A core problem in domestic oil: Widening gap between targets and output

A persistent gap between output and targets has played its part in subdued core-sector growth

One of the notable but unnoticed anomalies in the data set that makes up India’s core sector is the widening gap between domestic oil production targets and actual output.  

The core sector includes production of crude oil, natural gas, refinery products — collectively known as the Petroleum, Oil and Lubricants (POL) sector — coal, fertilisers, steel, cement and electricity. A slowdown in any of them could be a leading indicator of a slowdown in economic demand. In the case of oil, however, the data reflects a structural problem that has been occurring over a fairly long time (see table).  

Analytical notes based on core sector data released by the Department for Promotion of Industry and Internal Trade have frequently concluded there is a lack of demand in the economy. This outlook may be broadly correct but runs the risk of being overstated. Data for the past few years show that more than a lack of demand, it is the inability of the oil and gas sector to push up production that is contributing to the slack in the growth of the core sector.

The results are significant because the POL sector accounts for almost half of the core sector output at 43.9 per cent. So trends in this sector essentially decide the performance of the core sector. As Sunil Kumar Sinha, chief economist, India Ratings, pointed out, “Supply constraints have not often been factored in.”

Since the core sector accounts for 40.27 per cent of the weight of items included in the Index of Industrial Production, there is no doubt the performance of the POL sector has an outsize influence on the final readings of industrial production.  

Consider the data up close. In five years since FY17, state-owned ONGC, India’s flagship upstream company, has missed its annual crude production target. This is primarily because of the underperformance in its most promising cluster WO-16, a field on the edge of the giant Mumbai High off the west coast, on which ONGC has been working since 2009.

In March 2018, a government press release explained the reason for this deficit as “due to delay in implementation of Conversion of Sagar Samrat to mobile oil production unit project”. In different forms, this reason has been more or less the same up to March 2022 (<see table>). The same reasons apply to the shortfall in production of natural gas. WO-16 is expected to offer 20 million metric tonnes of oil by 2030. Although this is nowhere near the original reserves of Mumbai High, it is substantial for marginal fields.

Sagar Samrat is ONGC’s workhorse in operation for close to 50 years. More than a decade ago, the company gave a contract to Mercator, India’s second largest private ship owner, to vastly expand the capacity of this fixed rig and make it a mobile offshore production unit so that it could exploit fields on the margins of the 46-year-old Mumbai High field.  But with Mercator sinking under the weight of debt and internal managerial problems, ONGC had to change the contractor in 2018.

A tweet from ONGC in March 2022 noted that “Drilling Rig Sagar Samrat was under conversion into a Mobile Offshore Production Unit (MOPU) for oil production from WO-16 Cluster. The MOPU was to be commissioned in the beginning of FY19 — not met on a/c of failure on part of the contract”. Finally, in March this year, another tweet confirmed the work has been completed.

What about Oil India Ltd (OIL), the second largest government-owned hydrocarbon exploration and producer? The company is hamstrung because it owns mature fields, mostly in Assam and some in Tripura. It also began prospecting in Konkan and the Krishna-Godavari basin, where the production has been tapering for some years. From FY19, the most common reasons that OIL has given for failing to reach production targets have been, “Loss from bandh and miscreant activities in operational areas”. These “miscreant activities” are not spelt out but they mostly cover pipeline breaks and demands for ransom in the politically unstable Northeast.

Between them, ONGC and OIL account for 75 per cent of the total domestic production of crude and 69 per cent of natural gas.

None of them responded to emails from Business Standard on the issues raised.

At a somewhat lower scale, the same supply constraints are visible in refinery output, too. In the five-year period since FY17, for most months, the government-run refineries have blamed their underperformance on factors ranging from plant shutdowns, wear and tear, or the lack of material to carry out repairs. For example, for IOC, which runs half of the 18 government-owned refineries, production was lower “due to…Delayed Coker Unit (DCU) & Indmax Unit shutdown”, or “M&I shut down”. For MRPL it was “limitation in CDU III unit ejector-condensor”. Shorn of the technicalities, these are production, not market demand, constraints.  

The impact of these developments on the overall core sector performance is visible. In the three pre-Covid years (FY17 to FY19), the overall growth of the core sector has averaged 3 per cent. These have fed into the overall rate of industrial production, which has remained sluggish. In FY22, as the economic recovery has gained pace, most elements of the core sector have revived. February data shows year on year growth at 5.8 per cent, but, again, crude oil production has remained sluggish, dampening the growth rate.

Sinha pointed to the consistent lack of investment in the sector as a contributory factor in sluggish production. “These constraints reflect the lack of investments in fossil fuels over the past few years, globally.” Indeed, ONGC has spent only Rs 1.5 trillion on exploration and production in the past five years, suggesting that this anomaly in core sector data will remain for some more time.