The year 2018-19 witnessed significant efforts by the government to drive investments in the oil and gas sector. It was marked by the government’s decision to hike natural gas prices for the fourth consecutive time in the past two years. In a bid to increase domestic output and reduce imports, the government has granted marketing and pricing
freedom to all new gas discoveries, the field development plans of which are yet to be approved. It also introduced fiscal incentives for operational fields for producing more than their current production level.
Further, three bidding rounds were launched under the newly formulated Open Acreage Licensing Policy (OALP) under which 92 blocks were offered. The government has committed an investment of about Rs 15 trillion over the next four to five years for the development of these blocks. Another 53 blocks were awarded under the two discovered small fields (DSF) bidding rounds.
The prospects for the city gas distribution (CGD) segment have also improved significantly in the past few years. The Petroleum and Natural Gas Regulatory Board has granted authorisations for the development of CGD infrastructure in 130 new geographical areas (GAs) under Rounds 9 and 10 of bidding.
Meanwhile, the declining trend in the country’s crude oil production continued with output falling by more than 4 per cent in 2018-19. The increase in natural gas production has only been marginal and liquefied natural gas is imported to bridge the gap in domestic gas availability and demand. Moreover, the consumption of natural gas has been rising consistently since 2014-15.
Not much progress has been made in the pipeline segment. Utilisation of the existing pipelines remained low. Development of new pipelines has been slow owing to issues related to land acquisition and right of use.
Indian Infrastructure presents a snapshot of recent trends and developments as well as the outlook for the sector…
E&P activity: Initiatives and reforms to revive investments
New initiatives have been taken to revive activity in the exploration and production (E&P) segment. One such step is the creation of the National Data Repository, which will provide easy access to data on Indian sedimentary basins. Similarly, the National Seismic Programme has been launched by the government to carry out a fresh appraisal of all the sedimentary basins across the country for a better understanding of the total hydrocarbon potential.
The government has also recently approved a new policy for enhancing domestic E&P of oil and gas. For Category I basins with proven commercial productivity, bidding will continue to be based on exploration work and revenue share in the ratio 70:30. In Category II and III basins, where commercial production of oil and gas is yet to be established, blocks will be awarded on the basis of international competitive bids based exclusively on the exploration work programme. Through this policy, an investor-friendly environment is envisaged that will help accelerate production activities.
Renewed focus: Domestic production of oil and gas continues to be abysmally low
The current demand for oil and gas outstrips supply by a wide margin. During 2018-19, crude oil production fell to 34.2 million tonnes (mt) as compared to 35.68 mt in the previous fiscal year. Oil output for 2018-19 is 7.59 per cent lower than the target production. Considering the overall trend of the past five years (2014-15 to 2018-19), crude oil output registered a decline of 2.28 per cent.
Natural gas production during 2018-19 was 32,873 million metric standard cubic metres (mmscm), 0.69 per cent higher than the production in 2017-18. However, the production was 7.66 per cent lower than the target set for the period. During the five-year period under consideration, natural gas production declined by 0.58 per cent.
Need for urgent attention: Oil and gas consumption continues to grow
The demand for petroleum products has been rapidly increasing over the years. During the 2014-15 to 2018-19 period, crude oil consumption witnessed an increasing trend. As per the latest data available from the Petroleum Planning and Analysis Cell, domestic consumption of petroleum products grew at a compound annual growth rate (CAGR) of 5.04 per cent from 165.5 mt in 2014-15 to 211.6 mt in 2018-19. With consumption growing at a rapid pace and domestic output remaining stagnant, oil import dependence rose from 82.9 per cent in 2017-18 to 83.7 per cent in 2018-19. This has also affected India’s oil import bill.
As in the case of crude oil, there is a mismatch between the demand and supply of natural gas as well. During the five-year period 2014-15 to 2018-19, gross natural gas consumption showed a consistent rise from 51,230 mmscm in 2014-15 to 59,071 mmscm in 2018-19, registering a CAGR of 2.89 per cent.
Crude oil prices hover close to $70 owing to OPEC supply cuts
On the pricing front, the main highlight of 2018-19 was the increase in crude oil prices due to supply cuts from the Organization of the Petroleum Exporting Countries (OPEC), and a group of non-affiliated producers including Russia, known as OPEC+. From mid-2014 till early 2016, crude oil prices remained soft due to a supply glut. In fact, the price closed at $30 per barrel in early 2016. However, since the end of 2018, there has been an increase in global crude oil prices and prices reached $80 per barrel only to fall again later. At present, the price is hovering at around $70 per barrel on the back of extended production cuts from OPEC and Russia with an expectation of a pickup in demand. As a result, in 2018-19, the import bill increased to around $112 billion from $64 billion in 2015-16.
Gas transmission infrastructure: Providing access to north-eastern and eastern regions
The natural gas transportation infrastructure (of over 16,000 km) is concentrated primarily around the historical sources of gas production. Pipelines too are concentrated in the northern and north-western regions. But now significant measures are being taken to improve and increase infrastructure in the eastern part of the country. As of May 1, 2019, about 8,423 km of natural gas pipelines are under construction. In terms of length, the 2,539 km Jagdishpur-Haldia-Bokaro-Dhamra pipeline (excluding the Guwahati-Barauni extension project) is the biggest pipeline project, and is being implemented by GAIL (India) Limited. In addition, the government is developing the 1,600 km Indradhanush Gas Grid connecting the north-eastern states to the existing natural gas pipeline network.
Expanding CGD networks: New licensing rounds and upcoming opportunities
Initiatives have been taken to expand the CGD network across the country. The top priority in domestic natural gas allocation is accorded to the domestic compressed natural gas and piped natural gas categories. Under the ninth and tenth rounds of bidding, 136 new GAs have been bid out. Many of these have already been allocated to CGD entities while others are in the process of being awarded. After the successful completion of the bidding rounds, around 70 per cent of the country’s population will be covered by the CGD network.
Sector outlook
As per International Energy Agency estimates, primary energy consumption in the country is set to increase to 1,440 million tonnes of oil equivalent by 2030. Increasing domestic E&P activity is likely to correct the declining oil and gas production, as investments in the newly awarded blocks under the OALP and DSF bidding rounds are expected to grow in the next one-two years. CGD infrastructure is expected to be developed in 186 GAs in the next eight to 10 years.
However, there is an urgent need to incentivise the gas transmission segment and create the necessary infrastructure to improve reach to consumers. While the recent policy initiatives are a significant departure from the past and bode well for the sector, effective and timely implementation will hold the key to overall success. The presence of an enabling regulatory regime will also be extremely important for better functioning of the oil and gas sector.
In summary, the outlook for the Indian oil and gas sector is very robust, driven as it is by strong domestic demand. However, issues such as high execution risks associated with huge capital expenditure, the slow pace of pipeline build-up, increasing import bills and long-term pricing policies need urgent attention. Last, but not the least, the government needs to create a more conducive business environment and financiers/lenders need to introduce innovative financing methods.