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Achieving energy security
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Promoting growth of domestic production appears to be a better option
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Sidharth Balakrishna
The recent hardening of oil prices close to a stratospheric $100 a barrel has once again drawn attention to a pressing issue — India’s energy security. The country’s import dependence on oil is likely to increase further from an already high figure of approximately 73 per cent.
All this while domestic crude oil production has been practically stagnant at around 33 million tonnes a year for the last several years. The government realises the importance of the issue but seems to be able to do precious little to alleviate it.
The two pillars of the traditional approach adopted by our policy makers and their drawbacks are outlined below:
i) Domestic public sector oil companies, particularly ONGC Videsh, have been encouraged to take equity stakes in producing oil and gas fields abroad or acquire acreages in areas with high oil potential from which the produce can be shipped or piped to India.
ii) Exploration efforts within the country have been given a boost through the New Exploration and Licensing Policy, with six rounds having been conducted so far and Production Sharing Contracts signed with companies winning bids for exploration acreages. The auction process has also resulted in revenues flowing to the exchequer.
However both these have suffered from certain drawbacks. As far as the first pillar is concerned, oil and gas is typically found in areas that seem to be affected by extreme geo-political instability such as Iraq, Iran, Nigeria, etc. Many commentators have pointed out that acquiring acreages in such areas does not provide any ‘security’ as contracts are difficult to enforce and goal-posts are shifted at the drop of a hat as political regimes change. Furthermore, competition with other countries, particularly China, in the acquisition of oil fields has pushed up costs of acquisition and hence, decreased potential returns.
Promoting growth of domestic production thus appears to be a better idea. However, despite news of some domestic companies making large ‘finds’, subsequent testing has proven their claims to be tall ones (with the possible exception of Reliance Industries’ KG Basin find). Further, the big foreign oil companies that India had hoped to attract, including Exxon Mobil, Shell, Chevron, Total, etc., have by and large shown less than satisfactory interest in India’s hydrocarbon potential.
In such a scenario, the government’s policy needs to be supplemented by the following additional measures:
1. The hydrocarbon recovery factor of fields in India, particularly those operated by ONGC, has been found to be extremely low at 26-28 per cent. This needs to be rapidly improved to global standards of 40 per cent and higher.
2. Special fiscal terms need to be offered to operators willing to take higher risks in exploring ultra-deep water and frontier basins. India still has large swathes of unexplored territory and a large find could be around the corner in deep water areas, provided firms are ready to explore these areas.
3. It has often been stated that a vibrant petroleum industry needs the presence of both large and small firms. The large firms deploy the latest technology, while the smaller ones are willing to take more risks. The success of Cairn in Rajasthan illustrates this theory.
4. Alternative and non-conventional sources of energy need to be probed. These include the development of coal bed methane, nuclear, wind and solar energy as commercial energy sources. The nuclear deal with the U.S. must be seen as a step forward in the achievement of energy security, the politics surrounding it notwithstanding.
5. India has virtually no domestic provider of services associated with oil exploration activity. A reduction on import dependence on this at least would be a step forward.
6. Regulation of the upstream sector needs to be in competent and professional hands, with the regulator being able to coax the best out of industry participants. At present, the staffing of the Directorate General of Hydrocarbons, the de facto regulator, consists mainly of ONGC and Oil India personnel, rather than true-blood regulatory experts.
Progress on the above points should help us move forward in the quest to supply energy to India’s rapidly growing economy. One thing is sure: we need to act quickly on this issue!
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