The Indian economy is the world’s third largest economy (in terms of purchasing power parity), growing at an average rate of 7 per cent per annum. The country is also the third largest energy consumer in the world after China and the US. The commendable growth so far has taken place despite the huge deficit in energy infrastructure. Even today, more than 3,000 villages do not have access to electricity or any other form of commercial energy. A large proportion of the population still uses noncommercial fuels such as firewood, crop residues, etc. This makes India a large market with huge untapped potential for energy.
According to the BP Statistical Review of World Energy 2018, primary energy consumption in the country in 2017 was about 753.7 million tonnes of oil equivalent (mtoe), growing at an average annual rate of 4-5 per cent. Crude oil and natural gas accounted for a 29.5 per cent and a 6.2 per cent share in the country’s primary energy mix. As India explores options for a lower carbon growth strategy, the share of natural gas is expected to increase within the energy basket. Thus, a number of initiatives are being taken by the government to attract investments in exploration and production (E&P) and in sourcing and transmission infrastructure.
Indian Infrastructure presents a snapshot of the recent trends and developments as well as the outlook for the sector…
Renewed interest in E&P activities: On the E&P front, the biggest achievement this year was the introduction of the Hydrocarbon Exploration and Licensing Policy (HELP) and the Open Acreage Licensing Policy (OALP). These policies allow exploration companies to propose their own area/block for bidding and also provide a uniform licensing system to cover all hydrocarbons under a single licensing framework. Further, the Directorate General of Hydrocarbons has identified 69 discovered small fields (DSFs) with 89 million tonnes (mt) of oil and gas resources for development. Of a total of 46 contract areas bid out in May 2016, bids were received for 34. The government has already awarded 30 contract areas to 20 firms for exploration. Besides, in February 2018, the government approved the second round of DSF auctions offering a total of 60 DSFs.
The bidding process under the OALP, Round I, also commenced in July 2017. There were 46 onland blocks and nine offshore blocks on offer. For the onland blocks, 92 bids were received while 18 bids came for the offshore blocks. The government is likely to award contracts for the first round of oil and gas auctions in July 2018.
Downward trend in crude oil and gas production: The current demand for oil and gas in the country outstrips supply by a wide margin. During 2017-18, India produced 35.7 mt of crude oil, thereby registering a slight decline over the 36 mt produced in the preceding fiscal year. During the first two months of the current fiscal year (2018-19), indigenous crude oil and condensate production decreased by 1.9 per cent as compared to April-May 2017. Considering the overall trend during the past five years (2013-14 to 2017-18), crude oil production registered a decline of 1.42 per cent. Factors responsible for the low production of crude oil include ageing fields and non-realisation of planned production from new wells.
From 2013-14 to 2017-18, gross natural gas production declined at a compound annual growth rate (CAGR) of 2 per cent. In 2017-18, gross domestic gas production was 89.5 million metric standard cubic metres [mmscm] per day (mmscmd), registering an increase of over 2 per cent over the previous year. In the first two months of 2018-19 (April-May), gross gas production was 5,391 mmscm vis-à-vis 5,302 mmscm during the same period of the previous year (2017-18).
With regard to petroleum products, the total production was 254.4 mt in 2017-18, about 4.48 per cent higher than the 243.5 mt recorded in 2016-17. From 2013-14 to 2017-18, the production of petroleum products registered a CAGR of about 3.62 per cent. For 2018-19 (April and May), the production of petroleum products was reported to be 42.5 mt, higher than the 40.9 mt recorded during the corresponding period of 2017-18.
Oil and gas consumption continues to grow: The demand for petroleum products has been rapidly increasing over the years. In 2017-18, India registered a 5.3 per cent growth in demand for petroleum products. The growth rate, however, was less than the 11.6 per cent recorded in 2015-16, which was the highest during the period 2013-14 to 2017-18. In 2017-18, demand for petroleum products stood at 204.9 mt, as against 194.6 mt in 2016-17. To meet the growing demand, the country’s dependence on crude oil imports has also jumped to about 83 per cent.
Natural gas continues to be a small part of India’s energy mix, accounting for only 6 per cent. The consumption of natural gas, however, has been rising consistently since 2014-15. In 2017-18, India’s natural gas consumption was 159.1 mmscmd, in comparison to 152.1 mmscmd in 2016-17. 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.
Volatility in natural gas price environment: On the pricing front, the biggest highlight in 2017-18 was the increase in the price of domestic gas after a long period of falling prices. The government last raised gas prices when it introduced a new pricing formula in November 2014. Since then, it has reduced prices by more than half through five successive cuts. Spot LNG prices have shown a downward trend over the past few years leading to higher LNG imports. With regard to long-term LNG contracts, India has renegotiated terms on three LNG contracts, with RasGas (Qatar), ExxonMobil (Australia) and Gazprom (Russia).
Growing LNG imports: India first began importing LNG in 2004 and by 2016 it had become the world’s fourth largest importer. Declining global gas prices have been a significant growth driver for LNG import demand. LNG imports have risen sharply from 47.1 mmscmd in 2013-14 to 72.1 mmscmd in 2017-18. To keep pace, LNG import infrastructure is expanding rapidly with existing terminals expanding capacities and new terminals being developed at various locations. At present, at least 19 million tonnes per annum (mtpa) of LNG import capacity is under construction and another 30 mtpa has been proposed/planned to be added in the future.
Inadequate pipeline infrastructure: India’s current gas pipeline infrastructure is skewed heavily towards the western region, while the eastern and southern parts of the country are not well connected. The existing gas pipeline network runs across 16,462.41 km, with a capacity of 387.31 mmscmd (as of November 2017). Several gas operators are currently involved in the development of new pipeline infrastructure. About 14,489 km of gas pipeline network with a combined capacity of 545 mmscmd is under execution and 14,657.6 km (174.43 mmscmd) has been proposed or planned to be taken up in the future. However, these projects face a number of challenges like land acquisition, permissions from multiple agencies, etc.
Focus on city gas distribution (CGD) infrastructure: The prospects for the CGD segment have improved in the past couple of years. The network has continued to grow and fresh licences have been issued at a much faster pace. Gas availability has increased due to priority being given to the compressed natural gas (CNG) and piped natural gas (PNG) segments. Several amendments have been made to the bidding criteria to address most of the concerns. The recently announced ninth CGD bidding round has received a good response from both domestic and global players. Also, GAIL (India) Limited has received permission to develop CGD infrastructure in seven cities along its new pipelines – Varanasi, Patna, Jamshedpur, Kolkata, Ranchi, Bhubaneswar and Cuttack. Several geographical areas (GAs) under the previous bidding rounds (six, seven and eight) have received one bid or failed to receive any bid on account of relatively weaker prospects. Fresh bids will be invited for these GAs in the future. Overall, the CGD segment offers significant opportunities for all stakeholders. The ninth round of bidding alone is expected to entail an investment of Rs 700 billion. The Petroleum and Natural Gas Regulatory Board has also identified 223 GAs for future bidding depending on the gas connectivity and demand scenario in the areas.
As per International Energy Agency estimates, primary energy consumption in the country is set to increase to 1,440 mtoe by 2030. E&P activities are expected to grow with increased demand and renewed interest from the private sector. The recent policy initiatives such as introduction of the OALP and HELP, giving pricing and marketing freedom for new gas production from deepwater, ultra deepwater and high pressure-high temperature areas and coal bed methane blocks, award of DSF fields, bringing some clarity on the bidding parameters for CGD, creation of an international oil and gas think-tank, etc., are expected to revive investor interest in the oil and gas sector. However, there is an urgent need to incentivise the midstream sector (transportation) and create the necessary infrastructure to increase reach to consumers. Also, the creation of adequate support infrastructure (LNG terminals, pipeline connectivity, draught, etc.), research on and investment in unconventional sources, monetisation of discoveries, and a favourable policy and regulatory environment will be key enablers for growth of the oil and gas sector.