When economic activity is strong, power and transport demand rises. In 2013-14, India has seen an odd mix of numbers on this front. Automobile sales, including commercial vehicle sales, have dropped through the first half, which is a bad signal. But power consumption and transport fuel consumption have both grown, which is a positive signal.
The action in the crude and refining sectors is especially interesting, given the impact on the fiscal deficit and the trade balance. In 2012-13, India imported 185 million tonnes (mt) of crude at a cost of $144 billion. In 2013-14, between April-August 2013, India has so far imported 81.5 mt of crude, up 9 per cent from 74.9 mt in April-August 2012.
Projections suggest imports will cross 196 mt for 2013-14 - implying about 5 per cent increase in consumption since domestic crude production will fall marginally. The weaker rupee has pushed up the import bill by about 9-10 per cent in rupee terms - it is a 3.5 per cent increase in US dollar terms, from $58 billion in April-August 2012-13 to $60 billion in 2013-14.
Between April-August 2013, India exported 28 mt of products earning $24 billion. If product exports run as projected, India should beat the volumes of 2012-13. Assuming no major fluctuations in crude prices, or in refining margins, the net import bill for 2013-14 may actually be lower than 2012-13, or more or less the same, despite the rising imports.
India's refining industry is competitive for several reasons apart from economies of scale. One is geography. India is on the major maritime trade routes to Europe, Asia and the Middle East, which means both convenience and lower transport costs. Another reason is labour arbitrage. Most Indian refineries have relatively lower capital costs as well. A significant portion of the capacity is capable of handling a wide range of crudes, making the cost structure more flexible.
Government policy is reasonably liberal. FDI of up to 100 per cent is allowed in private sector refineries. There are provision for tax exemptions and import duty exemptions on refinery products in SEZs and in export oriented units.
The domestic demand for petro products is expected to grow 17 per cent between 2013 and 2017, while refining capacity (starting from a higher base due to the surplus over domestic demand) is expected to grow 22 per cent by 2017. So, India should enhance its position as a products exporter in the Twelfth Five Year Plan.
However, only private sector units have been beneficiaries of the liberal export-oriented policies so far. While the government may be liberal in granting concessions to private sector refiner-exporters, every other aspect of the oil and gas policy - exploration, domestic refining and downstream retail - is regressive.
The PSU refiner-marketers will possess excess capacity as well since they all have expansion plans. But they are hobbled because they are forced to supply products at highly subsidised, controlled retail prices. So we have this dichotomy where private refiners have profit opportunities abroad while PSUs suffer massive enforced losses.
High product exports is one way to reduce forex outgo on the petroleum front. Another way would be to boost domestic crude and gas production. This require reworking policy to encourage exploration.
Downstream, in retailing, distortions arise with pricing controls on diesel, petrol and kerosene. This causes distortions in usage apart from making marketing financially unviable. Diesel, for example, is more expensive to produce than fuel oil. But controlled retail pricing makes diesel cheaper than fuel oil, so power plants use diesel. The huge price differential between kerosene and aviation turbine fuel is scandalous since they are exactly the same substance.
Upstream, lacunae in exploration and production contracts have led to a long-standing dispute with Reliance and caution on the part of potential prospectors. Coal bed methane (CBM) production has been stalled for years due to contractual issues. Notably coal and CBM in the same mine cannot be exploited by the same entity. Shale hasn't gotten off the ground.
If all these issues were sorted out, India could substantially improve energy security and government finances. If some of it was worked out, there would be partial benefits. It's worth keeping an eye on the sector. Given pressures on the external account, more reform may be forced.
The action in the crude and refining sectors is especially interesting, given the impact on the fiscal deficit and the trade balance. In 2012-13, India imported 185 million tonnes (mt) of crude at a cost of $144 billion. In 2013-14, between April-August 2013, India has so far imported 81.5 mt of crude, up 9 per cent from 74.9 mt in April-August 2012.
Projections suggest imports will cross 196 mt for 2013-14 - implying about 5 per cent increase in consumption since domestic crude production will fall marginally. The weaker rupee has pushed up the import bill by about 9-10 per cent in rupee terms - it is a 3.5 per cent increase in US dollar terms, from $58 billion in April-August 2012-13 to $60 billion in 2013-14.
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To a large extent, India's imports are balanced by exports of refined products. Over the years, India has build massive excess refining capacity. The total refining capacity is about 215 mt. In 2012-13, India exported 63.4 mt of products, at a value of $59 billion. The net crude import bill was thus, whittled down to $85 billion.
Between April-August 2013, India exported 28 mt of products earning $24 billion. If product exports run as projected, India should beat the volumes of 2012-13. Assuming no major fluctuations in crude prices, or in refining margins, the net import bill for 2013-14 may actually be lower than 2012-13, or more or less the same, despite the rising imports.
India's refining industry is competitive for several reasons apart from economies of scale. One is geography. India is on the major maritime trade routes to Europe, Asia and the Middle East, which means both convenience and lower transport costs. Another reason is labour arbitrage. Most Indian refineries have relatively lower capital costs as well. A significant portion of the capacity is capable of handling a wide range of crudes, making the cost structure more flexible.
Government policy is reasonably liberal. FDI of up to 100 per cent is allowed in private sector refineries. There are provision for tax exemptions and import duty exemptions on refinery products in SEZs and in export oriented units.
The domestic demand for petro products is expected to grow 17 per cent between 2013 and 2017, while refining capacity (starting from a higher base due to the surplus over domestic demand) is expected to grow 22 per cent by 2017. So, India should enhance its position as a products exporter in the Twelfth Five Year Plan.
However, only private sector units have been beneficiaries of the liberal export-oriented policies so far. While the government may be liberal in granting concessions to private sector refiner-exporters, every other aspect of the oil and gas policy - exploration, domestic refining and downstream retail - is regressive.
The PSU refiner-marketers will possess excess capacity as well since they all have expansion plans. But they are hobbled because they are forced to supply products at highly subsidised, controlled retail prices. So we have this dichotomy where private refiners have profit opportunities abroad while PSUs suffer massive enforced losses.
High product exports is one way to reduce forex outgo on the petroleum front. Another way would be to boost domestic crude and gas production. This require reworking policy to encourage exploration.
Downstream, in retailing, distortions arise with pricing controls on diesel, petrol and kerosene. This causes distortions in usage apart from making marketing financially unviable. Diesel, for example, is more expensive to produce than fuel oil. But controlled retail pricing makes diesel cheaper than fuel oil, so power plants use diesel. The huge price differential between kerosene and aviation turbine fuel is scandalous since they are exactly the same substance.
Upstream, lacunae in exploration and production contracts have led to a long-standing dispute with Reliance and caution on the part of potential prospectors. Coal bed methane (CBM) production has been stalled for years due to contractual issues. Notably coal and CBM in the same mine cannot be exploited by the same entity. Shale hasn't gotten off the ground.
If all these issues were sorted out, India could substantially improve energy security and government finances. If some of it was worked out, there would be partial benefits. It's worth keeping an eye on the sector. Given pressures on the external account, more reform may be forced.