A Bright Spot: Falling crude prices good for energy security

Falling crude prices good for energy security

Over the past 18 months, a global supply glut of oil along with low demand has led to a steep decline in the price of crude oil. On the one hand, this has impacted major producer countries negatively while on the other, net importers such as India have benefited significantly. This scenario is being viewed as an ”opportunity” for India to forge long-term contracts with key producers and lock in the low prices prevailing currently.

Why are crude prices falling?

Continuous oversupply clubbed with sluggish demand from the chief oil-consuming economies has resulted in a southward trend. On the supply side, a significant increase in crude oil production by the US (once a net importer), owing to the shale oil boom, has been a major factor in flooding global markets with excess supply.

The shale oil boom has been a result of technological advancements and the easy availability of credit to develop the reserves. On the demand side, the economic slowdown in Europe, China and Japan, along with efficiency gains, fuel substitution efforts, etc., has contributed to keeping prices low. Key producers such as Saudi Arabia have been reluctant to cut production in a bid to protect their market share.

In January 2016, global oil prices entered the sub-$30 per barrel territory for the first time in 12 years. In addition to steady production from the Organization of Petroleum Exporting Countries, Iran too is set to re-enter global markets as sanctions on it are being lifted. This development indicates that low oil prices are likely to continue to prevail in the near term.

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Impact on India’s oil imports

India relies heavily on imports to meet its demand for oil and gas. Lower prices have thus been beneficial to India’s terms of trade.  During each of the fiscal years 2013-14 and 2014-15, India imported over 189 million tonnes (mt) of crude. In the first half of 2015-16 (till September 2015), crude imports amounted to 99.36 mt. Since 2012-13, however, there has been a significant reduction in the import bill for crude, which dropped from over Rs 8 trillion in 2013-14 to over Rs 6 trillion in 2014-15. Given the value of imports till September 2015 (about Rs 2.5 trillion) in the current fiscal year, the overall bill for the entire fiscal year is likely to be significantly lower than in 2014-15.

Most of India’s imported crude comes from the Middle East, Africa and South America. Over the past couple of years, India has increased its sourcing from Africa and South America, while imports from the Middle East have witnessed a decline. This is likely to change once crude from Iran becomes available.

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Opportunity to build strategic sources

The need for crude imports varies according to the interplay of a number of factors. These include operations in new production areas, successful acquisition of assets or equity in oil assets abroad, success in conservation efforts, etc. Through Indian Strategic Petroleum Reserve Limited, the government is setting up strategic crude oil reserves of 5.33 mt to be stored at three locations: Visakhapatnam (1.33 mt), Mangalore (1.5 mt) and Padur (2.5 mt). The storing of crude in the Visakhapatnam facility has been completed. The setting up of storage facilities at Mangalore and Padur, both on the western coast of Karnataka, is nearly complete, and is awaiting pipeline connections to the nearest ports.

In order to further increase the strategic crude oil storage capacity, and tap opportunities created by falling prices, a detailed feasibility report has been prepared for the construction of an additional 12.5 mt of strategic crude oil storage capacity in Phase II at four locations: Bikaner (Rajasthan), Rajkot (Gujarat), Chandikhol (Odisha) and Padur (Kerala). In February 2016, the Ministry of Petroleum and Natural Gas (MoPNG), sought Rs 150 billion from the Centre for setting up these facilities.

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Strategic dialogue

India has been actively moving ahead with plans to establish stable import relationships. Africa, for instance, accounts for about 16 per cent of the total oil imports, with most of it coming from Nigeria and Angola. Indian public and private sector companies have acquired interests in oil and gas fields across Africa, including Sudan, South Sudan, Mozambique and Gabon, so as to establish multiple supply sources.

In recent bilateral talks with a number of African countries, it was agreed to provide a facilitating framework for India’s public and private sector companies to undertake oil and gas projects in the continent. ONGC Videsh Limited (OVL), for instance, has signed an MoU with Equatorial Guinea for cooperation in pursuing exploration and production activities. In addition, Sudan offered OVL three new oil and gas blocks for exploration and production. The country has also sought the help of Indian firms in setting up a coastal refinery.

There have been talks with Russia to pave the way for greater participation by Indian players in the latter’s oil and gas sector. In December 2015, important deals were finalised between the two countries. It was agreed that OVL would purchase a 15 per cent stake in Russia’s second biggest oilfield, Vankorneft, for $1.3 billion. The oilfield is owned by Rosneft, the country’s leading petroleum company. Moreover, Oil India Limited and the Indian Oil Corporation both signed a non-binding agreement with Rosneft to set up a time frame to finalise a pact to buy stakes in the Taas-Yuryakh Neftegazodobycha oilfield, another major oilfield in Siberia.

The way forward

While recent developments bode well for reducing India’s fuel imports, self-reliance still remains the country’s long-term goal. Plans for domestic mega refineries are being chalked out and the building of strategic reserves is being given utmost importance.  Meanwhile, measures for more judicious use of fuel, such as blending petroleum with ethanol, are also being implemented.