Trends and Outlook

Greater investments in E&P and pipeline infrastructure to drive growth

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. The government also granted marketing and pricing freedom to all new gas discoveries, the field development plans of which are yet to be approved.

Further, three bidding rounds were launched under the newly formulated Open Acreage Licensing Policy (OALP), under which 92 blocks were offered. Another 53 blocks were awarded under the two discovered small field (DSF) bidding rounds. In the downstream segment, the Petroleum and Natural Gas Regulatory Board granted authorisations for the development of city gas distribution (CGD) infrastructure in 130 new geographical areas (GAs). The use of new and innovative technologies and digital solutions also increased significantly.

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 was only marginal and liquefied natural gas (LNG) is being imported to bridge the gap in domestic gas availability and demand.

Not much progress was made in the pipeline segment. Utilisation of the existing pipelines remained low. Besides, issues such as the execution risks associated with high capital expenditures, the slow pace of pipeline build-up, increasing import bills and fluctuating crude oil prices continued to impede sector growth.

A snapshot of noteworthy trends and developments over the past year and the outlook for the oil and gas sector…

Production trends

  •  The trend of falling crude output from domestic fields continues to be an area of concern for India’s energy security. Output has been falling continuously in the past few years, from about 37 million tonnes (mt) in 2014-15 to about 34.2 mt in 2018-19. During the April-June quarter of 2019-20, crude oil output was 8.2 mt, about 7 per cent lower than the 8.8 mt registered in the corresponding quarter of 2018-19. Mature fields and lower-than-planned production from newly drilled wells are the key reasons for the falling output. Meanwhile, there is an emerging trend of the increasing share of crude output from overseas assets of Indian oil and gas majors (ONGC Videsh Limited, Oil India Limited, etc).
  • The trend for natural gas production is rather similar, falling during 2014-15 and 2015-16, with a modest recovery in 2017-18. During the years 2014-16, gas output declined from 35 billion cubic metres (bcm) to about 32 bcm. In 2018-19, natural gas production was 32.8 bcm, roughly the same as the previous fiscal year’s production. This trend seems to persist, with about 8 bcm of gas production registered in the April-June quarter of 2019-20, the same as was witnessed in the first quarter of 2018-19.

Consumption trends

  • Consumption of petroleum products has been increasing over the years. Between 2014-15 and 2018-19, consumption inc-reased from 165 mt to 206 mt, clocking a compound annual growth rate (CAGR) of 5.71 per cent. During the April-June quarter of 2019-20, the figure stood at 54 mt. 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 in contrast with the earlier trend of petcoke being the fuel high in demand. Meanwhile, due to growing air pollution concerns, the government has clamped down on the sale of petcoke in the National Capital Region, Uttar Pradesh, Haryana, Rajasthan and Himachal Pradesh, and banned its import for select industries.
  • Natural gas continues to be a small part of the country’s energy mix, accounting for only 5-6 per cent. The consumption of natural gas, however, has been rising consistently since 2014-15. In 2018-19, natural gas consumption was 60,747 million metric standard cubic metres (mmscm), in comparison to 59,170 mmscm in 2017-18. During the 2014-15 to 2018-19 period, gas consumption grew at a CAGR of 7.42 per cent. The gap between demand and supply of natural gas has been increasing at a CAGR of around 10 per cent. This widening gap indicates the need for increasing LNG imports in at least the near term to cater to the growing requirements.

LNG imports

  • To bridge the yawning gap between production and consumption, reliance on LNG imports has been growing in the past few years. During the period 2014-15 to 2017-18, annual LNG imports grew from about 50 million metric standard cubic metres per day (mmscmd) to about 75 mmscmd. In 2018-19, LNG imports totalled 78 mmscmd, an increase of about 4.5 per cent over the 75.17 mmscmd recorded in 2017-18. During April-June 2019, the figure stood at 21.7 mmscmd, a modest increase over the 20 mmscmd during the corresponding quarter of 2018-19.
  • The share of LNG in the country’s total gas consumption has increased from 36 per cent in 2014-15 to nearly 50 per cent in 2018-19.

Policy push

  • Given the trend of declining domestic output for both oil and gas, the government has given significant attention to reviving the exploration and production (E&P) segment by introducing supportive policy measuers. These include introduction of the Hydrocarbon Exploration and Licensing Policy (HELP), the DSF Policy and the OALP. In February 2019, the government introduced a slew of enabling measures to increase exploration activities in unexplored/unallocated areas.
  • The introduction of policies has been backed by on-ground action as well. In the past 12-18 months, bidding rounds have been held under the OALP and the DSF Policy to provide a leg-up to domestic oil and gas output. In the first three bidding rounds of the OALP, 87 blocks/contract areas covering about 120,000 square km were awarded.

Price trends

  •  Crude prices in the country vary according to global supply and demand forces, which impact both domestic and international markets. In the past few years, this segment has faced significant price volatility. The average annual crude price in India during 2017-18 was $56.43 per barrel, and this increased significantly to $69.88 per barrel in 2018-19. Thereafter, there has been some softening of prices. In June 2019, the prevailing crude oil price (Indian Crude Basket – the weighted average of the prices of the Oman and Dubai sour crude price benchmark and the Brent sweet crude oil benchmark) was $62.39 per barrel.
  • Taking key products into consideration, the pricing trend has been mixed. The price of petrol in Delhi stood at Rs 72.23 per litre while that of diesel stood at Rs 65.88 per litre (prices as of August 8, 2019). LPG cylinders continue to be one of the most heavily subsidised petroleum products. In Delhi, as of August 1, 2019, the price of subsidised LPG stood at Rs 574.50. Kerosene prices in Delhi have remained low in the past decade, varying from Rs 13 to Rs 23 per litre. Delhi has now been declared a kerosene-free city. In Mumbai, the price of kerosene stood at Rs 32.97 per litre on August 1, 2019.

Pipeline infrastructure

  • As of June 2019, the total gas pipeline network stood at 16,324 km with a carrying capacity of about 368 mmscmd. Of the total length, GAIL (India) Limited has 11,410 km of operational gas pipelines which constitute a 70 per cent share. It is followed by Gujarat State Petronet Limited with a share of around 16 per cent, with 2,593 km of operational pipelines. Of the existing network, 44 per cent is regional while the remaining 56 per cent is trunk network. Overall, the capacity utilisation of pipelines stands at about 45 per cent.
  • Progress on the development of new pipeline infrastructure has been very tardy. Currently, work on pipeline projects with a total length of over 14,000 km is under way. Key projects include the Jagdishpur-Haldia-Bokaro-Dhamra pipeline, the Mehsana-Bathinda pipeline, the Mallavaram-Bhopal-Bhilwara-Vijaipur pipeline, and the North-East Region Gas Grid.

CGD segment

  • The CGD segment has witnessed noteworthy activity over the past year, as a large number of GAs were awarded in Rounds 9 and 10. Industry response to both rounds was overwhelming. Upon successful completion of CGD projects in the GAs awarded, 70 per cent of the population will have access to a CGD network and about 53 per cent of the country’s area will be covered by the CGD network.
  •  In total, 130 GAs have been granted authorisation in Rounds 9 and 10, of which 85 GAs are from Round 9 and 45 from Round 10.

Outlook

  • India’s hydrocarbons sector is at a crucial juncture. Increased activity has been witnessed over the past few years, and this seems encouraging for the times to come. On the supply side, the new acreages awarded under the OALP and the DSF bidding rounds offer fresh hope in terms of reducing import reliance once they come online. On the demand side, even higher growth rates are expected in the future, given the untapped potential in the economy. Key segments such as CGD are likely to drive up the demand for gas in a significant manner. For oil and associated products, the near to medium term looks positive, despite the focus on reducing the carbon footprint. There is an urgent need though to speed up pipeline infrastructure development.

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