The oil and gas sector has a major influence on India’s economic growth. The sector is expected to witness substantial growth and become an attractive destination for investments in the coming years. The onset of the Covid-19 pandemic caused various disruptions; however, the sector is now slowly returning to normalcy. The government has been placing special emphasis on the sector over the past few years. Several policies announced in the past few years are expected to witness significant progress in the next decade or so. The sector has also been facing various issues in recent years, such as narrowing margins in the upstream segment, promotion of electric vehicles (EVs) and delays in getting approvals. These issues need to be addressed in order to ensure the sector’s uninterrupted growth in the long term. Indian Infrastructure presents the views of leading experts on the sector’s recent progress, the impact of Covid-19 and the future outlook…
What has been the progress in the oil and gas sector in the past one year?
Over the past one year there has been considerable progress in the upstream segment as new rounds of the Open Acreage Licensing Policy (OALP) and the Discovered Small Fields (DSF) Policy have been introduced. Further, the Oil and Natural Gas Corporation has announced plans to enhance its production contracts. Hence, existing policies have witnessed significant progress in the past one year. One of the major challenges faced by the upstream segment in the past one year has been the global backlash against the oil and gas sector. As a consequence, the segment will now have to carefully analyse investor interest, as the Government of India is keen on growing the investor community and attracting new players in the sector.
As far as the downstream segment is concerned, preparatory work is being carried out for the eleventh bidding round of city gas distribution, which is to be launched soon. Meanwhile, there have been various developments in the fuel retailing segment over the past one year owing to the threat posed by the growth of EVs, rather than any significant policy push.
Financial year 2020-21 has been one of the most challenging for the oil and gas sector, primarily because of the pandemic and also because of the global commitment to decarbonise economic activity in general and energy production and consumption in particular. Oil consumption fell by over 9 per cent (calendar year). Domestic production of natural gas decreased by 11.9 per cent, the largest fall since 2013 compared to the 10-year average decline of 3 per cent.
If we look at financial years 2021 and 2022 (till date), three things stand out. First, the subsidies on domestic liquefied petroleum gas and public distribution system kerosene have been reduced to almost nil. Even when crude oil prices increased and remained at elevated levels, the price increases were passed on to the consumers, thereby maintaining very low underrecoveries. Second, during this period, refining product crack spreads were very low; however, oil marketing companies made healthy profits aided by healthy marketing margins. Refining margins continue to remain subdued but are expected to improve due to vaccine-led improvement in demand. Third, two large fields in the Million Metric Standard Cubic Meter Per Day basin commenced production in financial year 2021, and with a peak production potential of about 45 mmscmd, will contribute significantly to the overall domestic gas production volumes going forward. With regard to the gas utilities space, in December 2020, the Ministry of Environment, Forest and Climate Change identified about 1,644 industrial units spread across 50 industrial areas in Delhi for switching to piped natural gas (PNG) owing to the high levels of pollution. Additionally, the economics for conversion to compressed natural gas (CNG) remain compelling, given the high prices of petrol and diesel and low domestic gas prices.
“One of the major challenges faced by the upstream segment in the past one year has been the global
backlash against the oil and gas sector.”Anish De
What are some of the initiatives taken by the government in the past one year for the development of the sector? What has been the impact of these initiatives?
In the past one year, the government has largely focused on building on prior policy changes. Notable progress has been witnessed in the implementation of various policies that had been announced earlier. The quantum of biofuels in use has increased significantly over the past one year, and various other policies such as the DSF have materialised and are expected to facilitate growth of the sector.
The past year was an exception and cannot be used as a reference for progress in policy.
In July 2021, the Directorate General of Hydrocarbons released an order simplifying and standardising procedures and processes for oil and gas blocks awarded under the nine bidding rounds of the New Exploration Licensing Policy (NELP) and pre-NELP blocks. As many as 37 processes and procedures were required to be followed by a firm exploring oil and gas in a block awarded under the NELP or pre-NELP rounds. The procedures and processes have now been cut to 18, many of which would be on a self-certification basis. While the government’s intent is good and has resulted in exploration and production (E&P) reforms such as fast-tracked award of blocks under the DSF, Hydrocarbon Exploration Licensing Policy and OALP rounds, the benefits in terms of higher domestic oil and gas production will be realised only over the next three to five years. With regard to the city gas distribution (CGD) sector, the Petroleum and Natural Gas Regulatory Board (PNGRB) has announced the eleventh round of bidding for 65 geographical areas (GAs) which will result in deeper penetration of natural gas in the country.
“Promoting EVs on the one hand and simultaneously attracting investments in refining capacity on the
other sends confusing signals to stakeholders.” Lydia Powell
What has been the impact of Covid-19 on the sector and how have stakeholders responded to the challenges posed by the pandemic?
The overall oil and gas sector has not faced any irreversible damage over the past one year due to the Covid-19 pandemic and is currently on the path to recovery. Initially, during the nationwide lockdown in 2020, there were several disruptions in supply chain management; however, all issues were resolved promptly as the Indian supply chain system showed high resilience. Various issues were faced on the operational front as consumption patterns changed, with liquefied petroleum gas recording a growth in consumption while many other fuels reported a significant drop in demand. Recently, the increase in fuel prices on the back of global crude prices has posed a challenge for the sector. The government has limited ability to address the issue, as public health expenditure at the state and national levels has increased manyfold in the past one year. The international rebounding of crude oil prices has also added to the government’s difficulties.
The impact of Covid-19 has been felt in several areas. First, the slump in international energy prices resulted in weak realisations for upstream companies for both oil and gas. Even though prices recovered post the Organisation of the Petroleum Exporting Countries Plus production cuts, the average realisations for financial year 2021 were lower compared to pre-Covid levels. Second, refining margins slumped owing to global lockdowns and travel restrictions. Third, sales volumes slumped for petroleum and other liquids, and natural gas, owing to lockdowns, travel restrictions and the economic downturn. Lastly, progress of projects across the sector was impacted due to lockdowns, labour shortages, social distancing norms, etc.
What are some of the key inherent issues faced by the sector that require the immediate attention of policymakers?
India is a major importer of oil and gas. The country imports 85 per cent and 50 per cent of its total oil and gas requirements respectively. In case investments do not increase as global prices continue to soar, companies in the upstream segment would have to tighten their margins until the demand adjusts to alternative sources. The issue can be addressed by increasing domestic supply; however, that itself poses challenges due to India’s upstream segment not being an attractive destination for investors. The issue must be high on the agenda of policymakers in order to find a lasting solution.
Uncertainty in policy over the continued use of liquid petroleum fuels in transportation is the biggest challenge for investment in the sector. Further, promoting EVs on the one hand and simultaneously attracting investments in refining capacity on the other sends confusing signals to stakeholders.
Revision in the domestic gas price formula for nomination blocks, 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 the marketing exclusivity period is over are some of the key issues that remain unaddressed in the sector.
“The economics for conversion to CNG remain compelling, given the high prices of petrol and diesel and
low domestic gas prices.” Prashant Vasisht
What is the outlook for the oil and gas sector for the coming two years and what are the key segments that are expected to drive the sector’s growth?
The overall demand for oil and gas in India is expected to remain strong in the next few years. The demand for diesel and other motor fuels is expected to grow continuously until alternative fuels have a widespread presence in the long term. However, a major change in the demand mix is expected, as the country has a massive fleet of two-wheelers that will likely transition to EVs in the coming two to three years. Due to the change in the demand mix, some of the older refineries are expected to struggle in the short term.
In conclusion, a major change in India’s oil and gas sector is not expected in the short term, whereas globally, changes could take place at a much faster pace as they have already started decommissioning refineries, and investments are becoming hard to come by. Indian companies have longer runways than their Western counterparts. However, in the long term, oil and gas companies in India will also have to adapt to the changing environment, wherein natural gas and EVs are expected to take centre stage.
Grappling with decarbonisation policies and coping with volatility in oil prices are expected to dominate the sector in the next two years.
With global crude oil prices expected to remain elevated due to global economic recovery, increasing vaccination coverage and limited US supply increases, E&P companies’ profits should increase in the current fiscal. However, refining margins are expected to remain subdued, although they should improve from the current levels as vaccine coverage increases. The same should be positive for refining companies. Additionally, profits of public sector oil marketing companies will be buoyed by the healthy marketing margins. The CGD sector should do well in the existing GAs, with a steady rise in CNG conversions backed by favourable conversion economics, although spreads for PNG (industrial) sales remain slim due to the high spot LNG price outlook. However, since many of the CGD companies are in the midst of setting up networks in new GAs, commissioning of these projects in a timely manner without cost overruns will be key to their viability. The gas transmission segment should do well with rise in volumes owing to increasing domestic production and start-up of new LNG terminals on the supply side, and start-up of new fertiliser plants and increasing offtake by new and existing GAs on the demand side.
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