Interview with Dr Kirit Parikh: “Full price competition may take some time”

Dr Kirit Parikh has been instrumental in transforming India’s energy policy landscape. Most recently, he chaired an expert committee that came out with recommendations for overhauling the gas pricing mechanism, considered one of the biggest reforms in the sector so far. How has the oil and gas sector evolved over the years? In an interview with Indian Infrastructure in August 2006, Dr Parikh, then member, Planning Commission, talked about the energy priorities and strategies to bridge the demand-supply gap.    

What should be the national priorities with respect to the development of the oil and gas sector in India?

The Indian economy is expected to grow at a rate of 8-10 per cent in the coming years. The oil and gas sector would play a key role in achieving this growth. The sector currently contributes about 42 per cent of the energy requirement of the country. Domestic production of oil is around 33 mt and meets only 28 per cent of our consumption. This degree of self-sufficiency is expected to go down further as the demand for crude oil is projected to go up from the current level of 121 mt to between 350 mt and 486 mt by 2030 under different fuel-mix projection scenarios. However, the projected oil availability from domestic sources is expected to increase marginally. This raises the issue of oil security. The recent discovery of large reserves of gas in the east coast of India provides a certain degree of relief and may result in an increase in gas production.

The main priorities for the oil and gas sector in India are:

  • Increasing the exploration intensity both onshore and offshore for covering the prospective sedimentary basins which are either not explored or poorly explored.
  • Diversifying the supply sources for crude oil and natural gas by entering into long-term contracts wherever feasible.
  • Acquisition of equity oil and gas abroad (both producing properties and prospective exploration blocks).
  • Demand-side management of petroleum products.
  • Realising the potential of oil and gas conservation (20-25 per cent) in various end-use sectors by increasing efficiency along the entire value chain in the sector.
  • Providing a flexible taxation mechanism for the petroleum sector keeping in view the rising trend of international oil and gas prices so as to minimise the impact on consumers.
  • Effectively target the subsidies for kerosene and LPG to BPL (below poverty line) families.

What are the long-term trends in the consumption of oil and gas?

The consumption of petroleum products had been growing at a rate of 5-6 per cent up to the Ninth Plan. However, with improvement in the efficiency of vehicles, substitution of petroleum products by natural gas, improvement in road infrastructure and the growing use of information communication technologies (ICTs), the growth in consumption of oil is on the decline and is reported to be 2.7 per cent in the first four years of the Tenth Plan. This declining growth trend in the consumption of petroleum products is likely to continue in the long term. As indicated earlier, even with this declining growth trend, the requirement of petroleum products is expected to increase substantially in absolute terms in the long-term scenario.

With the recent large finds of natural gas in the Krishna Godavari basin and the added concern for environmental degradation, the use of natural gas is likely to increase in the long term. However, the increase will depend on the emerging price of natural gas as it is increasingly becoming a traded commodity with price linked to the price of oil.

What can we expect in terms of oil and gas production in the long term? What needs to be done to maximise production?

As stated earlier, a substantial increase in oil production is not envisaged even in the long term whereas gas production is likely to increase substantially. The following steps need to be taken to maximise production of oil and gas:

  • Stepping up exploration to find new reserves.
  • Aggressive application of improved oil recovery (IOR) and enhanced oil recovery (EOR) techniques.
  • Providing level terms for private and foreign operators willing to bring technology and investment to recover oil and gas from currently abandoned and/or marginal fields.
  • Application of new technologies for exploration as well as production operations.
  • Development of technology to exploit our reserves of gas hydrates which on preliminary indication look substantial.

How do we meet the remaining gap?

For meeting the gap between the projected demand and production of oil, there is a need to develop unconventional hydrocarbons such as oil shale deposits. Other measures include oil conservation, development of high efficiency vehicles, electric or hybrid vehicles, and other oil-using equipment. The other steps include substitution of oil with gas and electricity wherever feasible, promotion of bio-fuels and production of liquid fuels from coal. Availability of equity oil from abroad is another step in this direction.

The gap between demand and supply of natural gas could be met by imports either through pipelines or in the form of LNG. A number of transnational pipeline proposals for import of gas are under consideration. In addition to natural gas, the development of coal bed methane has also been initiated. In-situ gasification of coal can also help.

What are the steps that need to be taken to make pricing not only commercially sound but also socially and politically acceptable?

Petroleum is the most traded commodity in the international market. With the surplus refining capacity in the country, the export of petroleum products has been increasing. Therefore, the pricing mechanism of petroleum products on an import parity basis needs to be replaced by a trade parity basis. Further, trade parity pricing should ideally be a short-term measure. In the long term, full price competition at the refinery gate and at the retail level for all petroleum products should be pursued. However, during periods of continuously rising prices, the government can adjust the ad-valorem taxes and levies in a revenue-neutral manner to cushion the price rise for the customer.

Considering the poor paying capacity of vulnerable sections of society, LPG and kerosene may have to be provided at a subsidised price. Presently, subsidies for these products are universal. However, this subsidy has to be targeted at BPL families only. A proper mechanism for targeting these subsidies through introducing coupons or smart/debit cards to the intended beneficiaries is being explored.

Presently, there is a shortage of natural gas in the country. Ideally, this shortage should be reflected in the prices. However, it is not possible to have market-determined prices for gas as long as the main user, the fertilizer sector, has cost-plus pricing. Therefore, in the short run, gas needs to be allocated with regulator-determined prices.

What is the key infrastructure requirement for the sector? Where are the big gaps?

Infrastructure for the oil sector is well developed and any additional requirement is being taken care of by the oil companies. However, gas production and its use were confined to only a few parts of the country and the envisaged LNG trade. There is a need to expand the infrastructure requirements in terms of development of a gas pipeline network and setting up of LNG import terminals.

How should the oil and gas strategy be coordinated with other areas of energy?

The main areas that require coordination between the oil and gas sector and other areas of energy are pricing, energy security, regulation, consistency of taxes and environmental issues. As far as energy pricing is concerned, pricing of different fuels/sources cannot be set independent of each other. In a market economy, the relative prices of different energy supplies should be such that they yield the most optimal fuel mixes, investment flows and economic outcomes. With regard to oil security, the country is importing about 72 per cent of its present requirement, which is very high. Therefore, substitution of imported oil by other domestic sources would provide some comfort as far as energy security is concerned. Electricity, coal and bio-fuels can substitute petroleum products to a large extent. Independent regulation is critical to attaining competitive efficiency in the energy sector since the sector is characterised by large economies of scale and has natural monopoly characteristics in sub-sectors such as transportation and distribution networks. It is important that all sub-sectors of the energy sector are regulated in a consistent manner. The environmental impact of various fuels should be internalised in the prices. The challenge is to use conventional energy resources in a manner that cost-effectively maintains environmental quality.

What is your overall outlook on the sector?

The presently known crude oil and natural gas reserves in the country would last for 23 years and 38 years respectively at the current rate of production. As indicated earlier, 72 per cent of our oil requirement is being imported. Gas import in the form of LNG has also been on the increase. Although a rise in indigenous production of gas is envisaged in the near future, increase in production of oil may be marginal. Therefore, India’s supply strategy would require stepping up of exploration activities to find more oil and gas as well as substitute/supplement the sources wherever feasible. In view of the limited indigenous availability and continuance of high oil prices in the international market, full price competition may take some time. However, the existing price mechanism of petroleum products on an import parity basis may get replaced by a trade parity basis. The subsidy for LPG and kerosene would continue for people living below the poverty line. The regulatory framework would become operational, resulting in an optimal network of transportation and distribution of oil and gas. As long as the economy grows robustly, we should be able to import the needed oil and gas.