During the period 2014-19, India’s crude oil consumption witnessed an increasing trend. As per the latest data available from the Petroleum Planning and Analysis Cell (PPAC), the domestic consumption of petroleum products grew at a compound annual growth rate (CAGR) of 5.04 per cent from 165.5 million tonnes (mt) in 2014-15 to 211.6 mt in 2018-19 (all figures mentioned for the year are provisional).
Domestic production of crude oil, however, has not been able to keep pace with this growth and declined from 37.5 mt in 2014-15 to 34.2 mt in 2018-19. This has primarily been due to a fall in output from key wells operated by state-owned Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) as well as from other fields being operated under production sharing contracts. OIL’s wells registered a 3.3 per cent lower production while those of ONGC registered a decline of 4.9 per cent. A decline of about 12.4 per cent was also seen in other oilfields during the past year. Interestingly, crude oil production by the private sector and joint ventures too dropped by 1.9 per cent due to the closure of two wells by Reliance Industries Limited in the D1D3 field in the Krishna-Godavari basin.
With consumption growing at a rapid pace and domestic output remaining stagnant, the country’s oil import dependence rose from 82.9 per cent in 2017-18 to 83.7 per cent in 2018-19, thus impacting the oil import bill. India spent $111.9 billion on oil imports in 2018-19, up from $87.8 billion in the previous fiscal year. The import bill was $64 billion in 2015-16.
Reliance on imports increasing rapidly
To meet the gap between demand and supply, India has resorted to importing crude oil. Imports increased from 189.2 mt in 2013-14 to 226.6 mt in 2018-19, growing at a CAGR of 3.65 per cent.
From mid-2014 to early 2016, crude oil prices remained softer due to a supply glut. In fact, prices closed at a low of $30 per barrel in early 2016. However, there was an upward push in global crude oil prices last year when they reached $80 per barrel only to fall again later. Currently, prices are hovering at around $70 per barrel on the back of extended production cuts from the Organization of the Petroleum Exporting Countries and Russia.
Key products consumed
The key petroleum products consumed during 2018-19 were high speed diesel at 83.5 mt, followed by motor spirit/petrol (28.3 mt) and liquefied petroleum gas (LPG) (24.9 mt). This is a transition from the earlier trend when pet coke was the fuel in high demand. However, given the amount of pollution it creates, the government has clamped down on the sale of petcoke in the National Capital Region, Uttar Pradesh, Haryana, Rajasthan and Himachal Pradesh and has banned its import for select industries. As a result, sales dropped from 26.2 mt in 2017-18 to 20.5 mt in 2018-19.
Another noticeable trend is the increase in LPG consumers that have grown at a CAGR of 8.84 per cent from 148 million in 2014-15 to 226 million in 2018-19. This increase is due to the rapid population increase combined with LPG penetration in rural areas under the Pradhan Mantri Ujjwala Yojana. As of July 2019, more than 70 million connections have been given under the scheme. With these drivers, LPG consumption has increased to 24.9 mt in 2018-19. In Union Budget 2019-20, the government has proposed the provision of an additional 80 million free LPG connections.
Natural gas supply shortfall and LNG imports on the rise
As in the case of crude oil, there has been a mismatch between the demand and supply of natural gas too. During the five-year period 2014-15 to 2018-19, gross natural gas consumption showed a consistent rise from 51,230 million metric standard cubic metres (mmscm) in 2014-15 to 59,071 mmscm in 2018-19, a CAGR of 2.89 per cent. In contrast, gross natural gas production has exhibited peaks and troughs. From 2014-15 to 2016-17, gas production declined to 31,897 mmscm and thereafter increased by 2.35 per cent and 0.69 per cent, respectively, in 2017-18 and 2018-19. During 2018-19, when the production was 32,874 mmscm, consumption was as high as 59,071 mmscm.
This huge difference of 26,197 mmscm between natural gas production and consumption in 2018-19 was met through liquefied natural gas (LNG) imports, which increased from 18,536 mmscm in 2014-15 to 27,015 mmscm in 2018-19, a CAGR of 7.82 per cent.
Demand drivers for natural gas
Depending on availability, the Ministry of Petroleum and Natural Gas (MoPNG) allocates domestic natural gas to various sectors as per the gas allocation policy. Domestic gas is first allocated to priority areas such as city gas distribution (CGD), fertilisers, power and LPG. Consumers other than those in priority sectors mainly use imported LNG. During 2017-18, about 52.72 billion cubic metres (bcm) of natural gas was consumed, of which the top three consumers were the fertiliser, power and CGD sectors.
Of these, the fertiliser industry continued to be the leading consumer of natural gas, accounting for over 27 per cent of the country’s total natural gas consumption (as gas is the most suitable feedstock for producing urea). This was followed by the CGD and power sectors, which accounted for around 24 per cent and 23 per cent of the consumption respectively.
Future plans to increase domestic production
To reduce the current reliance on imports and meet energy demand, the government is planning to ramp up domestic production of oil and gas. It has set a target of bringing down crude oil imports by 10 per cent by 2022 by increasing domestic production. To this end, it has introduced a number of policy measures in recent years such as the Hydrocarbon Exploration Licensing Policy (HELP) and the Discovered Small Fields [DSF] Policy. These policy measures are in tandem with the aim of increasing the share of gas in the energy basket. Under HELP, three rounds of auctions offering 87 blocks/ fields have been conducted. Besides, 54 small and marginal fields have been offered under the two DSF bid rounds.
Further, oil production companies have planned investments for refining capacity additions and upstream production. For instance, in January 2019, ONGC revealed plans of drilling 100 wells in 21 onshore petroleum mining lease (PML) blocks in Sivasagar district at a cost of Rs 35 billion. The 21 onshore PML blocks in the district will cover major oil producing fields of Lakwa, Rudrasagar and Geleki, where the company has already drilled more than 500 wells.
With regard to the natural gas segment, the government has set a target of producing over 60 bcm of gas by 2022. It also plans to expand the existing gas transmission infrastructure in the country. To this end, the construction of around 13,500 km of gas pipelines is already under way and investments worth Rs 700 billion have been planned in the next few years to develop pipeline infrastructure. Emphasis has also been laid on expanding the CGD network for which 136 geographical areas have been recently awarded under Rounds 9 and 10 of bidding.
The road ahead
The outlook for the oil and gas sector looks bright as India is expected to surpass China to become the world’s second largest oil demand growth centre in 2019. This will be backed by buoyant demand for auto fuel and LPG and will create opportunities for exploration and production players to increase domestic output. Further, policy reforms such as reduction in the weightage of revenue sharing between the operator and the government from 50 per cent to 30 per cent in Category I basins and other fiscal incentives will encourage players to increase oil exploration activities. Apart from this, total exemption in revenue sharing in the less productive Category II and Category III basins will also act as a catalyst in increasing domestic production.
In the next few years, when the blocks offered in the Open Acreage Licensing Policy and DSF bidding rounds come into production, domestic production of oil and natural gas is expected to rise significantly.