India’s oil and gas sector is at a crucial juncture at present. This is owing to a number of factors such as the introduction of key (long- awaited) policies, changing supply dynamics, government plans to promote cleaner sources of energy (such as natural gas), growing concerns about sustainability, and the ever-increasing demand for hydrocarbons. From the viewpoint of energy security, there is an increasing focus on the reduction of import dependence and an increased reliance on domestic produce. However, the year-on-year trend for the past five fiscal years indicates that this aim of greater domestic reliance has not been met – both oil and gas output within the national geography has been consistently falling. However, the new policies are expected to bring some correction in the medium term, if not sooner.
Production trends
- The current oil and gas demand in the country outstrips supply by a wide margin. During 2016-17, India produced 36 million tonnes (mt) of crude oil, thereby registering a slight decline over the 36.9 mt produced in the preceding fiscal year. During the first two months of the current fiscal year (April and May 2017), crude oil production was reportedly around 6 mt, roughly the same level recorded during the first two months of 2016-17. Considering the overall trend during the past five years (2012-13 to 2016-17), crude oil production has declined from 37.86 mt to 36.01 mt. Factors responsible for the low production of crude oil include ageing fields (especially in Gujarat and the Northeast) and lower-than-planned production from newly drilled wells.
- With regard to natural gas, from 2012-13 to 2016-17, gross natural gas production consistently declined each year during the five-year period. In 2016-17, gross domestic gas production was 31,897 million metric standard cubic metres (mmscm), a decline of 1.09 per cent over the preceding fiscal year. The net natural gas production (gross gas production excluding flare and losses by gas producing companies) too witnessed a declining trend during the period. In 2016-17, net gas production in the country was 30,848 mmscm, a decline of about 1 per cent over the previous year.
- In terms of production of petroleum products, in 2016-17, the total production was 242.7 mt (provisional) – about 5 per cent higher than the 231.2 mt recorded in 2015-16. During the five years 2012-13 to 2016-17, the production of petroleum products registered a compound annual growth rate of about 3 per cent. For April and May, 2017-18, the production of petroleum products was reported to be 40.8 mt, marginally higher than the 39.6 mt recorded during the corresponding period of 2016-17.
- India not only imports but also exports petroleum products. The total import of petroleum products for 2016-17 was 35.9 mt, significantly higher than the 29.5 mt that was registered during the preceding fiscal year. Liquefied petroleum gas (LPG) imports account for over 30 per cent of total imports. Total exports of other petroleum products in 2016-17 were 65.5 mt, increasing from 60.5 mt during 2015-16.
Consumption trends
- The demand for petroleum products has been increasing over the years. In 2016-17, the country registered a 5 per cent growth in demand for petroleum products. The growth rate, however, was less than the 11 per cent recorded in the preceding fiscal year (2015-16), which was the highest during the five-year period 2012-13 to 2016-17. As of 2016-17, demand for petroleum products stood at 194.2 mt, as against 184.7 mt in 2015-16. In the first two months of 2017-18, the consumption of oil products stood at 34.54 mt, an increase of 4.25 per cent over the corresponding period of the previous year. Diesel consumption expanded by 5 per cent during the period April-May 2017 (over the corresponding period of the previous year) and was recorded at 14.47 mt. The country’s dependence on crude oil imports also jumped to over 80 per cent to meet the growing demand.
- Natural gas continues to be a minor part of India’s energy mix, accounting for only 5-6 per cent. The consumption of natural gas, however, has been rising consistently since 2014-15. In 2016-17, natural gas consumption was 55,534 mmscm, in comparison to 52,448 mmscm in the corresponding period of 2015-16. This is primarily due to the higher consumption of liquefied natural gas (LNG) that is available at prices less than those of domestically produced gas.
LNG uptake
- Declining global gas prices have been a significant growth driver for LNG import demand. India has thus emerged as a key importer of LNG in the Asia-Pacific region. LNG imports have risen sharply from 42.23 mmscm per day (mmscmd) in 2011-12 to 67.63 mmscmd in 2016-17. The biggest source of these imports has been Qatar. However, over time, Qatar’s share in total LNG imports declined, from a high of 96 per cent in 2005 to 62 per cent in 2016. Some of the other key source countries for LNG imports are Nigeria, Equatorial Guinea and Australia.
Update on pipeline infrastructure
- As of March 31, 2017, the operational pipeline infrastructure in the country spanned a total length of 16,150.41 km. This network had a combined design capacity of 383.81 mmscmd. Several gas operators are currently also undertaking the development of new pipeline infrastructure. These include GAIL (India) Limited, the Gujarat State Petroleum Corporation, Reliance Gas Pipelines, and Indian Oil Corporation Limited (IOCL). As on March 31, 2017, about 13,821 km of natural gas pipelines were under construction.
- Besides, two transnational gas pipeline laying projects are also being undertaken by GAIL. These are the Turkmenistan-Afghanistan-Pakistan-India pipeline and the Middle East-India deepwater pipeline projects. India’s share in the total capacities of the two projects amounts to 38 mmscmd and 31.5 mmscmd respectively.
Policy push
- During the past 12-18 months, a number of reforms have been introduced in the hydrocarbons sector. The government has clearly spelled out its vision of reducing the country’s import dependence on oil and gas by 10 per cent by 2022, and has thus introduced policies aimed at increasing domestic output. Some of the noteworthy policy measures include the introduction of the Hydrocarbon Exploration and Licensing Policy, the launch of the National Data Repository, the Policy for Marketing and Pricing Freedom for New Gas Production from Deepwater, Ultra Deepwater and High Pressure-High Temperature Areas, and the Open Acreage Licensing Policy.
Increasing focus on exploration
- At present, India imports 80 per cent of its oil requirements and nearly 40 per cent of its gas requirements. While depressed crude prices in recent years made a strong economic case to import cheap crude, these low prices disturbed the revenue flows of domestic refiners. Competition too has intensified in the sector, prompting refining companies to contemplate ramping up existing refining capacities in a bid to retain their export markets.
- A number of plans for the establishment of new refineries have been drawn up. The most significant one is the 60 million tonne per annum (mtpa) facility (two phases of 40 mtpa and 20 mtpa each) proposed to be set up at Rajapur in Maharashtra’s Ratnagiri district. In addition, refining companies such as IOCL and Bharat Petroleum Corporation Limited are pursuing plans for expanding their existing facilities.
City gas distribution segment
- The city gas distribution (CGD) segment has witnessed mixed progress over the past few years. The network has grown and fresh licences have been issued at a much faster pace than earlier. However, despite several changes in the bidding parameters to encourage participation, the response has remained lukewarm. In the past year, the Petroleum and Natural Gas Regulatory Board has granted authorisation to lay, build, operate and expand the CGD network in 16 cities covered under the sixth bidding round and one city under the seventh bidding round.
Price trends
- The prices of crude oil in the country vary according to market prices in the domestic and international markets. Of late, this segment has faced significant price volatility. Prices fell considerably in 2016, and hovered in the range of $45-$50 per barrel during May-November 2016. While this trend was reversed during December 2016-February 2017 when prices rose to $54.86 per barrel, the increase in prices was short-lived. Since March 2017, crude oil prices have again exhibited a decreasing trend. In June 2017, crude oil prices plunged by almost 8 per cent to $46.56 per barrel.
- Taking into consideration key products, the pricing trend has been mixed. The price of petrol in Delhi stood at Rs 64.57 per litre while that of diesel stood at Rs 54.95 per litre (prices as on July 26, 2017). LPG cylinders continue to be one of the most heavily subsidised petroleum products. The government has decided to restrict the supply of subsidised LPG cylinders to 12 per year for each consumer. In Delhi, as of July 1, 2017, the price of subsidised LPG stood at Rs 477.46. Kerosene prices have also remained low in the past decade, varying from Rs 13 to Rs 23 per litre. In Mumbai, the price of kerosene stood at Rs 21.48 per litre on July 16, 2017.
Outlook
The outlook of the hydrocarbon sector will be largely shaped by the policy measures taken recently. Domestic exploration and production activity is likely to correct the declining oil and gas production, as the issues that existed earlier have been addressed. However, there is an urgent need to incentivise the midstream sector (transportation) and create the necessary infrastructure to improve the reach to consumers. While the recent policy initiatives are a significant departure from the past and bode well for the sector, implementation will hold the key to the overall success. The growing focus on renewable energy and its increasing availability at affordable prices is a major area of concern for the oil and gas sector. It remains to be seen how players respond to the inevitable challenge of alternative energy sources.