Oiling the recovery

Private players struggle against excessive regulation. The result is loss of investment and employment opportunities in India

As petrol prices touch Rs 100 per litre the government may face the choice of either cutting fuel taxes or letting inflationary pressures build. The steady rise in international oil prices as global economic recovery gets underway adds to the dilemma, as petrol/diesel taxes are estimated to have increased about 90 per cent since 2015 and become the source of a quarter of all indirect tax revenues. Meanwhile, domestic oil production has continued to decline, hemmed in by tax and cess and the inability of government to resolve legal and bureaucratic bottlenecks.

At their Monitoring Committee meeting on February 2, OPEC ministers noted that, along with non-OPEC partners, they had since June 2020, “adjusted oil production down by a cumulative 2.1 billion barrels, stabilising the oil market…”. They also agreed on continuing the process — with Saudi Arabia cutting most — and hence oil prices are expected to stay elevated.

The change in US administration has brought reduced rhetoric against Iran, but with sanctions still in place, geopolitical tensions in the Gulf region remain high. Last week, the US sold off a million barrels of Iranian oil which it seized last year; and Iran is holding a South Korean tanker it seized in the Straits of Hormuz in January. Any crisis in the Gulf would have serious implications for India, in terms of both price and availability of crude oil, essential for our economy and national security.

Just how essential oil remains was brought out in the survey of India’s Energy Outlook 2021 published by the International Energy Agency recently. The IEA lauded India’s “massive expansion of renewable sources of energy led by solar power” as an extraordinary success. It predicts, however, that as the world’s fastest growing energy market, on the basis of current policies, “India’s combined import bill for fossil fuels triples over the next two decades, with oil by far the largest component, to continued risks to India’s energy security”.

In this scenario, by 2040 transportation and other requirements will raise India’s oil demand to 8.7 million barrels per day, while gas demand would go up to 201 billion cubic metres. The IEA estimates India would then be over 90 per cent dependent on imported oil, up from 77 per cent in 2015, and 60 per cent on imported gas — up from 20 per cent in 2010. This will inevitably put pressure on the balance of payments again, but it would also throw up security challenges as most of our imports are sourced from the volatile Gulf region. While strategic petroleum storages are being expanded we are far from achieving the capacity for 90 days of net import equivalent recommended by the IEA. 
 

Worries about oil supplies in a crisis could add to the burdens of our national security planners who are now faced with a two-front threat on our borders.

China and the USA are the two largest consumers of energy and they provide global examples to emulate when it comes to dealing with oil as a strategic commodity — increasing domestic production and building strategic reserves. China has made domestic oil production a national security priority, and its PSUs have invested accordingly, ever since relations with the US deteriorated under the Trump presidency. Capital spending is at its highest level in seven years, to squeeze out a 5 per cent increase in domestic output. Spending on overseas assets has not been increased — with Iran being the one potential exception, where China has reportedly worked out a huge, long-term hydrocarbon investment agreement focusing on the giant West Karoun fields. To enhance security Iran is working on the Goreh-Jask pipeline to take output from these fields outside the Straits of Hormuz which would be a chokepoint in case of a Gulf war. Clearly, both Iran and China are investing in infrastructure for security of oil supplies.

This is the strategic backdrop against which India’s oil production continues its relentless decline since 2013. In 2015, PM Modi set the target of reducing oil import dependence by 10 per cent by 2022. Ambitious, given the long lead times in the industry; but a start could have been made through reforms and incentivising increased output from producing fields. However, the HELP (Hydrocarbon Exploration and Licensing Policy) reforms devised by policymakers were made prospective and still contain discretionary regulations, which slow decisions in key areas such as enhanced oil recovery. The reforms have failed in attracting investment in exploration by international oil companies, many of whom exited India earlier because of the hostile regulatory environment. Continued caution induced by issues such as the punitive tax treatment of Cairn International, which had unlocked the resource of the Rajasthan fields, ensures that investments are directed elsewhere.

Without increased investment India’s oil potential will remain untapped. The latest data released by ONGC shows that since 2014, its expenditure on exploratory wells has fallen by 60 per cent and cash reserves are at 10 per cent of 2014 levels. It now has to work in logistically difficult areas with higher cost fields than its Bombay High mainstay; but remains constrained by high taxes and cess and bureaucratic controls. Private players struggle against disincentives like cess, service tax on royalty paid to the government, and excessive regulation which hampers decision-making. The result is loss of investment and employment opportunities in India, while oil imports transfer our money abroad. India’s oil producers must hope the government will carry through on the PM’s recent pronouncements and enable them to be wealth creators for the nation.

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