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Energy sector will continue to suffer

Till policy is straightened out to allow market forces to take over, the sector will continue to be in a mess

Devangshu Datta  |  New Delhi 

In the first nine months of 2013-14, India imported a little over 3.8 million barrels of crude oil a day – overtaking Japan in import volume. This makes India the third-largest oil importer in the world, behind China and the US.

By 2020, the International Energy Agency (IEA) estimates India will become the world’s largest oil importer. The Indian government, meanwhile, hopes it will achieve energy sufficiency by 2030, making imports unnecessary. It is very unlikely that IEA and the government are both correct in their projections.

Note that China has roughly 4.5 times India’s GDP and the US GDP is almost nine times as much as India. India’s oil consumption will rise inevitably as its economy grows larger. By the 2030s, India will need about eight million barrels a day, going by expected GDP and population growth.

As of now, India produces slightly less than 0.5 million barrels of crude a day and ramping up domestic production 16 times in the next 15-20 years would border on the miraculous. It is also difficult to imagine an energy substitution process that drastically reduces the need for crude. This would require major technological breakthroughs.

Most likely, India’s import dependency will rise substantially, to around 95 per cent of consumption. This is likely even if domestic sources are tapped efficiently; unconventional shale and coal-bed-methane are developed; massive substitution results via renewable, etc. Most First World nations are net oil importers. None of the importers offer subsidies on a commodity they must import. All ensure fuels are priced at market prices and most add punitive taxes to ensure there isn’t wasteful utilisation. Indian policy should have gone the same way. There should have been an attempt to empower Indian oil and gas explorers and producers. Policy should also be designed to encourage consumers to be as frugal and efficient as possible.

Developments on the ground suggest none of this is happening. Retail fuel prices are subsidised, meaning consumers don’t pay realistic prices for gas, diesel and kerosene. This encourages inefficient use of these fuels.

India’s oil sector public sector undertakings (PSUs) are crippled by the subsidy policy and the financial burden it imposes on them. Foreign exploration efforts aren’t backed with the kind of enthusiasm that for example, the Chinese government displays. Dwindling enthusiasm and few strikes across umpteen rounds of the New Exploration and Licensing Policy (NELP) indicate the policy of encouraging domestic exploration hasn’t been very successful. About the only positive in the policy ledger is that India has excess refining capacity, which makes exports of products possible.

There have been some abroad. Bharat Petroleum Corporation, Oil India, Indian Oil Corporation, Reliance Industries and Videocon Energy – have purchased equity stakes in oil and gas fields of South America, Africa and Caspian Sea region. ONGC Videsh Limited (OVL), the foreign arm of Oil and Natural Gas Corporation (ONGC), produced 6.21 mtpa of crude oil from its assets in 2012-13. OVL has oil producing blocks in Vietnam, Russia, Sudan, South Sudan, Syria, Brazil, Venezuela, Colombia and Azerbaijan.

Crude, allied to gas, continue to occupy the top position on the import list. The rupee’s value and India’s GDP growth are both closely linked to fluctuations in the global crude market. Starting with the 1970s oil shocks, Indian GDP has always been hit hard when crude prices have spiked.

No government has ever had the nerve to let fuel prices be dictated by market forces. The sector is likely to remain a mess until that becomes politically acceptable and there is no sign of it happening. The sector offers trading opportunities at best for Indian investors. If you held the Nifty portfolio minus PSUs, your returns over the past decade would have comfortably beaten the passive index return. If you held the Nifty portfolio less the energy sector, you would also have beaten the index. None of the industry ones, including the private players, will be capable of delivering stable shareholder returns until policy is straightened out.

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First Published: Sun, February 16 2014. 23:17 IST