June 2021

After decades of steady expansion in energy demand, India experienced a hiatus in 2020-21. This is no surprise, for energy consumption is directly associated with economic activity and the pandemic, with its associated lockdowns, caused a sharp contraction in GDP. However, demand is likely to recover quickly once the economy starts growing again.

By 2030, the demand for oil and oil equivalent will be roughly double the 2020 levels. Moreover, domestic production has been declining in the past five years. This will mean an ever-increasing reliance on imports, which already account for 85 per cent of domestic crude and 50 per cent of gas consumption. Moreover, economic policy indicates a shift away from coal and crude to natural gas, which means that gas consumption could triple by 2040.

Quite apart from the forex required on the trade account, this will need an enormous ramp-up of infrastructure. The crude will need to be refined; there must be sufficient LNG terminal capacity to land gas cargoes; there must be regasification capacity, pipelines to transport the gas, and city distribution networks including CNG stations and gas-to-home pipeline networks.

Apart from imports, government policy is also focused on improving domestic exploration and production. It is encouraging investments in this area by clearing the induction of 100 per cent FDI in segments such as natural gas, petroleum products and refineries. It has rebooted the exploration policy norms with the new HELP and OALP. It is also reconfiguring the ethanol blending policy and setting the modalities for long-term ethanol procurement, as well as the pricing methodology for blended fuels.

HELP proposes radical changes in moving to a revenue sharing regime with a single licence and a shift to open acreage licensing. The OALP regime offers the freedom to select blocks or areas to explore after studying the seismic data in the National Data Repository. HELP also offers marketing and pricing freedom.

Along with dwindling domestic production, the slow growth of the pipeline network is a matter of concern. The  target is to double the network in the next five years, but along with the usual issues of land acquisition, a combination of low returns, low utilisation of existing networks and high tariffs has deterred investments. The policy framework needs reviewing to assure reasonable post-tax returns for pipeline developers. The solutions could also include financial support in the form of capital grants and viability gap funding. Gas also needs to be brought within the ambit of GST, and the current pricing formula may need a review.

There is enormous long-term opportunity here, across every segment in the energy value chain, from upstream E&P to the servicing of retail customers downstream. Most of the policy changes have been welcomed as proactive by stakeholders and potential investors. As the economy rebounds, activity should accelerate across this space.

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