India is the third largest consumer of energy in the world. It accounts for 5.2 per cent of the global oil demand and has the fourth largest refining capacity. However, the country relies heavily on imports – for meeting more than 80 per cent of its oil requirements and 50 per cent of its natural gas requirements. Such heavy dependence on imports renders the economy vulnerable to volatility of energy markets. Achieving energy security has been at the centre of the government’s agenda and the goal of reducing import dependence by 10 per cent by 2022 was set in 2015. In the past few years, several initiatives have been taken to accelerate exploration and production (E&P) activities to bridge the existing demand-supply gap. The emergence of the ongoing COVID-19 crisis is, however resulting in enormous challenges for players across all segments. The imposition of a lockdown to stem the spread of the disease led to stifling of economic activities and, thus, a widespread fall in demand. Further, the fall in crude oil prices is also likely to affect domestic output and the government’s energy self-sufficiency goals.
Indian Infrastructure looks at the key policy developments and the impact of COVID-19 on the oil and gas sector…
Key policy developments
In the past few years, the government has paid significant attention to reviving the E&P segment. Several reforms have been initiated to accelerate E&P activities and check the declining domestic oil and gas output. These include the introduction of the Hydrocarbon Exploration Licensing Policy, the Discovered Small Fields [DSF] Policy and the Open Acreage Licensing Policy (OALP). In the past 12-18 months, bidding rounds have been conducted under the OALP and the DSF Policy to boost domestic output. The bid submission for the fifth OALP round was extended to June 30, 2020 in view of the COVID-19 pandemic. The fifth round opened in January 2020 and was to initially close on March 18. However, the bid date was first extended to April 16 and later to June 10, 2020. The round covers 11 blocks spread across eight sedimentary basins in Rajasthan, Gujarat, West Bengal, Odisha, Arunachal Pradesh and Assam along with western and eastern offshore areas. Besides, in February 2019, the government had introduced a slew of enabling measures to increase exploration activities in unexplored/unallocated areas. The liberalised policy terms focus on production maximisation with higher weightage given to work programmes as part of the evaluation criteria in Category I basins and no revenue share as part of the bidding parameters of Category II and Category III basins.In April 2020, the Directorate General of Hydrocarbons simplified the E&P procedures for oil and gas by permitting self-certification for a host of compliances. These include discovery notification and deemed consent for investment in fields within a stipulated time frame. The simplified norms have been in-troduced for production sharing contracts and for pre-New Exploration Licensing Policy (NELP) and NELP oil and gas blocks.
Further, greater emphasis has also been laid on developing a gas-based economy to reduce the country’s carbon emissions. The government aims to increase the share of gas in the country’s energy basket from the current 5-6 per cent to 15 per cent by 2030. Some of the measures taken include the award of new licences for development of city gas distribution (CGD) networks, focus on revival of gas-based power plants, etc. A major development was the launch of the Indian Gas Exchange (IGX), the country’s first gas trading platform, on June 15, 2020. The IGX, incorporated by the Indian Energy Exchange, will enable efficient and competitive discovery of gas prices and drive consumption by improving availability. Moreover, on June 2, 2020, the Petroleum and Natural Gas Regulatory Board (PNGRB) announced that any entity can set up a liquefied natural gas (LNG) station in a geographical area (GA) even if it is not the authorised entity for the particular GA. The easing of rules will enable the setting up LNG of distribution infrastructure, expand access to the fuel and attract more private investors.
In October 2019, the government had also approved the revised guidelines for granting authorisation to market transportation fuels. Earlier, the authorisation to market these fuels was only available to companies investing a minimum of Rs 20 billion in E&P, refining, pipelines or terminals. The revised policy lowered this threshold to Rs 2.5 billion. Besides, non-oil companies have also been permitted to invest in the retail sector. Further, the authorised entities are required to install facilities for marketing at least one alternative fuel such as compressed natural gas (CNG), LNG or biofuel at the proposed retail outlet within three years of its operationalisation.
In March 2020, as part of the economic relief package for COVID-19, the government announced that over 80 million PradhanMantriUjjwalaYojana beneficiaries would be entitled to a total of three 14.2 kg liquefied petroleum gas (LPG) cylinders for free during April-June 2020.
Impact of COVID-19
The country’s oil and gas sector is witnessing extraordinary times. While the pandemic has affected all segments of the oil and gas value chain, the impact has been markedly different across segments. In April 2020, muted global demand on account of the imposition of lockdown in several countries along with a supply glut emanating from an output war among key global producers resulted in a historic crude oil price crash. While crude oil prices are recovering from the distressed levels seen in April due to curtailment of production by the Organization of the Petroleum Exporting Countries (plus) and resumption of economic activity in a few countries, they are expected to remain depressed in the near term.
The low crude oil prices have deeply impacted the revenues of upstream players, leaving them with insufficient surplus to reinvest in exploring and developing their fields. Besides, domestic gas prices have also been reduced. Many companies in the segment including state-owned Oil and Natural Gas Corporation are looking to rationalise their capital expenditure plans and put key projects on hold. This is likely to have a negative impact on the country’s plans to increase domestic output and achieve self-sufficiency. Therefore, the high dependence on oil and LNG imports for meeting energy requirements is likely to continue. The import bills are, however, likely to soften.
In the downstream sector too, the destruction in demand has reduced profitability. There has been a significant fall in the demand for transport fuels such as jet fuel, petrol and diesel due to the nationwide lockdown. In April 2020, India’s fuel consumption shrank by about 70 per cent from a year ago. Petrol sales by public sector firms fell by 64 per cent in the first half of the month but some pickup was registered in the second half. Similarly, diesel sales slumped 61 per cent in the first half with some correction in the second half of the month. Consumption of aviation turbine fuel collapsed by 91.5 per cent in April 2020, as airlines remained grounded. The only fuel that showed demand growth was LPG. LPG consumption increased by 12 per cent year on year to 2.11 million tonnes in April 2020.
While demand has been recovering with the gradual reopening of the country and resumption of industrial activities, it will take some time more for it to reach normal levels. Further, in May 2020, the excise duty on petrol was increased by Rs 10 per litre, and that on diesel by Rs 13 per litre, all of which isto be borne by oil marketing companies (OMCs) and is not to be reflected in the retail prices of the fuels. This has resulted in thinner margins for OMCs. The debt levels of OMCs have also risen sharply as of March 2020, due to high inventories and payment delays by the government on account of cooking gas and kerosene subsidy and purchase of crude to fill strategic reserves.
Gas utilities have also been affected by the steep fall in demand and price disparities across spot LNG and term LNG contracts. While the CGD segment has been impacted by the fall in CNG and piped natural gas demand, demand from the power and fertiliser sectors has kept the industry going. Several players across the value chain had invoked the force majeure clause as part of the gas supply agreement. Besides, COVID-19 has impacted the speed of project execution in the sector. Several projects including CGD and pipeline development projects have been delayed due to issues with labour availability.
The way forward
The recovery in the oil and gas sector is expected to follow that in the overall economy. However, in these difficult times it is important that the government considers a set of relief measures for the industry, such as reducing royalty, cess and other levies, and providing for a floor price to domestic producers for them to stay afloat and make investments. An extension in timelines for completion of projects should also be provided. As a respite to CGD players, the PNGRB is planning to extend the deadline for completing the committed works under the ninth and tenth rounds by at least three months. Thus, going forward, the country’s oil and gas sector will need adequate government attention and support to bounce back from the ongoing crisis.