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Oil Upstream: Controlled by destiny - Views on News from Equitymaster
 
 
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  • Sep 8, 2001

    Oil Upstream: Controlled by destiny

    Under the British rule the consumption and supply of crude oil and petroleum products was minimal due to the lack of industrialization in the country. Companies in operation, at that time, were the Assam Oil Company in the northeast and ATTOCK Oil Company in the northwest.

    Post independence, the thinking changed and rightly so, as leaders of free India decided to develop the oil & gas sector. The hydrocarbon held strategic importance from the standpoint of security concerns and rapid industrialization. In fact, with industrialization high on the agenda -- Mahalanobis plan -- the Government assigned high importance to the sector under the industrial policy resolution in 1956. This led to the creation of Oil & Natural Gas Commission to plan, promote, organize and implement projects for the development of the sector. In the early 70's, as the commission ventured offshore, it made the most significant discovery that of Bombay High. Consequently, with many more discoveries the country was able to enjoy significant energy security.

    Nevertheless, energy security continued to have high recall among the policy makers of the country, as the two oil shocks in '73 and '79 came as a bolt out of the blue. Oil prices, which were trading at $2.9 / barrel in early 70's spiraled to $34 / barrel by '79. This came as a rude shock for large oil importers and achieving self-reliance in oil production became a key result area. Over the two decades from the 70's to 90's the oil production in the country steadily increased. This could be mainly due to:

  • Discovery of new fields
  • Adoption of better technologies, which increased yields.

    Over this same period, crude oil reserves of the country grew from 127.8 m metric tonnes (MMT) to 468.8 MMT at the start of the 80's and touched a high of 806.2 MMT in 1990. Ever since, however, the reserves have declined, as no new discoveries were made and existing oil wells began to dry. Exacerbating the trend was the increased growth in consumption of oil and petroleum products with liberalization of the economy.

    At the end of FY00, India's proven reserves stood at 645 MMT with an expected life of 20 years. Proven reserves, over the last decade, have fallen by 20% and by 11.9% in the last five years. In order to match higher consumption crude oil imports have increased by 124.2% from 33.9 MMT in FY97 to 76 MMT in FY01. A favourable development, though, has been the drop in imports of petroleum products with the refining sector being given high priority and the Government inviting private investments. Consequently, significant capacity has come on stream in the last two years, which has made petroleum imports redundant.

    The Finance Ministry, however, continues to have sleepless nights as oil prices, over the past two years, have surged to touch 20-year highs and imports continue to rise. The petroleum, oil & lubricants (POL) import bill of the country has jumped by 56.1% in dollar terms over the past five years from $10 bn to $15.7 bn. The rise in the POL import bill, which stood at an estimated Rs 738.3 bn in FY01, would be more frightening in rupee terms. Any plans to reign in the POL import bill is likely to revolve around three main alternatives:

  • Discovery of new fields
  • Reduction in international prices
  • Developing alternative sources of energy

    Boosting upstream investments
    Company / Consortium NELP - I
    Reliance Ind. & Niko Resources 12
    ONGC 5
    IOC & ONGC 2
    ONGC & GAIL 1
    OIL 1
    Cairn Energy 1
    Source: CMIE 22
    Company / Consortium NELP - II
    ONGC 6
    ONGC & consortium 10
    Reliance Ind. & Hardy Oil 4
    Niko Resources 1
    OIL 1
    GSPC - GAIL - Joshi Tech. 1
    Source: Media Reports 23

    Dealing with the second first, the movement in international oil prices is completely out of the Government's control, as India is not a major oil producer nor has the economic muscle to dictate terms. The sharp rise in oil prices from $10 / barrel to $ 35 / barrel, over the past two years, has led to spiraling of the oil import bill adversely impacting the fiscal position. Alternatively, the Government has stepped up efforts to identify new fields for exploration. In view of the above objective, the Government opened up the upstream sector (ONGC was converted to a corporation) in 1991 to private investments.

    To further streamline the investment process the New Exploration Licensing Policy (NELP) was introduced by the Government. Over the two rounds of NELP, 50 oil & gas blocks have been auctioned under the international bidding route. Under NELP - I, the Government has signed production-sharing contracts (PSC) for 22 blocks with envisaged investments of $240 m in the first phase of exploration. Under NELP - II, out of 25 fields, bids were received for 23 blocks and PSCs have been signed for the same. Phase - I of exploration under NELP -II is expected to draw an investment of $290 m. As per reports, the Government is planning a third round by the end of the current fiscal.

    Oil & Natural Gas Corporation is undertaking additional initiatives to boost reserves and increase assured supply of international crude. All these initiatives could help India augment its energy security. However, there is only that much oil in India's sedimentary basins. Consequently, energy security is likely to remain a gnawing issue with policy makers. The only long term or permanent solutions seems to be developing alternative sources of energy.

     

     

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