India’s energy sector has a lot going for it as it powers into 2016.
The country’s robust economic growth coupled with oil prices languishing at more than 40% below the previous year’s average, has boosted refined products demand by nearly 9% in the January-October period. That’s a growth rate unmatched in the past 15 years.
While that rate of increase might moderate, India’s oil products demand is expected to remain firmly on an upward trajectory, rising two-and-a-half-fold to 10 million barrels per day (b/d) by 2040, the biggest rise projected for any country, according to the International Energy Agency.
The Paris-based energy policy advisor to the OECD countries cites the 100 Smart Cities mission and the manufacturing boost expected from the Make in India campaign as factors that will drive the country’s oil appetite in the coming years.
The state-owned players in India’s refining sector, apart from benefiting from the captive and fast-growing domestic market, have also been freed of the yoke of diesel subsidies since October 2014, and are on their way to phasing out liquefied petroleum gas (LPG) subsidies too.
Shedding the LPG subsidy burden is crucial as the oil marketing companies push the cleaner burning cooking fuel into rural India, looking to boost the country’s household penetration to 85% from the current 65% over the next five years. The concurrent decline in kerosene use by households would also whittle down the subsidy burden.
Meanwhile, protecting the export markets in an environment of rising competition from overseas suppliers and anemic demand growth will likely be an uphill task for refiners like Reliance and Essar.
India’s oil product exports declined 7.4% from a year ago in the first 10 months of 2015 to around 1.25 million b/d, setting it on course for the first annual decline since 2008-09.
In the coming months, as India’s refiners and marketers profit from burgeoning gasoline demand on the back of strong car and two-wheeler sales and an expected resurgence in energy consumption growth led by manufacturing, they do need to become more environmentally responsible.
Air pollution in Delhi, world’s most polluted city according to the World Health Organization, has gone off the charts this winter. While some of the components of the pollution, such as dust, and smoke from the burning of agricultural stubble in farms, might be harder to tackle, India’s emission standards can be fast-tracked.
India’s private refiners currently export the cleanest of their fuel, which meets Euro 5 standards, while selling lower quality product at home. The major public sector refiners, Indian Oil Corp. Ltd, Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd, will need to upgrade their refineries to accelerate the transition to cleaner fuels.
The outlook for the upstream sector is bleaker in comparison, given the depressed oil and gas prices, and expectations of “lower for longer,” though the state-owned producers do get reprieve from the fuel subsidy sharing burden.
However, producers such as state-owned Oil and Natural Gas Corp. and private-owned Cairn India are being weighed down by a fixed $10/barrel cess they need to pay on top of royalty and other taxes, which is severely crimping their revenues and drying up funds available for upstream investment even faster.
The government, in the process of overhauling the exploration and production contract regime in a bid to attract foreign investment, needs to heed its upstream players’ request to switch to an ad valorem tax, which would be a percentage of the sales price.
India’s decision to adopt a world markets-linked formula to price domestic gas from November 2014, just as the rates were tanking globally, was an ironic twist of fate for its producers, who were forced to accept a cap of $4.20/mmBtu through years that saw US benchmark Henry Hub touch $13/mmBtu and spot LNG prices in North Asia spike to $20/mmBtu, as assessed by Platts.
If ONGC is reluctant to develop its substantial reserves in the Krishna Godavari basin deep waters owing to doubts on the commercial viability at current gas prices, how can one hope for foreign explorers to dive in, especially as a major new rival upstream frontier opens up in the geologically more lucrative Iran?
Several upstream reforms are underway, such as the move to a uniform licensing policy, which enables companies to explore and produce all kinds of hydrocarbons from a single block; an open acreage system, which allows companies to bid for blocks throughout the year instead of waiting for licensing rounds; and clearing the way for ONGC and Oil India to surrender marginal fields for open bidding that they deem uneconomical because of the fuel subsidy sharing mechanism, are all encouraging, provided they are managed smoothly, communicated clearly, and implemented consistently.
On balance, though, in the current price environment, India’s biggest selling point when it comes to exploration dollars is the access to a sizeable and fast-growing end-user demand. When it comes to gas, which is what India seems to have in its reservoirs, aside from the price, developing the downstream market and having the distribution infrastructure in place are equally critical ingredients.
Source:- livemint.com
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