Time to 'phase up' on oil production

With war and tensions mounting in West Asia, oil prices, and possibly even supplies, will be subject to even greater uncertainty than they were last year. Betting on oil prices has long been a sure way to lose money, but it does now seem that they are likely to remain elevated in the near term. This is bad news for India, which, in 2022-23, depended on imports for almost 88 per cent of its needs, or about 4.5 million barrels per day. Despite much discounted oil sourced from Russia, the bill was close to $160 billion.

Given India’s dire need for affordable energy, at the Intergovernmental Panel on Climate Change (IPCC) Conferences of Parties, India has successfully negotiated that coal production and use will be “phased down” rather than “phased out”. However, coal production increased over the last two years, now touching 890 million tonnes, with the billion tonne target not far away.
 

For other fossil fuels, the IPCC prescription is only to phase out inefficient subsidies; but the unending decline in domestic production might make a cynical observer conclude that India has decided to phase down — if not phase out — oil! Negative growth — in evidence since 2012-13 — continued in 2022-23, with domestic oil production falling again, to 29.2 million tonnes (mt), down about 25 per cent from the 38 mt achieved in 2011-12. As the demand for petroleum products drives on relentlessly, imports surged to 230 mt, leaving us vulnerable to vagaries of global uncertainties. The possibility of the war in Gaza spilling over into the Gulf region is just one of them.
 

China’s Global Times recently reported, with evident satisfaction, that India’s “discomfort” with using the yuan to pay for Russian oil had held up payments for seven cargoes of Russian crude oil because Russia has refused more payments in rupees. The yuan is now “the third most used currency for trade financing”, and as the rupee doesn’t circulate much internationally, many countries won’t use it for “transactions”. Also the rupee “exchange rate is volatile”, causing a sharp shrinkage in profits for the Russians. The paper did not need to spell out that that huge oil import pushing up India’s current account deficit was one of the causes of the volatility.
 

Our oil problems have mounted despite the Ministry of Petroleum and Natural Gas (MoPNG) having driven very substantial reforms since the Hydrocarbon Exploration and Production Policy (HELP) was adopted in 2016. As cited in a recent publication on the nine-year achievements of the ministry, reforms have accelerated in the last few years. The auction of “discovered small fields” was pushed through and five have reportedly started production. Almost 1 million square km of offshore areas have been opened up for exploration and production (E&P) with the removal of 99 per cent of the so-called “No Go” areas, where E& P was blocked by various ministries and agencies. An area of 200,000 square km, in 134 separate blocks, has been awarded for E&P — all impressive achievements by any measure.
 

Yet the “$3 billion investment commitments”, mentioned in the MoPNG’s achievements, are small considering that the global oil industry invests $500 billion in E&P annually; and commitments are relevant only when converted into investment. Smaller countries like Guyana, Namibia, and Mozambique, all of which once had geological prospects as (allegedly) poor as India’s, have received multiples of our figures in investment, and are on the way to becoming major players in the global hydrocarbon industry.
 

The real problem in India is that the domestic oil sector remains probably the most overtaxed, over-regulated, and over-litigated part of the industrial economy. Former leaders of India’s oil sector privately confirm that foreign and Indian companies which invested both money and hope in India after the HELP, etc came into force are still ground down by high taxes and endless litigation. The conclusion is that the Government of India, led by the Ministry of Finance, views the oil producers purely from the lens of revenue maximisation; and oil-industry regulators operate on the basis of suspicion rather than facilitation of these vital players in the national economy. Considerations of national energy security, or kick-starting a sizable new investment cycle, or large-scale employment possibilities do not figure in the calculations. Hence oil-industry investment flows to more pragmatic countries, transforming their economies. Guyana’s GDP growth last year was over 50 per cent!
 

According to the International Energy Agency, by 2027 India will replace China as the fastest-growing importer of additional oil. Obviously the world’s major oil exporters are happy to keep us going this way. While it can be said that market power adds to our diplomatic leverage, the issue is really that increased oil production at home, and being a valued customer for foreign suppliers, are not mutually exclusive, given the sheer size of our needs.
 

India is emerging as a world leader in alternative and green sources of energy. But in almost any scenario of energy transition, even in 2040 we will still be consuming more oil and gas than we do today. Whether we should leave our potential underground, or extract value from it for reducing energy poverty and boosting the national economy, is the decision for our policymakers. The US, which claims to be a green champion, is now the world’s largest oil producer, and oil and gas are its top export item! The UK too has changed tack and is planning to license new oil exploration. China is drilling 10 km underground in Xinjiang to tap ultra-deep oil reserves. There are lessons to be learnt from the experience of the real world even as we invest in energy transition.


 

The writer is a former foreign secretary