Oil in dangerous waters

Data for the financial year 2020-21 revealed that domestic oil production fell again by 5% to 30.5 mn tonnes. This is the lowest in this century

The past month has brought continuous bad news for India’s oil producers and consumers. The disaster at ONGC’s Western Offshore was one of the worst tragedies in the history of India’s oil industry. In the annals of the global offshore oil industry disasters, this will probably rank as the fifth deadliest in terms of human loss; and the worst in this century. Only the bravery and skill of the Indian Navy’s rescue act prevented it from being the worst of all time. The last major storm disaster for offshore oil was in 1989 when the Seacrest rig sank during a typhoon off Thailand, taking 91 people with it. Since then the global oil industry has lived through hurricanes and cyclones without losses anywhere near this scale. Hopefully the inquiry committee set up to study the sequence of events leading to the terrible human loss will fix responsibility clearly and recommend remedial procedures. It should also have been authorised to ask why ONGC was functioning without a director (offshore) and a full-time CMD.

 
A month earlier, data for the financial year 2020-21 revealed that domestic oil production fell again by 5 per cent to 30.5 million tonnes. This is the lowest in this century and about 22 per cent lower than in 2011-12 since when production has been declining each year. This dismal record has propelled import dependency to around 85 per cent of national requirements. This still seems to make no impression on policy makers who continue to view domestic oil only as a source of tax revenue.
 
The same policy makers have persisted with relentless taxation of consumers of refined products, which has not only distorted markets but begun to affect foreign relations. As international oil prices fell last year, the government made windfall gains through two large increases in taxes on petrol, bringing the total hike in petrol taxes in the last seven years to about 300 per cent. Thereafter when global oil prices recovered, and consumers reacted negatively to being hammered by ever increasing prices at the pump, the minister for petroleum and natural gas got into a spat with Saudi Arabia! Dramatic announcements were made of reducing imports from the Saudis, and the real beneficiaries turned out to be US oil, which made money out of increased exports to India. Not a hint of India’s atmanirbharta (self-reliance) anywhere.

 

The news of a rapidly changing environment for the international oil companies (IOCs) also holds out warning signs. What was once a campaign by climate change activists, challenging the social licence of the oil and gas industry, is now propelled by giants in the world of finance. In gruelling boardroom and courtroom battles in the US and Western Europe, ESG (environmental, social and governance) activists have successfully targeted the IOCs to enforce commitments towards rapid reduction in carbon and greenhouse gas emissions. Most big companies had given up the business-as-usual appr­oa­­ch and joined the “energy transition” bandwagon, investing carefully in renewables and emission-reduction strategies. The “transition” strategy is, however, now at risk of being rendered ineffective as the “ambition” for more decisive climate action grows. The commitments under the 2015 Paris Accords have been overtaken by pressure to commit to achieving “Net Zero Emissions “(NZE) by 2050 and all fossil fuels, not just coal, are in the crosshairs.

 
Just a few months ago, the western oil industry was engaged in intense but theoretical debates over the date of the likely peak in oil demand in the light of the transition strategies. There was growing consensus that it had to be brought forward from 2030 to 2025-28. Then the Internat­ional Energy Agency (IEA) dropped a bombshell in its May 17 report, which said that the trajectory of oil demand in the NZE perspective means that “no new exploration for new resources is required, and other than fields already approved for development, no new oil fields are necessary”. Further, that “no new natural gas fields are needed in NZE beyond those already under development. Also not needed are many of the LNG facilities currently under construction or at the planning stage.” While the IEA report does not reflect any government’s official policies, it has added real weight to demands for policies and regulations to achieve an immediate, almost revolutionary, shift away from investing in new oil and gas reserves. Rating agencies have already indicated serious credit risks for the big IOCs in the face of this challenge. 

 
The western anti-oil lobbies know that the fervour for change could be dampened if Republicans retake control over the US Congress in November 2022; which is probably why they are in a tearing hurry. They gloss over the facts that apart from modes of transportation, alternative feedstocks for petrochemicals, plastics, fertilisers etc will also take time to become commercially viable. But the IOCs know that they have to adapt, and adapt rapidly.   
 
It seems unlikely that the national oil companies in OPEC, and companies in Russia, will be affected as quickly, though they may find markets shrinking in the medium to long term. The result could be that production will get concentrated in the lowest cost producers where reserves have been proven, and companies will defer exploration and production (E&P) in newer areas around the world. India will be left to source oil requirements from Russia and the low-cost OPEC producers (think Saudi Arabia!); and will find few companies interested in unlocking India’s complicated potential. If we leave Indian oil producers hobbled by tax and regulation, we may well prove right the quip attributed to Sheikh Yamani that, just as the Stone Age ended before the world ran out of stones, the oil age will end before the world runs out of oil! The IEA report also noted that the brave new world of clean energy will rely on critical minerals like copper, lithium, nickel, cobalt, and rare earth elements. Perhaps atmanirbhar India needs to start digging. 

 
The writer is a former Foreign Secretary and former Ambassador to France