The need for hydrocarbon focus

India's green transition must go hand in hand with enhancing private investment in oil and gas exploration

Countries across the world have realised that the transition from dirty fuels to clean energy is not a neat, linear path but a bumpy journey with plenty of rough patches and sudden diversions. While they invest heavily in new, clean energy capacities, their dependence on older, “dirty” fuels is not going to go away anytime soon.

This is particularly true for India. It is the fastest-growing big economy but it has a long way to go before it can be considered a developed (or more accurately, a high-income country), and its energy needs are growing exponentially. Over the next few decades, as it adds rapidly to its solar and wind capacities, and builds up a clean energy storage ecosystem, it will also find its demand for dirty fuels like coal and hydrocarbons (crude and natural gas) increasing at a rapid pace.

In oil, India is already the third-largest importer and consumer in the world, and the International Energy Agency (IEA) projects that India’s demand for hydrocarbons (oil and gas) will keep rising rapidly until 2050, though coal demand may come down by then. Given that India imports over 80 per cent of its oil requirements and 50 per cent of its natural gas requirements currently, this leaves the country and its economy particularly vulnerable to any disruptions in the market. What is worse is that oil production in the country is falling because of ageing wells, which are yielding less crude than before. Over the next few years, oil production in India is likely to fall further unless new fields are discovered and production starts from these.

It is not that Indian policymakers are unaware of this vulnerability to external shocks that send oil and gas prices soaring. Apart from the Russia-Ukraine war, India has suffered from each global oil shock. While India managed to get cheaper Russian oil despite the Russia-Ukraine war, the next disruption caused by another global strife may well work against it.

When global crude and gas prices increase, plans are typically made by Indian policymakers to reduce the Indian economy’s vulnerability to such shocks but these plans are also often put into cold storage once the crisis abates.

The United Progressive Alliance-I government had planned to build strategic oil reserves underground to store oil that could be used during emergencies. After the first couple of such facilities were built, however, work practically stopped on building new storage facilities. During Prime Minister Narendra Modi’s first term, global crude prices dropped sharply, presenting a great opportunity to build up strategic petroleum reserves, but this opportunity was not utilised.

Over the past few years, Indian policymakers have again voiced the need to reduce India’s dependence on hydrocarbon imports and have started some work towards that — though the goals are typically more ambitious than the pace of decision-making and execution.

The plans to build strategic reserves of crude have been reactivated. The Indian Strategic Petroleum Reserves Ltd (ISPRL), a special-purpose vehicle created by the government in 2004 for building and operating strategic reserves, has recently invited bids for constructing 2.5 million tonnes of underground storage in Padur, Karnataka. ISPRL has some facilities that were built in Phase 1, but it is now constructing more facilities to meet India’s current and future needs.

Perhaps more importantly, Mr Modi’s second-term had seen a push for exploration to discover new oil fields. In 2015 and 2016, the government announced the Hydrocarbon Exploration Licensing Policy (Help) and the Open Acreage Licensing Policy (OALP) to replace the New Exploration Licensing Policy (Nelp) of 1997 in the expectation that it would attract more private players, particularly global biggies, into the sector.

Unfortunately, the big global oil companies have shown limited interest in unproven Indian fields, given that there are plenty of proven reserves around the globe that offer less risk. The global oil companies that did show interest in India have largely taken the low-risk approach of either tying up with Indian public sector companies for crude (ONGC, OIL etc) or private sector players (Reliance). The few that chose to bid on their own have relinquished their fields and exited India. Global oil investors have complained in private that the risks are too high compared to potential rewards, even though Help and OLAP are big improvements over the old Nelp. Other complaints have included bureaucratic red tape and uncertain tax measures. The “windfall tax”, for example, while great for Indian government revenues, doesn't enthuse investors who can’t see why they need to pay additional tax after taking the risk.

While Indian companies — especially the public sector undertakings — plan to invest big in oil and gas exploration over the next few years, it is unlikely to be enough. India needs to attract more private investment, both domestic and global.

The Indian government under Mr Modi has shown that it can offer special production incentives in sectors it considers strategic to attract investors. Given that oil and gas are of strategic importance to the country, it could explore ways to tweak its policies and incentives to make oil and gas exploration more attractive to private investors. Otherwise, its goal of reducing oil and gas imports sharply will remain only on paper.

The writer is former editor of Business Today and Businessworld, and founder of Prosaic View, an editorial consultancy