A Risky Business

Global challenges impact India’s hydrocarbon sourcing

Energy security is one of the key issues that the world is facing at present. The issue is pressing for developing countries such as India, which are yet to attain economic maturity to be comparable with their first world counterparts. For this to happen, some headroom for emissions is required to fuel and sustain growth. Emissions, the by-product of burning fossil fuels such as coal, oil and gas, have been an outcome of economic growth, confirmed by both economic theory and the past experience of most of the developed economies in the world.

To a large extent, emissions are determined by a country’s energy basket. For a growing economy such as India and as a result of its abundant reserves, coal has been the mainstay of energy sourcing so far. However, given the alarming rate of climate change effects, a transition towards less carbon-intensive fuels – oil and gas – has become necessary. According to the World Energy Outlook and the International Energy Agency, oil and gas together account for about 30 per cent of India’s current energy basket.

Being a signatory to the Paris Agreement 2015, the Indian government aims to increase this share to about 38 per cent by 2030 through decarbonisation plans, that is, reducing the share of coal and increasing the share of oil and gas (or “transition” fuels) as well as renewables.

Oil and gas sourcing has thus become crucial for the country at least in the medium term, not only for meeting its economic aspirations, but also for demonstrating its national and international commitments towards acting responsibly on climate change. On the flip side, this has thrown open a bouquet of risks associated with the value chain of the two hydrocarbons.

Macro risks clubbed with decelerating GDP

Considering macroeconomic variables, India’s growth story has perhaps hit a bump in recent times. In 2018-19, the GDP clocked a growth rate of 6.81 per cent, down from 7.2 per cent that was registered in the preceding fiscal year; the current account too widened to 2.1 per cent of GDP from 1.8 per cent during the same period, indicating a deteriorating trade balance. The slowdown has continued in the current fiscal year, as the GDP grew by 5 per cent during the April-June quarter, the lowest in the past 25 quarters, resulting in a downward revision of growth estimates for the entire year.

The deceleration in GDP growth, calling for corrective measures from the government, will call for greater energy requirements. For instance, growth in the industrial and transport sectors, two key economic engines, will translate into higher demand for oil and gas. This also aligns with the government’s vision of moving towards a more gas-based economy.

Rising import dependence

While the increase in demand for oil and gas is well established, the supply side is fraught with increasing import dependence. India’s own oil and gas fields are aged, reflected in stagnating production over the past four-five years. Naturally too, the country is not blessed with abundant hydrocarbon reserves, as compared to West Asian countries.

Thus, the yawning gap between demand and limited domestic output is being met through imports. For crude oil, the country’s import dependence has increased from about 80 per cent in 2015-16 to nearly 84 per cent at present. The trend is mirrored in gas imports too that have increased from about 40 per cent to 45 per cent during the period. Rising import dependence is in stark contrast with the government’s vision of bringing it down, the rationale being offsetting some of the risks associated with the global hydrocarbon value chain and increasing self-sufficiency in energy.

Geopolitics at play

West Asian countries such as Saudi Arabia, Qatar and Iran have been India’s major suppliers of oil and gas for a long time now. This, on several occasions, has brought to light how developments in the region (as well as outside of it) have serious implications for India’s energy sourcing.

The most recent one was the drone-guided attack on Saudi Arabia’s oil facilities which choked half the country’s oil output and resulted in a 19 per cent hike in crude prices within a day. While this was a regional development, other geopolitical steps such as sanctions imposed by the US on Iran, a major supplier of oil to India, also highlighted how exogenous variables can be a threat to domestic energy security. The Iran-Saudi Arabia conflict, considered to be a regional equivalent of the Cold War, has become a concern for India’s energy sourcing, as both countries are major energy suppliers.

Supporting the US, India stopped oil imports from Iran in May 2019. However, the country is walking a tightrope, as the situation is complex, given that it is constructing Chabahar port (located in south-eastern Iran). The facility is of strategic importance to the country for the development of regional maritime transit traffic to Afghanistan and Central Asia, as well as to build military muscle in the region.

Currency risks

Heavy reliance on imports and stability of the Indian rupee is also a risk-ridden area. In the past fiscal year, the falling rupee inflated India’s oil import bill by $26 billion, worsening the current account deficit.

While petroleum product exports act as a natural hedge against the crude import bill, a slowdown in exports, as has been the case recently, can erode the hedge to a significant extent. In June 2019, India’s exports, including those of petroleum products, took a beating owing to the global tariff war emanating from US-China tensions.

Tables have turned – India’s bargaining power

As a result of the untapped potential, the Indian economy has strong growth prospects. This translates to an assured market for energy, especially oil and gas. Already, concerns related to climate change have started tapering off demand for these fuels in major economies, leading oil and gas producers to turn towards developing countries such as India, which have ready and growing markets for petroleum.

This “demand security” has brought much bargaining power to India, which has successfully renegotiated long-term petro contracts in the past few years.

Besides, global oil companies are also looking to invest heavily in India, provided policy stability and a supportive business environment are in place. Oil and gas heavyweights such as Russia-based Rosneft and Saudi

Arabia’s Aramco have already entered the domestic market, signifying the importance of retaining India as an important export market.

Risk mitigation – India’s options

De-risking international energy (oil and gas) supply chains is no more a choice in the current global setting. A multipronged approach is required that may comprise the following strategies:

  • Diversification of the supplier group: Diversifying the sources of supply is an obvious and the most feasible way of mitigating risks associated with energy imports. Some headway has been witnessed recently – India has started importing gas from the US, Latin American countries such as Venezuela and Brazil, etc., which bodes well for the long-term buying position of the country.
  •  Military muscle and diplomatic engagement: Building military muscle is one of the key ways of gaining economic and strategic weight in a region. With the global oil and gas industry pinning its future business prospects on the East, especially Asia, the region assumes greater importance with regard to international hydrocarbon markets.
  • In this backdrop, as China is aggressively moving ahead to enhance its military presence, India is following in its footsteps, though to a far lesser degree. Marine military muscle (through the construction of strategic assets such as Chabahar port) can prove extremely helpful in negotiating future energy deals, as well as to provide buoyancy to diplomatic engagements with supplier countries.
  • Play on demand security: India must continue to leverage its dominant buyer position. The country has untapped potential for energy markets, as about 300 million people still lack basic energy access. While earlier, buyers were the chasers, now, with growing pressure on phasing out of fossil fuels, it is the selling countries that are competing to retain large markets such as India. This position can get even better terms for hydrocarbon contracts.
  • Sit on reserves and aim for new finds: Since India is not naturally well endowed with hydrocarbon deposits, one school of policy thinking suggests when crude prices are low, the country must sit on its reserves and utilise the time in enhancing domestic exploration, while meeting domestic demand through imports that complement domestic output.
  •  Equity oil and gas: Overseas asset acquisition is another key approach that can be dovetailed with existing policies aimed at ensuring energy security and mitigating risks associated with the global oil and gas value chain. China is India’s biggest competitor when it comes to acquisition of international oil and gas blocks. As energy is a zero-sum game, China’s successful acquisitions have been India’s missed opportunities (particularly in Africa and Latin America).
  • Economic inducements, sound national oil companies and strong political will through the foreign policy route have been the main ingredients of Beijing’s energy (oil and gas) strategy, and this can be an effective learning for India. The current competition is for hydrocarbons in Russia, where China is increasing its foothold, as India continues to tread carefully.

In sum

Risk is inevitable, especially in international energy markets. Taking a long-term view, India’s energy requirements are far from reducing. Oil and gas are likely to form the backbone of the country’s energy architecture in times ahead, and time is ripe for policymakers to meticulously plan strategies that de-risk energy sourcing to the maximum extent possible. A combination of diversification, diplomatic engagement, military muscle and overseas asset acquisition will prove to be key in meeting India’s oil and gas demand in at least the coming two decades.

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