Energy security is one of the most pressing concerns for India, which meets almost 85 per cent of its oil requirements and 50 per cent of its gas requirements through imports. Factors such as volumes, sourcing markets, international crude prices and the rupee-dollar exchange rate are key determinants of the country’s annual import bill for these hydrocarbons and their derivatives.
So far, the country has not been able to fully reap the benefits of its not insubstantial oil and gas reserves, primarily due to insufficient exploration, ageing fields, price restrictions on the final product (such as gas), and a discouraging policy framework that has stymied the sector for a long time. However, since 2015, a slew of policy measures have been introduced by the government to bridge the policy gaps. Of course, the full effects of these measures will only be realised in another three-four years, given the long gestation of projects in the sector. Thus, the supply side is expected to improve significantly on the domestic front in the coming years and will concomitantly result in reduced import dependence. Meanwhile, the robust demand posts high growth rates each year, placing the country amongst the top five energy consumers in the world. For this reason, exporting countries keen to retain this large and growing market are ready to negotiate prices with India, rendering it more economical at times to import the cheaper oil/gas instead of procuring it domestically. Falling crude prices too have a similar effect, lending much dynamism to India’s demand-supply position for oil and gas.
Demand and supply scenario
- Crude oil: After coal, oil is the most important energy source for the country, which is the third largest oil consumer globally. While the demand for petroleum products is continuously increasing, domestic production is declining every year, leading to rising import dependence.
- During the past five fiscal years, crude oil 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. Import dependence has thus increased significantly to about 85 per cent. In 2019-20, crude oil imports stood at 227 mt, increasing from 202.85 mt five years ago, a CAGR of 2.85 per cent. The falling output can be attributed to many factors including constrained extraction from mature fields, reservoir issues, subsea leakages, prolonged shutdowns, maintenance works and increase in water cuts.
- Natural gas: India still sources only about 6 per cent of its energy from natural gas, as against the world average of about 25 per cent, signifying the immense scope for market expansion. As in the case of crude oil, domestic gas production too has been on the decline, falling short of meeting the growing demand and pushing up imports (in the form of liquefied natural gas [LNG]).
During the past five fiscal years, natural gas production has reduced from 32,247 million metric standard cubic metres (mmscm) in 2015-16 to 31,180 mmscm in 2019-20. At the same time, consumption increased from 52,516 mmscm to 63,932 mmscm, a CAGR of 5.04 per cent. Import dependence too has thus increased over time. At present, nearly half of the country’s demand for gas is met through LNG imports. During 2016-20, LNG imports increased from 21,389 mmscm to 33,680 mmscm, a CAGR of 12.02 per cent.
COVID-19: A new dimension
Typically, India’s import bill for oil and gas accounts for 25-30 per cent of the overall import expenses in a year. More recently, owing to the COVID-19 pandemic, benign global prices and lower imports (due to muted consumption demand) significant forex savings are expected. In 2019-20, the import bill for oil and petroleum products decreased 8.15 per cent year on year to $129 billion, while that for LNG declined by 7.76 per cent year on year to $9.5 billion. According to IHS Markit, India’s import bill for oil may be about $47 billion for calendar year 2020, almost half the usual figure.
Looking ahead
With respect to the demand-supply matrix for oil and gas, a host of factors are at play. The outcome rests on how quickly India starts extracting its hydrocarbon reserves in the long run and how long it takes for demand to recover from the lockdown blip in the near term.