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Tuesday, August 04, 2020

In post-Covid world, we will need a mindset of preparedness to deal with all oil eventualities

Against the background of these post-COVID market uncertainties and the above factoids, I suggest that the mandarins of our petroleum industry switch to the “just in case” policy mode.

Written by Vikram S Mehta | Updated: June 1, 2020 8:17:04 pm
coronavirus impact on oil, coronavirus lockdown impact on oil companies, oil production, oil rates, oil prices, Express Opinion, Indian Express A Venezuelan oil worker walks in the El Palito refinery during the arrival of Iranian oil tanker Fortune near Puerto Cabello, Venezuela, Monday, May 25, 2020. (AP Photo/Ernesto Vargas)

The post-COVID “world (will be) switching from just in time to just in case”. This quote was brought to my attention by Pascal Lamy, the former Director General of the WTO through a note in which he attributed it to the economist Alan Kirman. This article is pegged around this quote, but rather than use it in the future continuous sense (“will be”), I use the auxiliary verb “should” and that too specifically for the Indian petroleum sector. The suggestion is that the decision makers of this sector should switch to a “just in case” policy mode.

The oil market is in no man’s land. Few speak with conviction about its future trajectory. Last month, it dropped into negative territory for a day in the USA; today the price of the same crude quality is above $30/barrel. If one reads the commentary of experts, one could be excused for thinking that oil prices will soon cross $50/barrel or crash once again, to below $20/barrel. The fine print of these reports is always caveated with the disclaimer, “it all depends” on one or more of the comparably uncertain variables of economic growth, geopolitics — US-China relations, the timing of the development of an anti-COVID vaccine or a combination of all these variables. The fact is no one really knows how the petroleum sector will fare in the “new normal”of the post-COVID world.

This is not a comfortable starting point for our decision makers. For, what they do know is that, irrespective of the twists and turns in the petroleum market, India will need fossil fuels (coal, oil and gas) to drive its economic growth for at least the next decade, if not longer. And that a sizeable percentage of these requirements will have to be imported. The country does not have the geology to expect gushers especially in an environment of volatile (and relatively low) oil prices.

What must also be discomforting is the “known unknown”of the post-COVID stress. They know that COVID has knocked the props from under the Indian economy. They also know that every petroleum company, irrespective of whether it is in the private or public sector, will face an increasingly uncertain and challenging future business environment. What they do not know is the nature of these challenges, and therefore, the conditions, sine qua non, for managing them.

India consumes around 5,000,000 barrels of crude oil every day. Of that, it imports approximately 4,500,000 barrels/day making the country the third largest crude market in the world. Every month, on average, 70 loaded VLCC (very large crude carriers ) — accounting for 10 per cent of the global tanker market — bring crude oil to India. Approximately 60 per cent of this oil is discharged in and around the Jamnagar area and then carried by pipelines to refineries in Jamnagar, Mathura, Panipat, Bina and Bhatinda. And 50 per cent or so is sourced from Saudi Arabia, Kuwait, Abu Dhabi, Iran and Iraq .

Against the background of these post-COVID market uncertainties and the above factoids, I suggest that the mandarins of our petroleum industry switch to the “just in case” policy mode.

ONGC/OIL are strategically important PSUs. Few have questioned the support to these two companies and the importance of harnessing our indigenous oil and gas reserves. Hitherto, this support has been premised on the view that oil supplies are relatively scarce and that prices will trend upwards. We now need to ask: What if, “just in case” the oil market is structurally oversupplied and prices fall to such low levels that it makes no commercial sense for ONGC/OIL to expend public resources on “ high risk, high cost” exploration? Oil and gas are, after all, tradables and can be purchased on the high seas. Should they not, given this possibility, contemplate redefining their core purpose and perhaps pivot away from oil and gas towards clean energy?

Looked at through a different lens but with a “just in case” mindset, the preponderance of crude supplies sourced from countries facing deep political, economic and social tensions raises the question: What if these domestic problems choked our access? How would we manage the disruption? These are not new questions. Our decision makers have worried about supply security for decades. What is new are the circumstances created by COVID. The issue of strategic reserves could, for instance, acquire a different hue. We have currently 11 days of reserve cover (5.33 million tonnes) with plans to increase it to 24 days (11.83 million tonnes). Were we to decide to build up these reserves to levels comparable to other countries of between 70 to 100 days of import cover, the issue would be capital. Given the slowdown of the economy and the pressures on the exchequer, the government would not have the financial resources to invest in the creation of additional facilities. The only way this financial hurdle could be overcome is if the government and the private sector invest jointly.This collaborative option would have to be considered to counter the “just in case” contingency of a prolonged and major disruption. And if indeed such an option were acceptable, it could be extended to cover trading, crude purchases, co-freighting, subject of course to anti-trust and competition rules.

A final example to embed the importance of “just in case” thinking can be drawn from the geopolitics of our neighbourhood. What if the relations between India/Pakistan/China took an ugly turn? What security measures should we contemplate to protect the petroleum assets located in Mumbai and Jamnagar?

Alan Kirman’s observation was made in the context (I presume) of the over reliance of MNCs on the “China” supply chain against the backdrop of US-China tensions. My suggestion is made in the context of COVID, when all hands on decks are needed to tackle the “urgent” task of reviving the economy.The government must not, in the process, lose sight of the “importance” of creating, if nothing else, the mindset of preparedness to respond to “just in case outcomes”.

The writer is chairman and senior fellow, Brookings India

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