Oil and natural gas form an important part of India’s energy matrix. The past few years have been quite eventful for the sector, with the introduction of a slew of reforms and policy measures to enhance self-sufficiency in sourcing these fuels. Yet, the country’s heavy reliance on imports continues for both oil and gas. In addition, the recent months, marked by the spread of the COVID-19 pandemic, have thrown open a new gamut of challenges for the industry. That said, there are some shoots of hope as Unlock 1.0 is resulting in some demand revival, although gradual.
Indian Infrastructure tracks various trends and developments that have shaped the sector over the past year…
Production and consumption landscape
The country has high import dependence to meet its oil and gas needs. About 85 per cent of the crude oil and 50 per cent of natural gas needs are met by imports from countries such as Qatar, Saudi Arabia, the UAE and Iran. Domestic output has been consistently falling year on year owing to ageing fields, lacklustre exploration activity, equipment issues and deeper levels of reserves.
For oil, domestic production reduced from 36.94 million tonnes (mt) in 2015-16 to 32.2 mt in 2019-20. At the same time, consumption of petroleum-based products increased from 184.67 mt to 213.7 mt, a compound annual growth rate (CAGR) of 3.72 per cent. Imports have been consistently increasing – in 2019-20, crude oil imports were at 227 mt, increasing from 202.85 mt five years ago, registering a CAGR of 2.85 per cent.
The scenario for natural gas is similar. During the past five fiscal years, natural gas production has fallen from 32,247 million metric standard cubic metres (mmscm) in 2015-16 to 31,180 mmscm in 2019-20. At the same time, consumption has increased from 52,516 mmscm to 63,932 mmscm, a CAGR of 5.04 per cent. Increasing consumption has been met through rising imports of liquefied natural gas (LNG), which have increased from 21,389 mmscm to 33,680 mmscm during the 2016-20 period, posting a CAGR of 12.02 per cent.
Noteworthy trends
Continued policy push for enhanced exploration and production: Given the trend of declining domestic output for both oil and gas, the government has paid significant attention to reviving the exploration and production segment by introducing supportive policy measures. Notable steps have been taken in the past three-five years. These include the introduction of the Hydrocarbon Exploration and Licensing Policy (HELP), the Discovered Small Fields [DSF] Policy and the Open Acreage Licensing Policy (OALP). The introduction of these 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. As of April 2020, four bidding rounds have been successfully conducted under the OALP. A total of 94 exploration blocks have been awarded covering an area of approximately 136,790 square km. For the next round, the bid submission date is June 30, 2020.
Recently, in April 2020, the Directorate General of Hydrocarbons (DGH) simplified the exploration and production 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.
According to recent reports, the government is also considering bringing natural gas under the ambit of the goods and services tax (GST) regime and offering pricing freedom to gas producers. At present, petroleum products such as petrol, diesel, jet fuel, crude oil and natural gas fall outside the GST ambit.
Investments: Oil and gas projects are inherently investment heavy. Much of this investment comes from public sector enterprises in the industry. During the past five years, projects worth Rs 1.37 trillion have been completed, averaging investments of Rs 200 billion-Rs 300 billion per annum. In 2019-20 (till October 2019), Rs 265.56 billion of investments were made towards exploration and production activities, refinery development works and setting up of LNG regasification capacities. Major investment destinations were states such as Andhra Pradesh, Assam, Gujarat, Odisha, Maharashtra, Kerala, Rajasthan, West Bengal and Haryana. Investments in offshore fields were at Rs 72.63 billion during the five-year period.
LNG trends: Until a few years ago, LNG supplies were mainly from Qatar. However, this has changed in recent years as the country started buying LNG from other countries such as Russia, Australia, Nigeria, Angola, Oman and the US. Besides, with falling spot LNG prices, short-term/spot contracts are being preferred over long-term contracts. That said, to make long-term contracts more attractive, Indian companies are adopting innovative approaches such as time swap of volumes, destination swaps and pricing formula calculated on a free-on-board basis, all of which have lent some flexibility to these contracts. Large offtake of the fuel by India has also changed some dynamics in recent years. This enabled the successful renegotiation of LNG contracts leading to lower prices for imported LNG. Qatar’s RasGas and Petronet LNG Limited (PLL) signed a revised sale purchase agreement in December 2015. Later, in 2017, PLL renegotiated its LNG contract with Exxon Mobil as well. GAIL also renegotiated the terms of the LNG purchase deal with Russia’s Gazprom in January 2018. More recently, in May 2020, Qatar has agreed to discuss India’s demand to further renegotiate its long-term LNG contract following declining spot prices and collapsing demand during the COVID-19 pandemic.
Move towards a gas-based economy: Transitioning towards a more gas-based economy has been high on the government’s agenda for the past four-five years, especially after the ratification of the Paris Agreement in 2015. As has been the case for crude oil, the focus has been on ramping up domestic output to take the share of gas in the energy basket from 5-6 per cent at present to 15 per cent by 2030. To achieve this, renewed attention is being given to the development of countrywide pipelines and city gas distribution (CGD) networks. So far, a total of 136 geographical areas (GAs) have been successfully awarded to CGD entities. The Petroleum and Natural Gas Regulatory Board (PNGRB) has proposed 44 new GAs for the upcoming eleventh round of bidding for CGD licences. In February 2020, the PNGRB stated its plans to issue letters of intent by August 2020.
On June 15, 2020, India also launched its maiden Indian Gas Exchange, taking a big step towards market-based pricing and trading of natural gas. The platform is the country’s first online delivery-based gas trading platform for natural gas.
Move towards cleaner fuels: Pressing concerns such as hazardous air pollution levels have resulted in renewed attention towards improving the quality of fuels, especially transport fuels such as petrol and diesel. A number of measures have been taken on this front in the past couple of years. The country has leapfrogged from BS-IV to BS-VI emission norms. As of March 2020, supply of BS-VI auto fuels commenced in 20 districts in states such as Rajasthan, Uttar Pradesh and Haryana. Besides, ethanol-blended petrol, compressed biogas and used cooking oil are other alternative fuels that are receiving attention.
Pricing scenario
The ongoing pandemic has resulted in an oil price crash. Muted global demand along with a supply glut (emanating from an output war among key global producers) has resulted in a historic crude price crash. In fact, West Texas Intermediate reached negative levels for oil futures in the last week of April 2020, and Brent too followed the price meltdown. In the first week of May 2020, Brent remained below the $30 per barrel mark. As a result, import bills for major importers like India are softening. Domestic refiners are understood to have stocked about 32 mt of crude oil in tanks, pipelines and on ships, to benefit from the global oil price crash. As of mid-June 2020, Brent crude recovered to breach the $35 per barrel mark.
For domestically produced gas, the latest revision has set the price at $2.39 per million metric British thermal units (mmBtu), the lowest under the new domestic gas pricing regime. It is thus making little economic sense to extract gas from domestic fields as prices are not enough to cover the cost of production. With regard to spot prices, over the past five years, there has been a steep fall in prices owing to a glut in the global LNG market. In the latest spot deals for LNG, prices have softened further to $1.3 per mmBtu at present. Under long-term contracts, the prices vary between $6.95 and $8.5 per mmBtu.
Outlook
The overall outlook for the oil and gas sector is positive, though conditional upon the post-COVID-19 recovery rate. Demand is certain as significant market potential lies untapped. The supply side is flush with imports, though these are expected to reduce some years from now, once current exploration activities result in producing fields. That said, the current disruption due to the pandemic is tough for oil and gas players worldwide, and Indian companies are no exception.