Opinion Privatisation and petroleum: Let’s resurrect an old question
Government’s investment is not an insignificant amount, especially as it generates no return. Privatisation could provide the funding. Hence, the question
The government has authorised the expansion of these reserves, but the pace of progress is slow because of delays in land acquisition for storage caverns and costs. (File Photo) Should the government privatise the petroleum exploration and production (EP) public enterprises, Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL)? This question had been deemed too sensitive for serious discussion. I resurrect it not to make the case for privatisation but because the altered landscape of the international petroleum market warrants a discussion.
Last month, I started this column with the words, “the fog of war has lifted somewhat” (‘From the Iran conflict, four geopolitical shifts India cannot afford to miss,’ IE, July 6) and sketched the four systemic shifts the conflict in the Middle East has wrought on the petroleum market — faltering trust in the US security umbrella; the lever of maritime choke points to alter the balance of power; the emergence of a faction in Iran driven more by the goal of building back the Iranian economy than defending the principles of the 1979 revolution; and OPEC’s weakening influence.
Since then, the fog of war has descended again. It is difficult to see where all this is headed. Several scenarios can be sketched. Diplomacy wins; President Donald Trump eats “a banquet of crow”, to quote American commentator Thomas L Friedman; Iran conciliates; the Strait of Hormuz is re-opened, and the region returns to the new normal of “no war – no peace”. Or madness continues. The US President makes real his threat to bomb Iran to rubble. Another possibility could be the Middle East conflict converging with the war in Ukraine. Iran has already warned Ukraine not to interfere with its ships crossing the Black Sea. China could use the turmoil to ratchet up temperatures around the South China Sea. Whatever the scenario, one thing is clear. The contours of the international petroleum market have been redrawn. It will not return to the status quo ante of February 28.
A wedge has been driven into the de jure principle of freedom of navigation. The Strait may reopen, and a compromise on levies may be agreed. But the shadow of kinetic impedance will not disappear, and will keep ship owners and crews on edge. The Houthis first attacked shipping in the Bab el-Mandeb on October 7, 2023. Two-and-a-half years on, commercial traffic through this strait is only 50 per cent of what it was before this attack.
A potentially positive flip is the evidence that the crude oil market is structurally oversupplied. Two factors support this evidence. One, even at the height of the conflict, crude prices did not stay elevated above $100/bbl. Experts had projected prices would range between $125 and $150/bbl. Second, at every hint of a diplomatic breakthrough, prices have fallen as sharply as they rose. The current pause in the bombing has brought prices down from just above $100/bbl to below $90/barrel.
It is against this redrawn landscape that the question posed above bears relevance. For whilst at one level, India faces greater risk of a supply disruption, at another it can draw comfort from a fundamentally glutted crude oil market.
To answer this question, two facts need to be taken into account. One, ONGC/OIL have not had great success in locating and developing new reserves. Domestic crude production has dropped almost 20 per cent over the past decade. Second, most of India’s hydrocarbon resources lie in complex geology and offshore areas. They are difficult and expensive to locate. Analysts estimate the finding cost of hydrocarbons in ONGC’s current focus areas of the offshore Godavari/ Mahanadi/Andaman basins could be between $60-80/barrel. If this estimate bears out, then in a “low for longer” price scenario where the futures market price for the marker Brent crude is around $ 70, it may not be commercially viable to bring a discovery into production.
The raison d’être for establishing state-owned EP companies has never been only economic. ONGC was created because energy security was (is) a matter of strategic significance. Cost comparisons should not, therefore, be the sole benchmark. That said, the question arises whether in a structurally oversupplied market confronted by the increasing probability of physical disruption, energy security is best achieved by allocating scarce public resources towards capital-intensive, high-risk and high-cost exploration or whether it would be better to deploy it towards the development of a “just for sure” strategy built around the expansion of India’s strategic petroleum reserves and green energy.
Currently, India has six to seven days of crude oil import cover in strategic reserves. (This is not to be confused with commercial inventory.) The government has authorised the expansion of these reserves, but the pace of progress is slow because of delays in land acquisition for storage caverns and costs. I can appreciate the latter. A robust strategic buffer of, say, 60 days of imports (China has 120 days cover and the IEA member countries 90 days) at $70/bbl would cost about $2.2 billion for just the oil. To that should be added the cost of land and ancillary logistics and distribution infrastructure. This is not an insignificant investment, especially as it generates no return. Privatisation could provide the funding. Hence, the question.
The writer is distinguished fellow and chairman, Centre for Social and Economic Progress
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