July 2016: EDITOR Devangshu Datta

EDITOR Devangshu Datta

The global slowdown has cast a dark cloud with exports dropping for the past six quarters. But there has been a silver lining in the form of low crude and gas prices.  This has led to a massive reduction in the subsidy burden, it has enabled refiners and marketers to reap profits and it has allowed the government to collect higher revenues by keeping fuel taxes high.

Lower prices have also masked higher fuel consumption and stagnant domestic production. The consumption of petro products increased by 11 per cent in 2015-16 over 2014-15, and oil imports rose to 81 per cent of total consumption from 78.5 per cent.  But the import bill dropped from $112 billion in 2014-15 to $64 billion in 2015-16.

It was a similar story in natural gas. Consumption was up by 2.4 per cent while domestic production dropped by 4 per cent. About 40 per cent of gas demand amounting to 21 billion cubic metres of LNG is now imported and here too, falling prices were very beneficial.

India’s energy demands will rise in tandem with economic growth. While global prices are expected to remain low in 2016-17, this cannot last forever. Sooner or later, crude prices will rise, either due to stronger demand or, perhaps, due to supply disruptions. Domestic production must be ramped up as fast as possible to prevent crippling levels of import dependency.

The revamped Hydrocarbon Exploration Licensing Policy is expected to stimulate exploration. HELP proposes radical changes, in terms of moving to a revenue sharing regime, in the introduction of a single licence as well as a shift to open acreage licensing. It also proposes lower royalty rates and a more flexible pricing regime. On the whole, HELP has been welcomed by stakeholders though there are reservations about the revenue sharing model.

In midstream, new refining capacity is expected to draw huge investments. India has surplus refining capacity but that is useful since exports are profitable. As domestic demand grows, more capacity, and environmentally sustainable refining capacity at that, will be required.

Gas is a relatively clean fuel and judicial activism and environmental concerns are driving demand.  There is plenty of interest in the construction of new LNG terminals since imports are expected to double over the next four years.  There is also interest in new pipelines and in the establishment of citywide gas distribution networks. Here, land acquisition, slow clearances and policy uncertainties have been a drag.  The new gas pricing policy appears pragmatic though there is still a large subsidy burden. There is also a welcome attempt to rationalise the kerosene subsidy by gradually raising prices.

However, the government has many unfinished tasks on the policy front. Uncertainties in the regulatory environment pertaining to everything from exploration and production, to terminals, to city gas, etc., need to be addressed. Subsidies, including fertiliser subsidies, must be further reduced and ideally, phased out. There has to be a push to encourage development of coal bed methane and shale assets as well.

The low prices of the past 21 months have proved to be a windfall in terms of public savings. This is also a window of opportunity to remove price and policy distortions. Let it not be frittered away.