Whenever global oil prices fall, it impacts countries differently.
India is not one of the 20 oil exporting countries. Hence, there is no loss of export revenue to worry about. On the contrary, India imports over three-fourths of its oil requirements. Hence, there is lot of savings when prices decline.
The current low price environment must be used firstly to enhance the strategic storage capacity in the country. The three strategic storage projects under development by Indian Strategic Petroleum Reserves Ltd at Vizag, Mangalore and Padur must be expedited. Simultaneously, unused storage tanks should be restored along with launch of new strategic reserve projects. Building of capacity to meet at least 100 days of India’s crude oil requirements will enhance its negotiating power as a large buyer to respond to future price spikes.
Secondly, this is the most opportune time to form an organisation for oil importing countries led by China and India. Its primary objective should be to bring transparency to the way the oil markets function. The world must further recognise that prices at $45/barrel makes production of even easy oil difficult.
Make no mistake, future oil will have to be found and developed from more difficult terrain. Without regular dialogue between exporting and importing countries, oil will continue its wild swings. Right now, we only have to see “who blinks first” — the US shale oil producers or Saudi Arabia — for the tide to turn.
The third thing we must do is stop subsidised sale of domestic crude oil by ONGC and Oil India to public sector refineries. Under a weird subsidy burden sharing scheme, the two upstream producers were forced to sell at below $50/barrel when the world prices were above $100. As a result, several marginal fields whose development at $50/barrel is uneconomical couldn’t be brought to production. Nor could enhanced oil recovery projects, which have dramatically improved recovery factors from matured oil fields in Oman, be viable at such low realised prices.
India today is a unique country willing to pay market price for imported crude, but only half of that to oil produced by its own companies! Such a pricing policy leaves little surplus for exploration effort. No wonder, two-thirds of the over three million square km of our 26 sedimentary basins remains under-explored.
That brings us to the fourth point. We must take advantage of the current falling cost of oil field services to significantly step up exploration activity.
A massive seismic survey effort to cover over 85 per cent of our sedimentary basins, which do not have any 3D data, should be kicked off. This data should form the basis for a “national geo data repository” that can be freely accessed and used to attract risk capital for oil exploration through transparent bidding round the year. Countries like Norway have adopted this model to create a vibrant domestic oil and gas sector. India can easily replicate this if only a portion of the over Rs 90,000 crore of accumulated cess money collected under Oil Industry Development Act is used for oil industry development.
The fifth opportunity lies in the area of mergers & acquisition. Several good assets of companies deprived of positive cash flows are now up for sale, even as potentially high-yielding long-term projects are seeking equity partners with strong balance sheets. This is where overseas investments in “equity oil” with a long-term view by our national oil companies would be a prudent step.
Sixth, falling crude have also rubbed off on global LNG prices. The commissioning of significant additional LNG capacities will make it even more a buyer’s market for gas. India should leverage this to secure advantageous contractual supply commitments and also tap the huge potential for liquid fuel substitution.
The substitution of petrol and diesel by compressed natural gas can generate fuel savings of 20 per cent or more to the economy. Imagine the savings if the Delhi CNG experiment can be replicated in other cities by leveraging the current low international gas prices through LNG imports.
Finally, we must realise that when oil prices fall, speculators get out of the market, but consumers tend to consume more. This is the time to remind ourselves of the value of conservation and fuel efficiency. In the past, oil importing countries reacted to falling global prices by enjoying the party till it listed. The sensible thing is to be proactive and contrarian.
Enhancing strategic storage capacities, strengthening buying power, removing subsidies, stepping up exploration effort, accessing equity oil, contracting for more imported gas and conserving fuel — these, to my mind, are the opportunities India should grab by moving swiftly.
The author is MD, Hindustan Oil Exploration Company
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