INDIA’S ENERGY (IN) SECURITY Executive summary This paper highlights the importance of India’s energy security and the possible repercussions of Government’s policy paralysis, which is hurting the endeavors of energy firms. India’s energy security is not attributed and confined to just oil & gas industry, whose role cannot be denied in India’s overall growth story. The Government has indeed taken steps in the right direction but now it has become critical for India to introduce policy reforms to secure India’s growing energy needs. Starting from making the present Production Sharing Contract (PSC) structure more remunerative for the investors, to rationalizing the taxation regime for the sector, changes are indispensable. The biggest hurdle currently is the sector’s slow decision-making process. The dwindling interest of foreign investors and their exodus are big concerns, especially at a time when India needs them and the technology they possess. Not to forget, the reforms that India needs in the downstream and midstream sectors and the coordination among various Ministries. Introduction Indian economy is at a crucial juncture. Year 2012 marks the beginning of the 12th five year plan; the economic scenario does not look very encouraging. Not just the European crisis but the fluctuating crude price (on which India’s dependence is precariously high at ~80% currently) is increasing the uncertainties. And though in recent times, crude prices are showing signs of relief, the depreciation of Indian Rupee vis-à-vis US Dollar is not helping. But again, this also underlines the issue of India’s growing dependence on energy. Analysts believe that situation will not change much, be it high crude prices or lower valuation of Indian currency, neither of the problems augurs well for Indian economy. So, then what are the possible options we have? How do we navigate through the crisis? Option 1: Reduce imports and solve both the problems. With the population, substantially over one billion, and growing energy demand this is not a policy solution. Table 1 highlights the precarious Indian situation. TABLE 1: Proved Reserve at the end of 2011 Country Thousand MnTonnes Thousand Million Barrels Share of Total (%) US 3.7 30.9 1.9 Canada 28.2 175.2 10.6 Mexico 1.6 11.4 0.7 Venezuela 46.3 296.5 17.9 Kazakhstan 3.9 30.0 1.8 1 Russia 12.1 88.2 5.3 Iran 20.8 151.2 9.1 Iraq 19.3 143.1 8.7 Kuwait 14.0 101.5 6.1 Saudi Arabia 36.5 265.4 16.1 Qatar 3.2 24.7 1.5 UAE 13.0 97.8 5.9 Gabon 0.5 3.7 0.2 Libya 6.1 47.1 2.9 China 2.0 14.7 0.9 Malaysia 0.8 5.9 0.4 India 0.8 5.7 0.3 (Source: BP Statistical review 2012) Option 2: Maximize self-sufficiency? This perhaps is one of the more sustainable options. Though India has the fourth biggest reserves of coal and is the second biggest coal producer, petroleum sector still continues to play a pre-eminent role in meeting the energy requirements of the country. In fact, 45% of the total energy needs are met by oil and gas. Though India’s present levels of per capita energy consumption is extremely low, with economy expected to grow between 7%-9%, energy consumption is set to increase (see Table 3). Though, other sources of energy, especially coal will remain important (see table 2), the Petroleum sector is crucial in determining India’s energy security. TABLE 2: Energy Source Mix (%) Year Coal Oil Gas Hydel Nuclear 2010-11 53 30 14 2 1 2024-25 50 25 20 2 3 (Sources: Planning Commission 2012) TABLE 3: Per capita Energy consumption (million tonnes of oil equivalent) Country/Region World 1.5 India 0.4 2 China 0.9 North America 6.3 Europe 3.3 Russian Federation 3.4 Rest of the World 0.8 (Source: BP Energy Statistics 2012) During the second half of the last decade, India’s energy consumption has gone up from 382 million tonnes of oil equivalent (MTOE) to 525 MTOE. And when we talk about maximizing self-sufficiency, it includes increasing the exploration activity in the country; bring in more technology and liaison with mature countries in the oil & gas sector, like Norway. Invite more foreign investments and make the environment more investor friendly. Needless to mention, for all these India needs – bureaucracy, polity, tax regime working in tandem to achieve nation’s energy security. HURDLES IN INDIA’S ENERGY SECURITY Bureaucratic and political hurdles : Domestic production stagnated Lower indigenous production and exploration: Fizzling NELP Energy security vs. national security : Defence hurdles International force: Fear of supply disruption Gas imports and international negotiation Overseas merger & acquisitions: Chinese aggression Non-remunerative taxation regime New technology for new source of energy – CBM, Shale Gas, Oil Sand, etc. Interrelated policy framework for upstream, midstream and downstream ACHIEVING ENERGY SECURITY India’s energy demand is growing by about 7% and based on the growth rate, International Energy Agency (IEA) estimates India may need to invest $800 billion by 2030 for meeting its demand. What makes this imperative is the fact that India’s annual production is 2.3% of world energy production, but India’s consumption is 3.3% of the world energy supply. The deficit is estimated to surpass Japan and Russia by 2030 placing India in the third position in terms of annual energy consumption. 1. Growing imports with growing economy: Domestic production stagnates 3 Fact: India’s domestic production has stagnated to around 33-35 MMT and imports have gone up from 120 MMT to 142 MMT between 2007 - 2011. Clearly, domestic production remained flat, probably because of slow pace of decision-making, bureaucratic hurdles, limited prospectivity, delays in commissioning of new projects and declining production from existing fields (See Table 4). TABLE 4: India’s import vs. domestic oil production MMT Domestic Imports %imports dependence (BCM) Domestic % Growth 2006-07 O I L 34 121 72.0 G A S 31.7 -1.4 2007-08 34.1 128 73.4 32.4 2.1 2008-09 33.5 133.6 75.0 32.8 1.3 2009-10 33.7 137.8 75.6 47.4 44.6# 2010-11* 38 142 73.0 52.2 9.95 Cairn-ONGC Rajasthan production started #KGD-6 gas production starts (Source: Petroleum Planning & Analysis Cell) Reasons: Delay in approvals to the already discovered fields. Best example is Cairn-ONGC JV in Rajasthan Indirectly, the bureaucracy and politics held back the decision on allowing ramp up from Barmer oil block, by almost an year. Timely approval for ramp-up in Rajasthan would have reduced oil imports and save forex reserves. Though the issue has now been resolved but crucial time and money was lost Still many of the oil blocks await approvals from DGH/Petroleum Ministry/Other Ministries Exploration in many of the pre-NELP and NELP blocks stopped because of hurdles Annexure 1 Remedy: PMO principal secretary has formed a group to resolve inter-ministerial issues. Annexure 2 The inter-ministerial group is focused on petroleum sector. Steps in such direction would surely 4 help PMO should make sure that the petroleum ministry will expedite the clearance process 2. Lower indigenous production and exploration: Fizzling NELP Fact: No significant increase in exploration expenditure in NELP blocks (See Table 5) No significant increase in investments seen, despite few big discoveries in some of the NELP blocks Under NELP-IX committed investment in the awarded blocks is about US$582.29 million So naturally, there is a significant dip between NELP 8 and 9 Table 5: No significant growth in exploration capex $ Mn 2006-07 2007-08 2008-09 2009-10 2010-11 Total NELP- I -VIII 1168.53 1625.60 1857.89 1942.05 2293.93 8888.00 (Source: Petroleum Ministry Data, 2012) Reason: NELP was meant to attract global energy giants but India’s low prospectivity is a deterrent (see table 1) Experience of global giants in Indian E&P sector: some example o Bureaucratic hurdles in BP’s $7.2 billion investment to pick up stake in RIL’s assets o Vedanta faced 16 months delay for acquiring majority stake in Cairn India o Delays in approvals finally forced ENI to minimize its operation o BHP Billiton NELP blocks have issues with Defence Ministry clearances Investors don’t get a smooth exit route: Cairn Energy’s exit was made very difficult Production sharing contract is regressive and confusing in nature: no clarity, freedom on gas pricing. Long process for allowing investors and technology experts, if they want to invest: again many examples but BP’s entry was not smooth. Arbitrary rules for clearances: It is expected that blocks offered under NELP have all clearances in place. However, in middle of exploration phase, various wings of government create hurdles; especially defense ministry. Best example is BHP Billiton, who is likely to lose its entire portfolio if policy action is further delayed. Annexure 3 Remedy: PMO* principal secretary has formed a group to resolve inter-ministerial issues. Annexure 2 Petroleum Ministry/DGH# should make sure that before the block is offered for NELP** rounds, all the negotiations and clearances are in place 5 Move towards the Open acreage system DGH should complete the national data repository soon to make the open acreage bidding possible Change in the PSC. Annexure 4 Exploring various contract models with a view to minimize monitoring of expenditure of the contractor without compromising, firstly, on the hydrocarbons output across time, and secondly, on the Government’s take Annexure 4 *PMO: Prime Minister’s Office **NELP: New Exploration Licensing Policy (international bidding rounds of oil & gas blocks in India) #DGH: Directorate General of Hydrocarbons (Technical advisory wing of Petroleum Ministry) NATIONAL SECURITY vs. ENERGY SECURITY (See Exhibit 1) India’s endeavor to minimize dependence on imported hydrocarbon is facing hurdles from Defence Ministry – in the name of NATIONAL SECURITY. There is a growing concern amongst the oil & gas companies as their operations are getting stalled because of clearances not granted by Defence Ministry. Examples: NELP-IX BLOCKS: MoD* in action For the two blocks - MB-DWN-2010/1 and MB-OSN-2010/2 – that were offered in NELP-IX, MoD is yet to give clearance Empowered Committee of Secretaries (ECS) too was helpless as MoD clearance for the blocks has not come as yet Offshore Defence Advisory Group (ODAG), under the MoD, is restricting any seismic surveys *MoD: Ministry of Defence Other case specific example BLOCK: PR-OSN-2004/1 (Cairn India bagged the block under NELP-VI) Cairn asked for invoking force majeure After a sunk cost of $30 million, now 40% of the block falls in a prohibited zone (as per MoD) The block falls near the missile testing range in Sriharikota WEST COAST: ALL BLOCKS OF MINING MAJOR BHP UNDER THREAT Defence ministry withheld clearances for all 10 blocks operated by BHP As per Defence Ministry all 10 blocks are inside Naval Exercise Area GVK Group of India is partner of BHP in these blocks The Blocks in question: NELP VII Blocks: KK-DWN-2005/1, MB-DWN-2005/2, MB-DWN-2005/2, MB-DWN-2005/3, MB-DWN- 6 2005/4, MB-DWN-2005/5, MB-DWN-2005/7, MB-DWN-2005/9 NELP VIII Blocks: MB-OSN- 2009/3, MB-OSN- 2009/6 and MB-OSN- 2009/7 EAST COAST: DEFENSIVE HURDLES Clearances from MoD were held up for four blocks meant to be offered under NELP-IX DRDO says they are in the rocket flight path from the missile test range in Machalipatnam RESULT: So much so all the blocks were NOT OFFERED in the NELP-IX round FUTURE OPERATIONS In 16 exploration blocks of Eastern offshore, 60 oil and gas discoveries made so far (eight in the NEC basin, three in the Mahanadi basin, 47 in the Krishna-Godavari basin and two in the Cauvery basin) Twenty-five major E&P companies are operating in the Eastern offshore with an exploration commitment of Rs 31,500 crore DEFENCE MINISTRY 100 major missions of national importance and this work cannot be compromised For missiles launch, Andaman is an ideal location Machlipatnam (AP) is of strategic importance for setting up a state of the art, long range missile launching facility DRDO says it has made it clear that it’s not possible to give long notice period on a missile launch due to technical complexities and secrecy involved Exhibit: 1 7 EAST COAST: LOST OPPORTUNITY Estimates: Out of 6.40 lakh sq km in Exclusive Economic Zone (EEZ) off eastern coast, 3.75 lakh sq km is where DRDO is putting hurdles Andaman offshore: Out of 6 lakh sq km (High prospects) DRDO’s restrictions reduced exploration by as much as 1.42 lakh sq km Due to high prospectivity petroleum companies are more keen for East coast HISTORY - In 2005, DRDO asked to set up exploitation and extraction equipment at the seabed (remember there is no technology in the world that would ensure that all exploration facilities could be seated at the seabed) IMPACT DRDO’s "danger corridor" covers virtually the entire East Coast, leaving little scope for carrying out exploration activities Major international E&P companies such as ENI, NIKO, BHP Billiton, Cairn Energy, British Gas, British Petroleum have entered India through liberal Foreign Direct Investment (FDI) in NELP (New Exploration Licensing Policy), but are now finding it difficult FINANCES - Estimates show that earnings of about Rs.8.55 lakh crore (at $80/barrel) in next 15-20 years is at stake. Plus nine new oil & gas fields are being developed in this area with an expenditure of $16,275 million and likely to generate revenue of Rs.9.69 lakh crores in the next 20 years ONGOING OPERATIONS Existing field: Ravva, PY-1, PY-3 and KG-D6 is being continuously bullied from Defence Ministry These fields currently produce60.68 MMSCM of gas per day out of India’s present production of 140 MMSCMD of gas These fields have estimated hydrocarbon reserve of 693.12 MMT (recoverable reserves of 337.023 MMT Exhibit 2 INDIA’S TOP CRUDE OIL SUPPLIERS INTERNATIONAL CONNECTION Saudi Arabia: 27 MT International force: Fear of supply disruption Iran: 19 MT Gas imports and diplomatic hurdles Iraq: 15 MT Overseas merger & acquisitions Nigeria: 13 MT Kuwait: 12 MT CRUDE REALITY India is highly dependent on crude supplies UAE: 11.5 MT from Middle East and North Africa, which accounts for 60% of Angola: 9 MT supplies to India. And the kind of geopolitical volatility Venezuela: 7 MT Oman: 5 MT witnessed in Middle East and North Africa is a cause for concern Qatar: 5 MT for India. Not just constraints from supply but similar upheaval Egypt: 3 MT and uncertainty will automatically trigger a drop in crude Malaysia: 2.5 MT production resulting in increased crude oil imports and higher Brazil: 2.5 MT prices in turn driving inflation in India. Ajarbaizan: 2.2 MT Mexico: 2 MT Russia: 1.6 MT 8 Ecuador: 1.2 MT Libya: 0.9 MT Remedy Expedite domestic exploration and production Lower dependence on Middle East and North Africa Look at other supply sources Increase the percentage of gas in India’s energy mix STEP ON GAS More than 30% of India’s gas demand is still not fulfilled. And situation is getting grimmer as domestic production has not delivered as per expectations. Other problems include delayed/failed negotiations for international pipelines (IPI: Iran-Pakistan- India pipeline) Problems in sourcing long term LNG (except Qatar and little bit from Australia, there is limited contract for India) Competition from China, Japan and South Korea is weighing heavy on India’s aspirations. China, Japan and South Korea have smoother decision making process compared to India. Diplomatic and bureaucratic failures in Qatar and even IPI have defeated India’s energy needs Even price issues delayed TAPI (Turkmenistan-Afghanistan-Pakistan-India) pipeline Limited LNG import infrastructure in the country and concentrated only in western India Goldman Sachs study shows increase of $10/barrel can lower the GDP growth by 0.4%. Also higher oil prices result in outgo of forex reserves impacting India’s trade deficit. Remedy Petroleum ministry’s “International Cooperation” wing should be strengthened At the time of Mani Shankar Aiyar’s tenure as minister, a special wing focused just on international opportunities was created. It should be revived (under an IFS officer) REGULATED domestic gas prices acts as a major deterrent. FOCUS ON OVERSEAS M&A India’s overall hydrocarbon (Oil & Gas) reserves are limited and it will not able to support future needs. The only option, apart from diversifying import sourcing countries, is to look for assets in oil & gas rich countries. Remedy Petroleum ministry’s “International Cooperation” wing should be strengthened At the time of Mani Shankar Aiyar’s tenure as minister, a special wing focused just on international 9 opportunities was created. It should be revived (under an IFS officer) Create a sovereign fund or consolidated war chest for acquiring assets overseas Promote public private partnership for overseas M&A Exhibit 3 SOVEREIGN FUND FOR ENERGY: Push For Energy Security Group of Ministers (GoM) already in place to discuss creation of sovereign wealth fund for energy security GoM looking for possibility of creation of a $10 billion sovereign wealth fund GoM may consider budget allocation of Rs 4,500 crore as a first tranche towards the fund Options Being Considered Option 1 - Create sovereign fund with budgetary allocation Option 2 - Use forex reserves to create sovereign fund Option 3 - Use part of surplus cash reserves lying with large PSUs SOVEREIGN FUNDS The Global Benchmark -Norway: $ 550 bn -Saudi Arabia: $ 450 bn -Singapore: $ 400 bn -China: $ 400 bn -Qatar: $ 60 bn -Malaysia: $ 40 bn Exhibit 4 BITTER EXPERIENCE: CHINESE AGGRESSION 2005: OVL lost out on acquiring 45% in the giant Akpo oilfield in Angola vs. China’s CNOOC (for $2.268 billion) 2009: OVL lost out to Sinopec, that acquired Swiss oil exploration firm Addax Petroleum for $7.2 bn 2009: CNPC-CNOOC outbid ONGC for 75% stake in YPF, the Argentine unit of Repsol, Spain ($13-14 billion) 2011:OVL lost bid to buy Exxon Mobil’s 25% stake at a deep-sea oil block in Angola (Bid $2.1-2.2 billion) vs. Chinese and Korean 2010: ONGC lost out in Algerian oilfield to a consortium led by a Chinese oil firm 2010: OVL lost bid for Halfaya oilfield in Iraq to CNPC and Petronas (remuneration five times higher) 2009: OVL lost the Zubair oil field in the first Iraqi round RATIONALISE TAXATION: GIVE AND TAKE FOR ENERGY SECURITY Any government can collect revenue from Petroleum sector by various instruments and in most of the cases government share of economic rent comes primarily through production-based or profit-based instruments. In India, it is a hybrid system. It is a system where the petroleum companies contribute to 10 government coffers through royalty payment and also through profit petroleum. Royalties ONSHORE SHALLOW WATERS DEEPWATER Crude 12.5% 10% 5-10%* Natural Gas 10% 10% 5-10%* *Royalty on deepwater production is 5% for the first seven years and 10% thereafter (Source: Petroleum Ministry, 2012) Income tax: Domestic Companies Foreign Companies 30% +surcharge* 5% on tax + 3% education cess 40% + surcharge* 2% on tax + 3% education cess *Surcharge is applicable when income is more than Rs.1 cr (Source: Petroleum Ministry, 2012) Taxing times Cess increased by Rs.2000/tonne to Rs 4,500 Service related to oil and gas production brought under service tax net Thankfully the proposal for windfall tax for the upstream companies, suggested by former petroleum secretary and now planning commission member B.K.Chaturvedi, did not materialize. Otherwise, it would have been untimely death for the upstream sector. Nonetheless government in Budget 2012 still implemented the hike in cess for upstream companies from Rs 2,500 a tonne to Rs 4,500. Though India was never seen as an investment destination for oil and gas sector but the discoveries in KG-D6 (for gas) and Barmer block (for oil) revived the investment hopes. But then, the higher cess on crude production, bringing upstream activities under service tax and taking away tax holiday on gas production certainly are not going to negatively impact the investment sentiments. Exploration is a high-risk activity and it needs sufficient incentive to attract investments. Remedy Income tax should be levied on all E&P companies uniformly (not separate for foreign firms) Service tax on E&P services may continue (move towards GST) but the cess on crude should be reduced 11 India’s present form of PSC regime has attracted lot of criticism, especially from CAG in its audit of private PSCs. CAG suggested royalty based contracts Countries like Chile, Ecuador, Norway, Peru, Kazakhstan and Thailand have implemented royalty based regimes However, seeing India’s need for more investment in the sector the present form of profit sharing under PSC should not be tinkered Allow tax benefit uniformly on LNG imports (presently LNG meant for power sector is exempted) NEW TECHNOLOGY AND NEW FORM OF ENERGY– CBM, SHALE GAS, OIL SANDS, ETC. After the traditional form of oil and natural gas, the other form that has taken some shape in India is CBM DGH is working on data and policy framework for auctioning shale gas assets National program on gas hydrate is also being conducted with US companies Coal blocks for Coal to Liquid has been allocated to Tata and JSPL in Orissa INTERRELATED POLICY FRAMEWORK FOR UPSTREAM, MIDSTREAM AND DOWNSTREAM Insufficient oilfield technology and services Problems with pipeline infrastructure Non-commercialization of discovery: Inadequate E&P infrastructure Lower investment in the past has resulted in inadequate E&P infrastructure in India India’s gas pipeline density (per sq. km) is one of the lowest Lower pipeline density leading to lower share of natural gas in the overall energy mix (10% vs. global average of 24%) Production of oil and gas remained stagnant (Table 4) Limited participation from foreign players in NELP rounds Inadequate infrastructure leading to non-commercialization of discoveries Out of 60 discoveries in nine NELP rounds since 1999, only two have entered production phase Shortage of oil rigs too has played spoilsport Foreign firms participation in NELP NELP-VII NELP-VIII NELP-IX 21 10 08 SUBDUED GAS PRICING: GOVERNMENT REGULATION KILLING SENTIMENTS 12 NELP has provision for charging market discovered price for gas However, operators have to follow the government determined price Even under regulation: No uniformity in pricing of domestic gas Remedy Let the market decide the gas prices Expedite the national gas grid program (as announced in the Budget) to enhance infrastructure The natural gas infrastructure in the country needs an overhaul Promote more CITY GAS DISTRIBUTION projects and allow market-driven pricing More LNG terminals, especially in the East Coast, need to be promoted CONCLUSION Though hydrocarbon will remain one of the key sources for India’s energy security, policy makers, however, can’t ignore the other sources – viz coal, hydro power, nuclear, and solar. In fact, coal is going to play a significant role in India’s energy security. Not just as a big source of fuel (50%), but also because India has huge reserves of coal. Of course, within hydrocarbon sector prospect of shale gas and natural gas needs to be identified as soon as possible. As far as the present form of allocation and contracts of oil & gas blocks are concerned, India needs lot of changes. It should be appreciated that Rangarajan committee is looking at overhauling the present format of PSC. One big move that India needs to make is the shift from annual auctioning of oil & gas blocks under NELP to open acreage. For open acreage, DGH needs to finalize the national data repository, so that companies can visit the always open data rooms and can bid whenever they want. This will keep the competition alive and also allow speedy exploration program in the country. DGH/Government also needs to finalise the terms for shale gas block bidding, so that India can take advantage of the development in the rest of the world. On regulation front, government needs to stop regulating gas prices and let the market decide the prices. This will make the market more competitive and more remunerative for the investors. Also this will give the much needed impetus to the gas retail sector in the country, which ultimately has the potential to lower the dependence on imports of liquid fuel. Focus also needs to be given to the PSU oil companies, who for all these years have contributed to the growth of Energy security of the country. Overall, India’s energy sector needs a concerted coordination between the departments, and more public-private partnership will do the trick. We should also ensure that foreign companies, such as ENI and mining major BHP Billiton, having deep pockets should get the right platform to drill deep for ensuring India’s energy security. 13
"India's Energy (in) Security"