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

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.

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

Why Qatar has left OPEC, and how the decision will impact oil prices, India

Note4students

Mains Paper 2: IR | Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests

From UPSC perspective, the following things are important:

Prelims level: OPEC

Mains level: Impact of Qatar’s leaving OPEC on India


News

  • Qatar among the world’s smallest countries by area and the richest in terms of per capita gross national income has announced it was walking away from OPEC.

OPEC

  1. OPEC is a cartel of 15 countries that produce about 45% of the world’s oil and contain over 80% of its “proven” reserves.
  2. OPEC was founded in 1960 by Saudi Arabia, Iraq, Iran, Kuwait, and Venezuela. Qatar joined in 1961. Saudi Arabia dominates the cartel, having pumped 11 million barrels per day in October.
  3. OPEC has a very big influence on global oil prices, which play a crucial role in determining the economic health of many countries, including India.

Why has Qatar left OPEC?

  1. Qatar wanted to focus on its gas industry rather than on oil, in which it was in any case a small player.
  2. Qatar’s riches are due to its natural gas reserves, and it is the world’s largest exporter of liquefied natural gas (LNG).

What is Saudi’s problem with Qatar?

  1. Qatar has long showed an independent mind in foreign policy that does not always align with the priorities of its regional Arab neighbours.
  2. This includes having a close economic and diplomatic relationship with Shia Iran, Sunni Saudi’s great regional rival.
  3. In June, 2017, Saudi Arabia, UAE, and Bahrain cut ties with Qatar, directed Qatari citizens to leave within 14 days, and forbade their citizens from going to or staying in Qatar.
  4. Egypt too severed diplomatic contact with Doha, and all of them shut their airspace to Qatari aircraft, and told foreign airlines to seek permission if flying to and from Qatar.
  5. Saudi sealed Qatar’s only land border, and closed its ports to Qatari-flagged ships.

What pulled Saudi to do so?

  1. Riyadh claimed Qatar had refused to end ties with “terrorists”, after Doha declined to fulfill 13 demands that were presented to it.
  2. Those demands included: cutting diplomatic relations with Tehran and military ties with Turkey, shutting down the TV station Al Jazeera, and aligning with other Arab countries “militarily, politically, socially and economically”.
  3. Qatar refused all these saying the demands amounted to “surrendering our sovereignty”.
  4. Doha has backed the Muslim Brotherhood and Hamas, but it is also part of the US-led war on the Islamic State, and has assisted the rebels fighting Bashar al-Assad’s regime in Syria.

Will Qatar leaving OPEC impact global oil prices?

  1. Qatar is a tiny player that pumped 609,000 barrels a day in October, only 2% of OPEC’s total output of 32.9 million barrels per day.
  2. However, over the last many decades, it has played a role mediating internal rivalries in OPEC and striking production-cut deals with producers like Russia.
  3. This is where its absence may hurt OPEC a bit.

And will India be impacted by the departure in any way?

  1. Qatar has limited influence on OPEC’s pricing decisions.
  2. From India’s perspective, its position as the world’s top LNG exporter (annual production of 77 million tonnes per year) and an influential player in the global LNG market is more pertinent.
  3. Qatar is one of India’s oldest LNG suppliers, with Petronet LNG among the companies that have contracted to buy LNG from Qatar.
  4. But LNG pricing is not in OPEC’s domain, so Qatar’s decision is unlikely to impact these trends.

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

[op-ed snap] The shale gas challenge

Note4students

Mains Paper 1: Geography | Distribution of key natural resources across the world (including South Asia & the Indian sub-continent)

From UPSC perspective, the following things are important:

Prelims level: Shale gas, fracking, Directorate General of Hydrocarbons

Mains level: Pros & Cons of shale gas exploration and its role in reducing India’s oil import bill


Context

New hydrocarbon policy approved

  1. The Central government has approved a far-reaching policy that allows private and government players to explore and exploit unconventional hydrocarbons (including shale gas) in contract areas
  2. These areas were primarily allocated for extracting conventional hydrocarbons

Shale gas exploration a difficult task

  1. Shale gas is trapped under low permeable rocks
  2. A mixture of ‘pressurised water, chemicals, and sand’ (shale fluid) is required to break low permeable rocks in order to unlock the shale gas reserves
  3. The process requires around 5 to 9 million litres of water per extraction activity, posing a daunting challenge to India’s freshwater resources

Inadequate provisions to deal with low water availability

  1. The Directorate General of Hydrocarbons (DGH) issued a guideline on environment management during shale gas extraction, stating that “overall volume of fracture fluid is 5 to 10 times that of conventional hydraulic fracturing” and “the (fracturing) activities are likely to deplete water sources and cause pollution due to the disposal of flowback (produced) water”
  2. The guideline falters and states that these challenges will be dealt while granting environmental clearances as per the Environment Impact Assessment (EIA) process
  3. The EIA process, however, does not differentiate between conventional and unconventional hydrocarbons
  4. Sensing this regulatory gap, the DGH in its guideline proposes five new reference points (term of references) relating to water issues in the fracking process that a project proponent must explain while applying for the environmental clearance
  5. However, these five reference points are not succinct to resolve the water-specific issues posed by the fracking activities

Why regulating water usage is important for India?

  1. The importance of clarity in water usage and the place of shale gas extraction in India is linked directly with water requirements of priority sectors like agriculture
  2. A recent study from Duke University observes that from 2011 through 2016, the water use per well in the U.S. increased up to 770% resulting in some shale wells consuming up to 42 million litres of water per well
  3. The study further conveys that over a period of time, the usage of water dramatically increases for extracting the same amount of shale gas from a well

A threat of ground & surface water contamination 

  1. Shale rocks are usually adjacent to rocks containing useable/ drinking water known as ‘aquifers’
  2. While fracking, the shale fluid could possibly penetrate aquifers leading to methane poisoning of groundwater used for drinking and irrigational purposes
  3. When shale fluid is injected underground at high pressure to fracture the rock, 5-50% (depending on the local geology) of the fluid returns to the surface, known as ‘flowback water’ and the flow continues as oil and gas is pumped from the well
  4. The flowback water is usually methane-contaminated, and therefore it poses different recycling and leakage issues than usual wastewater

Guidelines ineffective on various fronts

  1. The DGH guideline states that a project proponent must “design and construct wells with proper barriers to isolate and protect groundwater”, but misses out on broadly describing the nature or properties of a barrier that can be considered ‘proper’ to isolate and protect the groundwater
  2. The DGH guideline touches upon the exclusive nature of the flowback water but neither proposes any substantive treatment method nor recognises the increase in flowback water during repeated extraction of shale gas from a well over a period of time

Way Forward

  1. Indian households and irrigation thrive on groundwater
  2. Implementation of the fracking processes without a consultative thought through process, especially on ‘water usage policy’, may result in larger issues including water stress, contamination of groundwater, and related health hazards

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

[op-ed snap] A long-term strategy to reduce crude imports

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Strategy to reduce oil imports and make a sustained supply of other cost effective fuels


Context

Turmoil in oil industry

  1. The oil industry has been witnessing significant turmoil and uncertainty in recent months
  2. The primary benchmark for international oil prices, the Brent crude, reached a level ($80.49 per barrel) in May that was not seen since 2014
  3. Histrionics around the US sanctions on Iran have also affected sentiments considerably
  4. In recent weeks, tariffs imposed by the Donald Trump administration and the increasing production from Saudi Arabia and Libya have caused the abatement of prices

Impact on India

High oil prices is a double whammy for India:

  1. It would widen the country’s trade deficit
  2. And also impose a fiscal burden on account of fertilizer, kerosene and LPG subsidies

Possible options to reduce oil prices & their impact

  1. The expectation is that the excise duty on petroleum products might be lowered unless the recent fall in prices sustain
  2. The government had collected around ₹2 trillion from such duties in 2017-18, which played a crucial role in fiscal management
  3. So, lowering the excise duty would exert pressure on the fiscal balance
  4. Alternatively, oil marketing companies (OMCs) may be asked to absorb losses but that would intrude on their capital expenditure plan
  5. That would also send rather negative signals to markets, which have been watching out for any government moves on price control and passing over subsidy burdens to oil producing and marketing companies, and, in effect, rolling back pricing reforms

A strategy that can be used

  1. India now needs a carefully devised strategy that is not driven by short-termism but aims to gradually insulate the country from global oil price volatility
  2. Such a strategy should be centred on three things:
  • Expediting the migration to electric mobility
  1. Since the transport sector accounts for around 70% of the total diesel sales in the country, it is an appropriate sphere for a transition from traditional fuels to electric motors
  2. A favourable incentive mechanism (subsidy up to 60% of the total cost of an electric bus) to help the adoption of electric buses gain traction is already in place
  3. What we now need to do is to get the pace of building electric vehicle (EV) supportive infrastructure to catch up with the addition of new electric buses to the public transportation system
  4. Within the transport sector, trucks alone account for around 28% of the diesel consumption. Thus, creating dedicated electric corridors for trucks on the highways could go a long way in curbing oil imports
  • Expanding the biofuel blending in petrol
  1. Increasing the blending proportion of domestically available biofuels in cooking gas and transportation fuel is another way to reduce India’s reliance on imported crude oil
  2. Ethanol is mainly used for blending in our country and it is mostly derived from sugarcane molasses means its production is contingent on weather patterns
  3. Sugarcane, refining of which creates molasses, is a water-intensive crop, so fresh incentives to increase ethanol production may not be good economics in a country where water scarcity is a serious problem
  4. Hence, methanol, produced from coal, should be given more weightage when it comes to blending
  5. Besides, biodiesel supply should be augmented by making jatropha farming more productive through genetic modification
  • Stimulating exports
  1. If all these measures together reduce oil imports by 20%, the country could save up to $18 billion a year in terms of foreign exchange (assuming oil prices stay around their current level)

Way Forward

  1. Reducing the country’s reliance on oil imports would bode well for energy security, and make our financial markets less volatile in the event of untoward developments in the oil market
  2. The savings from reduced oil imports could in turn be used to finance infrastructure projects, which are crucial for India’s long-term growth prospects

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

Govt. plans ‘ISRO-like’ ocean mission

Note4students

Mains Paper 3: Science & Technology | Awareness in the fields of IT, Space, Computers, robotics, nano-technology, bio-technology

From UPSC perspective, the following things are important:

Prelims level: Particulars of the DOM

Mains level: All such missions are important from examination point of view.


News

Deep Ocean Mission

  1. The Centre has drawn up a five-year, ₹8,000 crore plan to explore the deep recesses of the ocean.
  2. The Union Earth Sciences Ministry tasked with coordinating the exercise unveiled a blueprint of the Deep Ocean Mission (DOM).
  3. Among the key deliverables to achieve these goals are an offshore desalination plant that will work with tidal energy and developing a submersible vehicle that can go to a depth of at least 6,000 meters with three people on board.
  4. The focus will be on technologies for deep-sea mining, underwater vehicles, and underwater robotics and ocean climate change advisory services, among other aspects.

Other deep-sea missions

  1. India has been allotted a site of 75,000 square kilometers in the Central Indian Ocean Basin (CIOB) by the UN International Sea Bed Authority for exploitation of polymetallic nodules (PMN)
  2. These are rocks scattered on the seabed containing iron, manganese, nickel and cobalt.
  3. It is envisaged that 10% of recovery of that large reserve can meet the energy requirement of India for the next 100 years.
  4. It has been estimated that 380 million metric tonnes of polymetallic nodules are available at the bottom of the seas in the Central Indian Ocean.
  5. India’s Exclusive Economic Zone spreads over 2.2 million square kilometres and in the deep sea, lies unexplored and unutilised.
  6. Recently India’s exclusive rights to explore polymetallic nodules from the seabed in Central Indian Ocean Basin (CIOB) have been extended by five years by International Seabed Authority

Back2Basics

UN International Sea Bed Authority

  1. The International Seabed Authority (ISA) is an intergovernmental body that was established to organize, regulate and control all mineral-related activities in the international seabed area beyond the limits of national jurisdiction, an area underlying most of the world’s oceans
  2. It is an organization established by the Law of the Sea Convention
  3. It is based in Kingston, Jamaica
  4. Currently, the Authority has 167 members and the European Union, composed of all parties to the Law of the Sea Convention
  5. The Authority operates by contracting with private and public corporations and other entities authorizing them to explore, and eventually exploit, specified areas on the deep seabed for mineral resources essential for building most technological products

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

[pib] Additional 6.5MMT Strategic Petroleum Reserves at Chandikhol in Odisha and at Padur, Karnataka

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Locations of SPR

Mains level: Initiatives for ensuring energy security


 News

  1. The Union Cabinet has approved establishment of additional 6.5 Million Metric Tonne (MMT) Strategic Petroleum Reserve (SPR) facilities at two locations, i.e. Chandikhol in Odisha and Padur in Karnataka, including construction of dedicated SPMs (Single Point Mooring) for the two SPRs.
  2. The SPR facilities at Chandikhol and Padur will be underground rock caverns and will have capacities of 4 MMT and 2.5 MMT respectively.

Generating more employment through PPP

  1. The in-principle approval is to take up the project under PPP model to reduce budgetary support of Government of India.
  2. The terms and conditions of such participation would be determined by M/oP&NG in consultation with Ministry of Finance after conducting road shows to elicit requirements of the market, including prospective investors.
  3. The construction phase of the SPRs is likely to generate significant direct & indirect employment opportunities in the states of Odisha and Karnataka.

Back2Basics

Strategic Petroleum Reserve Programme

  1. The Indian Strategic Petroleum Reserve (ISPR) is an emergency fuel store.
  2. Strategic crude oil storages are at 3 underground locations in Mangalore, Visakhapatnam and Padur (near Udupi).
  3. All these are located on the east and west coasts of India which are readily accessible to the refineries.
  4. These strategic storages are in addition to the existing storages of crude oil and petroleum products with the oil companies and serve in response to external supply disruptions.
  5. FM Arun Jaitley in his 2017-18 budget speech has announced that two more such caverns will be set up Chandikhole in Jajpur district of Odisha and Bikaner in Rajasthan as part of the second phase.

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

Why this week’s OPEC meeting matters for India

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: OPEC Meetings and their Outcome

Mains level: Effects of rising crude oil prices on Indian Economy.


 News

The world is waiting to see whether the Organization of the Petroleum Exporting Countries (OPEC) will decide to increase crude oil production at its meeting to be held in Vienna

Why is this meeting so important?

  1. With OPEC accounting for around 40% of global production, any decision will have a wide-ranging impact on energy markets.
  2. The meeting is also significant as it comes in the backdrop of a supply cut by OPEC and Russia, which triggered a rally in global crude oil prices.
  3. Prices have fallen since then. Also, there are growing fears of a trade war escalation, which may impact global growth.

How do international crude oil prices affect India?

  1. Retail prices of petrol and diesel in India track global prices of these fuels, not crude, but they are broadly linked to crude oil price trends.
  2. Crude oil prices impact India’s oil import bill and trade deficit. Lower oil prices had dramatically improved India’s terms of trade in 2015-16.
  3. A rally in global oil prices had pushed up the average cost of the Indian basket of crude

How did the Indian government respond to high prices?

The government has so far refused to roll back its decision to link domestic and international fuel prices and has said that it is working toward a ‘long-term solution’.

Why is this meeting particularly important for India?

  1. India’s energy needs are mainly met through imports, and OPEC accounts for around 83% of the country’s total crude oil imports.
  2. Oil minister who is scheduled to participate in the 7th OPEC seminar has maintained that India is a price-sensitive customer and will seek reasonable rates as its energy demand grows.
  3. He has also said market fundamentals do not support such high prices

Is Opec alone responsible for the oil market uncertainty?

  1. There have been both internal and external pressures on the grouping.
  2. There has been a rally in oil prices due to factors such as US President Donald Trump pulling his country out of the 2015 nuclear accord with Iran, and Opec and Russia cutting supplies.
  3. In addition, Venezuela’s oil output has collapsed to the lowest since the 1950s and geopolitical tensions have also played a part.

Back2Basics

Organisation of the Petroleum Exporting Countries (OPEC)

  1. OPEC  is an intergovernmental organization of 14 nations
  2. The 14 countries accounted for an estimated 44 percent of global oil production and 73 percent of the world’s “proven” oil reserves
  3. OPEC’s stated mission is “to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry
  4. The OPEC Conference is the supreme authority of the organization and consists of delegations normally headed by the oil ministers of member countries
  5. The Conference ordinarily meets at the Vienna headquarters, at least twice a year and in additional extraordinary sessions when necessary

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

India’s ONGC to quadruple production from Bay of Bengal block

Note4students

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

From UPSC perspectives, the following things are important

Prelims Level: Location of the Gas Block

Mains Level: Importance of the increase in the production of natural gas


News

Increase in output from Deendayal natural gas block in the Bay of Bengal

  1. India’s state-owned exploration company Oil and Natural Gas Corp. Ltd (ONGC) will by early 2019 quadruple the output from an offshore gas block in the Bay of Bengal
  2. The ONGC had spent a billion dollars on the block last year
  3. Output from the block off India’s east coast will reach as high as a million standard cubic metres per day by January 2019

Why is this increase important?

  1. ONGC, which meets up to 40% of India’s total natural gas demand, had been saddled with ageing fields and dropping production for almost a decade

Target set by the government

  1. Government has set a target of increasing the share of natural gas in India’s energy mix to 15% by 2030, from 6.5% now
  2. Government wants to cut down on energy imports, especially crude oil

Demand of natural gas in India

  1. India consumed around 145 million cubic metres of natural gas a day, nearly 50 percent of it imported, in 2017-18
  2. The government has projected India’s potential demand at nearly 500 million cubic metres of gas a day

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

India to launch gas trading hub

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Natural gas trading hub, Petroleum and Natural Gas Regulatory Board

Mains level: India’s ambition of becoming a gas-based economy and various issues associated with it


Developing an ecosystem for gas trading

  1. The government plans to launch a natural gas trading hub by October
  2. It will also be creating an Indian gas benchmark which will spark a surge in consumption of the cleaner-burning fuel
  3. Oil regulator Petroleum and Natural Gas Regulatory Board (PNGRB) has sought bids to hire a consultant to help develop a regulatory framework for operationalizing the gas trading/exchange hub

What’s in the offing

  1. In order to further boost the consumption of natural gas in the country, Government is considering the establishment of a Gas Trading Hub / Exchange (GTHE)
  2. Here natural gas could be traded and supplied through a market-based mechanism instead of multiple formula driven prices

Current mechanism

  1. Currently, the government fixes the price of the bulk of domestically produced natural gas
  2. The rate is arrived at using price prevalent in gas-surplus nations of US, Canada, UK, and Russia

Internationally accepted practice

  1. A hub is used as a central pricing point for a network that could aid better price discovery for domestic as well as imported gas
  2. India is not only country launching trading hub
  3. China plans to launch a natural gas trading hub in Chongqing this year
  4. The world’s biggest natural gas hub is the Henry Hub in the US state of Louisiana
  5. Britain has National Balancing Point (NBP) as the main gas hub

Back2Basics

Petroleum and Natural Gas Regulatory Board (PNGRB)

  1. The Petroleum and Natural Gas Regulatory Board Act, 2005 establishes the Petroleum and Natural Gas Regulatory Board (PNGRB) to regulate downstream activities in the petroleum and natural gas sector
  2. The PNGRB shall regulate the laying and expanding of (a) transmission pipelines for gas and petroleum and (b) city/ local gas distribution networks
  3. Entities will have to register with the PNGRB to market petroleum products and natural gas, operate LNG terminals and establish storage facilities beyond specified capacity
  4. PNGRB will monitor PNG prices and can take corrective measures to prevent restrictive trade practice by the entities
  5. The PNGRB will have the same powers as a civil court to settle disputes. The Appellate Tribunal under the Electricity Act will serve as the Appellate Tribunal for this Act

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

India to ally with China on ‘Asian premium’

Note4students

Mains Paper 2: IR | Bilateral, regional & global groupings & agreements involving India &/or affecting India’s interests

From UPSC perspective, the following things are important:

Prelims level: Asian premium, OPEC, International Energy Forum

Mains level: India’s dependence on oil imports and various issues related to it


Against Asian premium

  1. India would coordinate with China and other Asian countries to raise voice against the “Asian premium” being charged by the Organisation of the Petroleum Exporting Countries (OPEC)
  2. India with China’s help will chalk out the strategy that would result in getting a better price from OPEC countries
  3. India had also raised the issue on the sidelines of International Energy Forum

Back2Basics

Asian premium

  1. Asia is far more dependent on oil imports from the Middle East (ME) than any other major importing region in the world
  2. Because of this dependence, it is widely believed that Asian customers have been paying a premium for the Middle East crude oil relative to those in the US and EU
  3. A number of studies have consistently identified higher prices for exports to Asia relative to US and EU prices
  4. This is called as “Asian premium”

Organisation of the Petroleum Exporting Countries (OPEC)

  1. OPEC  is an intergovernmental organization of 14 nations
  2. The 14 countries accounted for an estimated 44 percent of global oil production and 73 percent of the world’s “proven” oil reserves
  3. OPEC’s stated mission is “to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry
  4. The OPEC Conference is the supreme authority of the organization and consists of delegations normally headed by the oil ministers of member countries
  5. The Conference ordinarily meets at the Vienna headquarters, at least twice a year and in additional extraordinary sessions when necessary

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

Govt nod for natural gas exploration in areas allotted to Coal India

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Cabinet committee on economic affairs (CCEA), coal bed methane (CBM)

Mains level: India’s energy security concerns and measures taken to overcome them


Exploring natural gas

  1. The cabinet committee on economic affairs (CCEA) has approved exploration and production of natural gas from areas allotted to state-run Coal India Ltd
  2. This will help expand India’s coal bed methane (CBM) sector

Push for a gas-based economy

  1. India has been pushing for a gas-based economy
  2. As the world’s fourth-largest liquefied natural gas (LNG) importer, it has been trying to leverage the glut in global LNG supplies to renegotiate its contracts
  3. The decision will help India’s natural gas production and reduce the demand-supply gap in the country

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

[pib] MoU between Indian Consortium and Saudi Aramco

Note4Students

From UPSC perspective, the following things are important:

Prelims level: Ratnagiri Refinery

Mains level: Petroleum sector in India and future prospects


News:

  • An Indian Consortium consisting of IOCL, BPCL and HPCL and Saudi Aramco signed a Memorandum of Understanding (MoU) to jointly develop and build an integrated refinery and petrochemicals complex, Ratnagiri Refinery & Petrochemicals Ltd. (RRPCL) in the State of Maharashtra.
  • The strategic partnership brings together crude supply, resources, technologies, experience and expertise of these multiple oil companies with an established commercial presence around the world.
  • The refinery will be capable of processing 1.2 million barrels of crude oil per day (60 million metric tonnes per annum, or MMTPA).
  • It will produce a range of refined petroleum products, including petrol and diesel meeting BS-VI fuel efficiency norms. 
  • RRPCL will rank among the world’s largest refining & petrochemicals projects and will be designed to meet India’s fast-growing fuels and petrochemicals demand

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

[pib] 16th International Energy Forum Ministerial

Note4Students

From UPSC perspective, the following things are important:

Prelims level: International Energy Forum

Mains level: Various summits hosted by India and their importance


News:

  • India hosted the 16th International Energy Forum Ministerial (IEF16).
  • The Prime Minister Shri Narendra Modi inaugurated the event.
  • IEF16 is the largest gathering of Energy Ministers from across the globe, industry leaders and heads of key international organizations who will debate the future of global energy.
  • The International Energy Forum (IEF) aims to foster greater mutual understanding and awareness of common energy interests among its members.
  • It has 72 member countries signatories to the IEF Charter, which outlines the framework of the global energy dialogue through this inter-governmental arrangement. Apart from them, 20 countries are also participating in this meeting as special invitees.
  • Covering all six continents and accounting for around 90% of global supply and demand for oil and gas, the IEF is unique in that it comprises not only consuming and producing countries of the IEA and OPEC, but also the Transit States and major players outside of their memberships, including Argentina, China, India, Mexico, Russia and South Africa.
  • Hosted by India and co-hosted by China and Korea, IEF16 aims to focus on how global shifts, transition policies and new technologies influence market stability and future investment in the energy sector.
  • IEF16 delegates are invited to consider how global market shifts and energy transition will shape the future of energy security.

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

India likely to push for dropping ‘Asian premium’ on oil prices

Note4students

Mains Paper 2: IR | Effect of policies & politics of developed & developing countries on India’s interests, Indian diaspora.

From UPSC perspective, the following things are important:

Prelims level: Asian premiumInternational Energy Forum, Oil Producing and Exporting Countries (OPEC)

Mains level: India’s high dependence on oil imports and measures to develop alternative power sources


Ending discriminatory premium on oil

  1. India is likely to lobby heavily for an end to the discriminatory “Asian premium” on oil prices and a “responsible” price mechanism
  2. The 16th International Energy Forum Ministerial Meeting will be held in New Delhi, India from 10-12 April 2018

IEF conference

  1. The IEF represents 90% of world consumption and production of oil and gas
  2. Key Oil Producing and Exporting Countries (OPEC) including Saudi Arabia and Iran’s petroleum ministers will attend the conference

What is Asian premium?

  1. IEF countries distinguished consumers in Asia from the U.S. and European countries in deciding oil prices
  2. The demands to abolish it have met with little success

Focus on renewable energy

  1. The thrust of the IEF conference will be on moving away from fossil fuels
  2. The outcomes would revolve around the whole issue of transition: of moving to electric vehicles, or renewables or decarbonization

Back2Basics

International Energy Forum

  1. IEF is the world’s largest recurring gathering of energy ministers
  2. It is unique in that participants not only include IEA and OPEC countries, but also key international actors such as Brazil, China, India, Mexico, Russia, and South Africa
  3. The IEF is promoted by a permanent Secretariat based in the Diplomatic Quarter of Riyadh, Saudi Arabia
  4. The 16th IEF International Energy Forum Ministerial will take place on 10-12 April in New Delhi under the theme “The Future of Global Energy Security: Transition, Technology, Trade and Investment”

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

[op-ed snap] The oil risk

Image Source

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: OPEC

Mains level: The newscard discusses the rising crude oil prices and its effects on India.


News

What is the issue?

  1. Crude oil price is about at about $70 a barrel, marking a four-year high and a price increase of close to 6% since the start of the year
  2. The rise in international prices has been particularly sharp given that oil had been selling at below $45 in June
  3. This is an increase of about 55% in a matter of just months

Reason behind this up and down in prices

  1. Oil price dynamics have often been explained by changes in the supply outlook influenced by the decisions of major oil producers
  2. But the recent spurt in oil prices, however, seems to be more the result of a weakening of the U.S. dollar than anything else

Effect of high prices on OPEC countries

  1. Oil trading at $70 should offer some respite to traditional oil producers like the OPEC members, which have suffered the onslaught of U.S. shale producers

Effect of oil prices on India

  1. Consumers in India are already beginning to feel the pinch as petrol and diesel prices have hit multi-year highs
  2. The retail selling price of both petrol and diesel in Delhi, for instance, has risen by close to Rs. 3 a litre since the beginning of 2018

What should be done from the government side?

  1. As rising oil prices put pressure on domestic consumers, the government will have to desist from resorting to subsidies to ease the pain
  2. It should work towards rationalising taxes on petrol and diesel to bring down retail prices
  3. This will help consumers without imposing an undue burden on the oil marketing companies

Effect of oil prices on India’s fiscal

  1. With the fiscal windfall from low oil prices likely to end for now, the government should think for the long term
  2. And make crucial tweaks to its hydrocarbon exploration and licensing policy to expedite oil discovery and production
  3. Simultaneously, it must take a leaf from China’s book and actively support Indian energy firms’ bids for overseas oilfields
  4. Self-reliance is ultimately the best hedge

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

Petroleum ministry to seek Cabinet approval for domestic gas trading hub

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From the UPSC perspective following things are important:

Prelims level: Government mandated formula for determining natural gas prices in the country.

Mains level: Energy related topics are specially mentioned in the mains syllabus.


News

Seeking approval

  1. Petroleum ministry is seeking approval from the Union Cabinet’s for a domestic gas trading hub
  2. It help India adopt a better mechanism for price discovery of both domestic as well as imported gas

Other plans of the ministry

  1. Ministry is in the process of creating an internal think-tank to assist in priority areas like
    (1) foreign investment
    (2) moving towards gas-based economy
    (3) financing models
    (4) using technology and curbing hydrocarbon imports

How is natural gas prices determined, currently?

  1. Currently, the price of natural gas in the country is determined through a government-mandated formula that links the local price to rates prevailing in gas-surplus nations

Future plans of the government

  1. Currently, India imports almost 60 per cent of its petroleum requirements
  2. India also plans to double its network of pipelines to transport natural gas to 30,000 km within the next three-four years which will help in shifting to a gas-based economy, reduce greenhouse emissions and cut oil import

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

[pib] India’s flagship biennial international oil and gas conference: PETROTECH

  1. Petrotech is Asia’s largest oil and gas event. The theme for this event is “Hydrocarbons to fuel the future – Choices and Challenges”
  2. Petrotech will also include a BRICS Roundtable of Energy Ministers and a Roundtable discussion involving select CELAC countries of Latin America
  3. India will also host the International Energy Forum – International Gas Union (IEF-IGU) Ministerial Forum on December 6
  4. What’s CELAC? The Community of Latin American and Caribbean States is a regional bloc of Latin American and Caribbean states thought out on February 23, 2010

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

Cairn cannot export Barmer crude: Delhi HC

  1. Delhi HC rejects plea of Cairn India Ltd to export crude oil from its Barmer oil field in Rajasthan
  2. The government had opposed Cairn’s plea on the ground that export of the domestic crude oil cannot be allowed as it would be detrimental to India’s energy security
  3. Nearly 85 per cent of required crude in India was imported
  4. The Delhi HC said that domestic crude cannot be exported till India attained “self sufficiency”

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

Shah panel indicts RIL in KG basin case

  1. Justice A.P. Shah committee: Probed a dispute between state-run Oil and Natural Gas Corp. Ltd (ONGC) and Reliance Industries Ltd (RIL)
  2. Dispute: Pertained to the flow of gas between the adjacent fields of ONGC and RIL in the Krishna-Godavari (KG) basin
  3. Finding: The unfair enrichment in RIL’s KG D6 field came because RIL retained the gains of the gas which flowed into its field from adjacent fields of ONGC
  4. The report accused both ONGC and RIL of not bringing to the notice of the regulator, the Director General of Hydrocarbons, information they had about how their fields were connected
  5. ONGC took action six years after it came to know about gas from its field flowing into RIL’s field

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

SC concerned over adulteration of petro products

  1. SC: A criminal-politician mafia nexus run petrol pumps and subsidised kerosene distribution in rural and urban parts of the country have led to rampant adulteration of petroleum products
  2. It is rampant and unfortunate that very powerful people like politicians have petrol pumps
  3. They can tamper with the machine & are the ones who will resist the change
  4. It asked Govt to detail measures taken to stop fuel adulteration and siphoning of subsidised kerosene meant for the poor
  5. It even suggested the possibility of installing equipment which can detect fuel adulteration

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

Reply to CAG report

  1. Ministry of Petroleum & Natural Gas has taken up the issue of significant implication of inclusion of condensate for determination of ONGC’s share of under-recoveries with the Govt
  2. ONGC: Had appealed to Govt that in future only crude oil quantity be considered for determination of ONGC’s share of under-recoveries and quantity of gas condensate may not be included
  3. Why not to include? The gas-condensate is neither crude oil nor is it sold

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

ONGC overstated crude oil output: CAG report

  1. CAG: ONGC had to bear a larger share of subsidy due to overstatement of reported crude oil production by inclusion of condensate and off-gas
  2. The measurement of crude oil production should not include condensates and off-gas (a dissolved gas in crude oil separated during the stabilisation process of crude oil)
  3. Under-recovery: Upstream national oil companies such as ONGC and OIL shared the under-recoveries of oil marketing companies that arose from their having to sell petroleum products at subsidised rates
  4. Subsidy sharing system(since 2012): An upstream company’s subsidy burden is to be calculated on the basis of its total crude oil production

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

India’s biggest oil refinery to come up

  1. India’s biggest oil refinery that state-run IOC, BPCL, HPCL and EIL plan to set up on the west coast will cost US$ 30 billion
  2. The refinery have 60 million tonnes capacity with 3 crude units of 20 million tonnes each for products such as petrol, diesel
  3. IOC has been looking at west coast for a refinery as catering to customers in West and South was difficult with its refineries mostly in the North
  4. HPCL and BPCL have also been looking at a bigger refinery because of constraints they face at their Mumbai units
  5. Reliance Industries has the biggest refinery in India till now with the 33 million tonnes capacity at Jamnagar in Gujarat

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

Low inflation shows oil price benefit passed on: Pradhan

  1. What? Oil Minister Dharmendra Pradhan has strongly dismissed the perception that the Govt has failed to pass on the benefits of lower oil prices to Indian consumers
  2. How? He cited reasonable levels of inflation over the past two years as a proof of transferring the benefits of lower oil pries
  3. If Govt had not passed on the crude oil price benefit to the consumer, the transportation sector would not have seen so much rationality in prices
  4. Avoiding shocks: He also defended the high taxation on fuels as a tool to protect people from a price shock when oil prices start to climb up again
  5. There is no developed country that has transferred the benefit of sliding oil prices to the consumers in any real way
  6. Use of savings: Centre has been using the fuel tax receipts to finance critical development programs such as affordable housing, cooking gas connections for the poor and so on
  1. What? Oil Minister Dharmendra Pradhan has strongly dismissed the perception that the Govt has failed to pass on the benefits of lower oil prices to Indian consumers
  2. How? He cited reasonable levels of inflation over the past two years as a proof of transferring the benefits of lower oil pries
  3. If Govt had not passed on the crude oil price benefit to the consumer, the transportation sector would not have seen so much rationality in prices
  4. Avoiding shocks: He also defended the high taxation on fuels as a tool to protect people from a price shock when oil prices start to climb up again
  5. There is no developed country that has transferred the benefit of sliding oil prices to the consumers in any real way
  6. Use of savings: Centre has been using the fuel tax receipts to finance critical development programs such as affordable housing, cooking gas connections for the poor and so on

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

Analysts grow more bullish on oil, OPEC poses no threat to rebalancing

  1. What? Analysts are growing increasingly confident that a near-two-year rout in oil has ended
  2. They have raised their price forecasts for a second month running
  3. Reason: Healthier demand and a drop in U.S. shale output to balance the market by 2017
  4. Also, the inability of OPEC and non-OPEC producers to agree to limit oil output is not expected to slow the rebalancing of global demand and supply
  1. What? Analysts are growing increasingly confident that a near-two-year rout in oil has ended
  2. They have raised their price forecasts for a second month running
  3. Reason: Healthier demand and a drop in U.S. shale output to balance the market by 2017
  4. Also, the inability of OPEC and non-OPEC producers to agree to limit oil output is not expected to slow the rebalancing of global demand and supply

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

LPG subsidy goes for high income consumers

  1. Context: Rationalisation of LPG subsidy
  2. Income limit: Oil and Gas Ministry is excluding people earning more than Rs.10 lakh a year from LPG subsidies
  3. Income will be as computed under Income Tax Act, 1961
  4. Change of stance: Last week, ministry had denied the use of Income Tax data for income identification
  1. Context: Rationalisation of LPG subsidy
  2. Income limit: Oil and Gas Ministry is excluding people earning more than Rs.10 lakh a year from LPG subsidies
  3. Income will be as computed under Income Tax Act, 1961
  4. Change of stance: Last week, ministry had denied the use of Income Tax data for income identification

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

Govt might cut natural gas price by up to 17%

  1. Context: The petroleum ministry might cut domestic natural gas prices by as much as 17%
  2. The Petroleum Planning and Analysis Cell is likely to make a notification of the new price
  3. Why? To align rates with the decline in global prices
  4. Impact: The new price would dent the earnings of state-run explorers and the government’s earnings from the royalty on production
  1. Context: The petroleum ministry might cut domestic natural gas prices by as much as 17%
  2. The Petroleum Planning and Analysis Cell is likely to make a notification of the new price
  3. Why? To align rates with the decline in global prices
  4. Impact: The new price would dent the earnings of state-run explorers and the government’s earnings from the royalty on production

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

Oil prices take toll on remittances

  1. Context: According to RBI data, Indians remitted $15.8 billion during 3rd quarter of 2016, the lowest in 18 quarters
  2. Reason: This reflects the flip side of the sharp fall in global crude oil prices
  3. If prices remain low for an extended period, the fall in remittances could prove to be more than a one-off
  4. Remittance is India’s most stable source of dollar inflows & a big positive for the country
  1. Context: According to RBI data, Indians remitted $15.8 billion during 3rd quarter of 2016, the lowest in 18 quarters
  2. Reason: This reflects the flip side of the sharp fall in global crude oil prices
  3. If prices remain low for an extended period, the fall in remittances could prove to be more than a one-off
  4. Remittance is India’s most stable source of dollar inflows & a big positive for the country

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

Future oil security at risk: IEA

  1. What? We may face an oil shock in future. according to the International Energy Agency
  2. Why? Because the price bust has hammered investment in future supply
  3. Oil firms have cancelled more than $100 billion investments, laid off tens of thousands of workers, slashed dividends and sold assets
  4. If investment doesn’t resume in 2017-18, we can see a spike in oil prices as oil supply can’t meet demand
  1. What? We may face an oil shock in future. according to the International Energy Agency
  2. Why? Because the price bust has hammered investment in future supply
  3. Oil firms have cancelled more than $100 billion investments, laid off tens of thousands of workers, slashed dividends and sold assets
  4. If investment doesn’t resume in 2017-18, we can see a spike in oil prices as oil supply can’t meet demand

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

Centre changes tack on LPG subsidy campaign

  1. Context: In Dec 2015, Centre had notified Rs. 10 lakh as the cut-off annual income for LPG subsidy, but urged people earning more to give it up voluntarily
  2. News: The govt has decided to charge the full unsubsidised price of cooking gas to all customers who earn more than Rs.10 lakh a year
  3. It was done with the support of Income Tax department which identified around 3 lakh people with an income of more than Rs. 10 lakh
  4. Reason: The voluntary campaign “Give it up” did not yield the desired results
  5. Statistics: Around 85.24 lakh people have given up their LPG subsidy voluntary
  1. Context: In Dec 2015, Centre had notified Rs. 10 lakh as the cut-off annual income for LPG subsidy, but urged people earning more to give it up voluntarily
  2. News: The govt has decided to charge the full unsubsidised price of cooking gas to all customers who earn more than Rs.10 lakh a year
  3. It was done with the support of Income Tax department which identified around 3 lakh people with an income of more than Rs. 10 lakh
  4. Reason: The voluntary campaign “Give it up” did not yield the desired results
  5. Statistics: Around 85.24 lakh people have given up their LPG subsidy voluntarily

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

Opec sees lower 2016 demand for its oil, pointing to higher surplus

  1. Context: Falling crude oil prices in global market
  2. News: The Organization of the Petroleum Exporting Countries predicted global demand for its crude oil will be less in 2016
  3. Reason: The supply from producers outside OPEC is more resilient to low prices and they have started cutting production
  4. OPEC sees considerable uncertainty for 2016 in Europe

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

New regime in oil and gas exploration

  1. Context: Govt effected major policy changes in oil & gas exploration
  2. Revenue sharing: Prospective replacement of profit-sharing in hydrocarbon exploration with a revenue-sharing formula
  3. Benefit: It may help prevent future disputes over pricing and cost recovery such as one with Reliance Industries Ltd (RIL)
  4. License Policy: A transparent single license and policy framework for oil, gas and coal-bed methane (CBM) exploration
  5. At present there is a different policy for each form of hydrocarbons
  6. Pricing: Freeing gas pricing from the new blocks and existing discoveries which are yet to commence production

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

First high-octane fuel unit to come up at Mathura

  1. News: Petroleum Minister laid the foundation stone for India’s first Octomax unit at the Mathura refinery for the production of high-octane gasoline.
  2. Importance: Unit will be the first-of-its-kind in India addressing the emerging scenario in petroleum refining
  3. About Octomax: Novel technology developed in-house by R&D Centre of Indian Oil
  4. Involves: conversion of cracked C4 streams to high-octane gasoline blending stock for production of Euro-IV/V equivalent gasoline
  5. Way forward: Mathura refinery will play major role in meeting govt’s target of introducing BS-VI standards in petrol and diesel by 2020
  1. News: Petroleum Minister laid the foundation stone for India’s first Octomax unit at the Mathura refinery for the production of high-octane gasoline.
  2. Importance: Unit will be the first-of-its-kind in India addressing the emerging scenario in petroleum refining
  3. About Octomax: Novel technology developed in-house by R&D Centre of Indian Oil
  4. Involves: conversion of cracked C4 streams to high-octane gasoline blending stock for production of Euro-IV/V equivalent gasoline
  5. Way forward: Mathura refinery will play major role in meeting govt’s target of introducing BS-VI standards in petrol and diesel by 2020

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

North East in Hydrocarbon Vision 2030

  1. Govt planning projects totalling Rs.1.3 trillion in public and private investments in the North-East region
  2. Aims to double oil and gas output in the next 15 years
  3. Has an eye on markets such as Bangladesh, Nepal, Bhutan and Myanmar
  4. A strong network of crude oil and natural gas pipelines would be set up as part of the plan
  5. Present production is 223 million tonnes of petroleum products and 33 billion standard cubic metres of natural gas a year

North-east India would be a gateway of South-East Asia in future

  1. Govt planning projects totalling Rs.1.3 trillion in public and private investments in the North-East region
  2. Aims to double oil and gas output in the next 15 years
  3. Has an eye on markets such as Bangladesh, Nepal, Bhutan and Myanmar
  4. A strong network of crude oil and natural gas pipelines would be set up as part of the plan
  5. Present production is 223 million tonnes of petroleum products and 33 billion standard cubic metres of natural gas a year

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

India to buy more crude oil from Nigeria

  1. India is set to import more crude oil from Nigeria, already one of the biggest contributors to the country’s oil imports.
  2. Nigeria has now agreed to increase the term contract from 1.7 million tonnes(MT) per annum to 3 MT in 2016.
  3. The benefit of a term-contract is that it ensures quantity as well as a stable price.
  4. Nigeria is the 3rd-largest contributor to India’s oil imports, behind Saudi Arabia and Iraq.
  5. Sudan has offered more oil blocks for exploration and asked for Indian companies’ expertise to raise production from existing fields.
  1. India is set to import more crude oil from Nigeria, already one of the biggest contributors to the country’s oil imports.
  2. Nigeria has now agreed to increase the term contract from 1.7 million tonnes(MT) per annum to 3 MT in 2016.
  3. The benefit of a term-contract is that it ensures quantity as well as a stable price.
  4. Nigeria is the 3rd-largest contributor to India’s oil imports, behind Saudi Arabia and Iraq.
  5. Sudan has offered more oil blocks for exploration and asked for Indian companies’ expertise to raise production from existing fields.

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

Saudi Arabia’s oil premium may force India to tap Africa

  1. India is looking at Africa to spruce up its oil and gas imports as it seeks to diversify its energy basket.
  2. Recently, Saudi Arabia has decided to charge a premium for the oil it sells to Asian customers.
  3. It would be charging Asian customers 60 cents a barrel more for crude oil during February.
  4. The upcoming 4th India-Africa Hydrocarbon Summit will help in moving this forward.
  5. Africa already contributes around 15% of India’s oil needs and Nigeria is one of the top providers of oil to India.
  1. India is looking at Africa to spruce up its oil and gas imports as it seeks to diversify its energy basket.
  2. Recently, Saudi Arabia has decided to charge a premium for the oil it sells to Asian customers.
  3. It would be charging Asian customers 60 cents a barrel more for crude oil during February.
  4. The upcoming 4th India-Africa Hydrocarbon Summit will help in moving this forward.
  5. Africa already contributes around 15% of India’s oil needs and Nigeria is one of the top providers of oil to India.

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

Union Cabinet gives nod for development of Underground Coal Gasification

  1. The UCG policy framework has been framed in line with the existing policy for Coal Bed Methane (CBM) development on revenue sharing basis.
  2. Development of UCG has been envisaged to provide for energy security and will be adopted for offering the blocks through competitive bidding.
  3. Central Mine Planning and Design Institute Ltd (CMPDIL) will be the nodal agency for all business related proposals and regulations.

Cabinet has approved a policy framework for development of Underground Coal Gasification (UCG) in unexplored coal and lignite bearing areas in country.

  1. The UCG policy framework has been framed in line with the existing policy for Coal Bed Methane (CBM) development on revenue sharing basis.
  2. Development of UCG has been envisaged to provide for energy security and will be adopted for offering the blocks through competitive bidding.
  3. Central Mine Planning and Design Institute Ltd (CMPDIL) will be the nodal agency for all business related proposals and regulations.

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

[op-ed snap] Welcome step on oilfields

  1. The government has taken a refreshing and progressive approach with respect to the unutilised natural resources locked away in the 69 small and marginal oilfields lying with the state-owned exploration agencies.
  2. Approved the auction of these oilfields to private, and even foreign, companies, and initiated a new approach in the licensing and proceeds-sharing mechanisms.
  3. Under the new plan, companies will be allowed to sell crude oil or natural gas at market prices, without any interference from the government.
  4. The other welcome step has to do with the licensing method.
  5. Companies will receive a unified licence for all hydrocarbons.
  6. This shows government’s move towards enhancing the ease of doing business.
  1. The government has taken a refreshing and progressive approach with respect to the unutilised natural resources locked away in the 69 small and marginal oilfields lying with the state-owned exploration agencies.
  2. Approved the auction of these oilfields to private, and even foreign, companies, and initiated a new approach in the licensing and proceeds-sharing mechanisms.
  3. The first step was to move from a profit-sharing mechanism to a revenue-sharing mechanism.The revenue-sharing approach is simpler, and is likely to earn the government more money and reduces delays and disputes.
  4. Under the new plan, companies will be allowed to sell crude oil or natural gas at market prices, without any interference from the government.
  5. The revenue and royalty-sharing mechanism will be pegged at this market rate.
  6. The other welcome step has to do with the licensing method.
  7. Companies will receive a unified licence for all hydrocarbons, including conventional ones such as oil and gas, and non-conventional ones such as shale oil and shale gas.
  8. This shows  government’s move towards enhancing the ease of doing business.

Let’s Dig out process of formation of crude oil? Shall we?

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
1 year ago

very usefull. thank you team CD!