India’s energy sector has witnessed strong growth in recent years as a result of economic expansion, growing population and large-scale urbanisation. Primary energy consumption grew at a compound annual growth rate (CAGR) of 20.86 per cent over the past five years, compared to the world CAGR of 5.31 per cent over the same period. However, the country is heavily dependent on imports for meeting its energy requirements with imported fuel accounting for close to 80 per cent of total consumption. India is expected to consume energy at higher rates to fuel the economy, currently on a growth trajectory of approximately 7 per cent per annum.
The heavy dependence on imports exposes the country to frequent price shocks due to changes in crude oil prices. Therefore, to meet the growing demand, the country will have to enhance its energy security by ensuring major investments in the domestic upstream industry. In the past two and a half years, new policies have been introduced to increase domestic investment in the exploration and production of natural gas and oil. The government is bidding out new licences for exploration and production (E&P) of oil and gas as well as development of city gas distribution (CGD) infrastructure. Also, a number of projects are being undertaken to expand the existing refining and liquefied natural gas (LNG) regasification capacity.
At the India Infrastructure Forum 2019, a panel discussion was held to discuss the recent initiatives and developments in the upstream, midstream and downstream segments and the issues and challenges being faced by the oil and gas sector, as well as highlight the opportunity areas for domestic and international players.
Focus on E&P activity: Introduction of a favourable policy framework and new bidding rounds
New initiatives have been taken across the value chain to realise the full potential of the sector. One such step is the creation of the National Data Repository, which will provide easy access to data on Indian sedimentary basins. Similarly, the National Seismic Programme has been launched by the government to carry out a fresh appraisal of all sedimentary basins across the country for a better understanding of the total hydrocarbons potential.
The government has also recently approved a new policy in the sector for enhancing domestic E&P of oil and gas. For Category I basins with proven commercial productivity, bidding will continue to be based on exploration work and revenue share in the ratio 70:30. In basins belonging to Category II and Category III, where commercial production of oil and gas is yet to be established, blocks will be awarded on the basis of international competitive bids based exclusively on the exploration work programme. Through this policy, an investor-friendly environment is envisaged that will help accelerate production activities.
Bids for 92 blocks have been invited under the three rounds of the Open Acreage Licensing Policy (OALP). OALP II and OALP III will run concurrently and the last date for bid submission was May 15, 2019. Meanwhile, the central government has already signed contracts with six companies for all 55 blocks awarded under Bid Round I.
Further, in September 2015, the Discovered Small Fields [DSF] Policy was introduced to encourage auction of small/marginal fields of the Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) to private players on liberalised terms including marketing and pricing freedom and lower taxes. Since the launch of the policy, two rounds of bidding have been conducted, both of which received an overwhelming response from industry participants.
Going forward, technology will play a key role in improving productivity and performance of the sector as most of the resources are located in deep waters and isolated basins in central India.
Gas transmission infrastructure: Providing access to north-eastern and eastern regions
The present natural gas transportation infrastructure in the country at over 16,000 km is concentrated primarily around the historical sources of gas production. Pipelines too are concentrated in the northern and north-west ern areas of the country. But now, significant measures are being taken to improve/increase the infrastructure in the eastern part. Under the ambitious Urja Ganga Pipeline Project, CGD networks are being laid in six cities – Patna, Varanasi, Ranchi, Jamshedpur, Bhubaneswar and Cuttack – in the eastern part of the country. The project will give the eastern states of Uttar Pradesh, Bihar, Jharkhand, Odisha and West Bengal access to natural gas. In addition, the government is developing the 1,600 km Indradhanush Gas Grid connecting the north-eastern states to the country’s existing natural gas pipeline network.
CGD: New licensing rounds and upcoming opportunities
Initiatives have been taken to expand the CGD network across the country. The top priority in domestic natural gas allocation is accorded to the domestic compressed natural gas (CNG) and piped natural gas categories. Under the ninth and tenth rounds of bidding, 136 new geographical areas have been bid out. Many of these have already been allocated to CGD entities while others are in the process of being awarded. After the successful completion of the bidding rounds, around 70 per cent of the country’s population will be covered by the CGD network. Though domestic production is expected to increase over the years, a lot of gas will still need to be imported to meet the growing demand. To this end, the government is expanding the existing LNG regasification capacity and setting up new LNG terminals across the country, especially on the east coast. The endeavour is to increase LNG import capacity to 56 million tonnes per annum.
Key challenges and mitigation measures
Despite numerous improvement measures, the sector remains plagued by many challenges that need to be urgently addressed for maintaining energy security. Due to heavy dependence on imports for meeting energy demand, the volatility of the global oil prices affects not only the country’s energy security but also its economic security. Rise in oil prices adversely affects the current account deficit which further leads to depreciation of the rupee. It will be difficult for the country to avoid hardship caused by frequent fluctuations in oil prices unless measures are taken to reduce import dependence and increase investments in domestic E&P activities.
The failure of the government to bring all petroleum products under the purview of the goods and services tax due to fear of heavy revenue losses is a major cause for concern for oil and gas companies. Moreover, the government needs to pass on the benefits of low oil prices to consumers (instead of using it to cover the fiscal deficit) to facilitate promotion of investment activities and spread the benefits to the economy as a whole.
The government should move quickly towards market-linked pricing freedom for gas from discovered and producing fields instead of subjecting them to international pricing. This will boost investments in the upstream segment.
Also, both public and private sector companies should increase their expenditure on research and development to compete with international players. Private participation in the CGD segment should also be encouraged through hybrid annuity models as in the case of road projects.
The coal bed methane (CBM) segment has also faced several challenges. The biggest of these has been marketing the blocks that are located in isolated parts of central India. The volumes are also low as compared to conventional fields. Proper pipeline connectivity is necessary for the transmission of CBM to locations from where the gas could be marketed locally in small quantities of LNG or CNG.
There is also a need to rationalise and liberalise the regulatory framework. Ideally, the role of a regulator should be to encourage market competition and act as an overseeing agency. For example, the role of the downstream regulator, the Petroleum and Natural Gas Regulatory Board, should not be that of a licensor but of a body that ensures a level playing field for the private sector and the public sector. Similarly, the role of the Directorate General of Hydrocarbons (DGH) should be that of a regulator of the upstream segment. Contract administration too should be handled by the DGH and not the Ministry of Petroleum and Natural Gas.
The road ahead
With the economy set to grow at an average of 8-9 per cent in the next five years, the demand for crude oil and natural gas will continue unabated. Further, as the government pursues a lower carbon growth path, the role of gas within the overall primary energy basket will only increase. Though the government has made efforts to increase domestic production, these initiatives are fairly recent, and are yet to show any significant result.
In order to tap the unexplored and isolated sedimentary basins across the country, technology needs to be leveraged to make E&P of these reserves viable and profitable. The government also needs to encourage the participation of both large and small private players by removing entry barriers, providing viability gap funding for big-ticket projects, and improving pipeline infrastructure to meet the targets set for infrastructure development.
Going forward, the successful transition to a low carbon economy will require robust infrastructure for gas production, price competitiveness of gas as compared to alternative fuels, and timely commissioning of the proposed transmission pipeline infrastructure.
Last, but not the least, the presence of an enabling regulatory regime will also be extremely important. The regulations will have to be both transparent and stable for better functioning of the oil and gas sector.
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