The oil and gas sector plays a predominant role in the energy mix. Notwithstanding the Covid pandemic, India’s energy sector, including the oil and gas sector, has bounced back. Energy demand has almost recovered to pre-Covid levels on the back of a revival in economic activities. The government has come up with a number of policy reforms and initiatives for increasing the exploration and production (E&P) of domestic petroleum resources to address issues of energy access, energy efficiency, energy sustainability and energy security. These initiatives are expected to address some of the key challenges facing the sector. Industry experts comment on the progress in the sector, the key challenges and future outlook. Excerpts…
What has been the progress in the oil and gas sector over the past one year?
Manas Majumdar
The oil and gas sector is a core industry that has a significant impact on all other major economic sectors. India is the third largest energy and oil consumer in the world after China and the US; however, the country’s per capita energy consumption is only one-third of the world’s average, indicating both efficiency and growth potential. Over the years, the country has witnessed a steady increase in the production and consumption of petroleum products. Crude oil demand has risen from 4.5 million barrels per day (bpd) in 2020 to around 4.8 million bpd in 2021, recording a 5.6 per cent growth and underlining the strong domestic demand fundamentals of India post Covid. The production of petroleum products also grew to 250 million metric tonnes (mmt) last year vis-à-vis 236 mt in 2020, that is, about 6 per cent year-on-year growth. On the consumption side, there was a focus on building retail infrastructure – with the number of fuel retail outlets increasing from over 77,000 to 81,100 during this period.
On the digital front as well, there has been significant progress with multiple implementations and partnerships undertaken by various players. For example, Bharat Petroleum Corporation Limited (BPCL) and Microsoft have collaborated and established a strategic cloud partnership aimed at accelerating digital transformation. India has also revamped the Strategic Clean Energy Partnership with the US to create stronger bilateral cooperation on energy expansion by focusing on emerging clean fuels.
“India is going to be the world’s fastest growing energy market due to its robust economic fundamentals.
Oil demand is projected to jump by over 8 per cent to 5.2 million bpd next year as the economy continues
to rebound.” Manas Majumdar
Suresh P. Mangalani
The past one year can be summed up as a period of turbulence and resilience. The country experienced a sharp resurgence of the second wave of the pandemic, affecting people and equipment mobility. The year was marked by a sharp increase in logistics and freight costs and kept the cost of oil and gas high. The economic recovery post the first two waves of the pandemic saw a rebound in energy demand around the globe. This, coupled with supply-side constraints, caused energy prices to soar, especially those of natural gas. While gas prices hit a 30-year low at the start of the pandemic, they touched a nearly two-decade high in 2021. The Russia-Ukraine conflict further hardened oil and gas procurement costs. Despite these challenges, the industry has not only sustained itself but also grown, demonstrating resilience in the face of unforeseen realities.
One positive outcome is the long-term shift to low-carbon energy systems. At COP26, a large number of countries and organisations committed to achieving net zero emissions within the next few years.
“With a greater focus on pursuing their net zero goals, oil and gas entities are expected to acquire
low-carbon assets or divest the high-intensity ones, leading to consolidation or portfolio restructuring.”
Suresh P. Mangalani
Akhil Mehrotra
In 2021-22, gas markets the world over witnessed volatility owing to high gas prices, as well as a tight supply environment and difficult geopolitical scenario due to the Russia-Ukraine conflict. As a result, global gas consumption declined in the later months of 2021-22.
Gas consumption in India during 2021-22 saw an increase of 7 per cent over the previous year, and most of this increase was met by a rise in domestic gas production, which saw an increase of 18.7 per cent over the previous year. On the demand side, the spurt in city gas distribution (CGD) resulted in a 29 per cent increase in gas consumption, whereas the soaring prices of natural gas vis-à-vis alternative fuels led to a decline in gas consumption by refineries (32 per cent) and power consumers (18 per cent).
Barring crude oil (-2.6 per cent), the output of natural gas and petroleum products has increased by around 20 per cent and 10 per cent respectively during 2021-22 over the corresponding period of the previous year. The government approved 100 per cent foreign direct investment under the automatic route for oil and gas PSUs as well as through direct investments in E&P and private sector refining projects.
With the Petroleum and Natural Gas Regulatory Board (PNGRB) quorum now in place, the natural gas sector in midstream and downstream is witnessing various reforms and policy initiatives such as expansion of the national gas grid, introduction of a unified tariff and gas exchange, and amendments to tariff and capacity regulations.
To promote efficient and market-driven solutions, the central government has collaborated with the US under the US-India Strategic Clean Energy Partnership (SCEP). A key objective of this partnership is to help India meet its growing energy demand and reduce greenhouse gas emissions.
Energy transition is the need of the hour and countries across the world are developing roadmaps to reach net zero. Recognising this need, the Government of India has set ambitious yet achievable goals to transition to a net zero economy. The National Hydrogen Mission and the Biofuel Policy, which mandates blending 20 per cent ethanol in petrol, compressed biogas, and renewables, are some of the key focus areas of the government and other stakeholders.
“The government has fast-tracked the process of increasing the share of natural gas in the energy mix
with the expansion of the natural gas pipeline network.” Akhil Mehrotra
Prashant Vasisht
The past year witnessed volatility in oil and gas prices due to a global economic recovery, increasing vaccination coverage, limited supply increases and the Russia-Ukraine conflict. One of the key highlights of last year for the Indian oil and gas sector has been the freeze on retail prices of auto fuels (motor spirit [MS] and high speed diesel [HSD]) despite high crude oil prices and crack spreads. Owing to the price freeze, oil marketing companies (OMCs) have been facing huge under-recoveries on retail sales and it remains to be seen when prices will be revised. However, some of the impact of the under-recoveries has been softened by the high crack spreads that the refiners are enjoying on gas, oil and aviation turbine fuel. Additionally, the past year witnessed a huge jump in liquefied natural gas (LNG) prices owing to a number of factors such as low stocks, odd weather patterns and the Russia-Ukraine conflict. Due to this, spot LNG procurement by India has reduced and capacity utilisation for LNG terminals has fallen. Another important trend witnessed is the net zero commitments by different oil and gas companies, and increasing investments in renewable energy.
“Domestic gas consumption has recovered from the impact of Covid-19 and is expected to grow by 8-9
per cent year on year in 2022-23.” Prashant Vasisht
What has been the impact of the initiatives taken by the government?
Manas Majumdar
In July this year, the central government imposed windfall taxes, including export duties on petrol, diesel and aviation turbine fuel (ATF), and windfall tax on domestic crude oil production and exports; this impacted the profitability of players. Although this move may help improve domestic supplies of petrol and reduce the inherent asymmetry between the domestic and export markets, oil companies will be significantly affected by ripple effects from the global market.
The government has been looking to bring in more investments in companies in the oil and gas sector. To facilitate this, last year the Department for Promotion of Industry and Internal Trade (DPIT) approved an order allowing 100 per cent foreign direct investment (FDI) under the automatic route for oil and gas PSUs. It also allowed 100 per cent FDI in upstream and private sector refining projects. The government aims to commercialise 50 per cent of its strategic petroleum reserves to raise funds and build additional storage to offset high oil prices and address future uncertainties. However, these efforts have seen mixed success in attracting foreign energy giants.
In the gas domain, the PNGRB has set up Indian Gas Exchange Limited (IGX) as a national-level gas market for natural gas delivery. It provides a neutral and transparent marketplace to buyers and sells at designated physical hubs. Further, the PNGRB has notified regulations for a unified tariff structure for pipelines to encourage more investment in infrastructure and enhance access to users. These initiatives are expected to improve accessibility and affordability across India.
Suresh P. Mangalani
The government has taken several initiatives for improving the country’s energy security. These include diversifying crude and gas sources, substituting demand by promoting the use of natural gas as fuel and moving towards a gas-based economy, promoting renewable energy and alternative fuels such as ethanol, promoting the use of compressed biogas (CBG) as automotive fuel under the Sustainable Alternative Towards Affordable Transportation (SATAT) initiative, issuing guidelines for promoting biodiesel, undertaking refinery process improvements, promoting energy efficiency and conservation, and initiating electrification of the transport sector.
Further, policies have been introduced for increasing oil and natural gas production under the production sharing contract regime. Other policies include the Discovered Small Field Policy, and Hydrocarbon Exploration and Licensing Policy. The government has made efforts to streamline approval processes, including the electronic single-window mechanism, for wider private sector participation. A recent reduction in excise duty on petrol and diesel by Rs 8 per litre and Rs 6 per litre respectively has brought about much-needed relief to consumers and addressed inflationary concerns.
Last year was a landmark year for the gas supply infrastructure – pipeline length increased from 16,200 km to 32,500 km, the planned capacity of LNG terminals increased to over 30 million tonnes per annum (mtpa) from the currently operational 42.5 mtpa. CGD infrastructure expanded significantly, as 209 geographical areas (GAs) were awarded in the 9th, 10th and 11th rounds of CGD bidding.
Akhil Mehrotra
India aims to become a gas-based economy by expanding natural gas access and decarbonising the existing energy sources. On the accessibility front, there have been multiple CGD bidding rounds and with the completion of the latest 11th CGD bidding round, 88 per cent of the country’s area would be authorised for the development of the CGD network to provide access to natural gas to 98 per cent of the country’s population.
The government has planned several policies to fulfil the increasing demand for natural gas, by expanding the CGD footprint across the country, promoting LNG as an automotive fuel, issuing a draft policy for the natural gas sector development, including open access, gas price pooling, etc.
To reduce India’s import dependency, the Ministry of Petroleum and Natural Gas (MoPNG) had initiated a slew of policy measures such as the Hydrocarbon Exploration Licensing Policy (HELP), allowing contractual flexibilities with production sharing contracts and exempting operators from revenue sharing with the government in unexplored Category II and III basins. To meet the increasing gas demand, the MoPNG has launched the 7th bidding round in the E&P sector under the Open Acreage Licensing Policy (OALP).
In addition, the government is pushing the decarbonisation agenda with the SATAT initiative to increase CBG production to 15 mtpa by 2023. This will not only increase domestic gas volumes (as it can be blended with natural gas) but also reduce the carbon footprint by reusing biomass, enabling waste management, and giving a boost to the rural economy and employment generation.
While these measures have led to an improved business environment for E&P, more can be done to increase the country’s oil and gas production and enhance “Aatmanirbharta” with fiscal and regulatory reforms such as:
- Inclusion of crude oil and natural gas under GST
- Incentivising high-risk area explorations and removing the ceiling price for HP/HT/DW/ UDW deep-field discoveries
- Deploying advanced analytics on NDR data to demonstrate the true potential in Indian reserves and attract investments.
Despite these reforms, there are still some growth barriers such as gas allocation issues, inadequately connected infrastructure and imperfect tariff regimes. To address connectivity challenges, many pipeline expansion projects are being taken up, but most have been facing delays. The government has realised this and has also provided support on a case-by-case basis. However, this needs to be institutionalised by introducing a structured economic viability support programme for key pipelines, single-window approval mechanisms for multi-state pipelines and accelerated asset monetisation structures for financing new infrastructure.
With the right focus on realignment initiatives (GST, tax alignment, pricing structures) and reforms (new infrastructure, incentives for production and consumption), India can usher in strong growth in the oil and gas sector, which, in turn, will drive economic growth.
Prashant Vasisht
The government instituted a gas pooling mechanism for the CGD sector wherein GAIL (India) Limited, as a gas aggregator, pools domestic gas, high pressure high temperature gas and long-term and spot LNG. These are provided to all CGD entities for their compressed natural gas (CNG) and piped natural gas (PNG) (domestic) segments as against the earlier practice of providing domestic gas only. Due to this measure, there has been a pan-Indian runup in the prices of CNG and PNG (domestic). This measure could impact the returns of CGD entities as high prices could deter conversions and adversely impact the economics vis-à-vis alternative fuels. The government has also imposed windfall gains tax on crude oil production and levied a special additional excise duty on exports of HSD, MS (since withdrawn) and ATF. The windfall tax is negative for upstream companies and would impact the earnings before interest, taxes, depreciation and amortisation (EBITDA) of the industry by about Rs 310 billion in 2022-23. For the downstream industry, the special additional excise duty would impact the overall gross refinery margins of exporters by up to $1.5 per barrel depending on their proportion of exports and the EBITDA impact on the industry is expected to be Rs 160 billion for 2022-23. In August 2021, the government announced a National Monetisation Pipeline, which included assets such a gas and petroleum product pipelines as well as effluent treatment plants of several PSUs. However, none of the oil and gas assets has been monetised till date. Lastly, BPCL’s divestment has been shelved following the withdrawal of two bidders citing inability to attract global investors.
What are the emerging trends in the area of digitalisation?
Manas Majumdar
The last decade saw a massive upgrade in technology advancements across the globe. Interestingly, 90 per cent of the digital data existing now was created in the last two years. An increase in the adoption of digital technologies is beginning to change the way oil and gas companies work and this trend is shaping the future through:
- IoT and AI: Internet of things (IoT) devices and sensors can provide real-time data on machinery, pipes, etc. Artificial intelligence (AI)-enabled platforms can support decision-making using this real-time data, with insights from cognitive, predictive and prescriptive analytics. The technology provides real-time intelligence and recommendations by applying a combination of AI and data science across business functions of oil and gas companies – an example of this is safety in refinery complexes or video analytics in retail outlets.
- Big data analytics: Everyday operations in the oil and gas sector generate large volumes of unstructured data. These platforms allow for ingestion of data from disparate sources and draw insights across operational and performance metrics.
- Robotics and automation: Oil and gas operators typically work in a complex and rugged environment, posing a significant risk to human safety. The use of robots/drones for inspection, loading/unloading, and arms to handle sorting and packaging can increase productivity and reduce human errors.
- Augmented and virtual reality: Immersive technologies, including augmented reality (AR) and virtual reality (VR), show real-time information of equipment, tools, etc. It combines real and virtual environments for tasks such as product assembly, item repair and maintenance using smart wearables, and also provides remote assistance support.
- Blockchain: It allows oil and gas companies to share data across supplier networks in a decentralised and secure way. Blockchain also allows companies to automate invoices and track the status of product delivery, payments and collections.
- Additive manufacturing/3D printing: 3D printing of specialised and customised items, spare parts and prototypes is increasingly being used in the oil and gas sector.
Suresh P. Mangalani
Digitalisation is no longer an option, it is the new normal, and availability, accessibility of quality data and data usage are now the new ways of defining “wealth”. Companies are accelerating digital transformation across processes and operations with the objectives of achieving customer satisfaction, improving efficiency, increasing speed, and enhancing precision and competitiveness by investing in cutting-edge technologies and automated infrastructure. At Adani Total Gas Limited, digitalisation, innovation, robotisation and automation are way of life and a part of our DNA.
Improved governance is a key modern-day demand for which technology- and digitalisation-driven platforms can be leveraged by minimising human interventions as well as corresponding errors.
Consolidation of organisational capabilities into a knowledge hub to facilitate the flow of knowledge, leading to informed decision-making, is another key area of digitalisation. Predictive and prescriptive data analytics are being used for demand forecasting and discerning consumer behaviour. This will enable organisations to respond in real time.
Akhil Mehrotra
With the huge scale of natural gas footprint expansion planned for the country, digital innovation is key for managing the large amount of data and monitoring assets for efficient operations. The use of IoT solutions, such as placement of sensors to enable real-time data collection, can minimise maintenance costs and help identify faulty equipment quickly.
Large volumes of data are generated every day in the oil and gas industry. Data is extremely important as it provides great insight into both production and performance; however, this data often tends to be unstructured. Big data analytics can help structure and analyse data, to streamline complex operational processes and reduce costs.
India’s CGD sector has seen exponential growth. There are opportunities for digitalisation throughout the CGD value chain. Some of the emerging trends in CGD are pipeline leak detection using smart techniques (acoustic and robotic), automatic ultrasonic testing, robotic inspection, thermal mass flow sensors, geographic information systems, nylon polymer pipes, video analytics devices at CNG filling stations, innovations in cascade systems and smart dispensers. There is also an emergence of smart metering including automatic billing and remote location monitoring, ensuring end-to-end data security.
With the implementation of the gas exchange, there has been a significant increase in the number of market players – consumers, transporters, traders, distributors and even E&P entities. This has resulted in increased contractual transactions before the gas is delivered at the consumption point. Digitalisation has become a must for managing such multi-party and short-term transactions and facilitating gas transportation up to the intended consumption point.
What are the key challenges that need to be addressed?
Manas Majumdar
We are in a phase of energy transition and need to work towards climate change abatement. To achieve this, oil companies need to monetise hydrocarbons and ensure energy security. The goal to continuously improve the environmental footprint and simultaneously meet increasingly stringent standards in a complex regulatory compliant industry adds to the challenge. Further, the operations of most oil and gas companies are spread across states and countries, and the decentralised nature of working makes it difficult to implement initiatives in a smooth manner, thus making the process of planning, scoping and funding more complex.
Globally, the oil and gas industry has lower digital maturity and a higher average workforce age, leading to slower adoption of digital solutions. According to KPMG, oil and gas companies have a digital maturity of between five and six on a scale of 10. This lack of digital/tech skills and strong inertia to move away from traditional work practices are impacting broader Industry 4.0 implementation in the industry. Amidst the growing amount of business data and vulnerability of internetworked systems, there is also the increasing threat of cyberattacks, and the industry is working to develop a stronger, cyber governance framework and resilient infrastructure.
So, there are both external challenges such as climate change and global tensions as well as internal challenges relating to efficiency, security and digitalisation that oil and gas companies are grappling with.
Suresh P. Mangalani
Oil and gas entities need to deal with multiple government authorities, agencies and departments for grant of permissions and no-objection certificates. The most cumbersome part is obtaining multistage multi-authorities’ permissions and this leads to abnormal delays in completing infrastructure projects, resulting in cost overruns and viability concerns. Streamlining permissions or introducing a regime of “deemed permissions after 30 days” should be the key reform to help entities focus on infrastructure building.
The increase in the cost price of natural gas, coupled with a reduction in the allocation of domestic natural gas over the past one year, has had an adverse effect on consumer economics, suppressing the existing demand and future growth as well as the cash flows of CGD entities. High natural gas prices are severely hampering the development of newly allocated GAs due to reduced advantage over alternative fuels. The government is working on providing maximum feasible gas to CGD entities for home and CNG consumers and that too at administrative price mechanism (APM) prices. In light of the expected increase in gas prices in the future, the industry has been requesting the government for a sustainable and longer-term affordable APM pricing to provide certainty and stable prices to end consumers.
Prashant Vasisht
Delays in getting statutory approval for E&P blocks, litigation by the industry against the PNGRB as regards various tariff-related anomalies for gas pipelines and giving open access to the incumbent CGD networks where marketing exclusivity period is over, are some of the key issues that remain unaddressed.
What is the sector outlook for the next one to two years?
Manas Majumdar
India is going to be the world’s fastest growing energy market due to its robust economic fundamentals. Oil demand is projected to jump by over 8 per cent to 5.2 million bpd next year as the economy continues to rebound. Natural gas consumption is expected to grow by 25 billion cubic metres, registering an average annual growth of 9 per cent. However, India’s energy self-sufficiency has been affected – the domestic production of crude oil has been trending downwards since 2011-12 as the existing oil fields are ageing and new discoveries have been elusive despite government support. In May 2022, the Oil and Natural Gas Corporation announced plans to invest $4 billion over the period 2022-25 to increase its exploration efforts and promote rapid production, and India hopes to reduce oil and gas import dependence by 10 per cent over the next few years.
Meanwhile, environmental, social and governance (ESG) as well as digitalisation challenges are also being addressed by oil and gas companies. They are pursuing net zero carbon goals by investing in new clean energy technologies and moving away or putting on hold any high-carbon plans. Among various clean energy technologies, OMCs are keenly exploring green hydrogen and biofuels. To give these clean energy initiatives a boost, the government has set a target of achieving 20 per cent ethanol blending in petrol by 2025. Also, digitalisation initiatives are being undertaken by many oil companies, and this has started to create differentiated benefits for all stakeholders. The industry seems to be on the right path and the outlook seems robust.
Suresh P. Mangalani
With the conclusion of the 11th round of bidding, India’s CGD network has covered 86 per cent of the national land mass and 96 per cent of the population, laying the framework for transitioning to a gas-based economy. In the CGD sector, demand has remained concentrated in a few pockets where CGD infrastructure is available. However, going forward, this is expected to change with large-scale availability of natural gas across the country.
There has been a massive push by the government to rapidly expand the natural gas infrastructure through initiatives such as Bharatmala, Sagarmala, the green energy corridors, and multiple industrial and economic corridors. The development of multiple smart cities has ensured an inflow of huge investments, which is further expected to drive up demand.
Many organisations are looking to reinvent themselves by optimising their resource portfolios, transforming business models, focusing on financial health and committing to climate change by setting aggressive ESG goals.
Oil prices have recovered to around $100 per barrel after turning negative in April 2020. Oil prices above $60 per barrel will most likely improve or complement the energy transition in the near term. Strong oil prices enable investments in riskier and expensive green energy solutions such as green hydrogen, and carbon capture, utilisation and storage. With a greater focus on pursuing their net zero goals, oil and gas entities are expected to acquire low-carbon assets or divest the high-intensity ones, leading to consolidation or portfolio restructuring.
Traditional fuels (diesel and gasoline) also face competition from low-emission fuels such as hydrogen, renewable energy sources and electric vehicles. Going forward, green hydrogen is expected to play a key role. Reputed organisations have declared their ambitions to produce the least expensive green hydrogen. This will transform India from a country that is over-reliant on imported oil and gas to one that can become a net exporter of clean energy.
Akhil Mehrotra
It is expected that the Indian economy will expand to $5 trillion by 2025 and to $10 trillion by 2030 from the current $3 trillion, leading to burgeoning energy demand. As per the projections by BP Energy Outlook, India’s share in global energy demand is expected to double from the current 6 per cent to 12 per cent by 2050, and natural gas is expected to play an important role in meeting the energy requirement.
With more freedom to E&P entities for marketing of gas and an increase in products at the gas exchange, the gas market is expected to leapfrog.
An increased thrust to promote innovations is expected in order to provide clean energy options to consumers at economical rates. Developing India as a green hydrogen hub is a key focus of the government. Oil and gas companies are developing projects for the use of hydrogen as fuel and blending hydrogen in gas pipelines by repurposing the existing infrastructure.
The government has drawn a strategic roadmap to cater to the increasing energy demand by blending conventional fuels with cleaner fuels. Consequently, we are witnessing ethanol blending in petrol and hydrogen blending in natural gas, both of which are aimed at finding the right balance in the energy mix.
The government has fast-tracked the process of increasing the share of natural gas in the energy mix with the expansion of the natural gas pipeline network to about 36,000 km from the current 21,715 km.
Prashant Vasisht
Crude and natural gas prices are expected to remain high. This will aid the profitability of upstream companies even after the windfall tax provision. Domestic gas prices are expected to increase further in the next revision due to the elevated prices at various international hubs and continuing high spot gas prices. In 2022-23, the demand for petroleum products is expected to increase by 3-4 per cent and capacity utilisation of PSUs and private refiners is anticipated to remain high. However, any further waves of the pandemic and elongated lockdowns remain a key concern. Refining margins are currently robust and are expected to remain healthy, although these might reduce from the current high levels. Domestic gas consumption has recovered from the impact of Covid-19 and is expected to grow by 8-9 per cent year on year in 2022-23. In the medium term, there could be a structural shortage of LNG capacity, given the net zero commitments of different countries. The LNG market is expected to remain tight and prices are likely to remain elevated. This would impact demand growth. The domestic demand for gas is expected to grow owing to the commissioning of new fertiliser plants and increase in sales from new CGD GAs.
