  • First- Passing half the benefit to consumers: As oil prices slide below levels in the previous two years and also below the price of India’s oil basket of $65 per barrel reportedly assumed for 2020-21, there’s an opportunity to pass on about half the benefit of lower global prices to consumers, while the other half can be used to shore up revenue by levying higher excise duty.
    • The Union government did something similar between 2014 and 2016.
    • Improving the fiscal health: It used low oil prices to improve its fiscal health, as the budget deficit it inherited from the previous government was higher than what the official figures suggested.
  • Second-Revenue generated should be used to clear dues: The additional tax revenue thus generated through higher excise duty should be used to clear all dues of the central government, whether to private companies, state governments, or others awaiting tax refunds.
    • Putting cash back in the hands of households and small businesses will go a long way in maintaining the growth of domestic demand, besides improving the credibility of the Union government as a trustworthy counter-party.
  • Third-Fiscal leeway: The potential excise duty windfall from oil prices could come in handy for the government to provide relief to beleaguered telecom companies.
    • The government will have fiscal leeway to allow a staggered and a longer schedule for the payments they have to make, arising out of the Supreme Court ruling on adjusted gross revenues.
    • The telecom growth story is an important component of the broader India story, and the sector needs an urgent breather to ensure we are adequately prepared for a 5G roll-out, whenever it happens.
  • Fourth-Recalibrate: A slowdown in economic activity, which is inevitable with restrictions placed on mobility and human interaction, will have adverse fiscal implications.
    • Tax collections will decline. So will remittances from Indian workers in the Gulf, if that region is buffeted by oil and virus shocks.
    • Hence, the quantum of the windfall from lower oil prices will need to be constantly re-assessed and fiscal strategies recalibrated.
  • Fifth-Hedging against the higher prices: Even as it should nimbly take advantage of the lower prices now, the government should seriously consider hedging against possible higher oil prices in the medium- to long-term through appropriate instruments available in financial markets. This idea should be extended to hedging against a fall in the rupee relative to the US dollar too.
  • Finally-Consider assembling the crack team: It may be worthwhile for the government to consider assembling a crack team of former and current bureaucrats, who have proven their mettle in different crises and in different sectors, to advise it on policy measures that should be adopted in these extraordinary times. Much policy innovation and courage, combined with integrity, will be needed for India to emerge stronger from 2020. For the country’s leadership, there isn’t much to lose from breaking free of old policy and behavioural shackles.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Why have LPG prices seen a sharp rise?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : LPG, PM Ujjwala Scheme

Mains level : Pricing mechanism of LPG in India

 

Recently, LPG prices, which are revised on a monthly basis, went up yet again.

What influences LPG prices in India?

  • Domestic prices of liquefied petroleum gas (LPG) are based on a formula — the import parity price (IPP), which is based on international LPG prices.
  • Saudi Aramco’s LPG price acts as the benchmark for the IPP and includes the free-on-board price, ocean freight, customs duties, port dues and the like.
  • This dollar-denominated figure is converted into rupees before local costs — such as local freight, bottling charges, marketing costs, margins for oil marketing firms and dealer commissions and the GST — are added.
  • This helps the government arrive at the retail selling price for LPG.
  • The government resets the LPG price every month, the decision being influenced by international prices and how the rupee has behaved against the dollar in the immediately preceding weeks.

Who will the price rise affect?

  • The price increase will affect retail consumers who have given up the subsidy.
  • The government has said that for those who avail subsidy, the increase would be mostly absorbed by the rise in subsidy.
  • The Centre said the price of an unsubsidized cylinder would increase from ₹714 to ₹858.50 in Delhi, for example, and that the subsidy offered would go up from ₹153.86 to ₹291.48.
  • Of the 27.76 crore retail consumers, 26.12 crore consumers avail LPG subsidy. Likewise, for Ujjwala consumers, the subsidy would go up from ₹174.86 to ₹312.48 per cylinder.

Does this help the government move to an open pricing regime?

  • Prior to the latest round of the price increase, the government had raised LPG cylinder prices by ₹62, starting from August 2019.
  • Compare this with the increase of ₹82 that had taken place over five years to mid-2019, indicating a penchant for increasingly lesser subsidy.
  • In the latest round, though, the Centre has sought to absorb much of the increase for those availing subsidy.
  • It looks like the most recent increase has been beyond its control and it is hence raising the subsidy levels to protect consumers, given that the economy is reeling from lack of consumer spending.

What is the outlook?

  • With international crude prices on the downtrend, it is plausible the LPG prices too would see a slump.
  • Aramco has lowered its propane price for February to $505 per metric tonne.
  • Assuming we receive no surprises from the rupee-dollar tango, a softening of LPG prices in the domestic context may be expected.

What are the implications for the broader economy?

  • At a time when consumer demand, in general, for goods and services in the country has slumped, more cash in the hands of the retail consumer may have helped spur demand.
  • It is ironic that the government has had to raise LPG prices now.
  • This sucks away even more disposable income from those consumers who pay market rates for LPG. As a result, household budgets are bound to go up, especially for those not availing the subsidy.
  • The increase in LPG price could spur headline inflation even further. As it is, the consumer price index inflation has seen a rise over the past few months.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Natural Gas Grid (NGG)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Natural Gas Grid (NGG)

Mains level : Natural gas: Its uses and limitations

A study to facilitate the development of a National Gas Grid is to be undertaken soon by a U.S. entity. The Government has last year envisaged developing the NGG.

National Gas Grid

  • At present about 16,788 Km natural gas pipeline is operational and about 14,239 Km gas pipelines are being developed to increase the availability of natural gas across the country.
  • These pipelines have been authorized by Petroleum and Natural Gas Regulatory Board (PNGRB) and are at various stages of execution viz. Pre-Project activities/laying/testing/commissioning etc.

Aims and Objective

  • To remove regional imbalance within the country with regard to access of natural gas and provide clean and green fuel throughout the country.
  • To connect gas sources to major demand centres and ensure availability of gas to consumers in various sectors.
  • Development of City Gas Distribution Networks in various cities for supply of CNG and PNG.

NGG Technical Assistance Program

  • The India NGG Technical Assistance programme stems from an agreement in September between PNGRB and the US Trade Development Agency (USTDA).
  • The study will aim at developing an economic basis for building India’s Natural Gas Grid (NGG).

Utility of the study

  • It would provide an update on the gas demand analysis, including anchor consumers, industries, city gas distribution (CGD) and emerging demand centres such as CNG and LNG for road transport.
  • The study will take a fresh look at the gas supply analysis too. This includes review of LNG imports, domestic supply, potential transnational gas pipeline imports and virtual pipelines.
  • Share of natural gas in India’s energy basket is 6.2% as against 23.4% globally and is expected to increase.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

[pib] Saksham Campaign

Note4Students

From UPSC perspective, the following things are important :

Prelims level : ‘Saksham’ Campaign

Mains level : Fossil fuels conservation

‘Saksham’ Campaign for fuel conservation has been launched.

‘Saksham’ Campaign

  • It is an annual one-month long, people-centric fuel conservation mega campaign of Petroleum Conservation Research Association (PCRA) under the aegis of Ministry of Petroleum and Natural Gas.
  • PCRA and Oil & Gas companies carry out various interactive programs during this month-long campaign.
  • Activities like ‘Saksham’ Cycle Day, Cyclothons, Workshops for drivers of commercial vehicles, Seminars for housewives/cooks on adopting simple fuel saving measure.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

[pib] Winter-grade diesel

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Winter-grade diesel

Mains level : NA

News          

The launch of a special winter-grade diesel, developed by Indian Oil Corporation (Indian Oil), for the high-altitude regions of Ladakh was recently held.

Winter-grade diesel

  • Motorists in high-altitude sectors like Ladakh, Kargil, Kaza and Keylong face the problem of freezing of diesel in their vehicles when winter temperatures drop to as low as -30o
  • Indian Oil has come up with an innovative solution to this problem by introducing a special winter-grade diesel with a low pour-point of -33o
  • This fuel does not lose its fluidity function even in extreme winter conditions.
  • This will help reduce the hardships faced by the local people for transportation and mobility during the harsh winter months.
  • It will further facilitate the local economy as well as tourism of the region.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Motihari-Amalekhgunj Petroleum Pipeline

Note4Students

From UPSC perspective, the following things are important :

Prelims level : About the Pipeline

Mains level : India-Nepal Economic Realtions


  • PM Modi and his Nepalese counterpart KPS Oli will “switch on” the Motihari-Amalekhgunj petroleum pipeline from their offices in New Delhi and Kathmandu.

About the Pipeline

  • The pipeline will transport fuel from Barauni refinery in Bihar’s Begusarai district to Amalekhgunj in southeastern Nepal, situated across the border from Raxaul in East Champaran district.
  • The 69-km pipeline will drastically reduce the cost of transporting fuel to landlocked Nepal from India.
  • The Amalekhgunj fuel depot will have the capacity to store up to 16,000 kilolitres of petroleum products.
  • The pipeline will help in tackling the oil storage problem in Nepal and doing away with transportation of petroleum products through tankers.
  • It will ensure smooth, cost-effective and environment-friendly supply of petroleum products to Nepal.

Years in making

  • The pipeline project was first proposed in 1996, but progress was slow. Things began to move after PM visited Kathmandu in 2014.
  • The following year, the two governments signed an agreement to execute the project; however, political tensions, including India’s alleged “economic blockade” of Nepal, acted as roadblocks in the implementation.
  • In 2017 Indian Oil Corporation (IOC) signed a petroleum trade agreement to supply about 1.3 million tonnes of fuel annually to Nepal with a promise to double the volume by 2020.
  • In July, the two countries successfully concluded a “testing transfer” through the oil pipeline.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Oil-emanating tarballs on Mumbai’s beaches

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Tarballs

Mains level : Ocean water pollution


  • Recently on Girgaum chowpatty a famous tourist spot in South Mumbai saw big, black oil-emanating balls lying on its sandy beach.

What are tarballs?

  • The tar balls are crude-oil forms from which petrol is extracted.
  • Tar balls are dark-coloured, sticky balls of oil that form when crude oil floats on the ocean surface.
  • They are formed by weathering of crude oil in marine environments.
  • They are transported from the open sea to the shores by sea currents and waves.
  • Tarballs are usually coin-sized and are found strewn on the beaches. However, over the years, they have become as big as basketballs and can weigh as high as 6-7 kgs.

Do tarballs indicate an oil spill?

  • Most of the times, the presence of several tarballs indicate an oil spill.
  • However, its annual occurrence on the west coast during the monsoon has led marine biologists and experts to demand an investigation in the matter.
  • Experts have urged authorities to take stricter vigil and check if ships are dumping burnt oil waste off the western coast of India.
  • Oil-well blowouts, accidental and deliberate release of bilge and ballast water from ships, river runoff, discharges through municipal sewage and industrial effluents” also leads to the formation of tarballs.

Are tarballs harmful?

  • Tarball pollution is a major concern to global marine ecosystem.
  • Tarballs that travel towards the coast can get stuck to the fishing nets installed in the sea, making it difficult for fishermen to clean.
  • In addition, it could affect marine life, especially filter feeders like clams and oysters.
  • Coming in contact with a small amount of the greasy oil is not harmful, but if an individual is sensitive to hydro-carbons found in crude oil, then the contact area should be washed with soap and water.

How are they disposed?

  • Microbes such as bacteria and fungi are known to be associated with tarballs.
  • They presumably play an important role in tarball degradation and some are potential human and animal pathogens.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Explained: Life without Iranian oil

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Heated US-Iran relation and its impact of India and the World

Background

  • India has said the country is “sufficiently prepared” to deal with the impact of the US decision to curtail the temporary exemption from sanctions on the purchase of Iranian oil.
  • India has “a robust plan” that has been put in place for adequate supply of crude to refineries.
  • In the past several months India has worked hard to significantly diversify its energy sources in preparation for this situation.
  • But its ties with Iran are significant and historic, and New Delhi will work hard to maintain some links.

Iran and India’s oil basket

  • India, the world’s third-biggest oil consumer, meets more than 80% of its crude oil requirements and around 40% of its natural gas needs through imports.
  • India is Iran’s top oil buyer after China.
  • In 2018-19, it imported 23.5 million tonnes from Iran; in the previous year, almost 10% of its total 220.4 million tonnes of crude imports was from Iran.
  • Iran was the fourth largest supplier of oil to India in 2018-19, and other suppliers may not provide the same benefits in the form of price and credit facilities.
  • The US move comes at a time when the price of the Indian crude basket — an average of the Dubai, Oman and Brent crude benchmarks — has been rising, and the country is in the middle of gemeral elections.

Amidst US sanctions

  • Indian refiners have almost halved their Iranian oil purchases since Nov 18, when the sanctions came into effect.
  • At the time, the US had granted waivers for six months until May 2 to eight countries — India, China, Japan, South Korea, Taiwan, Turkey, Italy and Greece.
  • According to market players, Indian refiners are increasing their planned purchases from the OPEC, Mexico, and even the US to make up for the loss of Iranian oil.

Diversification efforts

  • As part of the diversification, India imported crude from the US for the first time two years ago.
  • The first US crude consignment reached Paradip on October 2, 2017.
  • Also, Indian oil companies had until February 2018 acquired stakes in 27 countries including Australia, Brazil, Canada, Colombia, Indonesia, Iraq, Kazakhstan, Libya, Mozambique, Nigeria, Russia, and the UAE.
  • Recently, an Indian consortium picked up 10% in the Lower Zakhum offshore oil field in UAE, and IOCL acquired 17% in Oman’s Makhaizna oilfield.

No comparison for Iranian Oil

  • The big concern is that the substitute crude suppliers — Saudi Arabia, Kuwait, Iraq, Nigeria and the US — do not offer the attractive options that Iran does, including 60-day credit, and free insurance and shipping.
  • The challenge is to secure an alternative supplier at competitive terms in an already tightening global situation.
  • The OPEC and allied producers including Russia have voluntarily cut output, which has pushed up oil prices more than 35% earlier this year.
  • The projected drop in Iranian exports could further squeeze supply in a tight market.

Potential impact on India

Analysts point to key metrics that could be impacted by the current situation:

I. Current account deficit:

  • Higher crude oil prices will widen the trade deficit and current account deficit, given that the value of imports goes up with crude oil.
  • A permanent increase in crude oil prices by 10% under ceteris paribus conditions could translate into the current account deficit increasing by 0.4-0.5% of GDP.
  • Given that each dollar increase in the price of oil raises India’s annual import bill by over Rs 10,500 crore.
  • Any spike in global crude prices could have a bigger impact on India’s deficit numbers in the absence of the Iranian cushion.

II. Rupee:

  • The currency could be impacted if the trade and current account deficits were to widen. An increase in the import bill will tend to put pressure on the rupee.
  • The coefficient of correlation between the absolute value of exchange rate and Brent between April 1, 2019 and April 22, 2019 was high at 0.62, the data show.

III. Inflation:

  • There could be significant impact on inflation, given how crude oil prices move and the extent to which the government allows the pass-through to the consumer.
  • Analysts do not expect a full pass-through until the elections are over.
  • The crude oil price could be an important consideration when the Monetary Policy Committee meets for its bi-monthly meeting in June.

IV. Fiscal impact:

  • There could be a two pronged impact on government finances — both on the revenue side and on the expenditure side.
  • On the revenue side, higher oil prices mean more revenue for the states as tax is ad valorem; for the Centre, though, it may not materially impact the fiscal math as the duty rates are fixed.
  • According to CARE data, subsidy provided on LPG was Rs 32,989 crore and kerosene was Rs 4,489 crore for FY20.
  • The expenditure impact would primarily be on account of fuel subsidy outlays.

Geopolitical Impact

I. Strait of Hormuz: world’s most critical oil choke point

  • After the US said it would prevent five of Iran’s biggest customers including India from buying its oil, Tehran threatened to close the Strait of Hormuz.
  • The strait is a neck of water between its southern coast and the northern tip of the sultanate of Oman, and the lane through which a third of the world’s seaborne oil passes every day.
  • It is a threat that Iran has made earlier, too and this strategic area has seen several flashpoints erupt in Tehran’s fraught relationship with the West over the years.

II. State of play

  • Iran cannot legally close the waterway unilaterally because part of it is in Oman’s territorial waters
  • However, ships pass through Iranian waters, which Iran’s Islamic Revolutionary Guards Navy controls (recently named terror organization by US).
  • Annual war games by Iran involve missile tests. The Guards have warned that the security of the US and US interests are in Iranian hands
  • The US fifth fleet in Bahrain protects commercial shipping in the area. The US has said closing the Hormuz Strait would amount to crossing a “red line”

III. A test of Hostility

  • Massive stakes give Iran leverage, but closing the Hormuz Strait will amount to an escalation with unknown fallout.
  • This is one reason Iran has, in 40 years of hostility with the West, never yet acted on its threats to close the Strait.

IV. Choking trade routes

  • International energy markets are critically dependent on reliable transport.
  • Over 60% of the world’s petroleum and other liquids production moves on maritime routes.
  • The seven choke points in the map above are critical nodes of the world’s energy security grid.
  • Blocking them can lead to huge increases in energy costs and world energy prices.
  • Choke points are also the places where tankers are most vulnerable to pirates, terrorist attacks, political unrest, war, and shipping accidents.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

U.S. ends waiver for India on Iran oil

Note4Students

From UPSC perspective, the following things are important :

Prelims level : India's oil imports

Mains level : Heated US-Iran relation and its impact of India

  • The U.S. has decided that it will not renew exemptions from its sanctions for importing oil from Iran.

Penalty for Indian Imports

  • The US will not issue any additional Significant Reduction Exceptions [SREs] to existing importers of Iranian oil.
  • US has continued to apply maximum pressure on the Iranian regime until its leaders change their destructive behaviour, respect the rights of the Iranian people, and return to the negotiating table.
  • India, China and U.S. allies Japan, South Korea and Turkey will be the most impacted by the non-renewal of waivers.
  • The other three currently exempted countries — Italy, Greece and Taiwan — have already reduced their imports to zero.

Implications for India

  • India is the second biggest buyer of Iranian oil after China.
  • It is being pushed by the US to restrict its monthly purchase to 1.25 million tonnes or 15 million tonnes in a year down from 22.6 million tonnes in 2017-18 financial year.
  • Even during the last set of sanctions between 2012 and 2015, India had continued to import oil from Iran.
  • The US decision is intended to bring Iran’s oil exports to zero, denying the regime its principal source of revenue.
  • Apart from oil imports, India will also have to navigate a waiver for development of the Chabahar port which is of critical strategic importance.

About India’s Oil Import

  • India is the world’s third-largest consumer of oil.
  • With 85 per cent of its crude oil and 34 per cent of its natural gas requirements is being fulfilled by imports.
  • In 2016, India imported 215 million tonnes of crude oil and at 13 per cent, Iran stood third among India’s biggest oil suppliers, after Saudi Arabia and Iraq at 18 per cent each.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

[pib] National Gas Grid

Note4students

Mains Paper 3: Economy | Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

From the UPSC perspective, the following things are important:

Prelims level: National Gas Grid

Mains level: Ensuring clean fuel across the country


News

  • The Government has envisaged to develop the National Gas Grid and has informed about the operational status.

National Gas Grid

  • At present about 16,788 Km natural gas pipeline is operational and about 14,239 Km gas pipelines are being developed to increase the availability of natural gas across the country.
  • These pipelines have been authorized by Petroleum and Natural Gas Regulatory Board (PNGRB) and are at various stages of execution viz. Pre-Project activities/laying/testing/commissioning etc.

Aims and Objective

  • To remove regional imbalance within the country with regard to access of natural gas and provide clean and green fuel throughout the country.
  • To connect gas sources to major demand centres and ensure availability of gas to consumers in various sectors.
  • Development of City Gas Distribution Networks in various cities for supply of CNG and PNG.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Ujjwala scheme takes India to second rank in LPG imports

Note4students

Mains Paper 3: Economy | Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

From the UPSC perspective, the following things are important:

Prelims level: WLPGA, Asia LPG Summit

Mains level: PMUY , its prospects and challenges.


News

Status report of PMUY

  1. The PM Ujjwala Yojana (PMUY) has so far provided over 6.31 crore free LPG connections since its launch, and now the target has been upped to 8 crore connections by March 2020.
  2. This has helped the country achieve LPG coverage of close to 90 per cent, but this has also led to a rapid increase in LPG imports, said Petroleum Ministry at Asia LPG Summit.

Rise in LPG Imports

  1. With estimated imports of above 12 million metric tonnes in the financial year 2018-19, India stands as world’s second largest importer of LPG, after China.
  2. LPG consumption is expected to grow to 30.3 million tonnes by 2025 and 40.6 million tonnes by 2040
  3. With only kerosene and LPG have subsidized categories, and LPG being the growing segment, government’s subsidy burden can increase especially in case of higher global oil prices.

About Asia LPG Summit

  • The summit is organized by the World LPG Association (WLPGA) in along with major Indian public-sector oil companies (OMCs) Indian Oil, Hindustan Petroleum, and Bharat Petroleum.

World LPG Association

  1. Based out of Paris, the WLPGA is the voice of the global LPG Industry representing the full LPG value chain.
  2. The Association was established in 1987 and granted Special Consultative Status with the United Nations Economic and Social Council in 1989.
  3. The primary goal of the Association is to add value to the sector by driving premium demand for LPG, while also promoting Compliance to good business and safety practices.
  4. The WLPGA brings together over 200 private and public companies operating in more than 125 countries involved in one, several or all activities of the industry.
  5. It develops long-term partnerships with international organisations; and implements projects on local and global scales.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

[pib] Saksham 2019

Note4students

Mains Paper 3: Environment | Conservation, environmental pollution and degradation, environmental impact assessment

From UPSC perspective, the following things are important:

Prelims level: Saksham 2019

Mains level:  Read the attached story


News

Saksham 2019

  1. Saksham (Sanrakshan Kshamta Mahotsav) is a campaign organised by Petroleum Conservation Research Association (PCRA).
  2. It is an annual high intensity one-month long people-centric mega campaign under the aegis of Ministry of Petroleum and Natural Gas.

Aims and Objectives

  1. It aims to sensitize the masses about conservation and efficient use of petroleum products which will lead towards better health and environment.
  2. This campaign is aimed at showing the way forward for making a change and enhancing the conservation capabilities of people.
  3. It helps understand the need for fuel conservation and find solutions thereof.
  4. The campaign seeks to promote effective utilization of petroleum products, something that will lead to environmental protection.

About PCRA

  1. The Petroleum Conservation Research Association (PCRA) is an organization established in India in 1978, under the aegis of the Indian Ministry of Petroleum and Natural Gas.
  2. It is engaged in promoting energy efficiency in various sectors of the economy.
  3. It helps the government in proposing policies and strategies aimed at reducing India’s dependency on oil, in order to save money, reduce the environmental impact of oil use and also conserve fossil fuel.

Recently, Cabinet has approved new Hydrocarbon Exploration and Licensing Policy (HELP), which will replace New Exploration Licensing Policy (NELP), for Oil and Gas exploration, Will that make any change in oil and gas exploration regime? Let’s see this in brief!

Let’s first take an overview of New Exploration Licensing Policy (NELP)

  • New Exploration Licensing Policy (NELP) was created in 1997
  • To provide an equal platform to both Public and Private sector companies in exploration and production of hydrocarbons
  • Directorate General of Hydrocarbons (DGH) was a nodal agency for its implementation
  • Between 1998 and 2012, there were 9 rounds of oil and gas block auction (NELP 1 to NELP 9)
  • Although 126 discoveries have been made in 41 active blocks, commercial production has commenced only in 3 blocks
  • Reasons for the delay vary from inadequate technology to delayed regulatory approvals
  • Today, only 2 blocks, the Reliance Industries-operated KG D6 block and the Gujarat State Petroleum Corporation-operated Cambay onshore block, are producing oil or gas

<Let’s Move towards new version of Policy>

What are the Main facets of HELP policy?

  • Uniform License for exploration and production of all forms of hydrocarbon
  • Open acreage policy
  • Easy to administer Revenue sharing model
  • Marketing and pricing freedom for the crude oil and natural gas produced

What is Unified Licensing Policy?

  • As the name suggests, all licenses are unified i.e. this allows exploration and production of all hydrocarbons such as oil, gas, coal bed methane and shale oil and gas in a block
  • Contrast this with NELP, which required separate licensing for different types of hydrocarbons time and cost overruns

Concept of Open Acreage Policy

  • Contractors will now have the flexibility to request bidding for any block on-tap under Open Acreage Licensing
  • Earlier, they had to wait for the government to auction blocks, and could only bid for blocks that were put up for auction
  • This will enable Exploration & Production (E&P) companies choose the blocks from the area they like

What’s new in Revenue-sharing formula?

  • Present system is that of of production sharing based on Investment Multiple and cost recovery/ production linked payment
  • Under the new revenue-sharing formula, contractors will share the revenue from the time first drop of oil/gas starts flowing from the field.

How this policy of revenue sharing is in tune with Ease of Doing Business?

  • Earlier, under the Production/profit Sharing Methodology, it became necessary for the Govt to scrutinize cost details of private participants and this led to many delays and disputes<as govt was given its share only after all the costs were recovered, govt had to make sure that private parties do not inflate cost to reduce govt’s share>
  • To prevent loss of government revenue, there were requirements for Government approval at various stages to prevent the contractor from exaggerating the cost
  • Activities could not be commenced till the approval was given.  This process became a major source of delays and disputes
  • Under the new regime, the Govt will not be concerned with the cost incurred and will receive a share of the gross revenue from the sale of oil, gas etc.
  • So, no CAG audit, no approvals required, no micromanagement by govt.
  • Companies would worry less about the govt and focus more on operations
Parameter Production sharing Contract Revenue Sharing Contract
Risk Investor can take higher risk as he will be able to recover investment before sharing with govt Won’t take higher risk, has to share revenues from the first drop of oil
Govt interference Higher as costs have to be rechecked minimal
Useful for High risk high cost environment such as deep fields Low cost environment, fully explored blocks
Recommended by Kelkar Committee Rangrajan Committee
Govt policy NELP HELP

India remains one of the least explored countries and could hold large potential resources. For example, 15 basins out of a total 26 sedimentary basins in India spread over on-land, offshore and deepwater, are estimated to hold prognosticated hydrocarbon resources of over 200 billion barrels of oil equivalent. Hence some recommend Production sharing contracts for India with investing capacity to manage such contracts better.

 Graded system of royalty to boost investment

  • The current policy regime, in fixing royalties, does not distinguish between shallow water fields (lower costs and risks) and deep/ultra-deep water fields(much higher costs and risks)
  • Under the new policy, there is lower royalty rates for difficult areas compared to NELP royalty rates
  • A graded system of royalty rates have been introduced, in which royalty rates decreases from shallow water to deepwater and ultra-deep water
  • Royalty rate for onland areas have been kept intact so that revenues to the state governments are not affected

Pricing and Marketing Freedom

At present, natural gas price is determined by taking into account the average of prices in gas-surplus countries such as the US, Canada and Russia, but proposed formula is market-efficient

  • New Policy allows pricing freedom to companies with a cap on prices to protect consumer interest
  • Gas price will be the lowest of imported fuel price; weighted avg of naphtha, coal and fuel oil; and the price of imported LNG
  • Policy also gives marketing freedom
  • The new price will apply to undeveloped gas discoveries and not on currently producing fields

So, new price formula combined with lower royalty rates will help in undeveloped gas discoveries in deep-sea, ultra-deep sea and high-temperature, high-pressure fields. Increased investment and competition will eventually bring down gas prices as well as import dependence of India and lead to the development of a competitive gas market in the country.

From NELP to HELP

UNIFORM Licensing Policy One license for E&P of all the hydrocarbons from a block
Open acreage system Licenses on tap
Revenue sharing model Minimal govt interference
Marketing and pricing freedom Sell to whoever you want at market determined prices subject to a ceiling price

 

How Contract extension will help to remove further obstacles?

  • The grant of extension of production sharing contracts for 28 small, medium sized discovered fields is welcome
  • Because, this move will remove uncertainty and help contractors plan their investments in these blocks
  • The extension will be for 10 years, both for oil and gas fields or economic life of the field, whichever is earlier

Way forward

  • India currently produces around 90 mmscmd (Million Metric Standard Cubic Meter Per Day) of gas, hardly meeting 40 per cent of the needs (imports majority of gas from Qatar)
  • Oil and Natural Gas Corp (ONGC), Reliance Industries and Gujarat State Petroleum Corporation(GSPC) will now get freedom to price gas from its idle discoveries in deep sea, ultra deepsea and high-pressure and high-temperature areas
  • So, overall we can say that, Govt’s target for O&G seems to be on track, to attract more investments, boost production and take away govt discretion from Oil and Gas Exploration
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Babji Harish
Babji Harish
2 years ago

very usefull. thank you team CD!