Realising oil and gas potential

India is growing fast. Therefore, accelerating exploration and production of India’s potential petroleum resources is crucial to support a rapidly expanding economy, as well as fuel demand for greater mobility, and boost infrastructure for the nation, which is soon expected to be the world’s most populous country.

But production of oil and natural gas is falling well behind the growth in demand. As a result, India’s reliance on oil imports will climb above 90 per cent by 2040, up from 70 per cent in 2014, predicts the International Energy Agency (IEA), underscoring our vulnerability to volatile global markets.

Demand for oil in India will rise by more than the growth in any other country in the world by 2040, more than doubling to nearly 10 million barrels per day. Yet the IEA projects domestic oil production to remain relatively flat, hitting a plateau rate of 900,000 barrels per day in 2025, up from just 800,000 barrels per day in 2016, as investors seek more lucrative opportunities elsewhere.

While domestic gas output could triple, from 31 billion cubic metres in 2017 to some 85 billion cubic metres in 2040, assuming upstream reforms advance, it is still not enough to meet projected demand of 183 billion cubic metres in just over 20 years time.

India’s net oil and gas import bill will rocket too, jumping more than seven-fold from $65 billion in 2015 to $480 billion by 2040, data from the IEA shows. Of that, gas will account for some 10-15 per cent. Worryingly, the total bill makes up a sizeable share of India’s overall gross domestic product – 3.1 per cent in 2015 and 4.6 per cent in 2040.

Still, as the world’s third-largest importer of oil, India has fortuitously been one of the main beneficiaries of the fall in global oil prices since 2014. But these gains have started to dissipate, as oil prices have already soared almost 30 per cent to around $70/barrel over the past 12 months. Most analysts expect the oil price will continue its upward trajectory in the medium term. This does not bode well for energy-hungry, yet resource-poor, nations, such as ours.

As our imports of oil and gas are set to surge further, it should come as no surprise that the energy security is increasingly fragile. Yet, the oil and gas sector, which is vitally important in meeting the needs of the expanding economy and ballooning population, has been neglected. Over the last 20 years, the sector received just 2 per cent of all foreign direct investment flowing into the country.   Investors seeking more attractive opportunities in other industries, such as pharmaceuticals, chemicals, power, telecommunications, and automobiles, have bypassed it. This is symptomatic of a wider problem with the oil and gas sector, even though we have chosen to look the other way.

In the past foreign oil and gas players, such as global giant BHP Billiton, Australian independent Santos, Brazil’s Petrobras, Russia’s Gazprom, and Italian major Eni, made investments in India’s potential. But the obstructions they faced, including excessive red tape, onerous regulations, poor transparency in business dealings, dismal coordination between ministries, and unattractive pricing structures, all played a role in their exit.

Nevertheless, India does offer significant oil and gas opportunities, which if tapped, could stem increasing import dependence, and help meet the government’s vision of cutting oil imports by 10 per cent.

For a country that is short of hydrocarbons, India still has a considerable amount of unexplored potential. This leaves room for upside to the IEA’s production projections, particularly for gas, in the next 10-20 years, if licensing and pricing arrangements are right.

But despite efforts to boost production, the sector has underperformed. The resource base remains under-explored and under-appraised. The complex regulatory environment, including uncertainty over contract terms and pricing, has not helped. The upstream, dominated by state players ONGC and Oil India, lacks the competitive edge needed for it to thrive. India cannot just rely on three or four big operators to drive exploration and production.

Half of India’s sedimentary basins, which could be rich in hydrocarbons, remain unexplored. While only seven out of 26 basins are producing hydrocarbons. India’s deep-waters, which are potentially rich in gas, are largely unexplored. The drilling record reinforces this sense of under-explored potential, reported the IEA. Some 3,000 wells have been drilled offshore India, at an average density of one well per 146 square kilometres, which is low next to other offshore regions.

Nevertheless, over the past four years, the government has made great strides in improving the sector. Introduction of HELP, OALP, Discovered Small Field Rounds, various other initiatives, including gas price incentives, will help boost domestic supply. These reforms will translate into production 6 to 8 years from today and are applicable to future contracts. These reforms doesn’t address administrative and regulatory issues in production from existing contracts.

There is no doubt India needs more companies to come and explore. But, the lack of big finds in recent years, due to the lack of investment, means there are real doubts about the prospect of discovering large oil and gas fields.  On top of this, the supermajors will not come and invest, as the obstacles they currently face make the risk-reward ratio unappealing. This perception has to be altered.

The fact is India needs urgent changes to the nation’s upstream strategy that will significantly boost investment in exploration, from both domestic and foreign players. Otherwise, the government’s vision of curbing India’s rising dependence on foreign oil and gas imports will remain just a dream.

 (The writher is an industry expert and global analyst of energy businesses)