Foreign investment dwindles as India struggles to boost oil production

India's high demand for oil and low domestic output are increasing the dependence on imports. The 'supportive' upstream policy, if backed by lower taxes, could turn things around

A supercharged economy, growing at 8 per cent, is fuelling India’s thirst for more oil, but domestic production has been declining. That leaves a $200 billion fuel import market open for suppliers such as Russia, Saudi Arabia, and Iraq, and global traders Vitol, BP, and Trafigura.

Industry officials say there just isn’t enough on the table for state-run behemoth ONGC or private companies to make large investments in field development. Foreign oil companies, which possess advanced drilling technologies, prefer to drill in countries such as Guyana and Brazil, which offer high prospectivity.
 

During the last decade, India’s dependence on foreign oil has climbed by around 10 percentage points to 88 per cent. Very soon, analysts say, of every 10 barrels consumed by India, nine will flow from West Asian countries, a region not immune to turmoil, and Russia, which remains engaged in a war.
 

High demand, low exploration
 

Paris-based International Energy Agency expects India to be the single largest source of global oil demand growth from 2023 to 2030, larger than China. During this seven-year period, says the IEA in its latest report released last month, Indian oil products consumption will surge by almost 1.2 million bpd, accounting for more than a third of the increase in global demand.
 

But domestic crude oil output, which has slumped by more than 30 per cent from a peak of close to 800,000 bpd in 2011 to 587,000 bpd in the period between April 2023 and January this year, is expected to fall further to 540,000 bpd by 2030, according to the IEA. That is a conservative estimate — barring ONGC’s east coast discovery, there are no major finds. Also, large discoveries typically take six to 10 years for development.
 

International oil companies have shunned India’s upstream sector partly due to the country’s fiscal terms. Annual exploration spending in India fell to around $1 billion last year from a high of $3 billion in 2010, when Reliance Industries was developing a huge discovery in the Krishna Godavari basin, the IEA said. Foreign investment in the entire oil and gas sector was a measly $108 million last financial year — just 0.2 per cent of the total foreign direct investment of $71 billion flowing into the country — and has remained at these levels since the pandemic, the oil ministry says.
 

Pallavi Jain, the new head of the country's upstream regulator, Directorate General of Hydrocarbons, told Business Standard at the India Energy Week in Goa last month that she was not unduly concerned over the lack of participation from foreign oil companies. Aatmanirbharta, or self-reliance, she said, envisaged participation from domestic drillers.
 

According to the IEA, “The Indian exploration and production sector boasts a supportive policy regime, low surface risk, and high data availability.’’
 

However, the supportive policy is not translating into participation, if the eighth drilling round was an indication. Awards under India’s eighth open acreage licensing policy (OALP) drilling round, launched in July 2022, were delayed, with ONGC eventually bagging most of the 10 areas in January. Bid submissions for the 28 blocks offered in the ninth round have been delayed by around 75 days to May 15. The ninth and 10th rounds offer more than 1 million square kilometres of acreage in locations previously barred for national security reasons, according to Jain.
 

The non-negotiables
 

The absence of international companies could be due to lacklustre discoveries since the turn of the century, the IEA said. Over the last 23 years, 2 billion barrels of commercial liquid resources have been discovered in India, with close to half associated with Cairn’s onshore Rajasthan RJ-ON-90/1 project. By comparison, Angola, Norway, and Guyana have all seen around 10 billion barrels of oil resources discovered over the same period, while explorers in Brazil have found a massive 40 billion barrels.
 

Past disputes with foreign explorers such as Cairn Energy over retrospective taxes have also upset foreign drillers, said an official from one of the world's top oil companies, pointing out that policy certainty and stable fiscal regime were non-negotiable.

Waning investor interest leaves India very few choices, the most attractive of them being to focus on enhancing production from the existing areas held by ONGC and private sector Vedanta.
 

India’s oil production is concentrated in mature, declining areas, or in pre-NELP blocks, with the Mumbai offshore basin accounting for 60 per cent of its output and the onshore Rajasthan basin nearly 20 per cent, the IEA said. (NELP is short for New Licensing and Exploration Policy.) But, industry officials at the India Energy Week said these areas required billions of dollars in investments, advanced technologies, and a longer licence duration for revival.
 

Though India has an attractive fiscal regime for areas offered under NELP and HELP (Hydrocarbon Exploration and Licensing Policy), foregoing a cess on crude and adopting lower royalty rates, the most prolific, older areas carry much higher taxes. After adding the special additional excise duty on crude oil output, the government’s share of most of India’s production, industry officials say, comes to around 69 per cent of revenues, leaving a net of 7 per cent for developers after accounting for production costs. The government’s share drops to 55 per cent and the explorer’s net share rises to 21 per cent in blocks offered after the introduction of NELP and HELP.
 

The government increased the windfall tax on crude oil by Rs 300 to Rs 4,900 rupees ($60) a tonne (or, $8.1 a barrel) from March 15, adjusted every fortnight where the tax kicks in when global crude oil prices cross $75 a barrel. An industry official said windfall tax was more understandable in 2022, when crude oil was above $120 a barrel.
 

“India would need to make its exploration and production economics drastically more attractive to lure western supermajors,” says Narendra Taneja, a Delhi-based oil expert.
 

An 18 per cent GST (goods and services tax) on exploration makes it more onerous; companies cannot adjust it because oil and gas is outside the GST, says Prashant Vasisht, senior Vice President and Co-Group Head-Corporate Ratings, at rating agency ICRA, a Moody’s affiliate. But the cess and windfall taxes on crude and fuels have helped the government manage the deficit better. India budgeted receipts of Rs 18,500 crore in the current financial year (2023-24) and Rs 19,400 crore next year from a cess on crude oil. Revenues accruing from Special Additional Excise Duties were budgeted at Rs 145,000 crore this year and Rs 152,080 crore next.
 

Put together, that is sufficient to fund a major portion of the food subsidy. Moreover, taxes on fossil fuels have helped bolster the country’s argument at international forums that it planned to curtail their consumption, in the interest of the environment.
 

“If the windfall tax was used to offset extra spending elsewhere, in volatile circumstances like in 2022, it should be lifted as soon as the market normalises,” says Singapore-based oil expert Vandana Hari, founder of Vanda Insights.