Overview

New policies to give impetus to the sector

The current oil and gas demand in the country outstrips supply by a wide margin, thus making a strong case for investment in exploration and production (E&P) as well as in infrastructure for transmission and distribution. On the one hand, the past year witnessed a decline in the domestic production of both oil and gas while on the other, factors such as lower prices, rapid economic growth, increased vehicle purchases and rising air traffic pushed up domestic oil and gas consumption.

During 2015-16, India produced only 36.9 million tonnes (mt) of crude oil, lower than the 37.5 mt produced in the previous year. In comparison, the country consumed about 183.5 mt of petroleum products, an increase of about 11 per cent over the 165.5 mt consumption recorded in 2014-15. Dependence on oil imports rose to 81 per cent in 2015-16 from 78.5 per cent in 2014-15. In absolute terms, India imported over 202 mt of crude, compared to 189 mt in 2014-15. However, lower oil prices led to a significant reduction in the crude import bill, which dropped from $112 billion in 2014-15 to about $64 billion in 2015-16.

With regard to natural gas, while the consumption increased marginally by 2.4 per cent during the two-year period 2014-16, domestic production declined by 4 per cent. The increase in consumption was met entirely by imports, which rose by 14 per cent. Currently, about 40 per cent of India’s gas needs are met through imports, primarily in the form of liquefied natural gas (LNG). In 2015-16, India imported 21 billion cubic metres of LNG.

Given the tight domestic oil and gas supply situation and the burgeoning energy requirements, the government took some important policy initiatives in the past year to attract investor interest, particularly in the E&P segment. In a long-awaited move, the government approved the Hydrocarbon Exploration and Licensing Policy (HELP) which replaced the New Exploration Licensing Policy introduced in 1997. HELP, which is more transparent and investor friendly, has introduced a uniform licensing regime, which will provide a major fillip to untapped unconventional sources of energy such as shale and coal bed methane. Moreover, the new policy provides complete freedom in the pricing and marketing of the gas produced. HELP has also proposed a shift from the production sharing contract to a revenue sharing regime, which will be linked directly to output levels and price.

Another noteworthy policy that has been approved is the Marketing and Pricing Freedom for New Gas Production from Deepwater, Ultra-Deepwater and High Pressure/High Temperature Areas Policy, which is expected to provide a boost to production activity. Other reforms were also introduced to encourage more firms to make forays into the sector. The government approved the Marginal Field Policy for 69 small and marginal fields in a bid to provide pricing and marketing freedom to explorers. Further, a shift to the Open Acreage Licensing Policy has been proposed, allowing companies to choose the area for exploration rather than the government identifying blocks and offering them in different bid rounds.

Meanwhile, in the midstream segment, over the past year, there were only nominal additions to pipeline infrastructure. As of April 2016, the total length of the oil, gas and product pipeline network in the country stood at about 41,070 km, a growth of about 3.4 per cent over the previous fiscal year’s figure of 39,710 km. At present, a number of pipeline projects are under way, most of which pertain to gas pipelines.

As far as the downstream segment is concerned, it continues to grow in terms of market size and network. The city gas pipeline network has grown at a compound annual growth rate (CAGR) of 15 per cent between 2012 and 2016 (till June 2016) while the number of CNG stations has increased at a CAGR of 16 per cent. New city gas distribution (CGD) bidding rounds (fifth and sixth) were undertaken by the Petroleum and Natural Gas Regulatory Board. A total of 54 geographical areas were offered under the two rounds. Besides, new licences were issued to lay, build, operate and expand the CGD network in 14 districts/cities – Ernakulam and Belgaum were offered in the fourth bidding round; Krishna, Dharwad, Tumkur, Godavari East, Godavari West, Hardwar and Udham Singh Nagar were offered in the fifth bidding round; and Rupnagar, Patan, Amreli, Bhatinda and Saharanpur were offered in the sixth bidding round.

Going forward, the oil and gas sector will largely be shaped by improvements in E&P activities and by the impact of commodity prices. To this end, there is an urgent need to incentivise the upstream sector and create the necessary infrastructure to reach consumers. While recent policy initiatives are a significant departure from the past and bode well for the sector, an effective implementation framework will be critical to future success.

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