NEWS India still lagging potential as major player on world energy markets

India's Oil Production/Consumption Gap [21468 bytes]
Outlook For India's Refined Products Demand [28147 bytes]
India's Petroleum Infrastructure [72507 bytes]
Indiam Exploration Acreage op for Bidding [48572 bytes]

India continues to lag its huge potential as a major player on world energy markets.

All forecasts point to strong growth rates in oil and gas demand continuing well into the next century.

Current government estimates see India's refined products demand soaring to 3 million b/d by 2010 from 1.4-1.6 million b/d in fiscal 1996-97. If India's natural gas demand growth continues at its current rate, it would double every 5 years, the government predicts.

However, although it is the world's second largest country in terms of population-possibly overtaking leader China in the next century-India's energy intensity is among the lowest, lagging countries arguably less developed.

Per capita consumption of energy in India of about 1.7 bbl of oil equivalent (BOE)/year is much lower than the world average of 11.6 BOE/year. At the top end of the scale are the U.S. and Canada, where per capita energy consumption is more than 35 times that of India. Even China, often cited for its untapped energy consumption potential, consumes about 3% more per capita than does India.

At the same time, India is moving slowly to privatize and deregulate its energy sector. It is trying to attract foreign capital to a sector in need of investments the government estimates at as much as $120 billion by 2010. About $60-80 billion of that sum will be needed for upstream projects in order for India to approach oil and gas self-sufficiency.

That's not out of line with private sector projections for petroleum sector investment needs. ABN-Amro Bank NV of Netherlands estimates combined investment needs in India for upstream and downstream oil and gas projects at $28-48 billion by 2000 and $90 billion by 2010.

Scant success to date

While the potential for growth and need are there, India's attempts to attract private sector investment in its energy sector, particularly in oil and gas, have seen scant success.

Although foreign companies have shown only limited interest in India's exploration offerings-mostly because of what they see as inadequate terms and less than prime acreage-there remains a strong interest in participating in India's downstream.

Companies have submitted proposals covering a combined 1.3 million b/d of added refining capacity in India. Of that total, more than 1 million b/d is grassroots capacity to be added mainly by joint ventures with foreign companies (see tables with map, p. 21).

Because of political infighting over regulatory and fiscal reforms, however, many of these proposals-notably the foreign joint venture projects, some of which date back to the 1980s-are being held in abeyance.

Investors' reluctance is underpinned by rough and tumble national and local politics that make it difficult for energy projects to get off the ground in India. Provincial politics almost scuttled a megaproject promoted by Enron Corp. that combined a major electrical power plant with South Asia's first liquefied natural gas receiving terminal (OGJ, Jan. 15, Newsletter).

Another negative factor for investors is the seemingly intractable-from a political standpoint-problem of removing heavy subsidies for domestically consumed petroleum products in India. New Delhi knows any petroleum sector deregulation/ privatization effort will remain hamstrung by such subsidies, yet any attempt to scrap subsidies will prove politically explosive in this poverty ridden nation.

Until recently, the petroleum industry in India was highly regulated, with the government exercising virtually total control.

However, a number of factors have spurred calls for a change in the attitude of the Indian government, notably the country's ever growing tab for imports of crude oil and refined products.

World Bank critique

Nevertheless, New Delhi continues to come under heavy criticism for the slow pace of reforms in its hydrocarbon sector.

The World Bank in December blistered the Indian government for failing to implement reforms as planned.

In a recent audit report, the bank also blasted New Delhi for a disappointing project aimed at securing foreign participation in reducing gas flaring in the Bombay High offshore area. It claimed the government exaggerated the foreign exchange requirement for the gas flaring reduction program.

"The audit rates the project outcome as unsatisfactory, the institutional development as negligible, and the sustainability as uncertain," the bank said of the gas flaring reduction program.

The bank also criticized the government's latest joint venture exploration bid round, which had a lackluster response.

"On the policy side, the project failed to meet its main policy objective of attracting a significant volume of foreign investment to participate in petroleum exploration.

"There was a weak international response to the fourth round of bidding for exploration acreage primarily because the acreage offered was of limited value and the terms were inadequate."

While not disputing specifics, Indian Finance Ministry officials expressed surprise at the tone the World Bank adopted in the audit report.

Need for reforms

The Indian government has long been acutely aware of the need for significant investment in the country's petroleum industry.

That awareness led to the petroleum sector being placed among the first industries in India targeted for economic reform this decade.

The petroleum reform process began about 5 years ago, when the leading state owned oil and gas producing company, Oil & Natural Gas Commission (ONGC), began a gradual divestment of many areas that was to accompany its transformation from a government agency to a full fledged, independent operating company designed along private sector lines.

At the same time, oil and gas exploration and development, for years confined to public sector firms ONGC and Oil India Ltd. (OIL), was opened to foreign oil companies.

The restructuring of the petroleum sector in India began in earnest when the Asian Development Bank (ADB), supported by the World Bank, laid down severe conditions for grants of loans to the Indian government. The loans were ostensibly meant for restructuring the petroleum sector but instead were used to help the country weather its serious balance of payments problem.

ADB insisted that ONGC restructure, many oil field services be handed over to the private sector, and the government gradually divest its equity stake in the oil and gas industry. The liberalization of terms for oil and gas exploration by the private sector and foreign companies also was among conditions attached to ADB funding.

Ironically, much changed in the hydrocarbon sector after another 2 years, when the ADB loans were no longer needed.

Many new onshore and offshore areas were opened for exploration by the private sector, and oil fields discovered but not developed by ONGC and OIL were offered to other companies for development.

Crude, refining capacities

India has relatively small oil reserves, estimated currently at about 5.8 billion bbl, or about 0.5% of the world total.

At the current record rate of production of about 700,000 b/d, India's oil reserves are expected to last about 22 years.

India's oil production continues to lag demand. Crude production in India's fiscal year ended Mar. 31, 1995, averaged 645,000 b/d, down from the country's earlier peak of 680,000 b/d in the mid-1980s.

Current projections call for average production of 740,000 b/d in fiscal 1995-96.

Indian refining capacity also remains far below domestic needs. Combined throughput capacity of India's 13 refineries at yearend fiscal 1994-95 was 1.128 million b/d.

With refined products demand for the current fiscal year projected at about 1.5 million b/d, imports of refined products are likely to remain strong. India imported 277,800 b/d of products in fiscal 1994-95.

Because of this shortfall, India's position as a net importer of crude oil and refined products means that more than one third of the country's foreign exchange goes for petroleum imports.

Demand estimates suggest that India currently could support addition of at least 500,000 b/d of refining capacity, government officials contend.

Self-sufficiency

The long emphasis on oil self-sufficiency has kept New Delhi focused keenly on the urgency of finding more oil fields.

That urgency grows with the recognition that domestic crude oil production is trailing further behind rocketing domestic demand.

India's self-sufficiency in oil has plummeted to only 50% from a peak of 75% about a decade ago.

The dilemma of an ever widening domestic crude supply/demand shortfall led to a novel proposal voiced last September at an oil and gas conference organized by Tata Energy Research Institute (TERI) in New Delhi.

This proposal holds that India should now focus on becoming a powerful oil consumer like Japan instead of trying to raise indigenous production.

Put forth by conference cochairman and East-West Center Director Fereidun Fesharaki, this theory envisages India emerging as an important player in oil by virtue of its clout as an importer.

With India set to become a bigger oil buyer than China by the turn of the century, Fesharaki contends New Delhi should focus more on expanding the nation's refining/marketing sector rather than investing in the risky area of exploration.

Exploration policy

Fesharaki's idea is not likely to find much favor with the Indian government, which is committed to searching for more oil either through operations of national oil companies or attracting foreign participation.

The Petroleum Ministry went so far as to ask state owned refining companies Indian Oil Corp. (IOC), Hindustan Petroleum Corp. Ltd. (HPCL), and Bharat Petroleum Corp. Ltd. (BPCL) to form a joint exploration company that would supplement the exploration efforts of ONGC and OIL.

That initiative was later scrapped, but the same companies have been asked to set up joint ventures with private parties for exploration.

Meantime, New Delhi is evaluating various policy options for devising a new oil and gas exploration policy it hopes will attract significantly more exploration risk capital from a broad spectrum of international companies.

Petroleum Minister Satish Sharma disclosed the initiative at the World Economic Forum in New Delhi last December.

Sharma also said some of India's blue chip petroleum companies, notably ONGC and IOC, will be listed on the New York Stock Exchange (NYSE). This not only would give those companies access to a huge capital market but also enable them to adopt more rigorous accounting practices, as required for listing on NYSE.

Government criticized

The Indian government's efforts on oil exploration are often seen as a case of too little, too late.

Former ONGC Chairman S.P. Wahi accused the government of making no concerted efforts to find oil in the country. Wahi claimed no significant oil fields have been discovered in India since 1990.

"There may not be a drop of oil after 25 years unless a major thrust is given to oil exploration," Wahi told Oil & Gas Journal. He charged that India's oil sector is in the grip of "chaotic conditions," adding that the government provides no definite direction to the oil sector.

Wahi said he is not averse to the entry of multinationals in the oil sector but wants foreign companies to undertake exploration before they are asked to get involved in production.

Speaking of the Bombay High offshore area, keystone of India's production, Wahi noted some of the oil wells there were being rapidly depleted with no effort to bolster production.

Wahi also criticized changes in India's political, bureaucratic, and managerial leadership that he contended have caused the oil sector to fall into decline. He called for a broad restructuring to reintegrate India's oil sector.

"Ours is the only oil sector in the world that is totally disintegrated," Wahi said. "Separate companies exist for exploration, refining, production, and gas transportation. There is no coordination at the top, whereas oil companies the world over are integrated, managed, and coordinated by professionals at the top. This ensures optimal use of resources and technological excellence."

Lukewarm upstream interest

The Petroleum Ministry's desperation to enlarge the search for hydrocarbons stems from the failure to any significant extent to attract major oil companies in the many bidding rounds held the last few years.

Majors' response to the bidding rounds continues lukewarm, as can be seen in the latest list of companies submitting bids. These include Polish and Irish firms as well as several U.S. and Canadian companies, but no majors are on the list.

An executive with Chevron Corp. attending the TERI conference insisted his company still is interested in exploration in India. But he contends the blocks being offered are not prospective enough, and there is more potential in areas not yet offered to foreign companies.

Despite expressions of intent, the level of investment needed for India to find more oil is massive and so far does not appear to be forthcoming.

Sharma indicated as much at the International Energy Conference in Venezuela last September, when he said $50-120 billion will be needed to boost reserves and achieve required production levels.

With India's demand for petroleum set to top 2.5 million b/d by the middle of the next decade, official estimates are that the current 7%/year growth in demand will jump to more than 10%/year in the next few years.

Downstream interest

With this projected level of consumption, it is no wonder oil majors are looking at India as an emerging giant market for petroleum products.

If anything, the majors' lack of interest in India's upstream sector is virtually offset by their enthusiasm to participate in the country's refining/marketing sector.

All the majors that left India after the nationalization of oil companies in the early 1970s have returned eager to invest in the liberalized economy. Leading the charge are Exxon Corp., Mobil Oil Corp., Royal Dutch/Shell Group, and the Chevron Corp./Texaco Inc. jointly owned Caltex. These companies have formed joint ventures in lubricants production and marketing with public sector firms IOC, HPCL, BPCL, and IBP Co. Ltd.

The next step is to set up refineries and enter marketing, a much less risky venture than exploration.

Oil majors were represented at the New Delhi conference last September, but their hopes of an early decision on dismantling the administered price mechanism were dashed at the outset when Finance Minister Manmohan Singh ruled out deregulation for at least the next 6 months.

Although Singh referred to the need for phased decontrol, the clarification over the timeframe was significant because the Petroleum Ministry had been hinting to investors that deregulation was imminent this fiscal year.

In fact, none of the potential refining investors, including private Indian companies such as Essar Oil Ltd. and Reliance Petroleum Ltd., are going ahead with plans to build refineries, simply because the Petroleum Ministry has often given such indications in the past without later movement.

The upshot of such confusing signals to prospective downstream investors is that most are awaiting some decision moving toward deregulation. First steps would include proposals to reduce tariffs on petroleum products to make refining more attractive.

The Finance Minister's comment about timing at the New Delhi conference has, however, made it amply clear that the status quo will continue for at least another year. The uncertainty is apparently linked to unresolved questions about India's national elections this year.

Uncertainty over the timing of national elections continues, with dates ranging from February to April. Even after the installation of a new government, it will take a few months before hard decisions toward deregulation are taken, for these will be viewed as inflationary and antipoor.

In fact, there remains lingering skepticism in oil industry circles over the fate of the memoranda of understanding (MOUs) the government signed for setting up refineries in India with other governments, notably IOC's MOUs with state oil companies of Kuwait and Oman. Some of these are certain to be reviewed if a new political party assumes power.

In sum, short term prospects in India's downstream sector may not be promising, but the long term prospects remain attractive.

As India's consumption of petroleum products continues to increase rapidly, its need to expand infrastructure upstream and downstream sectors grows apace. Whether this need will be met by the domestic industry or through the flow of foreign capital will depend largely on fresh policy initiatives that will have to be undertaken by a new government.