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Saturday, July 11, 2020

Explained: Why India is producing less and less oil

A lack of new oil discoveries in India coupled with a long lead time to begin production from discovered wells has led to a steady decline in India’s crude oil production.

Written by Karunjit Singh | New Delhi | Updated: June 30, 2020 9:06:46 am
crude oil, crude oil production, crude oil price, oil price Crude oil storage tanks are seen in an aerial photograph at the Cushing oil hub in Cushing, Oklahoma, U.S. April 21, 2020. (Reuters Photo: Drone Base, File)

India’s crude oil production fell 7.1% in May 2020 compared to May 2019 on the back of low demand due to the Covid-19 pandemic. Domestic production of crude has, however, been falling every year since FY 2012. Annual crude oil production has fallen at a compounded annual rate of 2.1% since to 32,169.3 thousand Metric Tonnes (TMT) in FY 2020 from 38,089.7 TMT in FY 2012. This has led to a steady climb in the proportion of imports in domestic crude oil consumption from 81.8% in 2012 to 87.6% in 2020.

Why is production falling?

Experts say that most of India’s crude oil production comes from aging wells that have become less productive over time. A lack of new oil discoveries in India coupled with a long lead time to begin production from discovered wells has led to a steady decline in India’s crude oil production making India increasingly dependent on imports. The output of these aging wells is declining faster than new wells can come up according to experts. Domestic exploration companies are attempting to extend the life of currently operational wells.

Falling production, rising imports

Crude oil production in India is dominated by two major state-owned exploration and production companies, ONGC and Oil India. These companies are the key bidders for crude oil block auctions and end up acquiring most of the blocks that are put up for auction in India, according to experts.

Why are there not more private players?

While there are some private players in the upstream oil sector including Cairn India and Hindustan Oil Exploration Company there has been a lack of interest in exploration and production in India from major private players, particularly those based abroad. According to experts, this is because of long delays in the operationalisation of production even after an oil block is allotted due to delays in approvals. Some of the key approvals which are required to begin production include, environmental clearances and approval by the Directorate General of Hydrocarbons after the allottee completes a seismic survey and creates a field development plan.

“The best-case scenario from allotment to production is at least 5-7 years,” said an industry expert noting that in many cases it was delayed beyond this timeline particularly in the case of public sector companies.

What policy changes could help?

Existing public and private sector players have asked for reduced levies of oil production including oil cess, royalties, and profit petroleum especially when crude oil prices are below $45/barrel. Experts say the requirement to pay royalties to the government at low crude prices can make it unviable for these companies to invest in further exploration and production.

The government introduced the Open Acreage Licensing Programme (OALP) in 2019 to allow companies to carve out blocks that they are interested in and with lower royalties and no oil cess. However, existing players are calling for a relaxation of royalties and oil cess on block allotted under previous policies. One expert pointed out that the Chinese government offered a floor price to oil producers insulating them somewhat from any sharp falls in international crude prices.

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“This kind of policy at least allows for a company to have a fixed worst-case scenario for the sale of crude oil,” said an expert noting that this incentivised more investment in exploration and production.

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